<PAGE> 1
Kemper Strategic
Income Fund
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED NOVEMBER 30, 1995
"It was a very good year for the fund across the board -- in terms of total
return and market price."
<PAGE> 2
Table of
Contents
3
General
Economic Overview
6
Performance Update
8
Terms to Know
8
Portfolio Statistics
10
Portfolio of
Investments
13
Report of
Independent Auditors
14
Financial Statements
16
Notes to
Financial Statements
18
Financial Highlights
19
Description of Dividend
Reinvestment Plan
At A Glance
- -----------------------------------------------------------
TOTAL RETURNS
- -----------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED NOVEMBER 30, 1995
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
- -----------------------------------------------------------
<S> <C> <C>
KEMPER STRATEGIC
INCOME FUND 19.29% 20.03%
</TABLE>
- -----------------------------------------------------------
NET ASSET VALUE AND MARKET PRICE
- -----------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
11/30/95 11/30/94
- ------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $13.12 $12.60
MARKET PRICE $14.25 $13.50
</TABLE>
- -----------------------------------------------------------
DIVIDEND REVIEW
- -----------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF NOVEMBER 30, 1995.
<TABLE>
- --------------------------------------------------------------
<S> <C>
1 YEAR INCOME: $1.70
NOVEMBER DIVIDEND: $0.1450
ANNUALIZED DISTRIBUTION RATE:
(BASED ON NET ASSET VALUE) 13.26%
ANNUALIZED DISTRIBUTION RATE:
(BASED ON MARKET PRICE) 12.21%
</TABLE>
Statistical Note: Current annualized distribution rate is the latest monthly
dividend shown as an annualized percentage of net asset value/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/market value assuming reinvestment of dividends. Returns are
historical and do not represent future performance. Market price, net asset
value and returns fluctuate. Additional information concerning performance is
contained in the Financial Highlights appearing at the end of this report.
About Your Report
Your fund's annual report is one of your best sources for tracking the progress
of your investment. This report includes several changes that have been made in
an effort to provide additional information to you as well as to explain
significant changes to the fund over the last fiscal year. In addition, the
performance update includes commentary from your fund's management team on what
might be expected in the coming months.
Specifically, your report now includes:
- Terms you need to know related to your fund
- A look at your fund's portfolio composition and how it has changed
- The maturity and quality of your fund's underlying investments
If you have any comments about the revised format, please write to:
Kemper Funds
Shareholder Communications
120 South LaSalle Street
Chicago, IL 60603
<PAGE> 3
General Economic Overview
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS CHIEF EXECUTIVE AND CHIEF INVESTMENT OFFICER OF KEMPER
FINANCIAL SERVICES, INC. (KFS). KFS AND ITS AFFILIATES MANAGE APPROXIMATELY $63
BILLION IN ASSETS, INCLUDING $44 BILLION IN RETAIL MUTUAL FUNDS. TIMBERS IS A
GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD UNIVERSITY.
DEAR SHAREHOLDER,
Investors enjoyed very positive performance in both the fixed income and stock
markets in 1995. The returns of most leading securities markets worldwide were
significantly higher than they were
in 1994.
We have an excellent environment for financial assets. After several
quarters of robust growth, the United States economy seems to be growing at a
pace that investors find comfortable. Contrary to isolated reports that caused
some observers to become concerned, we believe the economy is in no jeopardy of
recession. Its health was confirmed with the news that the economy grew (as
measured by real gross domestic product [GDP]) at an annual rate of 4.2 percent
in the third quarter. This follows much lower growth in the first two quarters,
as the economy was adjusting to the Federal Reserve Board's series of interest
rate increases. The slowdown, in fact, was acknowledged by the Fed when it
eased short-term rates by a small but symbolic 25 basis points in July. Now we
know that the economy was rebounding from July through September.
Growth without a corresponding increase in inflation is very encouraging.
Although we are well along in the economic cycle and at a point when prices
often start hiking up, inflationary pressures have actually been reduced
somewhat.
The Fed reduced rates again in December, this time acknowledging
discussions underway to reduce the federal budget deficit. Assuming these
discussions are productive, a third rate cut is possible. Even with such
reducing by the Fed, our forecast calls for lower growth ranging between 2
percent to 3 percent for the next few quarters, with the momentum likely to
come from exports and nonresidential construction.
MARKET OUTLOOK
Slow growth and low inflation is the optimal combination for investors in the
fixed income markets, and we expect them to continue to perform well.
We believe that the opportunities for common stock investors will be
increasingly concentrated in higher quality investments. After hitting new
highs and showing considerable strength for most of the year, the stock market
has shown some vulnerability and then gone on to set records. However, it's
inevitable -- the current bull market will come to an end some day. In fact,
some sectors may be overextended today.
As we view the new year, companies cannot necessarily count on the economy
to provide above-average earnings support. Rather, stocks that have proven
themselves with a pattern of consistent earnings are likely to attract investor
support. Specifically, sectors that produce more consistent earnings, such as
health care, consumer nondurables, selected technology and selected capital
goods can be expected to do well. Picking the right sectors to invest in will
be the key challenge for equity investors during the next few quarters.
International investing continues to be quite complex. After sinking to
its post-World War II low last year, the value of the U.S. dollar has gained
strength against most foreign currencies. While a stronger dollar favors the
U.S. economy because it reduces the cost of American imports and attracts
foreign capital, a strong dollar in relation to a local currency has the effect
of devaluing a foreign investment. The value of the dollar and the
attractiveness of U.S. investments to foreign investors will be key factors in
the next few months.
3
<PAGE> 4
General 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 (12/31/95) 6 months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 5.71 6.28 7.78 5.75
Prime Rate (2) 8.65 8.80 8.50 6.00
Inflation (3)* 2.60 2.97 2.60 2.74
The U.S. Dollar (4)* -1.57 -9.31 -4.52 1.71
Capital Goods orders (5)* 7.60 17.84 13.53 23.75
Industrial production (6)* 1.88 2.80 6.43 3.76
Employment growth (7)* 1.50 2.29 3.15 2.58
</TABLE>
Source: Economics Department, Kemper Financial Services, Inc.
(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%. 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 corporate profits and equity performance.
(7) An influence on family income and retail sales.
* Data as of November 30, 1995
** Data as of October 31, 1995
We are in the midst of a global recovery, and the same fundamentals
that have driven markets higher in the U.S. can be found in many foreign
countries currently. However, leading international economies continue to lag
the U.S. Japan and Germany, whose economies typically follow U.S. growth, are
not as robust as in past cycles. Moreover, conditions in emerging market
countries underline the importance of careful research and experience in
understanding how these markets work.
Political leadership also has some bearing on the progress of the economy
and the state of the financial markets. In the months preceding a
presidential election year, it has been common
for incumbents to attempt to stimulate growth. Given our Republican Congress
and Democratic President, however, we do not consider this as
likely this time.
With the rest of the country, we are closely following political
initiatives to produce a balanced fedo react with enthusiasm if progress can be
made.
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including a question-and-answer interview with
your fund's portfolio manager. Thank you for your continued support. We
appreciate the opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
CHIEF INVESTMENT AND EXECUTIVE OFFICER
January 9, 1996
4
<PAGE> 5
Management Team
Kemper Strategic Income Fund
Portfolio Management Team
[BEIMFORD PHOTO]
J. PATRICK BEIMFORD JOINED KEMPER FINANCIAL SERVICES, INC. (KFS) IN 1976 AND IS
NOW EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER --FIXED INCOME. HE HAS
BEEN PORTFOLIO CO-MANAGER OF THE KEMPER STRATEGIC INCOME FUND SINCE 1995.
BEIMFORD RECEIVED HIS BACHELOR OF SCIENCE AND INDUSTRIAL MANAGEMENT DEGREE FROM
PURDUE UNIVERSITY AND WENT ON TO RECEIVE HIS M.B.A. FROM THE UNIVERSITY OF
CHICAGO AND IS A CHARTERED FINANCIAL ANALYST.
[MCNAMARA PHOTO]
MIKE MCNAMARA HAS BEEN WITH KFS SINCE 1972 AND IS NOW SENIOR VICE PRESIDENT.
HE BECAME PORTFOLIO CO-MANAGER OF KEMPER STRATEGIC INCOME FUND IN 1995.
MCNAMARA GRADUATED WITH A B.S. IN BUSINESS ADMINISTRATION FROM THE UNIVERSITY
OF MISSOURI AND WENT ON TO RECEIVE HIS M.B.A. FROM LOYOLA UNIVERSITY.
[RESIS PHOTO]
HARRY RESIS IS A SENIOR VICE PRESIDENT WITH KFS. HE JOINED THE COMPANY IN 1988
AND BECAME PORTFOLIO CO-MANAGER OF KEMPER STRATEGIC INCOME FUND IN 1995. RESIS
RECEIVED A B.A. IN FINANCE FROM MICHIGAN STATE UNIVERSITY.
[TRUTTER PHOTO]
JONATHAN TRUTTER HAS BEEN WITH KFS SINCE 1989. HE IS NOW A FIRST VICE PRESIDENT
AND HAS BEEN PORTFOLIO CO-MANAGER OF KEMPER STRATEGIC INCOME FUND SINCE 1995.
TRUTTER RECEIVED HIS BACHELOR'S DEGREE WITH DUAL MAJORS IN EAST ASIAN LANGUAGES
AND INTERNATIONAL RELATIONS FROM THE UNIVERSITY OF SOUTHERN CALIFORNIA. HE WENT
ON TO RECEIVE A MASTER'S OF MANAGEMENT DEGREE FROM KELLOGG GRADUATE SCHOOL OF
NORTHWESTERN UNIVERSITY. HE IS ALSO A CERTIFIED PUBLIC ACCOUNTANT.
The views expressed in this report reflect those of the portfolio management
team 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.
5
<PAGE> 6
Performance Update
DURING A YEAR OF FALLING INTEREST RATES, KEMPER STRATEGIC INCOME FUND'S
DIVIDEND WAS INCREASED TWICE. THE PORTFOLIO MANAGEMENT TEAM DISCUSSES
HOW IT USED LEVERAGING AND HEDGING TO ENHANCE THE VALUE OF THE FUND AND TO
INCREASE ITS INCOME AS INTEREST RATES FELL.
Q THE FUND CLOSED ITS FIRST FULL FISCAL YEAR WITH A TOTAL RETURN OF 19.29
PERCENT ON A NET ASSET VALUE BASIS. THIS IS IN CONTRAST TO THE NEGATIVE RETURN
POSTED LAST YEAR FOR THE FUND'S FIRST SEVEN MONTHS OF PERFORMANCE. WHAT BROUGHT
ABOUT THIS SHARP CHANGE?
A It was a very good year for the fund across the board -- in terms of
total return and market price. And it was a great year for the bond market over
all. Bond prices appreciated significantly as interest rates fell, economic
growth slowed and inflation remained low. This was quite different from the
previous year, when economic growth was robust and the Federal Reserve Board
raised the federal funds rate multiple times in an effort to circumvent
inflation. Bond prices fell dramatically as interest rates rose, and 1994 was
one of the worst years in bond history.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUND AS INTEREST RATES
FELL?
A For the most part, the fund remains evenly split between investments
in mortgage-backed securities, high yield bonds and emerging market bonds. We
maintain this allocation because it helps us to meet our primary objective of
providing a high level of current income while diversifying risk. As interest
rates and coupon rates of new bond issues fell during the year, this objective
became more and more challenging. We made asset adjustments but relied more on
our use of tools such as leveraging and hedging. As a result, we enhanced the
fund's asset allocation -- the level of investments in each sector -- and
earned enough income to increase the fund's monthly dividend twice during the
year to $0.1450 per share from $0.1275 per share.
Q CAN YOU ELABORATE ON HOW THESE TOOLS WERE USED?
A The use of leveraging is an important means of generating income. We
borrow short-term funds at market rates to increase our investment in bonds
that pay higher rates of interest, which increases income. Since the fund's
inception in April 1994, approximately one-third of its net assets have been
leveraged -- or used as collateral for the loans.
The fund's mortgage investments played a substantial role in our ability
to leverage. Lenders will generally allow us to borrow almost the full value of
our mortgages because of their high credit rating and level of liquidity. As
the government market rallied this year, the prices of the fund's mortgages
increased. This enabled us to borrow additional funds without leveraging more
than one-third of the portfolio. Moreover, the cost of borrowing declined as
interest rates fell during the year, freeing more funds to invest.
Hedging, in contrast, was used to protect our investments, not to
increase income. At the start of the year, we had hedges in place on nearly all
of our investments in emerging markets. By hedging we can help assure that the
value of our investments will not fall below a specific value -- no matter what
happens in the market. But it costs money to hedge, so we use this tool only
when economic conditions of an entire sector seem uncertain. Also, there is no
guarantee that a particular hedging strategy will work. Our hedges were of
great value when the Mexican peso was devalued in December 1994, causing
turmoil in the entire emerging markets sector. (The actual devaluation of the
peso has no direct impact on the fund's holdings as it invests only in U.S.
dollar denominated investments.) Although the entire sector was hurt, our
hedges reduced the fund's losses. In May we removed the hedges as performance
within the sector began to improve.
Q IS THERE A RISK TO LEVERAGING?
A The stated objective of this fund is to provide a high level of
current income. As such, we will seek to incur only the risk necessary to
achieve that objective. The higher the potential for return, the higher the
risk involved. Yet, we are cautious about the risks and how we employ our
investment tools. For instance, the terms of our loans
<PAGE> 7
Performance Update
are staggered. This reduces the chance that sudden rate changes would
impact the entire portfolio at once.
Leveraging is critical to maintaining the fund's income level and is an
integral part of our investment strategy. This year, its use was even more
crucial as interest rates fell. Without leveraging a portion of the fund's
assets, we could have never increased the dividend. In addition, the market
value of the fund's shares rose after each of the two dividend increases, which
represented even more value for shareholders. However, investors should realize
that leverage presents special risk considerations and can exaggerate the
volatility of the net asset value of the fund's shares and its yield.
Q WHAT WAS THE BEST-PERFORMING SECTOR FOR THE FUND?
A Mortgages and high yield bonds were both superior performers. As
interest rates fell and economic growth slowed, the government bond market
rallied. Mortgage performance gained momentum with the rally that heightened in
May and continued to a lesser extent through the end of the fiscal year. As a
result, our mortgage holdings appreciated significantly in price and provided a
favorable level of income.
High yield investments also performed exceptionally well and our cyclical
bond issues provided a great deal of income. Cyclical industries are those that
flourish when the economy expands because they produce or support the
production of discretionary goods, such as new homes or automobiles. By
comparison, defensive industries tend to be less sensitive to economic
slowdowns because they support nondiscretionary spending on items such as food
or health and beauty products.
As economic growth slowed during the year, defensive issues gained
popularity in the market. Yet we held on to most of our higher-coupon cyclical
issues because we were optimistic that the economy would pick up. And our
bullishness paid off -- cyclical issues outperformed defensive issues
throughout the year, generating a high level of income.
Q WERE THERE ANY DISAPPOINTMENTS?
A The fund's emerging markets sector was a disappointment during the
first part of the year. As mentioned earlier, its performance was dragged down
by the devaluation of the Mexican peso in December 1994. The devaluation
triggered a sell-off of investments as it had not been anticipated and
highlighted the perils of investing in emerging markets. This fear affected
investments not only in Mexico but in all emerging markets and especially those
in South and Latin American countries. The term "the tequila effect" was coined
to describe this widespread downturn. As a result of the tequila effect, there
were very few investment opportunities in the emerging markets sector.
Although volatility in this sector is to be expected, the losses
experienced at that time were extreme. Fortunately, the steepest losses were
contained to the first few months of the fiscal year. By late spring,
investments in emerging markets began to rebound. Throughout the rest of the
year performance remained volatile, but recouped enough to provide gains by the
year's end.
As this sector recovered, we began diversifying our investments among
countries to reduce risk. Previously, most of the fund's emerging markets
investments were in Argentina. They have performed well and we remain bullish
on Argentina, but we believe diversification is prudent. Late in the year,
attractive investment opportunities enabled us to increase exposure to Brazil
and Mexico and to reduce exposure to Argentina. We will continue to diversify
in this sector as more opportunities arise.
Q WILL NEXT YEAR BE AS POSITIVE FOR THE FUND?
A While 1996 may not be as robust for the fund as 1995, the economic
outlook is very good. We anticipate continued slow to moderate economic growth,
a benign level of inflation and interest rates that should continue to fall.
Further contributing to this scenario is the likelihood that a meaningful
balanced federal budget agreement will be reached. If that happens, it is
possible that interest rates may move even lower during 1996. This would be a
positive environment for fixed-income investments.
Q WHAT ARE SOME OF THE RISKS TO THAT ASSUMPTION?
The risk would be that economic growth significantly accelerates
causing interest rates and inflation to rise. But, at this point, that's not
what the economic data suggest. Exports and housing construction markets are
somewhat strong but it is unlikely that these two forces alone could move the
economy in a different direction.
7
<PAGE> 8
Terms to Know
BOND RALLY A sharp, short-lived rise in bond values after a period of either
little movement or falling values.
EMERGING MARKETS A developing or emerging country can be considered to be a
country that is in the initial stages of its industrial cycle. Developing or
"emerging" markets involve exposure to economic structures that are generally
less diverse and mature than in the United States and to political systems that
may be less stable.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period, assuming the
reinvestment of all dividends. It represents the aggregate percentage or
dollar value change over the period.
VOLATILITY The characteristic of an investment that causes it to rise or fall
sharply in price in a relatively short time period.
Portfolio Statistics
PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
ON 11/30/95 ON 11/30/94
- -----------------------------------------------------------------------
<S> <C> <C>
MORTGAGE PASS-THROUGHS 33% 34%
HIGH YIELD CORPORATE BONDS 31 31
EMERGING MARKETS 33 32
CASH AND RECEIVABLES -- 3
OTHER 3 --
- -----------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
- - MORTGAGE PASS-THROUGHS
- - HIGH YIELD CORPORATE BONDS
- - EMERGING MARKETS
- - CASH AND RECEIVABLES
- - OTHER
<PAGE> 9
Portfolio Statistics
LONG-TERM FIXED INCOME
SECURITIES RATINGS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
ON 11/30/95 ON 11/30/94
- -----------------------------------------------------------------------
<S> <C> <C>
AAA 36% 35%
A 7 --
BB 21 39
B 33 25
Other 3 1
- -----------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
- AAA
- A
- BB
- B
- OTHER
THE RATINGS OF STANDARD & POOR'S CORPORATION (S&P) AND MOODY'S INVESTORS
SERVICES, INC. (MOODY'S) REPRESENT THEIR OPINIONS AS TO THE QUALITY OF
SECURITIES THAT THEY UNDERTAKE TO RATE. THE PERCENTAGE SHOWN REFLECTS THE
HIGHER OF MOODY'S OR S&P RATINGS. PORTFOLIO COMPOSITION WILL CHANGE OVER TIME.
RATINGS ARE RELATIVE AND SUBJECTIVE AND NOT ABSOLUTE STANDARDS OF QUALITY.
AVERAGE MATURITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
ON 11/30/95 ON 11/30/94
- -----------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 11.3 YEARS 12.7 YEARS
</TABLE>
<PAGE> 10
Portfolio of Investments
KEMPER STRATEGIC INCOME FUND
Portfolio of Investments at November 30, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
U.S. GOVERNMENT Government National Mortgage Association
OBLIGATIONS--48.2% 7.50%, 2023-2024 $ 9,646 $ 9,842
8.00%, 2022-2024 11,356 11,743
---------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $20,257) 21,585
===========================================================================
- ------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT (c)Republic of Argentina
OBLIGATIONS--48.8% 5.5625%, 2002 8,900 6,090
5.5625%, 2007 5,125 3,455
Federal Republic of Brazil, 8.00%, 2014 14,653 7,775
United Mexican States, 6.25%, 2019 3,550 2,183
Panama, 7.25%, 2014 2,825 2,345
---------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $20,329) 21,848
===========================================================================
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS
<S> <C> <C> <C>
AGRICULTURE AND Hines Horticulture, 11.75%, 2005 500 512
CHEMICALS--2.2% Pioneer Americas Acquisition Corp., 13.375%,
2005 140 146
Polymer Group Inc., 12.25%, 2002 135 140
Rexene Corporation, 11.75%, 2004 170 181
---------------------------------------------------------------------------
979
- ------------------------------------------------------------------------------------------------------------
BROADCASTING, CABLESYSTEMS ACT III Broadcasting, Inc., 9.625%, 2003 500 520
AND PUBLISHING--12.7% Affinity Group Inc., 11.50%, 2003 500 505
(b)Australis Media Corporation, 14.00%, 2003 400 288
(b)Bell Cablemedia PLC, 11.95%, 2004 370 253
Cablevision Industries Corporation, 9.25%, 2008 500 530
Cablevision Systems Company, 9.875%, 2013 450 470
CF Cable TV Inc., 11.625%, 2005 110 120
Continental Cablevision, Inc., 9.50%, 2013 250 263
(b)Echostar Communications,
12.875%, with warrants, 2004 700 483
Granite Broadcasting, 10.375%, 2005 250 256
(b)International Cabletel Incorporated, 12.75%,
2005 1,130 694
Rogers Cablesystems Limited, 10.00%, 2005 140 147
Sinclair Broadcast Group, Inc., 10.00%, 2003 500 511
(b)Videotron Holdings PLC, 11.125%, 2004 250 169
Webcraft Technologies, Inc., 9.375%, 2002 500 480
---------------------------------------------------------------------------
5,689
- ------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES, HOME Coinmach, 11.75%, 2005 200 202
BUILDING AND REAL ESTATE Hovnanian Kent, 11.25%, 2002 500 471
- --3.0% Outdoor Systems, Inc., 10.75%, 2003 500 483
The Presley Companies, 12.50%, 2001 250 200
---------------------------------------------------------------------------
1,356
- ------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
Portfolio of Investments
<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
COMMUNICATIONS--3.0% (b)Call-Net Enterprises, 13.25%, 2004 $ 330 $ 234
(a)(b)Celcaribe, S.A., 13.50%, 2004 300 278
Century Communications, 11.875%, 2003 250 267
Communication and Power Industry, Inc., 12.00%,
2005 150 154
Intermedia Communications of Florida, Inc.,
13.50%, with warrants, 2005 200 219
USA Mobile Communications, Inc. II, 14.00%, 2004 150 174
---------------------------------------------------------------------------
1,326
- ------------------------------------------------------------------------------------------------------------
DRUGS AND HEALTH Charter Medical Corporation, 11.25%, 2004 500 542
CARE--2.2% Dade International, Inc., 13.00%, 2005 160 177
Ornda Healthcorporation, 12.25%, 2002 250 274
---------------------------------------------------------------------------
993
- ------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED Chesapeake Energy Corporation, 10.50%, 2002 80 83
SERVICES--1.7% Empire Gas Corporation, 7.00%, with warrants,
2004 260 215
Gerrity Oil & Gas, 11.75%, 2004 500 466
---------------------------------------------------------------------------
764
- ------------------------------------------------------------------------------------------------------------
HOTEL, GAMING AND Bally's Park Place Funding, Inc., 9.25%, 2004 500 500
ENTERTAINMENT--3.7% Cinemark USA, Inc., 12.00%, 2002 200 218
Empress Riverboat Casino, 10.75%, 2002 200 206
Player's International, Inc., 10.875%, 2005 470 439
Santa Fe Hotel Inc., 11.00%, 2000 412 288
---------------------------------------------------------------------------
1,651
- ------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS Aftermarket Technology, 12.00%, 2004 500 524
AND TECHNOLOGY (b)Building Materials Corp. of America, 11.75%,
- --10.3% 2004 1,100 742
Day International Group, Inc., 11.125%, 2005 40 40
Fairchild Industries, 12.25%, 1999 500 524
(b)Foamex - JPS Automotive L.P.,
14.00%, with warrants, 2004 160 92
Great Dane Holding Company, 12.75%, 2001 320 295
GS Technologies, 12.25%, 2005 200 200
Gulf States Steel, 13.50%, with warrants, 2003 200 174
Jordan Industries, 10.375%, 2003 150 126
Merisel Inc., 12.50%, 2004 250 188
Nortek, 9.875%, 2004 780 727
Unisys Corporation, 13.50%, 1997 500 480
Waxman Industries, Inc., 12.25%, 1998 500 485
---------------------------------------------------------------------------
4,597
- ------------------------------------------------------------------------------------------------------------
PAPER AND FOREST (b)Gaylord Container Corporation, 12.75%, 2005 500 481
PRODUCTS--3.7% Maxxam Group, Inc., 11.25%, 2003 500 488
SD Warren Company, 12.00%, 2004 170 188
Sweetheart Cup Company Inc., 10.50%, 2003 500 503
---------------------------------------------------------------------------
1,660
- ------------------------------------------------------------------------------------------------------------
RETAILING, FOOD Beatrice Foods, Inc., 12.00%, 2001 500 125
AND BEVERAGE--2.5% (d)Color Tile Inc., 10.75%, 2001 330 30
(b)International Semi-Tech Microelectronics
Inc.,
11.50%, 2003 840 433
Thrifty Payless, Inc., 12.25%, 2004 500 536
---------------------------------------------------------------------------
1,124
- ------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
Portfolio of Investments
<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
TRANSPORTATION--1.3% (d)Burlington Motor Holdings Inc., 11.50%, 2003 $ 500 $ 105
OMI Corporation, 10.25%, 2003 550 485
---------------------------------------------------------------------------
590
---------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--46.3%
(Cost: $21,400) 20,729
===========================================================================
- ------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENT--1.1%
Yield 5.90%, Due 1995
Cooper Industries, Inc.,
(Cost: $500) 500 500
---------------------------------------------------------------------------
TOTAL INVESTMENTS--144.4%
(Cost: $62,486) 64,662
---------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(44.4)% (19,886)
---------------------------------------------------------------------------
NET ASSETS--100% $ 44,776
===========================================================================
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The following security may require registration under the Securities Act of
1933 or an exemption therefrom in order to effect sale in the ordinary
course of business; it was valued at cost on the date of acquisition. The
security is valued at fair value as determined in good faith by the Board of
Trustees of the Fund. At November 30, 1995 the value of the funds restricted
security was $278,000 which represented .62% of net assets.
<TABLE>
<CAPTION>
DATE OF PRINCIPAL UNIT
SECURITY DESCRIPTION ACQUISITION AMOUNT COST
<S> <C> <C> <C>
--------------------------------------------------------------------------------------------
Celcaribe, S.A., 13.50%, 2004 May 1994 $ 300,000 $0.80
--------------------------------------------------------------------------------------------
</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 November
30, 1995. The dates shown represent the final maturity of the obligations.
(d) Non-income producing security. Issuer has defaulted on the payment of
interest.
Based on the cost of investments of $62,486,000 for federal income tax purposes
at November 30, 1995, the aggregate gross unrealized appreciation was
$3,689,000, the aggregate gross unrealized depreciation was $1,513,000 and the
net unrealized appreciation of investments was $2,176,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
Report of Independent Auditors
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER STRATEGIC INCOME FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Strategic Income Fund as of
November 30, 1995, the related statement of operations for the year then ended
and the statements of cash flows and changes in net assets and the financial
highlights for the year then ended and for the period from April 29, 1994
(initial public offering) to November 30, 1994. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
November 30, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Strategic Income Fund at November 30, 1995, the results of its operations, its
cash flows, and the changes in its net assets and the financial highlights for
the periods referred to above in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 12, 1996
13
<PAGE> 14
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1995
(in thousands)
- -------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
Investments, at value
(Cost: $62,486) $64,662
- -------------------------------------------------------------------------------------------------
Interest rate swap agreements, at value 405
- -------------------------------------------------------------------------------------------------
Cash 578
- -------------------------------------------------------------------------------------------------
Interest receivable 842
- -------------------------------------------------------------------------------------------------
Deferred organization costs 34
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS 66,521
=================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
<TABLE>
<S> <C>
Liability under reverse repurchase agreements 21,504
- -------------------------------------------------------------------------------------------------
Payable for:
Investments purchased 202
- -------------------------------------------------------------------------------------------------
Management fee 30
- -------------------------------------------------------------------------------------------------
Other 9
- -------------------------------------------------------------------------------------------------
Total liabilities 21,745
- -------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO 3,413 SHARES OUTSTANDING, $.01 PAR VALUE, EQUIVALENT TO $13.12
PER SHARE $44,776
=================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
<TABLE>
<S> <C>
Paid-in capital $47,670
- -------------------------------------------------------------------------------------------------
Accumulated net realized loss on sales of investments (6,199)
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,581
- -------------------------------------------------------------------------------------------------
Undistributed net investment income 724
- -------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $44,776
=================================================================================================
NET ASSET VALUE PER SHARE ($44,776 / 3,413 shares outstanding) $13.12
=================================================================================================
</TABLE>
STATEMENT OF OPERATIONS
Year ended November 30, 1995
(in thousands)
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
<TABLE>
<S> <C>
Interest Income $ 7,558
- -------------------------------------------------------------------------------------------------
Expenses:
Management fee 359
- -------------------------------------------------------------------------------------------------
Interest expense 1,313
- -------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 68
- -------------------------------------------------------------------------------------------------
Professional fees 51
- -------------------------------------------------------------------------------------------------
Trustees' fees and other 44
- -------------------------------------------------------------------------------------------------
Total expenses 1,835
- -------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 5,723
=================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
<TABLE>
<S> <C>
Net realized loss on sales of investments (4,905)
- -------------------------------------------------------------------------------------------------
Change in net unrealized depreciation on investments 6,733
- -------------------------------------------------------------------------------------------------
Net gain on investments 1,828
- -------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,551
=================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
Financial Statements
STATEMENTS OF CHANGES IN NET ASSETS AND CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 29, 1994
NOVEMBER 30, TO NOVEMBER 30,
1995 1994
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
Net investment income $5,723 2,929
- -------------------------------------------------------------------------------------------------
Net realized loss (4,905) (1,286)
- -------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation 6,733 (4,152)
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 7,551 (2,509)
- -------------------------------------------------------------------------------------------------
Distribution from net investment income (5,792) (2,144)
- -------------------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
(48 shares in 1995 and 8 shares in 1994) 627 108
- -------------------------------------------------------------------------------------------------
Net proceeds from shares sold (3,350 shares) -- 46,835
- -------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 2,386 42,290
=================================================================================================
- -------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period 42,390 100
- -------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment
income of $724 and $787, respectively) 44,776 42,390
=================================================================================================
- -------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Increase (decrease) in net assets from operations 7,551 (2,509)
- -------------------------------------------------------------------------------------------------
Non-cash items (4,107) 4,020
- -------------------------------------------------------------------------------------------------
Sale (purchase) of investments 577 (65,640)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 4,021 (64,129)
=================================================================================================
- -------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Reverse repurchase agreements 702 20,298
- -------------------------------------------------------------------------------------------------
Issuance of capital stock -- 47,235
- -------------------------------------------------------------------------------------------------
Payments for:
Distributions to shareholders (5,165) (2,036)
- -------------------------------------------------------------------------------------------------
Organization and offerings costs -- (448)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (4,463) 65,049
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (442) 920
- -------------------------------------------------------------------------------------------------
Cash at beginning of period 1,020 100
- -------------------------------------------------------------------------------------------------
Cash at end of period $578 1,020
=================================================================================================
</TABLE>
15
<PAGE> 16
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 year ended November
30, 1995. The accumulated net realized loss on
sales of investments for federal income tax
purposes at November 30, 1995, amounting to
approximately $6,192,000, is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 2002 through
2004.
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.
Dividends 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.
- --------------------------------------------------------------------------------
2 TRANSACTIONS WITH
AFFILIATES The Fund has a management agreement with Kemper
Financial Services, Inc. (KFS) and pays a
management fee at an annual rate of .85% of average
weekly net assets. The Fund incurred a management
fee of $359,000 for the year ended November 30,
1995.
16
<PAGE> 17
Notes to Financial Statements
Pursuant to a services agreement with the Fund's
transfer agent, Kemper Service Company (KSvC) is
the shareholder service agent of the Fund. For the
year ended November 30, 1995, the transfer agent
remitted shareholder service fees to KSvC of
$24,000.
Certain officers or trustees of the Fund are also
officers or directors of KFS. During the year ended
November 30, 1995, the Fund made no direct payments
to its officers and incurred trustees fees of
$15,000 to independent trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT TRANSACTIONS For the year ended November 30, 1995, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $42,676
Proceeds from sales 39,974
- --------------------------------------------------------------------------------
4 REVERSE REPURCHASE
AGREEMENTS The Fund has entered into reverse repurchase
agreements with third parties. Approximately
$16,255,000 of the agreements mature within thirty
days, with the remainder maturing within ninety
days. The weighted average interest rate is 6.28%.
Securities valued at $21,585,000 have been pledged
as collateral for the agreements.
- --------------------------------------------------------------------------------
5 INTEREST RATE SWAP
AGREEMENTS In order to reduce 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 November 30, 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%
---------------------------------------------------------------------------------------
Lehman Brothers Special
Financing Inc. 5,000,000 5/31/1999 LIBOR 6.875%
---------------------------------------------------------------------------------------
</TABLE>
The Fund bears the market risk from changes in
interest rates and accordingly the unrealized gain
(loss) on the investments is included in the
financial statements. The unrealized gain on
outstanding interest rate swap agreements at
November 30, 1995 amounted to $405,000. The Fund
also bears the credit risk that the counterparty
will not perform under the contract.
17
<PAGE> 18
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED APRIL 29, 1994
NOVEMBER 30, TO 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 1.68 .87
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .54 (1.60)
- ----------------------------------------------------------------------------------------------------------
Total from investment operations 2.22 (.73)
- ----------------------------------------------------------------------------------------------------------
Less distribution from net investment income 1.70 .64
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.12 12.60
- ----------------------------------------------------------------------------------------------------------
Market value, end of period $14.25 13.50
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
Based on net asset value 19.29% (5.43)
- ----------------------------------------------------------------------------------------------------------
Based on market value 20.03 (5.67)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
ANNUALIZED RATIOS TO AVERAGE NET ASSETS
Expenses 4.35% 3.41
- ----------------------------------------------------------------------------------------------------------
Net investment income 13.56 10.95
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $44,776 42,390
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 49% 55
- ----------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: 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.
18
<PAGE> 19
Description of Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
1 PARTICIPATION We invite you to review the description of the
Dividend Reinvestment Plan (the "Plan") which is
available to you as a shareholder of Kemper
Strategic Income Fund (the "Fund"). If you wish to
participate and your shares are held in your own
name, simply contact Kemper Service Company, whose
address and phone number are provided in Paragraph
4 of the Plan for the appropriate form. If your
shares are held in the name of a brokerage firm,
bank, or other nominee, you must instruct that
nominee to re-register your shares in your name so
that you may participate in the Plan, unless your
nominee has made the Plan available on shares held
by them. Shareholders who so elect will be deemed
to have appointed United Missouri Bank, n.a.
("UMB") as their agent and as agent for the Fund
under the Plan.
- --------------------------------------------------------------------------------
2 DIVIDEND INVESTMENT
ACCOUNT The Fund's transfer agent and dividend disbursing
agent or its delegate ("Agent") will establish a
Dividend Investment Account (the "Account") for
each shareholder participating in the Plan. Agent
will credit to the Account of each participant
funds it receives from the following sources: (a)
cash dividends and capital gains distributions paid
on shares of beneficial interest (the "Shares") of
the Fund registered in the participant's name on
the books of the Fund; (b) cash dividends and
capital gains distributions paid on Shares
registered in the name of Agent but credited to the
participant's Account. Sources described in clauses
(a) and (b) of the preceding sentence are
hereinafter called "Distribution."
- --------------------------------------------------------------------------------
3 INVESTMENT OF
DISTRIBUTION FUNDS HELD
IN EACH ACCOUNT If on the record date for a Distribution (the
"Record Date"), Shares are trading at a discount
from net asset value per Share (according to the
evaluation most recently made on Shares of the
Fund), funds credited to a participant's Account
will be used to purchase Shares (the "Purchase").
UMB will attempt, commencing five days prior to the
Payment Date and ending at the close of business on
the Payment Date ("Payment Date" as used herein
shall mean the last business day of the month in
which such Record Date occurs), to acquire Shares
in the open market. If and to the extent that UMB
is unable to acquire sufficient Shares to satisfy
the Distribution by the close of business on the
Payment Date, the Fund will issue to UMB Shares
valued at net asset value per Share (according to
the evaluation most recently made on Shares of the
Fund) in the aggregate amount of the remaining
value of the Distribution. If, on the Record Date,
Shares are trading at a premium over net asset
value per Share, the Fund will issue on the Payment
Date, Shares valued at net asset value per Share on
the Record Date to Agent in the aggregate amount of
the funds credited to the participants' accounts.
- --------------------------------------------------------------------------------
4 ADDITIONAL INFORMATION Address all notices, correspondence, questions, or
other communication regarding the Plan to:
KEMPER SERVICE COMPANY
P.O. Box 419066
Kansas City, Missouri 64141-6066
1-800-294-4366
19
<PAGE> 20
Description of Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
5 ADJUSTMENT OF
PURCHASE PRICE The Fund will increase the price at which Shares
may be issued under the Plan to 95% of the fair
market value of the shares on the Record Date if
the net asset value per Share of the Shares on the
Record Date is less than 95% of the fair market
value of the Shares on the Record Date.
- --------------------------------------------------------------------------------
6 DETERMINATION OF
PURCHASE PRICE The cost of Shares and fractional Shares acquired
for each participant's Account in connection with a
Purchase shall be determined by the average cost
per Share, including brokerage commissions as
described in Paragraph 7 hereof, of the Shares
acquired by UMB in connection with that Purchase.
Shareholders will receive a confirmation showing
the average cost and number of Shares acquired as
soon as practicable after Agent has received or UMB
has purchased Shares. Agent may mingle the cash in
a participant's account with similar funds of other
participants of the Fund for whom UMB acts as agent
under the Plan.
- --------------------------------------------------------------------------------
7 BROKERAGE CHARGES There will be no brokerage with respect to Shares
issued directly by the Fund as a result of
Distributions. However, each participant will pay a
pro rata share of brokerage commissions incurred
with respect to UMB's open market purchases in
connection with the reinvestment of Distributions.
Brokerage charges for purchasing small amounts of
Shares for individual Accounts through the Plan can
be expected to be less than the usual brokerage
charges for such transactions, as UMB will be
purchasing Shares for all participants in blocks
and prorating the lower commission thus attainable.
- --------------------------------------------------------------------------------
8 SERVICE CHARGES There is no service charge by Agent or UMB to
shareholders who participate in the Plan other than
service charges specified in Paragraph 12 hereof.
However, the Fund reserves the right to amend the
Plan in the future to include a service charge.
- --------------------------------------------------------------------------------
9 TRANSFER OF SHARES
HELD BY AGENT Agent will maintain the participant's Account, hold
the additional Shares acquired through the Plan in
safekeeping and furnish the participant with
written confirmation of all transactions in the
Account. Shares in the Account are transferable
upon proper written instructions to Agent. Upon
request to Agent, a certificate for any or all full
Shares in a participant's Account will be sent to
the participant.
- --------------------------------------------------------------------------------
10 SHARES NOT HELD IN
SHAREHOLDER'S NAME Beneficial owners of Shares which are held in the
name of a broker or nominee will not be
automatically included in the Plan and will receive
all distributions in cash. Such shareholders should
contact the broker or nominee in whose name their
Shares are held to determine whether and how they
may participate in the Plan.
- --------------------------------------------------------------------------------
11 AMENDMENTS Experience under the Plan may indicate that changes
are desirable. Accordingly, the Fund reserves the
right to amend or terminate the Plan, including
provisions with respect to any Distribution paid
subsequent to
20
<PAGE> 21
Description of Dividend Reinvestment Plan
notice thereof sent to participants in the Plan at
least ninety days before the record date for such
Distribution.
- --------------------------------------------------------------------------------
12 WITHDRAWAL FROM
PLAN Shareholders may withdraw from the Plan at any time
by giving Agent a written notice. If the proceeds
are $25,000 or less and the proceeds are to be
payable to the shareholder of record and mailed to
the address of record, a signature guarantee
normally will not be required for notices by
individual account owners (including joint account
owners), otherwise a signature guarantee will be
required. In addition, if the certificate is to be
sent to anyone other than the registered owner(s)
at the address of record, a signature guarantee
will be required on the notice. A notice of
withdrawal will be effective for the next
Distribution following receipt of the notice by the
Agent provided the notice is received by the Agent
at least ten days prior to the Record Date for the
Distribution. When a participant withdraws from the
Plan, or when the Plan is terminated in accordance
with Paragraph 11 hereof, the participant will
receive a certificate for full Shares in the
Account, plus a check for any fractional Shares
based on market price; or if a Participant so
desires, Agent will notify UMB to sell his Shares
in the Plan and send the proceeds to the
participant, less brokerage commissions and a $2.50
service fee.
- --------------------------------------------------------------------------------
13 TAX IMPLICATIONS Shareholders will receive tax information annually
for personal records and to assist in preparation
of their Federal income tax return. If shares are
purchased at a discount, the amount of the discount
is considered taxable income and is added to the
cost basis of the purchased shares.
21
<PAGE> 22
Shareholders' Meeting
SPECIAL SHAREHOLDERS' MEETING
On September 19, 1995, a special shareholders' meeting was held. Kemper
Strategic Income Fund shareholders were asked to vote on three separate issues:
election of two additional members to the Board of Trustees, ratification of
Ernst & Young LLP as independent auditors and approval of a new investment
management agreement with Kemper Financial Services, Inc. or its successor on
the same terms as the current agreement. We are pleased to report that all
nominees were elected and all other items were approved. Following are the
results for each issue:
1) Election of additional Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
James E. Akins 3,048,354 120,743
Fred B. Renwick 3,048,354 120,743
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
3,117,771 14,747 36,579
</TABLE>
3) Approval of new investment management agreement
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
3,082,411 24,175 65,511
</TABLE>
22
<PAGE> 23
NOTES
23
<PAGE> 24
Trustees and Officers
TRUSTEES OFFICERS
STEPHEN B. TIMBERS JOHN E. NEAL
President and Trustee Vice President
JAMES E. AKINS JOHN E. PETERS
Trustee Vice President
ARTHUR R. GOTTSCHALK J. PATRICK BEIMFORD, JR
Trustee Vice President
FREDERICK T. KELSEY MICHAEL A. MCNAMARA
Trustee Vice President
FRED B. RENWICK HARRY E. RESIS, JR.
Trustee Vice President
JOHN B. TINGLEFF JONATHAN W. TRUTTER
Trustee Vice President
JOHN G. WEITHERS PHILIP J. COLLORA
Trustee Vice President and
Secretary
CHARLES F. CUSTER
Vice President and
Assistant Secretary
JEROME L. DUFFY
Treasurer
- ----------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- ----------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419066
Kansas City, MO 64141-6066
- ----------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- ----------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- ----------------------------------------------------------------------------
INVESTMENT MANAGER KEMPER FINANCIAL SERVICES, INC.
120 South LaSalle Street
Chicago, IL 60603
[RECYCLED LOGO] [KEMPER FUNDS LOGO]
Printed on recycled paper.
KSIT - 2 (1/96)
1008310
Printed in the U.S.A.
