<PAGE> 1
DEAR SHAREHOLDER:
We are pleased to provide you with an overview of Kemper Strategic Income Fund
and the fixed-income market.
PERFORMANCE HIGHLIGHTS
- The fund continued to pay $0.1275 per share on a monthly basis. At the end of
May, the fund's distribution rate was 11.50% based on net asset value, and
11.55% based on market price. Recently, on June 30, the fund announced an
increase in its monthly dividend to $0.13 per share. This reflects a higher
level of earnings by the fund.
- The fund returned 13.32%, based on a net asset value, for the six-month period
compared with an average return of 11.48% for the 16 closed-end general bond
funds tracked by Lipper Analytical Services, Inc.*
- The fund's closing price on May 31, 1995, was $13.25. Based on its net asset
value of $13.30 on this date, the fund was trading at a 0.38% discount.
- The fund's total return for the period based on its close on the New York
Stock Exchange was 5.14%.
MARKET REVIEW
Since we last wrote to you at the end of November of 1994, we are happy to
report that the bond market has greatly improved. To give you an idea of the
change that's occurred -- the Salomon Brothers Broad Investment Grade Bond
Index,** which is a broad measure of bond activity, rose 11.56% over the six
months ended May 31, 1995, compared to a decline of 0.04% for the six months
prior to the November-end. Bond yields which move inversely to bond prices have
also fallen. For example, the yield on the 10-year Treasury fell from 7.91% at
the end of November, to 6.29% at the end of May.
In late November, economic data began to suggest that the economy had slowed
from the very strong pace of earlier in 1994. As you may know, slower economic
growth is usually positive for bond prices because it implies that inflation,
which erodes the value of fixed payments, is less likely to rise. Throughout the
first quarter of 1995, economic data such as industrial production, retail
sales, employment and consumer confidence continued to be weak. Since these
suggested slower economic growth, yields declined and bond prices rallied.
FUND REVIEW
Given the returns of the various sectors of the bond market, our allocation
among these sectors proved to be fair. As mentioned before, the fund returned
13.32% on a net asset value basis compared to an average return of 11.48% for
the Lipper general bond fund, closed-end fund category.
High yield bonds, which composed approximately one-third of the fund's assets,
were one of the best performing asset classes during the period and advanced
12.88% according to the Salomon Brothers High Yield Market Index.+ High yield
bonds were good performers because of favorable market fundamentals. As bond
yields fell for most of the period, the demand for the higher income offered by
high yield corporates grew. This and lower supply, because of a drop in the
new-issuance of corporate bonds, was favorable for corporate bond prices. In the
fund's government component, we concentrated on higher yielding mortgage-backed
securities. Mortgage-backed securities performed favorably and returned 11.05%
according to the Salomon Brothers Mortgage Index.++ Mortgages outperformed
Treasuries of comparable maturities in the first quarter of 1995 but
underperformed in May.
The fund held approximately one-third of its assets in emerging market bonds
during the six-month period. Emerging markets were volatile during the period,
largely because of the surprise devaluation of the Mexican Peso during December
of 1994. Prior to the devaluation, we purchased put options on the fund's
Argentinean bonds. (Argentina was the predominant country in the fund's emerging
market position.) These put options acted as a hedge and helped mitigate some of
the volatility in the market.
1
<PAGE> 2
It is notable that at the end of May, emerging market bond prices had nearly
recovered from their lows following the peso's devaluation.
PORTFOLIO COMPOSITION
The fund's composition was as follows:
<TABLE>
<CAPTION>
% OF PORTFOLIO % OF PORTFOLIO % OF PORTFOLIO
SECURITY 5/31/95 2/28/95 11/30/94
-------- -------------- -------------- --------------
<S> <C> <C> <C>
High yield
corporates 32 34 31
Emerging markets
(U.S. dollar
denominated) 32 24 32
Mortgage pass-
throughs 34 37 34
Cash equivalents
and
receivables 0 2 3
Other 2 3 0
--- --- ---
Total 100 100 100
</TABLE>
OUTLOOK
While a temporary correction in some of the economic data is possible, we think
that the persuasiveness of slower economic data is compelling and that it
supports the theory that the slowdown in growth is not merely a pause but a
trend reversal from last year's pace.
Slower economic growth, which keeps inflation tame, would be positive for all
bonds, including high yield bonds, since lower inflation helps preserve the
value of fixed-income payments. Our outlook, then, is favorable.
In the high yield sector, slower economic growth will likely limit the potential
for price-appreciation. However, shareholders can continue to benefit from the
high level of income potential that high yield bonds offer relative to other
investments.
We expect to remain active in emerging markets and believe that they continue to
represent good
investment opportunities relative to global fixed income markets. We believe
that the fundamental economic progress made in many emerging markets countries
has been substantial and underscores the ongoing value in this sector as a
whole.
Thank you for your continued support of Kemper Strategic Income Fund and we look
forward to serving you in the future.
Sincerely,
Portfolio Management Team
Mike McNamara,
Vice President and Portfolio Co-Manager
Harry Resis,
Vice President and Portfolio Co-Manager
Paul Sloan,
Vice President and Portfolio Co-Manager
Jonathan Trutter,
Vice President and Portfolio Co-Manager
* Lipper Analytical Services, Inc. performance is based upon changes in net
asset value with all dividends reinvested. Performance is historical and does
not reflect future results.
** Salomon Brothers Broad Investment Grade (BIG) Bond Index is a market
capitalization - weighted index that covers an all-inclusive universe of
institutionally traded U.S. Treasury, agency, mortgage, and corporate
securities. This index includes all fixed-rate bonds with a maturity of one
year or longer and issues with at least a $50 million amount outstanding
($200 million for mortgage coupons). Source is Salomon Brothers Inc.
+ Salomon Brothers High Yield Market Index includes cash-pay and
deferred-interest bonds with remaining maturities of at least one year.
Source is Salomon Brothers Inc.
++ Salomon Brothers Mortgage Index is an unmanaged index comprised of 30- and
15-year Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation
(FHLMC) pass-throughs, and FNMA and FHLMC balloon mortgages.
Statistical Note: Current annualized distribution rate is the latest monthly
dividend shown as an annualized percentage of the net asset value (or market
price) on the date shown. Distribution rate simply measures the level of
dividends and is not a complete measure of performance. Total return measures
aggregate change in net asset value (or market value) assuming reinvestment of
dividends. Returns are historical and do not represent future performance.
Market price, net asset value and returns fluctuate. Portfolio composition will
change over time. Additional information concerning performance is contained in
the Financial Highlights appearing at the end of this report.
2
<PAGE> 3
ANNUAL SHAREHOLDERS MEETING
We are pleased to report that all six trustees have been re-elected to the Board
of Trustees of Kemper Strategic Income Fund at the annual meeting held on May
16, 1995. The Trustees are: Arthur R. Gottschalk, Frederick T. Kelsey, David B.
Mathis, Stephen B. Timbers, John B. Tingleff and John G. Weithers.
Along with the re-election of the Trustees, shareholders were asked to ratify
the selection of Ernst & Young LLP as the independent auditors for the fund. The
results of the shareholders' vote at the May 16, 1995 meeting were as follows:
- Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
Arthur R. Gottschalk 3,158,927 57,405
Frederick T. Kelsey 3,159,950 56,382
David B. Mathis 3,158,336 57,996
Stephen B. Timbers 3,157,531 58,801
John B. Tingleff 3,160,256 56,076
John G. Weithers 3,160,491 55,841
</TABLE>
- Ratification of the selection of Ernst & Young LLP as independent auditors for
the fund
For: 3,164,064
Against: 19,142
3
<PAGE> 4
PORTFOLIO OF INVESTMENTS May 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
------------ -------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS
------------------------------------------------------------
Government National Mortgage
Association Certificates
8.00%, 2022-2024 $ 12,086 $12,384
7.50%, 2023-2024 10,044 10,106
------------------------------------------------------------
TOTAL U.S. GOVERNMENT
OBLIGATIONS-49.9%
(Cost: $21,304) 22,490
------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS
------------------------------------------------------------
(c)Republic of Argentina
6.187%, 2002 (Pre 4) 8,900 5,712
7.312%, 2005 10,025 6,629
6.187%, 2007 (Pro 2) 4,400 2,724
------------------------------------------------------------
Federal Republic of Brazil,
8.00%, 2014 6,722 3,395
------------------------------------------------------------
(a)Sovereign Value Trust II
(Republic of Argentina) 6.70%,
2005 2,500 1,580
------------------------------------------------------------
United Mexican States, 6.25%,
2019, with value recovery
rights expiring 2003 2,000 1,115
------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT
OBLIGATIONS-46.9%
(Cost: $21,042) 21,155
------------------------------------------------------------
CORPORATE OBLIGATIONS
BROADCASTING, CABLESYSTEMS AND
PUBLISHING-11.1%
------------------------------------------------------------
Act III Broadcasting, Inc.,
9.625%, 2003 500 490
------------------------------------------------------------
Affinity Group, Inc., 11.50%,
2003 500 500
------------------------------------------------------------
(b)Australis Media, units,
14.00%, 2003 400 204
------------------------------------------------------------
(b)Bell Cablemedia PLC,
11.95%, 2004 370 242
------------------------------------------------------------
CF Cable TV Inc., 11.625%,
2005 110 117
------------------------------------------------------------
Cablevision Industries
Corporation, 9.25%, 2008 500 505
------------------------------------------------------------
Cablevision Systems Company,
9.875%, 2013 450 464
------------------------------------------------------------
<CAPTION>
Principal
Amount Value
------------ -------
<S> <C> <C>
Century Communications Corp.,
11.875%, 2003 $ 250 $ 266
------------------------------------------------------------
Continental Cablevision Inc.,
9.50%, 2013 250 253
------------------------------------------------------------
International CableTel
Incorporated, zero coupon,
2005 1,130 641
------------------------------------------------------------
Rogers Cablesystems Limited,
10.00%, 2005 140 142
------------------------------------------------------------
Sinclair Broadcasting Group,
Inc., 10.00%, 2003 500 500
------------------------------------------------------------
Videotron Groupe, 10.625%,
2005 90 94
------------------------------------------------------------
(b)Videotron Holdings PLC,
11.12%, 2004 250 160
------------------------------------------------------------
Webcraft Technologies, Inc.,
9.375%, 2002 500 447
------------------------------------------------------------
5,025
BUSINESS SERVICES-1.5%
------------------------------------------------------------
Merisel, Inc., 12.50%, 2004 250 220
------------------------------------------------------------
Outdoor Systems, 10.75%, 2003 500 480
------------------------------------------------------------
700
CHEMICALS-1.3%
------------------------------------------------------------
Pioneer Americas Acquisition
Corp., 13.375%, 2005 240 251
------------------------------------------------------------
Polymer Group Inc., 12.25%,
2002 135 136
------------------------------------------------------------
Rexene Corporation, 11.75%,
2004 170 185
------------------------------------------------------------
572
COMMUNICATIONS-3.7%
------------------------------------------------------------
(b)Call-Net Enterprises Inc.,
13.25%, 2004 330 197
------------------------------------------------------------
(b)Celcaribe, S.A., 13.50%,
2004 300 252
------------------------------------------------------------
(b)Echostar Communications,
units,
12.875%, 2004 700 333
------------------------------------------------------------
Intermedia Communications
Florida, units,
13.50%, 2005 200 201
------------------------------------------------------------
Paging Network Inc., 11.75%,
2002 500 539
------------------------------------------------------------
USA Mobile Communications,
Inc. II,
14.00%, 2004 150 166
------------------------------------------------------------
1,688
</TABLE>
4
<PAGE> 5
(Dollars in thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
------------ -------
<S> <C> <C>
CONSUMER PRODUCTS AND
SERVICES-5.0%
------------------------------------------------------------
Bally's Park Place Funding,
Inc., 9.25%, 2004 $ 500 $ 459
------------------------------------------------------------
Cinemark USA, Inc., 12.00%,
2002 500 542
------------------------------------------------------------
Empress River Casino, 10.75%,
2002 200 202
------------------------------------------------------------
Mid-American Waste Systems
Inc., 12.25%, 2003 520 536
------------------------------------------------------------
Players International,
10.875%, 2005 70 71
------------------------------------------------------------
Santa Fe Hotel, Inc., 11.00%,
2000 500 430
------------------------------------------------------------
2,240
DRUGS AND HEALTH CARE-2.2%
------------------------------------------------------------
Charter Medical Corporation,
11.25%, 2004 500 530
------------------------------------------------------------
Dade International Inc.,
13.00%, 2005 160 170
------------------------------------------------------------
Ornda Healthcorporation,
12.25%, 2002 250 275
------------------------------------------------------------
975
ENERGY AND RELATED SERVICES-1.9%
------------------------------------------------------------
Chesapeake Energy Corp.,
10.50%, 2002 80 81
------------------------------------------------------------
Empire Gas Corporation, 7.00%,
2004, with warrants
expiring 2004 260 211
------------------------------------------------------------
Gerrity Oil & Gas, 11.75%,
2004 500 470
------------------------------------------------------------
WRT Energy Corporation, units,
13.875%, 2002 90 92
------------------------------------------------------------
854
FINANCIAL SERVICES, HOME
BUILDING AND REAL ESTATE-3.0%
------------------------------------------------------------
(b)Building Materials
Corporation of America,
11.75%, 2004 1,100 671
------------------------------------------------------------
Hovnanian Kent, 11.25%, 2002 500 459
------------------------------------------------------------
The Presley Companies, 12.50%,
2001 250 210
------------------------------------------------------------
1,340
<CAPTION>
Principal
Amount Value
------------ -------
<S> <C> <C>
MANUFACTURING, METALS AND
TECHNOLOGY-9.1%
------------------------------------------------------------
Aftermarket Technology,
12.00%, 2004 $ 500 $ 530
------------------------------------------------------------
BE Aerospace, 9.75%, 2003 500 495
------------------------------------------------------------
Day International Group,
11.125%, 2005 40 41
------------------------------------------------------------
Exide Corporation
10.75%, 2002 500 528
10.00%, 2005 100 102
------------------------------------------------------------
Foamex L.P., 9.50%, 2000 500 498
------------------------------------------------------------
(b)Foamex - JPS Automotive
L.P., 14.00%, 2004, with
warrants expiring 1999 160 91
------------------------------------------------------------
Great Dane Holdings, 12.75%,
2001 500 505
------------------------------------------------------------
Gulf States Steel, units,
13.50%, 2003 200 203
------------------------------------------------------------
Jordan Industries, 10.375%,
2003 150 143
------------------------------------------------------------
(a)(c)Lehman (K&F) Promissory Note,
6.062%, 1997 44 41
------------------------------------------------------------
Nortek, Inc., 9.875%, 2004 680 645
------------------------------------------------------------
SPX Corporation, 11.75%, 2002 250 266
------------------------------------------------------------
4,088
PAPER AND FOREST PRODUCTS
AND CONTAINERS-3.0%
------------------------------------------------------------
(b)Gaylord Container
Corporation, 12.75%, 2005 500 487
------------------------------------------------------------
Repap New Brunswick, 10.625%,
2005 210 213
------------------------------------------------------------
Sweetheart Cup Company Inc.,
10.50%, 2003 500 490
------------------------------------------------------------
S.D. Warren Company, 12.00%,
2004 170 185
------------------------------------------------------------
1,375
RETAILING-4.5%
------------------------------------------------------------
Beatrice Foods, Inc.,
12.00%, 2001 500 460
------------------------------------------------------------
Color Tile, Inc., 10.75%, 2001 500 320
------------------------------------------------------------
Dominick's Finer Foods,
10.875%, 2005 210 213
------------------------------------------------------------
(b)International Semi-Tech
Microelectronics, Inc.,
11.50%, 2003 1,000 499
------------------------------------------------------------
Service Merchandise Company,
Inc., 9.00%, 2004 30 24
------------------------------------------------------------
</TABLE>
5
<PAGE> 6
(Dollars in thousands)
<TABLE>
<CAPTION>
Principal
Amount
or Number
of Shares Value
------------ -------
<S> <C> <C>
Thrifty Payless Inc., 12.25%,
2004 $ 500 $ 520
------------------------------------------------------------
2,036
TRANSPORTATION-1.1%
------------------------------------------------------------
OMI Corp., 10.25%, 2003 590 496
------------------------------------------------------------
TOTAL CORPORATE
OBLIGATIONS-47.4%
(Cost: $21,469) 21,389
------------------------------------------------------------
COMMON AND PREFERRED STOCKS
------------------------------------------------------------
Echostar Communications 4,200shs. 46
------------------------------------------------------------
Panamsat Corporation, PIK 100 105
------------------------------------------------------------
TOTAL COMMON AND
PREFERRED STOCKS-0.3%
(Cost: $129) 151
------------------------------------------------------------
<CAPTION>
Contracts Value
------------ -------
<S> <C> <C>
LONG PUT OPTIONS-.1%
(Cost: $14)
------------------------------------------------------------
Republic of Argentina Spread,
June 1995; 525 Strike 500cts. $ 31
------------------------------------------------------------
TOTAL INVESTMENTS-144.6%
(Cost: $63,958) 65,216
------------------------------------------------------------
LIABILITIES, LESS CASH AND
OTHER ASSETS-(44.6)% (20,107)
------------------------------------------------------------
NET ASSETS-100% $45,109
------------------------------------------------------------
</TABLE>
See accompanying Notes to Portfolio of Investments.
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The following securities may require registration under the Securities Act
of 1933 or an exemption therefrom in order to effect sale in the ordinary
course of business; they were valued at cost on the dates of acquisition.
These securities are valued at fair value as determined in good faith by the
Board of Trustees of the Fund. There were no market quotations available for
unrestricted securities of the same class on the dates of acquisition. At
May 31, 1995, the value of the Fund's restricted securities was $1,621,000
which represented 3.6% of net assets.
<TABLE>
<CAPTION>
DATE OF PRINCIPAL UNIT
SECURITY DESCRIPTION ACQUISITION AMOUNT COST
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lehman (K&F) Promissory Note, 6.062%, 1997 July 1994 $ 43,750 $ 90.75
--------------------------------------------------------------------------------------------------
Sovereign Valley Trust II, 6.70%, 2005 August 1994 2,500,000 66.625
--------------------------------------------------------------------------------------------------
</TABLE>
(b) Deferred interest obligation; currently zero coupon under terms of the
initial offering.
(c) Variable rate securities. The rates shown are effective rates on May 31,
1995. The dates shown represent the final maturity of the obligations.
"PIK" denotes that the interest or dividends is paid in kind.
Based on the cost of investments of $63,958,000 for federal income tax purposes
at May 31, 1995, the aggregate gross unrealized appreciation was $3,402,000, the
aggregate gross unrealized depreciation was $2,144,000 and the net unrealized
appreciation of investments was $1,258,000.
See accompanying Notes to Financial Statements.
6
<PAGE> 7
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1995
(in thousands)
<TABLE>
<S> <C>
ASSETS
----------------------------------------------------------
Investments, at value
(Cost: $63,958) $ 65,216
----------------------------------------------------------
Interest rate swap agreements, at value 504
----------------------------------------------------------
Cash 487
----------------------------------------------------------
Receivable for:
Investments sold 792
----------------------------------------------------------
Interest 1,014
----------------------------------------------------------
Deferred organization costs 37
----------------------------------------------------------
Total assets 68,050
----------------------------------------------------------
LIABILITIES AND NET ASSETS
----------------------------------------------------------
Liability under reverse repurchase agreements 21,787
----------------------------------------------------------
Payable for:
Investments purchased 1,109
----------------------------------------------------------
Management fee 31
----------------------------------------------------------
Other 14
----------------------------------------------------------
Total liabilities 22,941
----------------------------------------------------------
Net assets applicable to 3,391
shares outstanding, $.01 par value,
equivalent to $13.30 per share $ 45,109
----------------------------------------------------------
ANALYSIS OF NET ASSETS
----------------------------------------------------------
Net amount received from issuance of
shares on account of capital $ 47,365
----------------------------------------------------------
Accumulated net realized loss on sales of
investments (4,587)
----------------------------------------------------------
Unrealized appreciation of investments 1,762
----------------------------------------------------------
Undistributed net investment income 569
----------------------------------------------------------
Net assets applicable to shares outstanding $ 45,109
----------------------------------------------------------
Net asset value per share ($45,109 / 3,391
shares outstanding) $13.30
----------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
STATEMENT OF OPERATIONS
Six months ended May 31, 1995
(in thousands)
<TABLE>
<S> <C>
INTEREST INCOME $3,563
----------------------------------------------------------
EXPENSES
----------------------------------------------------------
Management fee 173
----------------------------------------------------------
Interest expense 621
----------------------------------------------------------
Custodian and transfer agent fees and
related expenses 32
----------------------------------------------------------
Professional fees 14
----------------------------------------------------------
Trustees' fees and other 14
----------------------------------------------------------
Total expenses 854
----------------------------------------------------------
Net investment income 2,709
----------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
----------------------------------------------------------
Net realized loss on sales of investments (3,299)
----------------------------------------------------------
Net change in balance of unrealized
depreciation of investments 5,914
----------------------------------------------------------
Net gain on investments 2,615
----------------------------------------------------------
Net increase in net assets resulting
from operations $5,324
----------------------------------------------------------
</TABLE>
7
<PAGE> 8
STATEMENTS OF CHANGES IN NET ASSETS
AND CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
APRIL 29,
SIX MONTHS 1994
ENDED TO
MAY 31, NOVEMBER 30,
1995 1994
---------- ------------
<S> <C> <C>
OPERATIONS
------------------------------------------------------------
Net investment income $ 2,709 2,929
------------------------------------------------------------
Net realized loss on investments (3,299) (1,286)
------------------------------------------------------------
Net change in unrealized
appreciation/depreciation 5,914 (4,152)
------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 5,324 (2,509)
------------------------------------------------------------
Distribution from net investment
income (2,927) (2,144)
------------------------------------------------------------
Proceeds from shares issued in
reinvestment of dividends (22
shares in 1995 and 8 shares in
1994) 322 108
------------------------------------------------------------
Net proceeds from shares sold
(3,350 shares) -- 46,835
------------------------------------------------------------
Total increase in net assets 2,719 42,290
------------------------------------------------------------
NET ASSETS
------------------------------------------------------------
Beginning of period 42,390 100
------------------------------------------------------------
End of period (including
undistributed net investment
income of $569 in 1995 and $787 in
1994) 45,109 42,390
------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------------------------------
Increase (decrease) in net
assets
from operations 5,324 (2,509)
-----------------------------------------------------------
Non-cash items (4,048) 4,020
-----------------------------------------------------------
Purchase of investments (583) (65,640)
-----------------------------------------------------------
Net cash provided by (used
in) operating activities 693 (64,129)
-----------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES
-----------------------------------------------------------
Proceeds from:
Reverse repurchase
agreements 1,379 20,298
-----------------------------------------------------------
Issuance of capital stock -- 47,235
-----------------------------------------------------------
Payments for:
Distributions to
shareholders (2,605) (2,036)
-----------------------------------------------------------
Organization and offerings
costs -- (448)
-----------------------------------------------------------
Net cash (used in) provided
by financing activities (1,226) 65,049
-----------------------------------------------------------
Net (decrease) increase in
cash (533) 920
-----------------------------------------------------------
Cash at beginning of period 1,020 100
-----------------------------------------------------------
Cash at end of period $ 487 1,020
-----------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF FUND
The Fund is registered under the Investment Company Act of 1940 as a
diversified, closed-end management investment company.
INVESTMENT VALUATION
Investments are stated at value. Fixed income securities are valued by using
market quotations, or independent pricing services that use prices provided by
market makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Exchange traded options
are valued at the last sale price unless there is no sale price, in which event
prices provided by market makers are used. Over-the-counter traded options and
interest rate swap agreements are valued based upon prices provided by market
makers. Financial futures and options thereon are valued at the settlement price
established each day by the board of trade or exchange on which they are traded.
Other securities and assets are valued at fair value as determined in good faith
by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed). Interest income is recorded on the accrual basis and
includes premium, original issue discount and market discount amortization.
Payments received or made under interest rate swap agreements are recorded as
adjustments to interest income. Realized gains and losses from investment
transactions are reported on an identified cost basis. Realized and unrealized
gains and losses on financial futures and options are included in net realized
and unrealized gain (loss) on investments, as appropriate.
FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS
The Fund has complied with the special provisions of the Internal Revenue Code
available to investment companies for the six months ended May 31, 1995. The
accumulated net realized loss on sales of
8
<PAGE> 9
investments for federal income tax purposes at May 31, 1995, amounting to
approximately $4,585,000, is available to offset future taxable gains. If not
applied, the loss carryover expires during the period 2002 through 2003.
The Fund declares and pays dividends on a monthly basis. Dividends payable to
its shareholders are recorded by the Fund on the ex-dividend date.
Distributions are determined in accordance with income tax principles which may
treat certain transactions differently from generally accepted accounting
principles.
ORGANIZATION AND OFFERING COSTS
Organization costs of $47,500 were capitalized and are being amortized over a
five year period. Offering costs of $400,000 were treated as a reduction of the
proceeds received from the initial public offering.
OTHER CONSIDERATIONS
The Fund invests a substantial portion of its assets in high yield bonds. These
bonds ordinarily are in the lower rating categories of recognized rating
agencies or are non-rated, and thus involve more risk than higher rated bonds.
Kemper Financial Services, Inc. (KFS), the Fund's investment manager, may serve
as a member of various bondholder's committees. These committees represent the
interests of bondholders in restructuring negotiations and court proceedings. As
a result of participation on such committees, KFS may receive material,
non-public information with respect to bonds the Fund owns. Accordingly, the
Fund may be temporarily precluded from effecting transactions in such bonds due
to various restraints imposed by federal and state securities laws involving the
possession of material, non-public information.
2. TRANSACTIONS WITH AFFILIATES
The Fund has a management agreement with KFS. For management services and
facilities furnished, the
Fund pays a fee at an annual rate of .85% of average weekly net assets. The Fund
incurred a management fee of $173,000 for the six months ended May 31, 1995.
The Fund has a custodian agreement and a transfer agent agreement with Investors
Fiduciary Trust Company (IFTC), which was 50% owned by KFS until January 31,
1995, when KFS completed the sale of IFTC to a third party. For the six months
ended May 31, 1995, the Fund incurred custodian and transfer agent fees of
$30,000 (excluding related expenses). Pursuant to a services agreement with
IFTC, Kemper Service Company (KSvC), an affiliate of KFS, is the shareholder
service agent of the Fund. For the six months ended May 31, 1995, IFTC remitted
shareholder service fees of $12,000 to KSvC.
Certain officers or trustees of the Fund are also officers or directors of KFS.
During the six months ended May 31, 1995, the Fund made no direct payments to
its officers and incurred trustees fees of $5,000 to independent trustees.
3. INVESTMENT TRANSACTIONS
For the six months ended May 31, 1995, investment transactions (excluding money
market instruments) are as follows (in thousands):
Purchases $23,340
--------------------------------------------------------------------------------
Proceeds from sales 20,664
--------------------------------------------------------------------------------
4. REVERSE REPURCHASE AGREEMENTS
The Fund has entered into reverse repurchase agreements with third parties.
Approximately $15,000,000 of the agreements mature within thirty to ninety days,
with the remainder maturing within nine months. The weighted average interest
rate is 6.52%. Securities valued at $22,490,000 have been pledged as collateral
for the agreements.
9
<PAGE> 10
5. INTEREST RATE SWAP AGREEMENTS
In order to remove the uncertainty of future interest rates for a portion of the
portfolio, the Fund has entered into interest rate swap agreements with
counterparties to convert investments in floating rate obligations into fixed
rate obligations. At May 31, 1995, the Fund had outstanding interest rate swap
agreements as follows:
<TABLE>
<CAPTION>
FLOATING RATE FIXED RATE
PAYMENTS MADE PAYMENTS
NOTIONAL TERMINATION BY THE FUND RECEIVED
COUNTERPARTY AMOUNT DATE BASED ON BY THE FUND
------------------------------------------ ---------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
GS Financial Products U.S., L.P. $5,000,000 5/31/1999 LIBOR 6.97%
-------------------------------------------------------------------------------------------------------------------
GS Financial Products U.S., L.P. 5,000,000 3/31/2005 LIBOR 7.18%
-------------------------------------------------------------------------------------------------------------------
Lehman Brothers Special Financing Inc. 5,000,000 5/31/1999 LIBOR 6.875%
-------------------------------------------------------------------------------------------------------------------
Chase Manhattan Bank 5,000,000 3/31/2005 LIBOR 7.12%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The Fund bears the market risk from changes in interest rates and accordingly
the unrealized gain (loss) is included in the financial statements. The
unrealized gain on outstanding interest rate swap agreements at May 31, 1995
amounted to $504,000. The Fund also bears the credit risk that the counterparty
will not perform under the contract.
10
<PAGE> 11
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Six months April 29, 1994
ended to
May 31, November 30,
1995 1994
---------- --------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $12.60 13.97
--------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .80 .87
--------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .77 (1.60)
--------------------------------------------------------------------------------------------------------------
Total from investment operations 1.57 (.73)
--------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .87 .64
--------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.30 12.60
--------------------------------------------------------------------------------------------------------------
Market value, end of period $13.25 13.50
--------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%):
Based on net asset value 13.32 (5.43)
--------------------------------------------------------------------------------------------------------------
Based on market value 5.14 (5.67)
--------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 4.21 3.41
--------------------------------------------------------------------------------------------------------------
Net investment income 13.35 10.95
--------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $45,109 42,390
--------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 49 55
--------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Ratios have been determined on an annualized basis. Total returns are not
annualized. Total return based on net asset value reflects changes in the
Fund's net asset value during the period. Total return based on market
value reflects changes in market value. Each figure includes reinvestment
of dividends. These figures will differ depending upon the level of any
discount from or premium to net asset value at which the Fund's shares
trade during the period.
11
<PAGE> 12
<TABLE>
<S> <C> <C>
KEMPER STRATEGIC INCOME FUND SEMIANNUAL REPORT TO SHAREHOLDERS
May 31, 1995
Trustees Officers ----------------------------------------
STEPHEN B. TIMBERS JOHN E. PETERS
President and Trustee Vice President KEMPER
ARTHUR R. GOTTSCHALK J. PATRICK BEIMFORD, JR.
Trustee Vice President ----------------------------------------
FREDERICK T. KELSEY MICHAEL A. MCNAMARA
Trustee Vice President STRATEGIC
DAVID B. MATHIS
Trustee HARRY E. RESIS, JR. ----------------------------------------
JOHN B. TINGLEFF Vice President
Trustee PAUL F. SLOAN INCOME
JOHN G. WEITHERS - Vice President
Trustee JONATHAN W. TRUTTER ----------------------------------------
Vice President
PHILIP J. COLLORA FUND
Vice President and
Secretary ----------------------------------------
CHARLES F. CUSTER
Vice President and
Assistant Secretary
JEROME L. DUFFY
Treasurer
---------------------------------------------------------
Legal Counsel Custodian and Transfer Agent
VEDDER, PRICE, KAUFMAN INVESTORS FIDUCIARY
& KAMMHOLZ TRUST COMPANY
222 North LaSalle Street 127 West 10th Street
Kansas City, MO 64105
Chicago, IL 60601
Shareholder Service Agent
KEMPER SERVICE COMPANY
P.O. Box 419430
Kansas City, MO 64141
Investment Manager
KEMPER FINANCIAL
SERVICES, INC.
120 South LaSalle Street
Chicago, IL 60603
240770
KSIT-3 (7/95) (LOGO) PRINTED ON RECYCLED PAPER Printed in U.S.A. [LOGO]
</TABLE>
