<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED SEPTEMBER 30, 2000
Kemper High Yield Opportunity Fund
Kemper High Yield Fund II
KEMPER HIGH YIELD FUNDS
"... During the past 12 months, higher-quality, lower-yielding bonds within the
high-yield market outperformed bonds with lower ratings and higher risk...."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
7
PERFORMANCE UPDATE
9
TERMS TO KNOW
11
PORTFOLIO STATISTICS
14
PORTFOLIO OF INVESTMENTS
28
FINANCIAL STATEMENTS
31
FINANCIAL HIGHLIGHTS
35
NOTES TO FINANCIAL STATEMENTS
41
REPORT OF INDEPENDENT AUDITORS
AT A GLANCE
KEMPER HIGH YIELD FUND II
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 II CLASS A FUND II CLASS B FUND II CLASS C CATEGORY AVERAGE*
--------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
-0.98 -1.73 -1.73 -0.02
</TABLE>
KEMPER HIGH YIELD OPPORTUNITY FUND
TOTAL RETURNS
FOR THE YEAR ENDED SEPTEMBER 30, 2000
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER HIGH YIELD KEMPER HIGH YIELD LIPPER HIGH CURRENT YIELD
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS A OPPORTUNITY FUND CLASS B OPPORTUNITY FUND CLASS C FUNDS CATEGORY AVERAGE*
------------------------------------------ ------------------------ ------------------------ -------------------------
<S> <C> <C> <C>
-6.91 -7.71 -7.82 -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.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
9/30/00 9/30/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER HIGH YIELD FUND II
CLASS A $7.78 $8.76
.........................................................
KEMPER HIGH YIELD FUND II
CLASS B $7.78 $8.77
.........................................................
KEMPER HIGH YIELD FUND II
CLASS C $7.78 $8.77
.........................................................
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
9/30/00 9/30/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER HIGH YIELD
OPPORTUNITY FUND CLASS A $6.94 $8.33
.........................................................
KEMPER HIGH YIELD
OPPORTUNITY FUND CLASS B $6.94 $8.33
.........................................................
KEMPER HIGH YIELD
OPPORTUNITY FUND CLASS C $6.94 $8.34
.........................................................
</TABLE>
KEMPER HIGH YIELD FUND II 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 #257 of 352 funds #281 of 352 funds #281 of 352 funds
....................................................................................
</TABLE>
KEMPER HIGH YIELD OPPORTUNITY 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 #313 of 352 funds #314 of 352 funds #316 of 352 funds
....................................................................................
</TABLE>
*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. RETURNS
AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE PERFORMANCE. INVESTMENT
RETURNS AND PRINCIPAL VALUE FLUCTUATE, SO THAT SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST.
DIVIDEND AND YIELD REVIEW
THE FOLLOWING TABLES SHOW PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF SEPTEMBER 30, 2000.
<TABLE>
<CAPTION>
KEMPER HIGH YIELD
FUND II CLASS A CLASS B CLASS C
...............................................................................................
<S> <C> <C> <C> <C> <C>
ONE-YEAR INCOME: $0.930 $0.860 $0.860
...............................................................................................
SEPTEMBER DIVIDEND: $0.077 $0.0718 $0.0718
...............................................................................................
ANNUALIZED
DISTRIBUTION RATE+: 11.88% 11.07% 11.07%
...............................................................................................
SEC YIELD+: 11.36% 11.12% 11.12%
...............................................................................................
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD
OPPORTUNITY FUND CLASS A CLASS B CLASS C
...............................................................................................
<S> <C> <C> <C> <C> <C>
ONE-YEAR INCOME: $0.810 $0.760 $0.780
...............................................................................................
SEPTEMBER DIVIDEND: $0.0710 $0.0656 $0.0657
...............................................................................................
ANNUALIZED
DISTRIBUTION RATE+: 12.28% 11.34% 11.36%
...............................................................................................
SEC YIELD+: 12.84% 12.46% 12.44%
...............................................................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE (WHICH DOES NOT INCLUDE SALES CHARGE
ADJUSTMENTS) ON SEPTEMBER 30, 2000. DISTRIBUTION RATE SIMPLY MEASURES THE LEVEL
OF DIVIDENDS AND IS NOT A COMPLETE MEASURE OF PERFORMANCE. THE SEC YIELD IS NET
INVESTMENT INCOME PER SHARE EARNED OVER THE MONTH ENDED 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. YIELDS AND DISTRIBUTION RATES ARE
HISTORICAL AND WILL FLUCTUATE.
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
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
PRESERVING CAPITAL WAS THE OVERRIDING MARKET
CHALLENGE AS THE DYNAMICS OF TELECOM-RELATED
FINANCING WEAKENED AND U.S. ECONOMIC GROWTH
MODERATED. GOVERNMENT BONDS OUTPERFORMED HIGH-YIELD
BONDS DURING THE PAST 12 MONTHS AS THE TREASURY
BOUGHT BACK LONG-TERM DEBT. BELOW, LEAD PORTFOLIO
MANAGER HARRY RESIS DISCUSSES HOW THE FUND
PERFORMED IN THIS ENVIRONMENT.
Q
HOW DID THE HIGH-YIELD MARKET BEHAVE AND THE 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 funds. Concern over the effect of the Federal Reserve Board
interest rate hikes, the overall credit quality of the high-yield market, 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.
For the 12-month period ended September 30, 2000, Kemper High Yield Fund II
declined 0.98 percent while Kemper High Yield Opportunity Fund dropped 6.91
percent (A shares at net asset value for both funds). This was worse than the
average 0.02 percent drop of the fund's peers as measured by Lipper, Inc. The
unmanaged Chase U.S./ Canada High Yield Bond index rose 0.50 percent for the
same period.
The funds focused on bonds issued by U.S.-based companies, which did not do as
well as certain high-yield emerging market bonds. In addition, Kemper High Yield
Opportunity Fund had a more concentrated portfolio than most of its peers and
Kemper High Yield Fund II. Price declines of telecom, cyclical industrial and
other high-yield bonds within High Yield Opportunity Fund's portfolio had a
disproportionate impact on total return.
Q
WILL YOU DESCRIBE HOW KEMPER HIGH YIELD FUND II AND KEMPER HIGH YIELD
OPPORTUNITY FUND WERE 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 each 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 portfolios 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.
Within Kemper High Yield Fund II, we purchased Treasuries during the year, and
this enhanced performance by helping to preserve principal and allowing the fund
to capitalize on the Treasury's buyback activity. Within Kemper High Yield
Opportunity Fund, we purchased a small amount of high-yielding equity
securities. This initially helped performance by augmenting income potential.
However, prices of these securities
[HARRY RESIS PHOTO]
HARRY RESIS JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1988 AND IS A MANAGING
DIRECTOR. HE IS ALSO LEAD PORTFOLIO MANAGER OF KEMPER HIGH YIELD FUND, KEMPER
HIGH YIELD FUND II AND KEMPER HIGH YIELD OPPORTUNITY FUND. RESIS HOLDS A
BACHELOR'S DEGREE IN FINANCE FROM MICHIGAN STATE UNIVERSITY.
[DAN DOYLE PHOTO]
DAN DOYLE IS A PORTFOLIO MANAGER OF KEMPER HIGH YIELD FUND II AND KEMPER HIGH
YIELD OPPORTUNITY FUND. A CERTIFIED FINANCIAL ANALYST, HE HAS BEEN INVOLVED WITH
KEMPER HIGH YIELD FUND IN BOTH RESEARCH AND TRADING SINCE 1986 AND IS A FUND
PORTFOLIO MANAGER. 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.
PERFORMANCE UPDATE
7
<PAGE> 8
PERFORMANCE UPDATE
generally declined during periods of increased equity market volatility.
Our bond repositioning efforts weren't enough to overcome the negative market
forces. 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 didn't 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 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
HIGH-YIELD BOND YIELDS (YIELD-TO-WORST) VS. 10-YEAR TREASURIES
SEPTEMBER 30, 1995 TO SEPTEMBER 30, 2000
[LINE CHART]
<TABLE>
<CAPTION>
MERRILL LYNCH HIGH
YIELD MASTER TEN YEAR
INDEX* TREASURIES
------------------ ----------
<S> <C> <C>
9/95 10.079 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>
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.
*THE MERRILL LYNCH HIGH YIELD MARGIN INDEX IS AN UNMANAGED GROUP OF LOWER
QUALITY BONDS THAT VARY IN MATURITY AND QUALITY.
8
<PAGE> 9
PERFORMANCE UPDATE
bond market, and high-quality corporate bonds provided relatively weak returns
in this uncertain environment.
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 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 rebound 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.
U.S. HIGH-YIELD BOND PERFORMANCE BY RATING CATEGORY
(AS OF SEPTEMBER 2000)
[LINE CHART]
<TABLE>
<CAPTION>
STOCK HIGH YIELD BONDS
----- ----------------
<S> <C> <C>
BB 4.63 2.65
B -1.80 -0.17
CCC -7.23 -1.49
</TABLE>
SOURCE: CHASE SECURITIES
9
<PAGE> 10
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED SEPTEMBER 30, 2000
(ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR CLASS
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER HIGH YIELD FUND II CLASS A -5.40% -2.91% (since 11/30/98)
........................................................................................................
KEMPER HIGH YIELD FUND II CLASS B -4.39 -2.54 (since 11/30/98)
........................................................................................................
KEMPER HIGH YIELD FUND II CLASS C -1.73 -1.18 (since 11/30/98)
........................................................................................................
</TABLE>
KEMPER HIGH YIELD II A
Growth of an assumed $10,000 investment in Class A
shares from 11/30/98 to 9/30/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER HIGH YIELD II SALOMON BROTHERS U.S. CONSUMER PRICE DLJ HIGH YIELD
A1 HIGH YIELD* INDEX+ INDEX++
-------------------- ---------------- ------------------- --------------
<S> <C> <C> <C> <C>
11/30/98 10000.00 10000.00 10000.00 10000.00
9490.00 10071.00 9994.00 9961.00
9642.00 10222.00 10018.00 10097.00
9652.00 10105.00 10030.00 10044.00
9766.00 10215.00 10061.00 10180.00
9921.00 10401.00 10134.00 10420.00
9719.00 10230.00 10134.00 10265.00
9716.00 10108.00 10134.00 10275.00
7/31/99 9691.00 10053.00 10165.00 10277.00
9612.00 9916.00 10189.00 10176.00
9566.00 9933.00 10238.00 10104.00
9551.00 9918.00 10256.00 10048.00
9724.00 10037.00 10262.00 10215.00
12/31/99 9832.00 10099.00 10262.00 10319.00
9761.00 10036.00 10293.00 10283.00
9814.00 10103.00 10354.00 10339.00
9616.00 9799.00 10439.00 10170.00
9670.00 9688.00 10445.00 10168.00
9504.00 9556.00 10457.00 10007.00
9664.00 9901.00 10512.00 10198.00
9708.00 10111.00 10537.00 10287.00
9681.00 10286.00 10537.00 10368.00
9/30/00 9471.00 10292.00 10539.00 10254.00
</TABLE>
KEMPER HIGH YIELD II B
Growth of an assumed $10,000 investment in Class B
shares from 11/30/98 to 9/30/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER HIGH YIELD II SALOMON BROTHERS U.S. CONSUMER PRICE DLJ HIGH YIELD
B1 HIGH YIELD* INDEX+ INDEX++
-------------------- ---------------- ------------------- --------------
<S> <C> <C> <C> <C>
11/30/98 10000.00 10000.00 10000.00 10000.00
9944.00 10071.00 9994.00 9961.00
10086.00 10222.00 10018.00 10097.00
10101.00 10105.00 10030.00 10044.00
10203.00 10215.00 10061.00 10180.00
10360.00 10401.00 10134.00 10420.00
10142.00 10230.00 10134.00 10265.00
10133.00 10108.00 10134.00 10275.00
7/31/99 10100.00 10053.00 10165.00 10277.00
10012.00 9916.00 10189.00 10176.00
9957.00 9933.00 10238.00 10104.00
9936.00 9918.00 10256.00 10048.00
10109.00 10037.00 10262.00 10215.00
12/31/99 10203.00 10099.00 10262.00 10319.00
10134.00 10036.00 10293.00 10283.00
10183.00 10103.00 10354.00 10339.00
9971.00 9799.00 10439.00 10170.00
10021.00 9688.00 10445.00 10168.00
9843.00 9556.00 10457.00 10007.00
10002.00 9901.00 10512.00 10198.00
10041.00 10111.00 10537.00 10287.00
10007.00 10286.00 10537.00 10368.00
9/30/00 9545.00 10292.00 10539.00 10254.00
</TABLE>
KEMPER HIGH YIELD II C
Growth of an assumed $10,000 investment in Class C
shares from 11/30/98 to 9/30/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER HIGH YIELD II SALOMON BROTHERS U.S. CONSUMER PRICE DLJ HIGH YIELD
C1 HIGH YIELD* INDEX+ INDEX++
-------------------- ---------------- ------------------- --------------
<S> <C> <C> <C> <C>
11/30/98 10000.00 10000.00 10000.00 10000.00
9944.00 10071.00 9994.00 9961.00
10086.00 10222.00 10018.00 10097.00
10101.00 10105.00 10030.00 10044.00
10203.00 10215.00 10061.00 10180.00
10360.00 10401.00 10134.00 10420.00
10142.00 10230.00 10134.00 10265.00
10133.00 10108.00 10134.00 10275.00
7/31/99 10100.00 10053.00 10165.00 10277.00
10012.00 9916.00 10189.00 10176.00
9957.00 9933.00 10238.00 10104.00
9924.00 9918.00 10256.00 10048.00
10109.00 10037.00 10262.00 10215.00
12/31/99 10215.00 10099.00 10262.00 10319.00
10135.00 10036.00 10293.00 10283.00
10184.00 10103.00 10354.00 10339.00
9972.00 9799.00 10439.00 10170.00
10022.00 9688.00 10445.00 10168.00
9844.00 9556.00 10457.00 10007.00
10003.00 9901.00 10512.00 10198.00
10042.00 10111.00 10537.00 10287.00
10008.00 10286.00 10537.00 10368.00
9/30/00 9785.00 10292.00 10539.00 10254.00
</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,
THE MAXIMUM CONTINGENT DEFERRED SALES
CHARGE IS 4%. CLASS C SHARES HAVE NO
SALES ADJUSTMENT, BUT REDEMPTIONS
WITHIN ONE YEAR OF PURCHASE MAY BE
SUBJECT TO A CONTINGENT DEFERRED SALES
CHARGE OF 1%. SHARE CLASSES INVEST IN
THE SAME UNDERLYING PORTFOLIO. DURING
THE PERIODS NOTED, SECURITIES PRICES
FLUCTUATED.
(1)PERFORMANCE INCLUDES REINVESTMENT OF
DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A
SHARES AND THE CONTINGENT DEFERRED
SALES CHARGE IN EFFECT AT THE END OF
THE PERIOD FOR CLASS B SHARES. IN
COMPARING THE PERFORMANCE OF THE
FUND 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
BA1 OR LOWER BY MOODY'S INVESTORS
SERVICE, INC. THIS INDEX IS UNMANAGED.
SOURCE IS SALOMON BROTHERS INC.
+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 IS
WIESENBERGER.
++THE DLJ HIGH YIELD INDEX IS 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 II
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION BY SECTOR* ON 9/30/00
<S> <C> <C> <C>
TELECOMMUNICATIONS 24%
................................................................................
CONSUMER CYCLICALS 23
................................................................................
MEDIA 15
................................................................................
BASIC INDUSTRY 10
................................................................................
CONSUMER NONCYCLICALS 8
................................................................................
U.S. TREASURIES 7
................................................................................
CAPITAL GOODS 5
................................................................................
ENERGY AND UTILITIES 3
................................................................................
OTHER 2
................................................................................
TRANSPORTATION 1
................................................................................
TECHNOLOGY 1
................................................................................
CASH AND EQUIVALENTS 1
--------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
QUALITY ON 9/30/00 ON 9/30/99
<S> <C> <C> <C> <C>
AAA 7% --
................................................................................
BBB 4 1%
................................................................................
BB 24 17
................................................................................
B 57 67
................................................................................
BELOW B AND NONRATED 8 15
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ON 9/30/00 ON 9/30/99
<S> <C> <C> <C> <C>
DURATION: 4.1 years 4.8 years
................................................................................
AVERAGE MATURITY: 6.8 years 6.9 years
--------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
11
<PAGE> 12
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED SEPTEMBER 30, 2000
(ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR CLASS
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS A -11.07% -2.54% (since 10/1/97)
....................................................................................................
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS B -10.21 -2.59 (since 10/1/97)
....................................................................................................
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS C -7.82 -1.82 (since 10/1/97)
....................................................................................................
</TABLE>
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS A
Growth of an assumed $10,000 investment in Class A
shares from 10/31/97 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
OPPORTUNITY A1 INDEX* INDEX+ INDEX++
----------------- ---------------- ------------------- --------------
<S> <C> <C> <C> <C>
10/31/97 9546.00 10000.00 10000.00 10000.00
9688.00 10136.00 9994.00 10085.00
9818.00 10288.00 9981.00 10185.00
10147.00 10511.00 10000.00 10343.00
10223.00 10580.00 10019.00 10425.00
10413.00 10699.00 10037.00 10542.00
10459.00 10772.00 10056.00 10588.00
10452.00 10862.00 10074.00 10596.00
10457.00 10949.00 10087.00 10609.00
10525.00 10993.00 10099.00 10691.00
9585.00 10380.00 10111.00 9966.00
9/30/98 9633.00 10689.00 10124.00 9942.00
9427.00 10538.00 10149.00 9735.00
10159.00 11161.00 10149.00 10282.00
10090.00 11240.00 10142.00 10242.00
10257.00 11409.00 10167.00 10382.00
10222.00 11278.00 10179.00 10327.00
10391.00 11401.00 10210.00 10467.00
10629.00 11608.00 10285.00 10714.00
10365.00 11418.00 10285.00 10872.00
6/30/99 10286.00 11282.00 10285.00 10882.00
10233.00 11231.00 10316.00 10884.00
10087.00 11067.00 10340.00 10777.00
9975.00 11086.00 10390.00 10701.00
9922.00 11068.00 10408.00 10640.00
10135.00 11202.00 10415.00 10819.00
10264.00 11272.00 10415.00 10929.00
10160.00 11202.00 10446.00 10891.00
10161.00 11276.00 10507.00 10950.00
9923.00 10936.00 10594.00 10771.00
9988.00 10813.00 10600.00 10769.00
9746.00 10665.00 10613.00 10599.00
9799.00 11051.00 10668.00 10800.00
9812.00 11285.00 10693.00 10895.00
9723.00 11480.00 10693.00 10980.00
9/30/00 9285.00 11487.00 10695.00 10859.00
</TABLE>
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS B
Growth of an assumed $10,000 investment in Class B
shares from 10/31/97 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
OPPORTUNITY B1 INDEX* INDEX+ INDEX++
----------------- ---------------- ------------------- --------------
<S> <C> <C> <C> <C>
10/31/97 10000.00 10000.00 10000.00 10000.00
10141.00 10136.00 9994.00 10085.00
10273.00 10288.00 9981.00 10185.00
10606.00 10511.00 10000.00 10343.00
10677.00 10580.00 10019.00 10425.00
10869.00 10699.00 10037.00 10542.00
10898.00 10772.00 10056.00 10588.00
10895.00 10862.00 10074.00 10596.00
10892.00 10949.00 10087.00 10609.00
10944.00 10993.00 10099.00 10691.00
9970.00 10380.00 10111.00 9966.00
9/30/98 10013.00 10689.00 10124.00 9942.00
9725.00 10538.00 10149.00 9735.00
10547.00 11161.00 10149.00 10282.00
10469.00 11240.00 10142.00 10242.00
10634.00 11409.00 10167.00 10382.00
10590.00 11278.00 10179.00 10327.00
10747.00 11401.00 10210.00 10467.00
10998.00 11608.00 10285.00 10714.00
10718.00 11418.00 10285.00 10872.00
6/30/99 10640.00 11282.00 10285.00 10882.00
10567.00 11231.00 10316.00 10884.00
10409.00 11067.00 10340.00 10777.00
10286.00 11086.00 10390.00 10701.00
10224.00 11068.00 10408.00 10640.00
10436.00 11202.00 10415.00 10819.00
10562.00 11272.00 10415.00 10929.00
10448.00 11202.00 10446.00 10891.00
10442.00 11276.00 10507.00 10950.00
10190.00 10936.00 10594.00 10771.00
10249.00 10813.00 10600.00 10769.00
9994.00 10665.00 10613.00 10599.00
10041.00 11051.00 10668.00 10800.00
10047.00 11285.00 10693.00 10895.00
9948.00 11480.00 10693.00 10980.00
9/30/00 9280.00 11487.00 10695.00 10859.00
</TABLE>
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS C
Growth of an assumed $10,000 investment in Class C
shares from 10/31/97 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
OPPORTUNITY C1 INDEX* INDEX+ INDEX++
----------------- ---------------- ------------------- --------------
<S> <C> <C> <C> <C>
10/31/97 10000.00 10000.00 10000.00 10000.00
10141.00 10136.00 9994.00 10085.00
10273.00 10288.00 9981.00 10185.00
10595.00 10511.00 10000.00 10343.00
10676.00 10580.00 10019.00 10425.00
10869.00 10699.00 10037.00 10542.00
10909.00 10772.00 10056.00 10588.00
10906.00 10862.00 10074.00 10596.00
10893.00 10949.00 10087.00 10609.00
10956.00 10993.00 10099.00 10691.00
9971.00 10380.00 10111.00 9966.00
9/30/98 10013.00 10689.00 10124.00 9942.00
9724.00 10538.00 10149.00 9735.00
10557.00 11161.00 10149.00 10282.00
10467.00 11240.00 10142.00 10242.00
10644.00 11409.00 10167.00 10382.00
10589.00 11278.00 10179.00 10327.00
10757.00 11401.00 10210.00 10467.00
10997.00 11608.00 10285.00 10714.00
10717.00 11418.00 10285.00 10872.00
6/30/99 10651.00 11282.00 10285.00 10882.00
10566.00 11231.00 10316.00 10884.00
10420.00 11067.00 10340.00 10777.00
10298.00 11086.00 10390.00 10701.00
10236.00 11068.00 10408.00 10640.00
10448.00 11202.00 10415.00 10819.00
10574.00 11272.00 10415.00 10929.00
10460.00 11202.00 10446.00 10891.00
10454.00 11276.00 10507.00 10950.00
10202.00 10936.00 10594.00 10771.00
10261.00 10813.00 10600.00 10769.00
10007.00 10665.00 10613.00 10599.00
10053.00 11051.00 10668.00 10800.00
10060.00 11285.00 10693.00 10895.00
9961.00 11480.00 10693.00 10980.00
9/30/00 9493.00 11487.00 10695.00 10859.00
</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,
THE MAXIMUM CONTINGENT DEFERRED SALES
CHARGE IS 4%. CLASS C SHARES HAVE NO
SALES ADJUSTMENT, BUT REDEMPTIONS
WITHIN ONE YEAR OF PURCHASE MAY BE
SUBJECT TO A CONTINGENT DEFERRED SALES
CHARGE OF 1%. SHARE CLASSES INVEST IN
THE SAME UNDERLYING PORTFOLIO. DURING
THE PERIODS NOTED, SECURITIES PRICES
FLUCTUATED.
(1)PERFORMANCE INCLUDES REINVESTMENT OF
DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A
SHARES AND THE CONTINGENT DEFERRED
SALES CHARGE IN EFFECT AT THE END OF
THE PERIOD FOR CLASS B SHARES. IN
COMPARING THE PERFORMANCE OF THE
FUND 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
BA1 OR LOWER BY MOODY'S INVESTORS
SERVICE, INC. THIS INDEX IS UNMANAGED.
SOURCE IS SALOMON BROTHERS INC.
+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 IS
WIESENBERGER.
++THE DLJ HIGH YIELD INDEX IS DESIGNED
TO MIRROR THE INVESTIBLE UNIVERSE OF
U.S. DOLLAR DENOMINATED HIGH YIELD
DEBT MARKET. SOURCE: DONALDSON LUFKIN
& JENRETTE.
12
<PAGE> 13
PORTFOLIO STATISTICS
KEMPER HIGH YIELD OPPORTUNITY FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION BY SECTOR* ON 9/30/00
<S> <C> <C> <C> <C>
TELECOMMUNICATIONS 23%
..................................................................................
BASIC INDUSTRY 18
..................................................................................
CONSUMER CYCLICALS 15
..................................................................................
MEDIA 13
..................................................................................
CONSUMER NONCYCLICALS 8
..................................................................................
CAPITAL GOODS 6
..................................................................................
ENERGY AND UTILITIES 5
..................................................................................
COMMON AND PREFERRED STOCK 4
..................................................................................
OTHER 3
..................................................................................
TRANSPORTATION 2
..................................................................................
TECHNOLOGY 2
..................................................................................
CASH AND EQUIVALENTS 1
----------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
QUALITY ON 9/30/00 ON 9/30/99
<S> <C> <C> <C> <C>
BBB 3%
................................................................................
BB 15 11%
................................................................................
B 68 71
................................................................................
BELOW B 10 --
................................................................................
OTHER -- 10
................................................................................
NONRATED 4 8
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ON 9/30/00 ON 9/30/99
<S> <C> <C> <C> <C>
DURATION: 3.7 years 4.7 years
................................................................................
AVERAGE MATURITY: 6.6 years 6.8 years
--------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD OPPORTUNITY FUND
Portfolio of Investments at September 30, 2000
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS--0.5% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
State Street Bank and Trust Company,
6.480%, to be repurchased at $116,063
on 10/02/2000**
(Cost $116,000) $116,000 $ 116,000
---------------------------------------------------------------------------
<CAPTION>
CORPORATE BONDS--92.5%
<S> <C> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--16.4%
AFC Enterprises, 10.250%, 05/15/2007 510,000 507,450
Avondale Mills, 10.250%, 05/01/2006 274,000 260,300
Circus Circus Mandalay Resort Group,
6.450%, 02/01/2006 30,000 26,440
Florida Panthers, 9.875%, 04/15/2009 400,000 386,000
Guitar Center Management,
11.000%, 07/01/2006 330,000 318,450
Hines Horticulture, Inc.,
11.750%, 10/15/2005 450,000 443,250
Hollywood Entertainment Corp.,
10.630%, 08/15/2004 160,000 123,200
MGM Grand, Inc., 9.750%, 06/01/2007 220,000 227,150
MGM Mirage, Inc., 8.500%, 09/15/2010 130,000 127,400
Mandalay Resort Group:
9.500%, 08/01/2008 100,000 101,750
10.250%, 08/01/2007 100,000 103,000
Park Place Entertainment, Inc.,
9.375%, 02/15/2007 150,000 152,250
Perkins Finance, L.P.,
10.125%, 12/15/2007 190,000 178,600
Restaurant Co.,
Step-up Coupon, 0% to 05/15/2003,
11.250% to 05/15/2008 250,000 125,000
Sealy Mattress Co.,
Step-up Coupon, 0% to 12/15/2002,
10.875% to 12/15/2007 670,000 497,475
Specialty Retailers, Inc.,
9.000%, 07/15/2007* 200,000 0
---------------------------------------------------------------------------
3,577,715
------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--0.9%
Grove Worldwide LLC,
9.250%, 05/01/2008 125,000 15,000
Jafra Cosmetics International, Inc.,
11.750%, 05/01/2008 190,000 182,400
---------------------------------------------------------------------------
197,400
------------------------------------------------------------------------------------------------------------------------
HEALTH--0.8%
Mariner Post-Acute Network, Inc.,
Step-up Coupon, 0% to 11/01/2002,
10.500% to 11/01/2007* 510,000 2,550
Tenet Healthcare Corp.,
9.250%, 09/01/2010 150,000 156,938
Vencor, Inc., 9.875%, 05/01/2005* 55,000 8,250
---------------------------------------------------------------------------
167,738
------------------------------------------------------------------------------------------------------------------------
COMMUNICATION--22.9%
Allegiance Telecom, Inc.,
12.875%, 05/15/2008 200,000 204,000
</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>
Crown Castle International Corp.:
10.750%, 08/01/2011 $ 70,000 $ 71,050
Step-up Coupon, 0% to 08/01/2004,
11.250% to 08/01/2011 90,000 59,400
Dobson Communications Corp.,
10.875%, 07/01/2010 100,000 97,000
Esprit Telecom Group, PLC:
10.875%, 06/15/2008 110,000 50,600
11.500%, 12/15/2007 330,000 151,800
FairPoint Communications,
12.500%, 05/01/2010 110,000 107,250
Global Crossing Holdings Ltd.,
9.500%, 11/15/2009 240,000 238,800
Global Telesystems Group,
9.875%, 02/15/2005 100,000 44,000
Hermes Europe Railtel BV,
11.500%, 08/15/2007 50,000 23,000
ICG Holdings, Inc.,
Step-up Coupon, 0% to 09/15/2000,
13.500% to 09/15/2005 500,000 110,000
Impsat Corp., 12.375%, 06/15/2008 155,000 116,250
KMC Telecom Holdings, Inc.:
Step-up Coupon, 0% to 02/15/2003,
12.500% to 02/15/2008 480,000 163,200
13.500%, 05/15/2009 220,000 138,600
MGC Communications,
13.000%, 10/01/2004 310,000 254,200
Nextel Communications, Inc.:
9.375%, 11/15/2009 340,000 334,475
Step-up Coupon, 0% to 04/15/2003,
9.450% to 04/15/2008 40,000 24,000
12.500%, 04/15/2006 80,000 78,400
Primus Telecommunications Group:
11.250%, 01/15/2009 70,000 35,000
11.750%, 08/01/2004 540,000 297,000
12.750%, 10/15/2009 50,000 25,500
Rogers Cantel, 9.750%, 06/01/2016 170,000 182,750
SBA Communications Corp.,
Step-up Coupon, 0% to 03/01/2003,
12.000% to 03/01/2008 110,000 81,950
Spectrasite Holdings, Inc.:
Step-up Coupon, 0% to 04/15/2004,
11.250% to 04/15/2009 500,000 273,750
Step-up Coupon, 0% to 07/15/2003,
12.000% to 07/15/2008 510,000 351,900
10.750%, 03/15/2010 20,000 19,000
Telecorp PCS, Inc.:
Step-up-Coupon, 0% to 04/15/2004,
11.625 to 04/15/2009 650,000 438,750
10.625%, 07/15/2010 100,000 101,000
Teligent, Inc., 11.500%, 12/01/2007 280,000 123,200
Tritel PCS Inc.,
Step-up Coupon, 0% to 05/15/2004,
12.75% to 05/15/2009 260,000 174,200
Triton Communications, L.L.C.,
Step-up Coupon, 0% to 05/01/2003,
11.000% to 05/01/2008 880,000 660,000
---------------------------------------------------------------------------
5,030,025
</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>
FINANCIAL--1.8%
Eaton Vance CDO Class C,
13.680%, 07/15/2012 $200,000 $ 200,000
FRD Acquisition, 12.500%, 07/15/2004 20,000 7,400
HMH Properties, 7.875%, 08/01/2008 200,000 184,000
---------------------------------------------------------------------------
391,400
------------------------------------------------------------------------------------------------------------------------
MEDIA--13.4%
AMFM, Inc.:
Step-up Coupon, 0% to 02/01/2002,
12.750% to 02/01/2009 110,000 105,462
8.000%, 11/01/2008 330,000 333,712
American Lawyer Media, Inc.,
9.750%, 12/15/2007 330,000 312,675
Avalon Cable Holdings LLC,
Step-up Coupon, 0% to 12/01/03,
11.875% to 12/01/2008 200,000 136,000
CSC Holdings, Inc.:
8.125%, 08/15/2009 54,000 52,920
9.250%, 11/01/2005 100,000 101,000
10.500%, 05/15/2016 60,000 64,800
Charter Communications Holdings LLC,
8.250%, 04/01/2007 410,000 369,000
NTL Communications Corp.,
11.875%, 10/01/2010 20,000 19,575
NTL, Inc., 11.500%, 10/01/2008 255,000 248,625
Panavision, Inc.,
Step-up Coupon, 0% to 02/01/2002,
9.625% to 02/01/2006 370,000 92,500
Renaissance Media Group,
Step-up Coupon, 0% to 04/15/2003,
10.000% to 04/15/2008 130,000 87,100
Star Choice Communications, Inc.,
13.000%, 12/15/2005 50,000 55,000
TeleWest Communications, PLC:
Step-up Coupon, 0% to 10/01/2000,
11.000% to 10/01/2007 95,000 90,963
9.625%, 10/01/2006 30,000 27,300
11.250%, 11/01/2008 140,000 136,500
Transwestern Publishing:
Step-up Coupon, 0% to 11/15/2002,
11.875% to 11/15/2008 310,000 238,700
9.625%, 11/15/2007 340,000 339,150
United International Holdings,
Step-up Coupon, 0% to 02/15/2003,
10.750% to 02/15/2008 170,000 113,900
---------------------------------------------------------------------------
2,924,882
------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--0.5%
Spincycle, Inc.,
Step-up Coupon, 0% to 05/01/2001,
12.750% to 05/01/2005 350,000 105,000
---------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
DURABLES--0.5%
Airxcel, 11.000%, 11/15/2007 160,000 102,400
---------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--17.6%
Agriculture, Mining and Chemicals, Inc.,
10.750%, 09/30/2003 90,000 61,200
Berry Plastics Corp., 12.250%, 04/15/2004 330,000 310,200
Consumers International,
10.250%, 04/01/2005 200,000 68,000
</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>
Flowserve Corporation,
12.250%, 08/15/2010 $100,000 $ 103,000
GS Technologies:
12.000%, 09/01/2004 210,000 21,000
12.250%, 10/01/2005 370,000 37,000
Gaylord Container Corp.:
9.750%, 06/15/2007 260,000 182,000
9.875%, 02/15/2008 50,000 17,500
Grove Holdings LLC:
Step-up Coupon, 0% to 05/01/2003,
11.625% to 05/01/2009* 80,000 800
14.500%, 05/01/2010 137,630 1,376
Huntsman Package, 11.750%, 12/01/2004 200,000 202,500
NL Industries, Inc., 11.750%,
10/15/2003 710,000 717,100
Plainwell, Inc., 11.000%, 03/01/2008 320,000 64,000
Printpack, Inc., 10.625%, 08/15/2006 330,000 318,450
Riverwood International Corp.:
10.250%, 04/01/2006 10,000 9,950
10.625%, 08/01/2007 20,000 20,100
10.875%, 04/01/2008 820,000 750,300
SF Holdings Group, Inc.,
Step-up Coupon, 0% to 03/15/2003,
12.750% to 03/15/2008 470,000 244,400
Tenneco Automotive, Inc.,
11.625%, 10/19/2009 450,000 285,750
Texas Petrochemicals,
11.125%, 07/01/2006 500,000 425,000
---------------------------------------------------------------------------
3,839,626
------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--1.8%
Exodus Communications, Inc.,
11.625%, 07/15/2010 80,000 80,800
Flextronics International,
9.875%, 07/01/2010 110,000 113,025
PSINet, Inc.:
11.000%, 08/01/2009 160,000 102,400
11.500%, 11/01/2008 160,000 105,600
---------------------------------------------------------------------------
401,825
------------------------------------------------------------------------------------------------------------------------
ENERGY--3.7%
AES Corp., 9.375%, 09/15/2010 150,000 151,500
Chesapeake Energy Corp.,
9.625%, 05/01/2005 350,000 348,250
Key Energy Services, Inc.,
14.000%, 01/15/2009 100,000 114,000
Nuevo Energy, 9.375%, 10/01/2010 100,000 100,000
Triton Energy, Ltd., 8.875%, 10/01/2007 100,000 100,000
---------------------------------------------------------------------------
813,750
------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--4.2%
MMI Products, Inc., 11.250%, 04/15/2007 340,000 332,350
Metal Management, Inc.,
10.000%, 05/15/2008 870,000 87,000
Metals USA, Inc., 8.625%, 02/15/2008 175,000 133,000
Renco Steel Holdings Co., Series B,
10.875%, 02/01/2005 480,000 312,000
Republic Technologies International,
13.750%, 07/15/2009 260,000 52,000
---------------------------------------------------------------------------
916,350
</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>
CONSTRUCTION--4.1%
Del Webb Corp., 9.750%, 01/15/2008 $200,000 $ 186,000
Dimac Corp., 12.500%, 10/01/2008* 120,000 1,200
Lennar Corp., 9.950%, 05/01/2010 240,000 237,493
Standard Pacific Corp.:
8.000%, 02/15/2008 100,000 91,250
8.500%, 04/01/2009 200,000 188,500
Toll Corp.:
8.000%, 05/01/2009 100,000 94,500
8.125%, 02/01/2009 100,000 94,250
---------------------------------------------------------------------------
893,193
------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--2.3%
Travelcenters America, 10.250%,
04/01/2007 500,000 503,750
---------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
UTILITIES--1.6%
Azurix Corp.:
10.375%, 02/15/2007 80,000 72,800
10.750%, 02/15/2010 140,000 124,600
Calpine Corp:
7.750%, 04/15/2009 100,000 94,834
8.625%, 08/15/2010 50,000 49,852
---------------------------------------------------------------------------
342,086
---------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $25,340,724) 20,207,140
---------------------------------------------------------------------------
FOREIGN BONDS--U.S. $
DENOMINATED--3.6%
AES Corporation, 11.500%, 08/30/2010 100,000 105,750
Euramax International, PLC, 11.250%,
10/01/2006 660,000 574,200
Federal Republic of Brazil, 14.500%,
10/15/2009 100,000 110,500
---------------------------------------------------------------------------
TOTAL FOREIGN BONDS--U.S. $ DENOMINATED
(Cost $873,400) 790,450
---------------------------------------------------------------------------
BOND INVESTMENT PORTFOLIO--0.0% SHARES
Morgan Stanley High Yield Fund
(Cost $1,125) 100 1,138
---------------------------------------------------------------------------
EQUITY INVESTMENT PORTFOLIO--0.4%
I Shares Russell 2000 Index Fund
(Cost $104,030) 1,000 103,625
---------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK--0.2%
COMMUNICATIONS
TELEPHONE/
COMMUNICATIONS
World Access, Inc.
(Cost $106,904) 72 53,546
---------------------------------------------------------------------------
PREFERRED STOCKS--1.3%
COMMUNICATIONS--0.8%
CELLULAR TELEPHONE
Dobson Communications, PIK 181 166,520
Nextel Communications, Inc., PIK 10 9,600
---------------------------------------------------------------------------
176,120
</TABLE>
18 The accompanying notes are an integral part of the financial statements.
<PAGE> 19
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C> <C> <C> <C>
FINANCIAL--0.1%
REAL ESTATE
Crown American Realty Trust $ 560 $ 21,560
---------------------------------------------------------------------------
MANUFACTURING--0.4%
CONTAINERS & PAPER--0.2%
SF Holdings Group, Inc., PIK 10 41,360
---------------------------------------------------------------------------
MACHINERY/COMPONENTS--0.2%
Eagle-Picher Holdings, Inc. 20 45,000
---------------------------------------------------------------------------
86,360
---------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $429,574) 284,040
---------------------------------------------------------------------------
<CAPTION>
COMMON STOCKS--1.3%
<S> <C> <C> <C> <C> <C>
COMMUNICATIONS--0.1%
TELEPHONE/
COMMUNICATIONS
Tele1 Europe Holding AB - ADR* 1,761 15,849
---------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--0.4%
CONTAINERS & PAPER
Gaylord Container Corp.* 10,000 16,875
SF Holdings Group, Inc.* 131 655
Smurfit-Stone Container Corp.* 5,000 60,000
---------------------------------------------------------------------------
77,530
------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--0.3%
STEEL & METALS
Metals USA, Inc. 24,000 70,500
---------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--0.5%
BUILDING PRODUCTS
Waxman Industries, Inc.* 18,000 3,375
---------------------------------------------------------------------------
HOMEBUILDING
Hovnanian Enterprises Inc. "A"* 15,000 111,562
---------------------------------------------------------------------------
114,937
---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $523,498) 278,816
---------------------------------------------------------------------------
<CAPTION>
WARRANTS*--0.2%
<S> <C> <C> <C> <C> <C>
COMMUNICATIONS--0.0%
TELEPHONE/
COMMUNICATIONS
KMC Telecom Holdings, Inc. 160 640
Star Choice Communications 1,158 9,843
---------------------------------------------------------------------------
10,483
------------------------------------------------------------------------------------------------------------------------
FINANCIAL--0.2%
OTHER FINANCIAL
COMPANIES
Ono Finance PLC 360 32,400
---------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--0.0%
MISCELLANEOUS CONSUMER
Spincycle, Inc. 350 4
---------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
PRINTING/PUBLISHING--0.0%
American Banknote Corp. 100 1
---------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
DURABLES--0.0%
AEROSPACE
Decrane Holdings Co. 230 0
---------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--0.0%
STEEL & METALS
Republic Technologies International 260 3
---------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $8,677) 42,891
---------------------------------------------------------------------------
TOTAL INVESTMENTS PORTFOLIO--100.0%
(Cost $27,503,933) (a) $21,877,646
---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
NOTES ON KEMPER HIGH YIELD OPPORTUNITY FUND PORTFOLIO OF INVESTMENTS
* Non-income producing securities.
** Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
(a) The cost for federal income tax purposes was $27,577,664. At September 30,
2000, the net unrealized depreciation for all securities based on tax cost
was $5,700,018. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess market value over tax cost
of $300,111 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $6,000,129.
PIK denotes that interest or dividend is paid in kind.
20 The accompanying notes are an integral part of the financial statements.
<PAGE> 21
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD II
Portfolio of Investments at September 30, 2000
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS--0.7% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
State Street Bank and Trust Company, 6.480%,
10/02/2000, to be repurchased at $899,324**
(Cost $899,000) $ 899,000 $ 899,000
---------------------------------------------------------------------------------
<CAPTION>
U. S. GOVERNMENT OBLIGATIONS--7.2%
<S> <C> <C> <C> <C> <C>
U.S. Treasury Bonds:
6.500%, 02/15/2010 3,000,000 3,126,090
14.000%, 11/15/2011 2,000,000 2,795,000
15.750%, 11/15/2001 1,000,000 1,100,470
U.S. Treasury Note, 6.000%, 08/15/2009 2,000,000 2,010,000
---------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $9,013,516) 9,031,560
---------------------------------------------------------------------------------
<CAPTION>
CORPORATE BONDS--89.7%
<S> <C> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--16.8%
AFC Enterprises, 10.250%, 05/15/2007 1,570,000 1,562,150
AMF Bowling, Inc.:
Step-up Coupon, 0% to 03/15/2001,
12.250% to 03/15/2006 1,000,000 200,000
10.875%, 03/15/2006 60,000 13,200
Advantica Restaurant Co., 11.250%, 01/15/2008 170,000 94,350
Avondale Mills, 10.250%, 05/01/2006 1,060,000 1,007,000
Circus Circus Mandalay Resort Group,
6.450%, 02/01/2006 130,000 114,572
Eldorado Resorts, 10.500%, 08/15/2006 1,000,000 1,010,000
Finlay Enterprises, Inc., 9.000%, 05/01/2008 275,000 251,625
Finlay Fine Jewelry Co., 8.375%, 05/01/2008 320,000 294,400
Florida Panthers, 9.875%, 04/15/2009 1,860,000 1,794,900
Galey & Lord, Inc., 9.125%, 03/01/2008 730,000 463,550
Guitar Center Management,
11.000%, 07/01/2006 1,732,000 1,671,380
Harvey's Casino Resorts, 10.625%, 06/01/2006 890,000 925,600
Hines Horticulture, Inc., 11.750%, 10/15/2005 1,355,000 1,334,675
Hollywood Entertainment Corp.,
10.625%, 08/15/2004 620,000 477,400
Horseshoe Gaming Holdings,
8.625%, 05/15/2009 1,140,000 1,120,050
Horseshoe Gaming LLC, 9.375%, 06/15/2007 380,000 379,050
International Game Technology,
8.375%, 05/15/2009 510,000 498,525
Krystal Inc., 10.250%, 10/01/2007 930,000 697,500
MGM Grand, Inc., 9.750%, 06/01/2007 1,010,000 1,042,825
MGM Mirage, Inc., 8.500%, 09/15/2010 700,000 686,000
Mandalay Resort Group:
9.500%, 08/01/2008 140,000 142,450
10.250%, 08/01/2007 320,000 329,600
Mohegan Tribal Gaming Authority,
8.750%, 01/01/2009 1,770,000 1,752,300
National Vision Association, Ltd.,
12.750%, 10/15/2005 450,000 180,000
Park Place Entertainment, Inc.,
9.375%, 02/15/2007 690,000 700,350
Perkins Finance, L.P., 10.125%, 12/15/2007 980,000 921,200
Restaurant Co.,
Step-up Coupon, 0% to 05/15/2003,
11.250% to 05/15/2008 350,000 175,000
</TABLE>
The accompanying notes are an integral part of the financial statements. 21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Sealy Mattress Co.,
Step-up Coupon, 0% to 12/15/2002,
10.875% to 12/15/2007 $ 925,000 $ 686,813
Specialty Retailers, Inc.:
8.500%, 07/15/2005 430,000 17,200
9.000%, 07/15/2007* 750,000 1
Station Casinos, Inc.,
10.125%, 03/15/2006 630,000 641,025
---------------------------------------------------------------------------------
21,184,691
------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--0.2%
Grove Worldwide LLC, 9.250%, 05/01/2008 480,000 57,600
Jafra Cosmetics International, Inc.,
11.750%, 05/01/2008 100,000 96,000
US Can Corporation, 12.375%, 10/01/2010 40,000 40,800
---------------------------------------------------------------------------------
194,400
------------------------------------------------------------------------------------------------------------------------
HEALTH--0.6%
Mariner Post-Acute Network, Inc.,
Step-up Coupon, 0% to 11/01/2002,
10.500% to 11/01/2007 800,000 4,000
Tenet Healthcare Corp., 9.250%, 09/01/2010 760,000 795,150
---------------------------------------------------------------------------------
799,150
------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--23.7%
Allegiance Telecom, Inc., 12.875%, 05/15/2008 875,000 892,500
Call-Net Enterprises, Inc.:
Step-up Coupon, 0% to 05/15/2004,
10.800% to 05/15/2009 80,000 24,000
9.375%, 05/15/2009 170,000 76,500
Crown Castle International Corp.:
Step-up Coupon, 0% to 11/15/2002,
10.625% to 11/15/2007 220,000 172,700
Step-up Coupon, 0% to 08/01/2004,
11.25% to 08/01/2011 160,000 105,600
9.000%, 05/15/2011 60,000 55,800
9.500%, 08/01/2011 1,000,000 960,000
10.750%, 08/01/2011 320,000 324,800
Dobson Communications Corp.,
10.875%, 07/01/2010 200,000 194,000
Esprit Telecom Group, PLC,
11.500%, 12/15/2007 450,000 207,000
FairPoint Communications,
12.500%, 05/01/2010 580,000 565,500
Global Crossing Holdings Ltd.,
9.500%, 11/15/2009 2,150,000 2,139,250
Global Telesystems Group, 9.875%, 02/15/2005 570,000 250,800
Hermes Europe Railtel BV,
11.500%, 08/15/2007 250,000 115,000
ICG Holdings, Inc.,
Step-up Coupon, 0% to 09/15/2000,
13.500% to 09/15/2005 1,565,000 344,300
Intermedia Communications of Florida, Inc.:
Step-up Coupon, 0% to 05/15/2001,
12.500% to 05/15/2006 670,000 633,150
Step-up Coupon, 0% to 07/15/2002,
11.250% to 07/15/2007 1,000,000 835,000
KMC Telecom Holdings, Inc.:
Step-up Coupon, 0% to 02/15/2003,
12.500% to 02/15/2008 1,310,000 445,400
13.500%, 05/15/2009 1,010,000 636,300
Level 3 Communications, Inc.:
Step-up Coupon, 0% to 12/01/2003,
10.500% to 12/01/2008 250,000 145,000
11.250%, 03/15/2010 320,000 304,000
</TABLE>
22 The accompanying notes are an integral part of the financial statements.
<PAGE> 23
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
MGC Communications, 13.000%, 10/01/2004 $ 749,000 $ 614,180
McLeod USA, Inc., 9.250%, 07/15/2007 900,000 837,000
MetroNet Communications Corp.:
Step-up Coupon, 0% to 11/01/2002,
10.750% to 11/01/2007 100,000 88,875
Step-up Coupon, 0% to 06/15/2003,
9.950% to 06/15/2008 1,610,000 1,340,325
Metromedia Fiber Network, Inc.,
10.000%, 11/15/2008 600,000 555,000
Millicom International Cellular, S.A.,
Step-up Coupon, 0% to 06/01/2001,
13.500% to 06/01/2006 1,380,000 1,200,600
Nextel Communications, Inc:
Step-up Coupon, 0% to 09/15/2002,
10.650% to 09/15/2007 1,120,000 918,400
Step-up Coupon, 0% to 06/01/2004,
12.250% to 06/01/2009 1,000,000 550,000
9.375%, 11/15/2009 1,340,000 1,318,225
10.750%, 11/15/2008 50,000 46,750
PTC International Finance,
Step-up Coupon, 0% to 07/01/2002,
10.750% to 07/01/2007 400,000 280,000
PTC International Finance II,
11.250%, 12/01/2009 130,000 130,000
Price Communications Wireless,
9.125%, 12/15/2006 1,800,000 1,836,000
Primus Telecommunications Group:
11.250%, 01/15/2009 280,000 140,000
11.750%, 08/01/2004 770,000 423,500
12.750%, 10/15/2009 440,000 224,400
Rogers Cantel, Inc.:
9.750%, 06/01/2016 1,000,000 1,075,000
8.800%, 10/01/2007 500,000 495,000
SBA Communications Corp.,
Step-up Coupon, 0% to 03/01/2003,
12.000% to 03/01/2008 520,000 387,400
Spectrasite Holdings, Inc.:
Step-up Coupon, 0% to 04/15/2004,
11.250% to 04/15/2009 1,530,000 837,675
Step-up Coupon, 0% to 07/15/2003,
12.000% to 07/15/2008 2,180,000 1,504,200
10.750%, 03/15/2010 90,000 85,500
Telecorp PCS, Inc.:
Step-up-Coupon, 0% to 04/15/2004,
11.625% to 04/15/2009 1,690,000 1,140,750
10.625%, 07/15/2010 370,000 373,700
Teligent, Inc.:
Step-up Coupon, 0% to 03/01/2003,
11.500% to 03/01/2008 435,000 121,800
11.500%, 12/01/2007 660,000 290,400
Tritel PCS Inc.,
Step-up Coupon, 0% to 05/01/2004,
12.750% to 05/15/2009 1,540,000 1,031,800
Triton Communications, L.L.C.,
Step-up Coupon, 0% to 05/01/2003,
11.000% to 05/01/2008 990,000 742,500
Versatel Telecom:
11.875%, 07/15/2009 140,000 121,800
13.250%, 05/15/2008 180,000 162,000
</TABLE>
The accompanying notes are an integral part of the financial statements. 23
<PAGE> 24
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Viatel, Inc.,
Step-up Coupon, 0% to 04/15/2003,
12.500% to 04/15/2008 $ 290,000 $ 75,400
Voicestream Wireless Corp.,
10.375%, 11/15/2009 1,400,000 1,515,500
---------------------------------------------------------------------------------
29,890,280
------------------------------------------------------------------------------------------------------------------------
FINANCIAL--4.0%
Carlyle High Yield Partners,
12.240%, 05/31/2007 1,000,000 957,200
Eaton Vance CDO Class C,
13.680%, 07/15/2012 1,000,000 1,000,000
FRD Acquisition, 12.500%, 07/15/2004 100,000 37,000
HMH Properties, 7.875%, 08/01/2008 3,300,000 3,036,000
---------------------------------------------------------------------------------
5,030,200
------------------------------------------------------------------------------------------------------------------------
MEDIA--15.4%
AMFM, Inc.:
Step-up Coupon, 0% to 02/01/2002,
12.750% to 02/01/2009 300,000 287,625
8.000%, 11/01/2008 900,000 910,125
Adelphia Communications Corp.:
7.875%, 05/01/2009 540,000 452,250
9.375%, 11/15/2009 330,000 303,600
American Lawyer Media, Inc.,
Step-up Coupon, 0% to 12/15/2002,
12.250% to 12/15/2008 2,150,000 1,435,125
CSC Holdings, Inc.:
8.125%, 07/15/2009 1,600,000 1,568,000
9.250%, 11/01/2005 1,300,000 1,313,000
Chancellor Media Corp., 8.125%, 12/15/2007 250,000 252,500
Charter Communications Holdings LLC,
8.250%, 04/01/2007 1,400,000 1,260,000
Diamond Cable Communications, PLC,
13.250%, 09/30/2004 450,000 472,500
Echostar DBS Corp.:
9.250%, 02/01/2006 950,000 933,375
9.375%, 02/01/2009 720,000 705,600
Interep National Radio Sales, Inc.,
10.000%, 07/01/2008 1,650,000 1,460,250
NTL Communications Corp.,
11.875%, 10/01/2010 930,000 910,237
Outdoor Systems, Inc., 8.875%, 06/15/2007 900,000 923,625
Renaissance Media Group,
Step-up Coupon, 0% to 04/15/2003,
10.000% to 04/15/2008 1,600,000 1,072,000
Rogers Cablesystems Ltd., 10.000%, 03/15/2005 500,000 527,500
SFX Entertainment, Inc., 9.125%, 12/01/2008 1,000,000 1,045,000
TeleWest Communications, PLC:
Step-up Coupon, 0% to 10/01/2000,
11.000% to 10/01/2007 600,000 574,500
9.625%, 10/01/2006 190,000 172,900
11.250%, 11/01/2008 750,000 731,250
Transwestern Publishing, 9.625%, 11/15/2007 1,000,000 997,500
United International Holdings,
Step-up Coupon, 0% to 02/15/2003,
10.750% to 02/15/2008 570,000 381,900
United Pan-Europe Communications, 10.875%,
11/01/2007 780,000 678,600
---------------------------------------------------------------------------------
19,368,962
------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--3.3%
Allied Waste Industries, 7.625%, 01/01/2006 360,000 320,400
Avis Rent A Car, 11.000%, 05/01/2009 1,470,000 1,598,625
</TABLE>
24 The accompanying notes are an integral part of the financial statements.
<PAGE> 25
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Coinmach Corp., 11.750%, 11/15/2005 $ 720,000 $ 721,800
Kindercare Learning Centers, Inc.,
9.500%, 02/15/2009 1,000,000 925,000
La Petite Academy, Inc., 10.000%, 05/15/2008 680,000 414,800
Spincycle, Inc.,
Step-up Coupon, 0% to 05/01/2001,
12.750% to 05/01/2005 500,000 150,000
---------------------------------------------------------------------------------
4,130,625
------------------------------------------------------------------------------------------------------------------------
DURABLES--1.5%
Decrane Aircraft Holdings, Inc.,
12.000%, 09/30/2008 230,000 211,600
Fairchild Corp., 10.750%, 04/15/2009 590,000 477,900
United Rentals, Inc.:
9.000%, 04/01/2009 50,000 46,000
9.250%, 01/15/2009 1,220,000 1,137,650
---------------------------------------------------------------------------------
1,873,150
------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--11.1%
Agriculture, Mining and Chemicals, Inc.,
10.750%, 09/30/2003 440,000 299,200
BPC Holdings Corp., 12.500%, 06/15/2006 142,111 109,425
Berry Plastics Corp., 12.250%, 04/15/2004 1,500,000 1,410,000
Consumers International, 10.250%, 04/01/2005 1,400,000 476,000
Delco Remy International, 10.625%, 08/01/2006 455,000 445,900
Eagle-Picher Holdings, Inc., 9.375%, 03/01/2008 600,000 498,000
Flowserve Corporation, 12.250%, 08/15/2010 270,000 278,100
Fonda Group, 9.500%, 03/01/2007 650,000 539,500
GS Technologies, 12.000%, 09/01/2004 2,200,000 220,000
Gaylord Container Corp.:
9.750%, 06/15/2007 1,200,000 840,000
9.875%, 02/15/2008 240,000 84,000
Grove Holdings LLC,
Step-up Coupon, 0% to 05/01/2003,
11.625% to 05/01/2009 40,000 400
Huntsman Package, 11.750%, 12/01/2004 350,000 354,375
Millar Western Forest Products, Ltd.,
9.875%, 05/15/2008 610,000 561,200
NL Industries, Inc., 11.750%, 10/15/2003 200,000 202,000
Plainwell, Inc., 11.000%, 03/01/2008 400,000 80,000
Printpack, Inc.:
9.875%, 08/15/2004 1,570,000 1,546,450
10.625%, 08/15/2006 250,000 241,250
Riverwood International Corp.:
10.250%, 04/01/2006 60,000 59,700
10.625%, 08/01/2007 100,000 100,500
10.875%, 04/01/2008 2,020,000 1,848,300
SF Holdings Group, Inc.,
Step-up Coupon, 0% to 03/15/2003,
12.750% to 03/15/2008 490,000 254,800
Stone Container Corp.:
10.750%, 10/01/2002 500,000 507,500
11.500%, 08/15/2006 440,000 453,200
Tenneco Automotive, Inc.,
11.625%, 10/15/2009 1,800,000 1,143,000
Terex Corp., 8.875%, 04/01/2008 970,000 873,000
Texas Petrochemicals, 11.125%, 07/01/2006 500,000 425,000
U.S. Can Corp., 10.125%, 10/15/2006 120,000 128,400
---------------------------------------------------------------------------------
13,979,200
------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--1.5%
Exodus Communications, Inc.,
11.625%, 07/15/2010 430,000 434,300
Flextronics International, 9.875%, 07/01/2010 350,000 359,625
</TABLE>
The accompanying notes are an integral part of the financial statements. 25
<PAGE> 26
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
PSINet, Inc.:
10.000%, 02/15/2005 $ 30,000 $ 19,200
11.000%, 08/01/2009 720,000 460,800
11.500%, 11/01/2008 880,000 580,800
---------------------------------------------------------------------------------
1,854,725
------------------------------------------------------------------------------------------------------------------------
ENERGY--2.4%
AES Corp., 9.375%, 09/15/2010 830,000 838,300
Chesapeake Energy Corp., 9.625%, 05/01/2005 350,000 348,250
Continental Resources, Inc.,
10.250%, 08/01/2008 50,000 46,000
Key Energy Services, Inc., 14.000%, 01/15/2009 170,000 193,800
Nuevo Energy, 9.375%, 10/01/2010 130,000 130,000
Pen Holdings, Inc., 9.875%, 06/15/2008 470,000 352,500
Pride International, Inc., 10.000%, 06/01/2009 390,000 407,550
R&B Falcon Corp.:
9.500%, 12/15/2008 210,000 226,800
11.000%, 03/15/2006 120,000 138,000
Triton Energy, Ltd., 8.875%, 10/01/2007 350,000 350,000
---------------------------------------------------------------------------------
3,031,200
------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--1.9%
MMI Products, Inc., 11.250%, 04/15/2007 960,000 938,400
Metal Management, Inc., 10.000%, 05/15/2008 1,750,000 175,000
Metals USA, Inc., 8.625%, 02/15/2008 390,000 296,400
Renco Steel Holdings Co., Series B,
10.875%, 02/01/2005 1,100,000 715,000
Republic Technologies International,
13.750%, 07/15/2009 1,140,000 228,000
---------------------------------------------------------------------------------
2,352,800
------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--5.0%
Congoleum Corp., 8.625%, 08/01/2008 1,810,000 1,086,000
Del Webb Corp., 9.750%, 01/15/2008 60,000 55,800
Dimac Corp., 0.0%, 10/01/2008 600,000 6,000
Forecast Group, L.P., 11.375%, 12/15/2000 100,000 100,000
Hovnanian Enterprises, Inc.,
9.750%, 06/01/2005 1,200,000 1,068,000
Lennar Corp., 9.950%, 05/01/2010 850,000 841,120
Nortek, Inc., 9.875%, 03/01/2004 1,510,000 1,457,150
Standard Pacific Corp.
8.000%, 02/15/2008 100,000 91,250
8.500%, 04/01/2009 200,000 188,500
Toll Corp.
7.750%, 09/15/2007 80,000 75,200
8.000%, 05/01/2009 200,000 189,000
8.125%, 02/01/2009 1,100,000 1,036,750
8.750%, 11/15/2006 70,000 69,300
---------------------------------------------------------------------------------
6,264,070
------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.1%
Transtar Holdings, Inc., 13.375%, 12/15/2003 450,000 457,875
Travelcenters America, 10.250%, 04/01/2007 970,000 977,275
---------------------------------------------------------------------------------
1,435,150
</TABLE>
26 The accompanying notes are an integral part of the financial statements.
<PAGE> 27
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
UTILITIES--1.2%
Azurix Corp.:
10.375%, 02/15/2007 $ 260,000 $ 236,600
10.750%, 02/15/2010 530,000 471,700
Calpine Corp.:
7.750%, 04/15/2009 430,000 407,786
8.625%, 08/15/2010 420,000 418,761
---------------------------------------------------------------------------------
1,534,847
---------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $131,905,402) 112,923,450
---------------------------------------------------------------------------------
FOREIGN BONDS--U.S. $ DENOMINATED--2.3%
AES Corporation, 11.500%, 08/30/2010 260,000 274,950
Dolphin Telecom PLC, zero coupon, 05/15/2009 2,000,000 380,000
Euramax International, PLC, 11.250%,
10/01/2006 1,110,000 965,700
Federal Republic of Brazil, 14.500%,
10/15/2009 500,000 552,500
Kappa Beheer BV, 10.625%, 07/15/2009 700,000 719,250
---------------------------------------------------------------------------------
TOTAL FOREIGN BONDS--U.S. $ DENOMINATED
(Cost $3,862,886) 2,892,400
---------------------------------------------------------------------------------
COMMON STOCKS*--0.1% SHARES
COMMUNICATIONS--0.1%
TELEPHONE/COMMUNICATIONS
Tele1 Europe Holding AB--ADR 15,323 137,907
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--0.0%
CONTAINERS & PAPER
SF Holdings Group, Inc 98 490
---------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $284,581) 138,397
---------------------------------------------------------------------------------
WARRANTS*--0.0%
FINANCIAL--0.0%
OTHER FINANCIAL COMPANIES
Ono Finance PLC 650 58,500
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--0.0%
MISCELLANEOUS CONSUMER
Spincycle, Inc 500 5
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
DURABLES--0.0%
AEROSPACE
Decrane Holdings Co. 260 0
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--0.0%
STEEL & METALS
Republic Technologies International 1,140 11
---------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $11) 58,516
---------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $145,965,396) (a) $125,943,323
---------------------------------------------------------------------------------
</TABLE>
NOTES TO KEMPER HIGH YIELD II FUND PORTFOLIO OF INVESTMENTS
* Non-income producing security.
** Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
(a) The cost for federal income tax purposes was $146,292,003. At September 30,
2000, the net unrealized depreciation for all securities based on tax cost
was $20,348,680. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess value over tax cost of
$1,216,201, and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value of $21,564,881.
The accompanying notes are an integral part of the financial statements. 27
<PAGE> 28
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
As of September 30, 2000
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD
OPPORTUNITY FUND FUND II
<S> <C> <C>
ASSETS
Investments in securities, at value
(cost $27,503,933 and $145,965,396, respectively) $21,877,646 125,943,323
------------------------------------------------------------------------------------------------
Cash -- 93,350
------------------------------------------------------------------------------------------------
Receivable for investments sold 218,640 1,805,087
------------------------------------------------------------------------------------------------
Dividends receivable 720 --
------------------------------------------------------------------------------------------------
Interest receivable 760,578 3,598,287
------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 5,328 88,723
------------------------------------------------------------------------------------------------
TOTAL ASSETS 22,862,912 131,528,770
------------------------------------------------------------------------------------------------
LIABILITIES
Due to custodian bank 56,617 --
------------------------------------------------------------------------------------------------
Dividends payable -- 667,654
------------------------------------------------------------------------------------------------
Payable for investments purchased 200,493 1,622,364
------------------------------------------------------------------------------------------------
Payable for Fund shares redeemed 3,333 267,358
------------------------------------------------------------------------------------------------
Accrued management fee 24,119 540,625
------------------------------------------------------------------------------------------------
Other accrued expenses and payables 191,648 137,067
------------------------------------------------------------------------------------------------
Total liabilities 476,210 3,235,068
------------------------------------------------------------------------------------------------
NET ASSETS, AT VALUE $22,386,702 128,293,702
------------------------------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income (loss) $ -- (126,898)
------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (5,626,287) (20,022,073)
------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) (4,433,502) (7,503,973)
------------------------------------------------------------------------------------------------
Paid-in capital 32,446,491 155,946,646
------------------------------------------------------------------------------------------------
NET ASSETS, AT VALUE $22,386,702 128,293,702
------------------------------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net assets applicable to shares outstanding $ 9,483,681 46,703,912
------------------------------------------------------------------------------------------------
Outstanding shares of beneficial interest, $.01 par value, unlimited number
of shares authorized 1,366,333 6,004,692
------------------------------------------------------------------------------------------------
Net asset value and redemption price per share $6.94 7.78
------------------------------------------------------------------------------------------------
Maximum offering price per share (100/95.50 of net asset
value) $7.27 8.15
------------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $10,944,900 63,210,910
------------------------------------------------------------------------------------------------
Outstanding shares of beneficial interest, $.01 par value, unlimited number
of shares authorized 1,577,804 8,125,884
------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price (subject to contingent
deferred sales charge) per share $6.94 7.78
------------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $ 1,958,121 18,378,880
------------------------------------------------------------------------------------------------
Outstanding shares of beneficial interest, $.01 par value, unlimited number
of shares authorized 282,086 2,362,812
------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price (subject to contingent
deferred sales charge) per share $6.94 7.78
------------------------------------------------------------------------------------------------
</TABLE>
28 The accompanying notes are an integral part of the financial statements.
<PAGE> 29
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended September 30, 2000
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD
OPPORTUNITY FUND FUND II
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 211,077 283,476
-----------------------------------------------------------------------------------------------
Interest 3,531,578 17,027,642
-----------------------------------------------------------------------------------------------
Total income 3,742,655 17,311,118
-----------------------------------------------------------------------------------------------
Expenses:
Management fee 195,625 955,843
-----------------------------------------------------------------------------------------------
Services to shareholders 61,854 214,572
-----------------------------------------------------------------------------------------------
Custodian and accounting fees 836 73,495
-----------------------------------------------------------------------------------------------
Distribution services fees 129,530 697,482
-----------------------------------------------------------------------------------------------
Administrative services fees 64,288 367,639
-----------------------------------------------------------------------------------------------
Auditing 51,180 31,850
-----------------------------------------------------------------------------------------------
Legal 5,912 8,969
-----------------------------------------------------------------------------------------------
Trustees' fees and expenses 26,598 11,383
-----------------------------------------------------------------------------------------------
Reports to shareholders 61,004 49,969
-----------------------------------------------------------------------------------------------
Registration fees 109,229 42,543
-----------------------------------------------------------------------------------------------
Other 6,544 8,228
-----------------------------------------------------------------------------------------------
Total expenses, before expense reductions 712,600 2,461,973
-----------------------------------------------------------------------------------------------
Expense reductions (2,620) (471,566)
-----------------------------------------------------------------------------------------------
Total expenses, after expense reductions 709,980 1,990,407
-----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,032,675 15,320,711
-----------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (2,586,478) (6,225,546)
-----------------------------------------------------------------------------------------------
Futures -- (47,903)
-----------------------------------------------------------------------------------------------
(2,586,478) (6,273,449)
-----------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period on:
Investments (2,160,377) (10,721,698)
-----------------------------------------------------------------------------------------------
Net gain (loss) on investment transactions (4,746,855) (16,995,147)
-----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(1,714,180) (1,674,436)
-----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 29
<PAGE> 30
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
HIGH YIELD OPPORTUNITY FUND HIGH YIELD FUND II
----------------------------------------- -----------------------------------------
FOR THE PERIOD
NOVEMBER 30, 1998
YEAR YEAR YEAR (COMMENCEMENT OF
ENDED ENDED ENDED OPERATIONS) TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 3,032,675 3,483,242 15,320,711 8,183,014
--------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on
investment transactions (2,586,478) (1,847,005) (6,273,449) (1,230,523)
--------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) on investment
transactions during the period (2,160,377) (681,495) (10,721,698) (9,300,374)
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting
from operations (1,714,180) 954,742 (1,674,436) (2,347,883)
--------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A (1,416,321) (1,673,668) (5,882,712) (3,322,069)
--------------------------------------------------------------------------------------------------------------------
Class B (1,459,394) (1,411,189) (7,050,841) (3,693,281)
--------------------------------------------------------------------------------------------------------------------
Class C (314,796) (306,844) (2,362,537) (1,318,586)
--------------------------------------------------------------------------------------------------------------------
From net realized gains
Class A -- (83,318) -- --
--------------------------------------------------------------------------------------------------------------------
Class B -- (77,491) -- --
--------------------------------------------------------------------------------------------------------------------
Class C -- (15,014) -- --
--------------------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 10,026,086 26,623,273 45,896,529 186,210,485
--------------------------------------------------------------------------------------------------------------------
Reinvestment of distributions 2,248,863 4,857,110 7,444,521 4,476,964
--------------------------------------------------------------------------------------------------------------------
Cost of shares redeemed (22,236,548) (18,305,608) (62,087,299) (26,095,152)
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from Fund
share transactions (9,961,599) 13,174,775 (8,746,249) 164,592,297
--------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (14,866,290) 10,561,993 (25,716,776) 153,910,478
--------------------------------------------------------------------------------------------------------------------
Net assets at beginning of period 37,252,992 26,691,000 154,010,478 100,000
--------------------------------------------------------------------------------------------------------------------
Net assets at end of period $ 22,386,702 37,252,992 128,293,702 154,010,478
--------------------------------------------------------------------------------------------------------------------
</TABLE>
30 The accompanying notes are an integral part of the financial statements.
<PAGE> 31
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
FOR THE PERIOD
OCTOBER 1, 1997
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
KEMPER HIGH YIELD SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
OPPORTUNITY FUND 2000 1999 1998
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.33 8.89 9.50
-------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .81(a) .88(a) .70
-------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (1.33) (.54) (.60)
-------------------------------------------------------------------------------------------------------------
Total from investment operations (.52) .34 .10
-------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.87) (.85) (.67)
-------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.05) (.04)
-------------------------------------------------------------------------------------------------------------
Total distributions (.87) (.90) (.71)
-------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.94 8.33 8.89
-------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) (C) (6.91) 3.55 .59**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 9,484 17,223 12,249
-------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.90 1.53 1.27*
-------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.89 1.53 1.27*
-------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 10.35 9.64 8.31*
-------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 76 98 169*
-------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
FOR THE PERIOD
OCTOBER 1, 1997
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1998
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.33 8.89 9.50
-------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .76(a) .80(a) .63
-------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (1.35) (.54) (.61)
-------------------------------------------------------------------------------------------------------------
Total from investment operations (.59) .26 .02
-------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.80) (.77) (.59)
-------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.05) (.04)
-------------------------------------------------------------------------------------------------------------
Total distributions (.80) (.82) (.63)
-------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.94 8.33 8.89
-------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) (C) (7.71) 2.73 (.18)**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 10,945 16,646 12,222
-------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.66 2.40 2.03*
-------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 2.65 2.40 2.03*
-------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 9.58 8.77 7.55*
-------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 76 98 169*
-------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 32
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
FOR THE PERIOD
OCTOBER 1, 1997
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1998
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.34 8.89 9.50
-------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .78(a) .80(a) .62
-------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (1.38) (.53) (.60)
-------------------------------------------------------------------------------------------------------------
Total from investment operations (.60) .27 .02
-------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.80) (.77) (.59)
-------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.05) (.04)
-------------------------------------------------------------------------------------------------------------
Total distributions (.80) (.82) (.63)
-------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.94 8.34 8.89
-------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) (C) (7.82) 2.39 (.18)**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net asset, end of period ($ in thousands) 1,958 3,384 2,220
-------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.61 2.38 2.03*
-------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 2.60 2.38 2.03*
-------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 9.63 8.78 7.55*
-------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 76 98 169*
-------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Not annualized
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
(c) Total return would have been lower had certain expenses not been reduced.
32
<PAGE> 33
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
FOR THE PERIOD
NOVEMBER 30,
1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
SEPTEMBER 30, SEPTEMBER 30,
KEMPER HIGH YIELD II 2000 1999
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.76 9.50
-----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (a) .93 .72
-----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.99) (.70)
-----------------------------------------------------------------------------------------------------------
Total from investment operations (.06) .02
-----------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.92) (.76)
-----------------------------------------------------------------------------------------------------------
Total distributions (.92) (.76)
-----------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.78 8.76
-----------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) (.98) .19**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 46,704 57,029
-----------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.20 1.59*
-----------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .88 .39*
-----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 10.90 10.24*
-----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 66 79*
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
FOR THE PERIOD
NOVEMBER 30,
1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.77 9.50
-----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (a) .86 .68
-----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.99) (.71)
-----------------------------------------------------------------------------------------------------------
Total from investment operations (.13) .03
-----------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.86) (.70)
-----------------------------------------------------------------------------------------------------------
Total distributions (.86) (.70)
-----------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.78 8.77
-----------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) (1.73) (.43)**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 63,211 70,802
-----------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.96 2.19*
-----------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.63 1.00*
-----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 10.16 9.63*
-----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 66 79*
-----------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 34
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
FOR THE PERIOD
NOVEMBER 30,
1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.77 9.50
-----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (a) .86 .68
-----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.99) (.71)
-----------------------------------------------------------------------------------------------------------
Total from investment operations (.13) .03
-----------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.86) (.70)
-----------------------------------------------------------------------------------------------------------
Total distributions (.86) (.70)
-----------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.78 8.77
-----------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) (1.73) (.43)**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 18,379 26,179
-----------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.94 2.25*
-----------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.63 1.00*
-----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 10.13 9.63*
-----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 66 79*
-----------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Not annualized
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
(c) Total return would have been lower had certain expenses not been reduced.
34
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper High Yield Opportunity Fund, a diversified
series of Kemper High Yield Series, and Kemper High
Yield Fund II, a diversified series of Kemper
Income Trust are registered under the Investment
Company Act of 1940, as amended (the "1940 Act"),
as open end management investment companies
organized as Massachusetts business trusts.
Each Fund offers multiple classes of shares. Class
A shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I (none issued as of
September 30, 2000) shares are offered to a limited
group of investors, are not subject to initial or
contingent deferred sales charges and have lower
ongoing expenses than other classes.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
Each Fund's financial statements are prepared in
accordance with 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 market. If there are no
such bid and asked quotations, the most recent bid
quotation shall be used.
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
35
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS
most recent bid quotation supplied by a bona fide
market maker shall be used. Money market
instruments purchased with an original maturity of
sixty days or less are valued at amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
REPURCHASE AGREEMENTS. The Funds may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Funds through their
custodian or sub-custodian bank, receive delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
FUTURES CONTRACTS. A futures contract is an
agreement between a buyer or seller and an
established futures exchange or its clearinghouse
in which the buyer or seller agrees to take or make
a delivery of a specific amount of a financial
instrument at a specified price on a specific date
(settlement date). During the period, the Kemper
High Yield Fund II purchased interest rate futures
to manage the duration of the portfolio. In
addition, the Kemper High Yield Fund II also sold
interest rate futures to hedge against declines in
the value of portfolio securities.
Upon entering into a futures contract, the Fund is
required to deposit with a financial intermediary
an amount ("initial margin") equal to a certain
percentage of the face value indicated in the
futures contract. Subsequent payments ("variation
margin") are made or received by the Fund dependent
upon the daily fluctuations in the value of the
underlying security and are recorded for financial
reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction,
the Fund will realize a gain or loss equal to the
difference between the value of the futures
contract to sell and the futures contract to buy.
Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures
contracts, including the risk that an illiquid
secondary market will limit the Fund's ability to
close out a futures contract prior to the
settlement date and that a change in the value of a
futures contract may not correlate exactly with the
changes in the value of the securities or
currencies hedged. When utilizing futures contracts
to hedge, the Fund gives up the opportunity to
profit from favorable price movements in the hedged
positions during the term of the contract.
FEDERAL INCOME TAXES. Each Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the Funds paid no federal income taxes
and no federal income tax provision was required.
In addition, for the Kemper High Yield Opportunity
Fund from November 1, 1999 through September 30,
2000 the Fund incurred approximately $2,094,000 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. The Kemper
High Yield II Fund from November 1, 1999 through
September 30, 2000 incurred approximately
$5,231,000 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.
36
<PAGE> 37
NOTES TO FINANCIAL STATEMENTS
At September 30, 2000, the Kemper High Yield
Opportunity Fund had a net tax basis loss
carryforward of approximately $2,265,000, which may
be applied against any realized net taxable gains
of each succeeding year until fully utilized or
until September 30, 2007 ($274,000) or September
30, 2008 ($1,991,000), the respective expiration
dates, whichever occurs first.
At September 30, 2000, the Kemper High Yield II
Fund had a net tax basis loss carryforward of
approximately $1,947,000, which may be applied
against any realized net taxable gains of each
succeeding year until fully utilized or until
September 30, 2008, the respective expiration date,
whichever occurs first.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made monthly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, each Fund may periodically
make reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Realized gains and losses
from investment transactions are recorded on an
identified cost basis. All discounts are accreted
for both tax and financial reporting purposes.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated between the Funds in
proportion to their relative net assets.
--------------------------------------------------------------------------------
2
PURCHASES AND
SALES OF SECURITIES For the year ended September 30, 2000, investment
transactions (excluding short-term instruments) are
as follows:
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD
OPPORTUNITY FUND FUND II
-----------------------------
<S> <C> <C>
Purchases $22,596,747 92,336,007
Proceeds from sales 33,356,282 97,925,994
</TABLE>
--------------------------------------------------------------------------------
3
TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. Each Fund has a management
agreement with Scudder Kemper Investments, Inc.
("Scudder Kemper") and pays a monthly investment
management fee of 1/12 of the annual rate of .65%
of the first $250 million of average daily net
assets declining to .49% of average daily net
assets in excess of $12.5 billion. Management fees
incurred for the year ended September 30, 2000 are
as follows:
High Yield Opportunity Fund $195,625
High Yield Fund II 940,921 (fee after
expense
waiver of
$14,922)
37
<PAGE> 38
NOTES TO FINANCIAL STATEMENTS
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. Each Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the year ended September 30,
2000 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS RETAINED BY KDI
---------------------------
<S> <C>
High Yield Opportunity Fund $ 3,216
High Yield Fund II 31,028
</TABLE>
For services under the distribution services
agreement, each Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the year ended September 30, 2000 are as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES
AND CDSC
RECEIVED BY KDI
-----------------
<S> <C> <C>
High Yield Opportunity Fund $184,699
High Yield Fund II 942,448 (fee after
expense
waiver of $3,048)
</TABLE>
Unpaid amount at September 30, 2000 as follows:
High Yield Opportunity Fund $6,737
High Yield Fund II 67,192
ADMINISTRATIVE SERVICES AGREEMENT. Each Fund has an
administrative services agreement with Kemper
Distributors, Inc. (KDI). For providing information
and administrative services to shareholders, each
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets. KDI in turn has
various agreements with financial services firms
that provided these services and pays these firms
based on assets of fund accounts the firms service.
Administrative services fees (ASF) paid for the
year ended September 30, 2000 are as follows:
<TABLE>
<CAPTION>
ASF PAID ASF PAID
BY KDI BY THE FUND
TO AFFILIATES TO KDI
------------- -----------
<S> <C> <C> <C>
High Yield Opportunity Fund $ -- $64,288
High Yield Fund II 663 100 (fee after expense
waiver of $367,539)
</TABLE>
Unpaid amount at September 30, 2000 as follows:
High Yield Opportunity Fund $4,940
High Yield Fund II --
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds' transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of each Fund. Under the agreement,
for the year ended September 30, 2000, KSvC
received shareholder services fees as follows:
High Yield Opportunity Fund $ 36,688
High Yield Fund II 163,212
38
<PAGE> 39
NOTES TO FINANCIAL STATEMENTS
Unpaid amount at September 30, 2000 as follows:
High Yield Opportunity Fund $33,660
High Yield Fund II 48,407
FUND ACCOUNTING AGENT. Scudder Fund Accounting
Corporation is responsible for determining the
daily net asset value per share and maintaining the
portfolio and general accounting records of the
fund. The Kemper High Yield Fund II incurred no
accounting fees for the year ended September 30,
2000 after an expense waiver of $64,631.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Funds are also officers or trustees of
Scudder Kemper. For the year ended September 30,
2000, the Funds made no payments to their officers
and incurred trustees' fees to independent
trustees.
High Yield Opportunity Fund $26,598
High Yield Fund II 11,383
--------------------------------------------------------------------------------
4 CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the Funds:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
KEMPER HIGH SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
YIELD OPPORTUNITY ------------------------- ------------------------
FUND SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 471,483 3,862,247 1,507,482 $13,484,948
--------------------------------------------------------------------------------
Class B 490,693 3,931,015 1,178,995 10,552,504
--------------------------------------------------------------------------------
Class C 266,652 2,195,973 227,883 2,054,731
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 124,795 986,895 183,460 1,638,140
--------------------------------------------------------------------------------
Class B 131,562 1,034,270 254,355 2,288,867
--------------------------------------------------------------------------------
Class C 28,740 227,698 102,076 930,103
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (1,302,501) (10,605,152) (1,062,650) (9,528,364)
--------------------------------------------------------------------------------
Class B (1,038,097) (8,254,205) (747,786) (6,701,325)
--------------------------------------------------------------------------------
Class C (419,211) (3,340,340) (173,662) (1,544,829)
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 4,590 36,851 62,017 531,090
--------------------------------------------------------------------------------
Class B (4,590) (36,851) (62,017) (531,090)
--------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ (9,961,599) $13,174,775
--------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 30, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
KEMPER HIGH ------------------------- -------------------------
YIELD FUND II SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 2,147,102 18,374,793 7,548,250 $ 70,659,914
--------------------------------------------------------------------------------
Class B 2,340,384 19,941,345 8,754,074 81,880,388
--------------------------------------------------------------------------------
Class C 828,749 7,111,005 3,571,130 33,289,183
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 361,417 3,030,443 195,727 1,790,143
--------------------------------------------------------------------------------
Class B 363,272 3,045,269 204,561 1,873,918
--------------------------------------------------------------------------------
Class C 162,691 1,368,809 88,872 812,902
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (3,067,325) (25,992,077) (1,280,785) (11,806,139)
--------------------------------------------------------------------------------
Class B (2,597,667) (22,007,849) (846,435) (7,732,263)
--------------------------------------------------------------------------------
Class C (1,615,116) (13,617,987) (677,024) (6,175,750)
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 54,799 469,386 42,000 381,000
--------------------------------------------------------------------------------
Class B (53,814) (469,386) (42,000) (381,000)
--------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ (8,746,249) $164,592,297
--------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5 EXPENSE OFF-SET
ARRANGEMENTS Each Fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of each Fund's
expenses. During the year ended September 30, 2000,
the High Yield Opportunity Fund's and High Yield
Fund II's custodian and transfer agent fees were
reduced by $836 and $1,784, and $6,764 and $14,662,
respectively, under these arrangements.
--------------------------------------------------------------------------------
6 LINE OF CREDIT The High Yield Opportunity Fund may borrow money
for leverage purposes up to a maximum of 20% of the
total assets of the Fund including the amount
borrowed. The agreement is with the Bank of America
and is available through December 18, 2000. At
September 30, 2000 there were no loans outstanding.
The High Yield Fund II and several Kemper funds
(the "Participants") share in a $750 million
revolving credit facility 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 their net assets under the
agreement.
40
<PAGE> 41
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER HIGH YIELD OPPORTUNITY FUND
KEMPER HIGH YIELD FUND II
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of Kemper High Yield Opportunity Fund
and Kemper High Yield Fund II, 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 each
of Kemper High Yield Opportunity Fund and Kemper High Yield Fund II at September
30, 2000, the results of their operations, the changes in their net assets and
the financial highlights for each of the fiscal periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
November 16, 2000
41
<PAGE> 42
NOTES
42
<PAGE> 43
NOTES
43
<PAGE> 44
<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 LINDA J. WONDRACK
and 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 KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
.............................................................................................
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
TRUSTEES&OFFICERS
[KEMPER FUNDS LOGO] Long-term investing in a short-term world(SM)
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This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Fund prospectus.
KHYFS - 2 (11/25/00) 1124140
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
