<PAGE> 1
KEMPER STRATEGIC
INCOME FUND
SEMIANNUAL REPORT TO SHAREHOLDERS
FOR THE PERIOD ENDED MAY 31, 1996
"...we're gratified by
the performance we
did achieve..."
<PAGE> 2
Table of
Contents
3
General
Economic Overview
5
Management Team
6
Performance Update
7
Portfolio Statistics
9
Portfolio of
Investments
12
Financial Statements
14
Notes to
Financial Statements
16
Financial Highlights
At A Glance
- -------------------------------------------------------------------------------
Total Returns
- -------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 1996
<TABLE>
<CAPTION>
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
- -------------------------------------------------------------------------------
<S> <C> <C>
KEMPER STRATEGIC
INCOME FUND 13.61% 25.51%
- -------------------------------------------------------------------------------
</TABLE>
CHANGE IN NET ASSET VALUE
AND MARKET PRICE
<TABLE>
<CAPTION>
AS OF AS OF
5/31/96 11/30/95
- -------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $13.97 $13.12
- -------------------------------------------------------------------------------
MARKET PRICE $16.88 $14.25
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
DIVIDEND REVIEW
- -------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND INFORMATION FOR THE FUND AS OF MAY
31, 1996.
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
SIX-MONTH INCOME: $0.9000
- -------------------------------------------------------------------------------
MAY DIVIDEND: $0.1450
- -------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON NET ASSET VALUE) 12.46%
- -------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON MARKET VALUE) 10.31%
- -------------------------------------------------------------------------------
</TABLE>
Statistical Note: Current annualized distribution rate is the latest monthly
dividend shown as an annualized percentage of market price/net asset value 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.
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 a specific period, assuming the
reinvestment of all dividends. It represents the aggregate percentage change in
the value of an investment in the fund over the period. Total return may be
based upon net asset value or market price.
VOLATILITY The characteristic of an investment that causes it to rise or fall
sharply in price in a relatively short time period.
<PAGE> 3
GENERAL ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF EXECUTIVE AND CHIEF INVESTMENT OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $78 BILLION IN ASSETS, INCLUDING $45 BILLION
IN RETAIL MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN
M.B.A. FROM HARVARD UNIVERSITY.
DEAR SHAREHOLDER,
The first six months of 1996 have provided a few surprises. As the year began,
most of us expected sluggish economic and corporate growth -- which the Federal
Reserve Board would address by reducing short-term interest rates. Yet, what we
experienced was stronger-than-anticipated economic growth, better corporate
earnings and rising interest rates. Although such surprises unsettled the bond
market, the stock market has followed a spectacular 1995 with strength so far
this year.
Where is the economy headed now? Its direction is even less predictable as we
draw nearer to the November elections. Half of the country's leading economists
are forecasting 3 percent growth while an equal number are looking for no better
than 1 percent growth. At Kemper Funds, we suspect that the economy is growing
at a subpar rate of 2 percent. Although commodity prices may suggest otherwise,
we think inflation is holding at less than 3 percent. We see no reason to expect
the Fed to reduce rates to stimulate growth but neither is it likely to raise
rates significantly to control growth. In an environment of stable or gently
rising rates, we would expect corporate earnings to grow at a rate of about 7 to
8 percent -- that's somewhat higher than we believed likely at the start of the
year.
Our forecast calls for a generally comfortable environment for investors. But
both the economy and the general direction of the markets are due for a
reversal. In July, the U.S. economy entered its 64th month of consecutive
growth. This is the longest expansion without a single quarter of negative
output growth since George Washington was president. Today's bull market started
in October 1990, which makes it one of the longest running bull markets in
history. By virtue of its length alone, the stock market is vulnerable to a
correction.
As expected, volatility has returned to the market this year. For example: The
stock market's performance on March 8, the date that a surprisingly strong
employment report was released, betrayed some level of investor skittishness.
But while the Standard & Poor's lost 3.1 percent that day, it quickly regained
the ground and moved higher.
CONSUMERS AND JOB SECURITY
The restructuring of corporate America, which is generally credited for its
improved profitability, has been an important influence on the consumer.
Economic growth is heavily dependent upon consumer spending which, in turn, is
a function of inflation, pay raises and fear of job loss. While the first two
have not been a recent concern, fear of losing one's job has dampened consumer
confidence.
Such anxiety in the workplace was the subject of a recent study by the
Council of Economic Advisors. According to that report, more than two-thirds
of the new jobs created in the United States in 1994 and 1995 paid better than
the average job. The report found that the rate at which jobs were eliminated
has risen slightly despite strong economic growth of recent years -- however, it
reported that the length of time most workers spent unemployed has declined.
The graph below tracks Bureau of Labor Statistics data that show the
recent relationship between number of jobs created versus the number of jobs
lost.
[LINE GRAPH]
<TABLE>
<CAPTION>
Jobs Created Jobs Lost
<S> <C> <C>
12/31/91 (300,000) 40,000
12/31/92 120,000 (30,000)
12/31/93 300,000 70,000
12/31/94 180,000 70,000
12/31/95 (80,000) (40,000)
3/31/96 490,000 (10,000)
</TABLE>
SOURCE: BUREAU OF LABOR STATISTICS
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.
<TABLE>
<CAPTION>
Now (5/31/96) 6 months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 6.74 5.71 6.17 7.10
Prime rate(2) 8.25 8.63 9.00 7.25
Inflation rate(3) 2.96 2.60 3.04 2.56
The U.S. dollar(4) 8.51 -2.58 -9.31 0.51
Capital
goods orders(5) 2.93 11.03 12.98 25.11
Industrial production(6) 3.26 1.08 2.80 6.61
Employment growth(7) 2.00 1.92 2.71 3.12
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years, infla-
tion 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.
Source: Economics Department, Zurich Kemper Investments, Inc.
Such ebb and flow is to be expected in investing, especially at this point in
the cycle. Attempting to "prepare" for a correction is futile, we believe. Those
whose caution caused them to excuse themselves from the market early this year,
for example, would have forgone its significant gain year to date.
Several opportunities exist today for the careful investor. First, having
settled down some from a raucous 1995, the technology sector continues to enjoy
the product and market demand that make it the dominant sector of the 1990s.
Second, equity investors willing to look overseas may find opportunities in
countries whose economies today are at a point where the U.S. economy was in
1995. Our forecast assumes that strength in foreign markets could boost those
countries' currencies, which would weaken the value of the dollar.
We expect the fixed-income markets to continue to be sensitive to interest
rate and inflation news. However, for as long as economic growth is positive and
earnings are growing, we believe the high-yield market is one market segment
that has significant potential.
Finally, we look for political activity to have less and less bearing on the
markets' performance. Although they may continue to debate tax reform,
federal budget deficit reduction and health care reform, the incumbent
legislators are running out of time to take action before the November
elections. If there is any suspense by November, it is likely to be in whether
the Republicans can retain control of Congress. Their success would make a
balanced budget and tax reform likely agenda topics for 1997.
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including an interview with your fund's portfolio
management. Thank you for your continued support. We appreciate the opportunity
to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
ZURICH KEMPER INVESTMENTS, INC.
July 2, 1996
4
<PAGE> 5
KEMPER STRATEGIC INCOME FUND
PORTFOLIO MANAGEMENT TEAM
[BEIMFORD PHOTO]
J. Patrick Beimford, Jr. joined Zurich Kemper Investments, Inc. (ZKI) in 1976
and is executive vice president and chief investment officer for fixed income
investments. Beimford is also a vice president and portfolio co-manager of
Kemper Strategic Income Fund. He received a bachelor of science and industrial
management degree from Purdue University and earned an M.B.A. from the
University of Chicago.
[MCNAMARA PHOTO]
Mike McNamara has been with ZKI since 1972. He is senior vice president of ZKI
and a vice president and portfolio co-manager of Kemper Strategic Income Fund.
McNamara graduated with a B.S. in Business Administration from the University of
Missouri and earned an M.B.A. from Loyola University.
[RESIS PHOTO]
Harry Resis is a senior vice president of ZKI. He joined the company in 1988 and
is a vice president and portfolio co-manager of Kemper Strategic Income Fund.
Resis received a B.A. in Finance from Michigan State University.
[TRUTTER PHOTO]
Jonathan Trutter has been with ZKI since 1989. He is a first vice president of
ZKI and a vice president and portfolio co-manager of Kemper Strategic Income
Fund. Trutter received a bachelor's degree with dual majors in East Asian
Languages and International Relations from the University of Southern
California. He earned a master's of management degree from Kellogg Graduate
School of Business at Northwestern University.
[VANDENBERG PHOTO]
Richard Vandenberg joined Zurich Kemper Investments, Inc. (ZKI) in March 1996,
as senior vice president of ZKI and a vice president and portfolio co-manager of
Kemper Strategic Income Fund. Vandenberg has more than 22 years of fixed-income
portfolio management experience. He received both a bachelors degree and an
M.B.A. from the University of Wisconsin.
Management Team
The views expressed in this report reflect those of the portfolio managers only
through the end of the period of
the report, as stated on the cover. The managers' views are subject to change at
any time, based on market and other conditions.
5
<PAGE> 6
PERFORMANCE UPDATE
KEMPER STRATEGIC INCOME FUND ENJOYED STELLAR TOTAL RETURN PERFORMANCE IN TERMS
OF BOTH NET ASSET VALUE (UP 13.61 PERCENT) AND MARKET VALUE (UP 25.51 PERCENT)
DURING THE SIX-MONTH REPORTING PERIOD. BELOW, THE PORTFOLIO MANAGEMENT TEAM
DISCUSSES WHY THE FUND ENJOYED SUCH EXCELLENT PERFORMANCE DURING A TIME WHEN THE
OVERALL BOND MARKET WAS SUFFERING WITH LACKLUSTER OR NEGATIVE RETURNS.
Q HOW WOULD YOU CHARACTERIZE THE BOND MARKET OVER THE LAST SIX MONTHS?
A The overall bond market suffered, but the sectors in which the fund
invests -- high yield bonds, mortgages and emerging markets -- all performed
positively. High yield and emerging market bonds often display a lower
correlation with movements in the U.S. Treasury market. This is a key premise
to the diversified structuring of a fund like Kemper Strategic Income Fund.
Here's what happened.
After a period of declining interest rates, benign inflation and slow economic
growth, perceptions about the economy began to change in February. Signs of what
appeared to be stronger economic growth surfaced and caused market rates to
begin rising. As strong employment figures were reported in March, yields jumped
even higher. In addition, with the U.S. presidential campaign underway, focus in
Washington moved away from negotiations for a balanced budget. Additionally,
columnist and presidential candidate Patrick Buchanan's strong early showing in
the Republican primaries concerned the market, which viewed many of his
proposals as potentially inflationary. This combination of political and
economic factors caused a sell-off in the bond market because more rapid
economic growth is associated with higher inflation, which erodes the value of
fixed-income investments.
Q WOULD YOU EXPLAIN WHY THE KEMPER STRATEGIC INCOME FUND'S INVESTMENTS WERE
LESS SENSITIVE TO THE RISING INTEREST RATE ENVIRONMENT?
A Basically, what hurt the overall market -- stronger economic growth and
higher interest rates -- was what helped the fund's high yield and mortgage
sectors perform positively.
When the economy is growing, credit quality becomes less of a concern to high
yield corporate bond investors. A stronger economy assumes that more growth in
corporate earnings will occur. And solid earnings are essential for companies to
continue paying the interest on their outstanding bond issues. Of course, wild
economic growth that leads to dramatic increases in inflation wouldn't be
positive. But moderate growth, which is what we experienced, was good for the
high yield market.
During the six-month period ended May 31, 1996, the Salomon Brothers Extended
High Yield Index advanced 3.89 percent*. By comparison, the Salomon Brothers
High Grade Corporate Index fell 4.19 percent** over the same period. These
higher quality investment-grade corporate bonds tend to behave more like
Treasuries and therefore struggled as interest rates rose.
Although the fund's mortgages didn't provide great price appreciation, they
did perform positively. In fact, they were the only U.S. government income
category that didn't lose ground. Mortgages posted a gain of 0.26 percent
according to Salomon Brothers, whereas Treasuries lost 1.66 percent.
* Salomon Brothers Extended High Yield Index is an unmanaged index which tracks
the performance of below investment-grade corporate bonds issued in the United
States. The index and its components include cash-pay, deferred-interest and
bankrupt bonds that are public, have a fixed coupon and are non-convertible.
** Salomon Brothers High Grade Corporate Index is an unmanaged index which
tracks the performance of long-term (ten years and longer) AAA/AA-rated
corporate component of the Salomon Brothers Broad Investment Grade Index.
Q WHAT ABOUT THE FUND'S INVESTMENT IN EMERGING MARKETS?
A For the six-month period ended May 31, 1996, Brady Bond investments in
emerging markets dramatically outperformed all other fixed-income classes. They
are primarily U.S. dollar denominated bonds issued by emerging market countries
as a part of their foreign debt
6
<PAGE> 7
PERFORMANCE UPDATE
restructuring. For the semiannual period, the Salomon Brothers Brady Bond Index
jumped 19.24 percent***. Beyond this recent performance, Brady Bond investments
in emerging markets have provided strong returns for more than a year -- since
the devaluation of the Mexican Peso in December 1994.
The reasons for strong performance in emerging markets varies from country to
country as does the level of potential volatility. However, improving economic
environments and credit fundamentals helped the performance of our investments
in Mexico, Brazil and Argentina.
*** Salomon Brothers Brady Bond Index is an unmanaged index which measures the
performance of emerging market debt that has been restructured under the Brady
plan. The index measures returns for all Brady bonds beginning with the first
issue by Mexico in March 1990.
Q HOW DO YOU MANAGE THE DIVERSIFICATION OF THE FUND?
A At the time of the fund's inception in April 1994, we announced our
investment objective. It was to provide high current income by
investing its assets in a combination of (1) lower-rated corporate fixed-income
securities (high yield bonds), (2) fixed-income securities of emerging market
and other foreign issuers and (3) fixed-income securities of the U.S.
Government and its agencies and instrumentalities and private mortgage-backed
issuers.
We have not strayed from that objective and have maintained a relatively even
asset allocation among the three sectors. This asset allocation has been
important in helping us consistently meet our investment objective. Since the
fund's inception, the dividend has been increased three times and has never been
decreased. Of course, future returns and dividend levels can not be guaranteed.
Q WERE THERE AND DISAPPOINTMENTS DURING THE PERIOD?
A Hind sight is 20/20. Although we're very pleased with the fund's
performance, we wish we would have taken advantage of several
opportunities. For example, there were attractive investment opportunities in
the emerging markets sector during the period. But after reviewing the credits
we were still unsure that the potential reward could justify the risk we would
have had to incur. Now that we look back, those investments we passed up did
generate great returns. And we wish we would have taken the risk. But we're
gratified by the performance we did achieve with much lower levels of risk.
Q WHAT'S YOUR OUTLOOK FOR THE MARKET AND KEMPER STRATEGIC INCOME FUND?
A Our outlook for the fund is positive. We expect economic growth to
remain moderate. Interest rates could move higher but we're not
expecting them to move much beyond 7.5 percent. And inflation, at this point,
does not appear to be problematic. All of these factors should provide a
favorable environment for the sectors in which the fund invests.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 5/31/96 ON 11/30/95
- --------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE PASS-THROUGHS 33% 33%
- --------------------------------------------------------------------------
HIGH YIELD CORPORATE BONDS 29 31
- --------------------------------------------------------------------------
EMERGING MARKETS 37 33
- --------------------------------------------------------------------------
OTHER 1 3
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[Pie Chart] [Pie Chart]
<TABLE>
<CAPTION>
On 5/31/96 On 11/30/95
<S> <C> <C>
Mortgage pass-throughs 33 33
High yield corporate bonds 29 31
Emerging markets 37 33
Other 1 3
</TABLE>
LONG-TERM FIXED INCOME
SECURITIES RATINGS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 5/31/96 ON 11/30/95
- --------------------------------------------------------------------------
<S> <C> <C>
AAA 35% 36%
- --------------------------------------------------------------------------
A 6 7
- --------------------------------------------------------------------------
BBB 1 0
- --------------------------------------------------------------------------
BB 22 21
- --------------------------------------------------------------------------
B 34 33
- --------------------------------------------------------------------------
OTHER 2 3
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[Pie Chart] [Pie Chart]
<TABLE>
<CAPTION>
On 5/31/96 On 11/30/95
<S> <C> <C>
AAA 35 36
A 6 7
BBB 1 0
BB 22 21
B 34 33
Other 2 3
</TABLE>
THE RATINGS OF STANDARD AND 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 5/31/96 ON 11/30/95
- -------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 13.7 YEARS 11.3 YEARS
- -------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS AT MAY 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT--48.5%
Government National Mortgage Association
7.50%, 2023-2026 $10,653 $ 10,417
8.00%, 2022-2025 12,801 12,833
-----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $22,826) 23,250
-----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENTS
- --54.7%
(c)Republic of Argentina
5.422%, 2002 8,900 8,250
5.422%, 2007 5,125 4,802
Federal Republic of Brazil, 8.00%, 2014, PIK 14,946 8,968
United Mexican States, 6.25%, 2019 2,500 1,606
(c)Republic of Panama, 6.628%, 2002 2,825 2,631
-----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $21,003) 26,257
-----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------
AGRICULTURE AND
CHEMICALS--2.1%
Hines Horticulture, 11.75%, 2005 500 522
Pioneer Americas Acquisition Corp., 13.375%, 2005 140 149
Polymer Group Inc., 12.25%, 2002 135 146
Rexene Corporation, 11.75%, 2004 170 179
-----------------------------------------------------------------------------
996
- --------------------------------------------------------------------------------------------------------------
BROADCASTING,
CABLESYSTEMS AND
PUBLISHING--10.7%
Affinity Group, Inc., 11.50%, 2003 500 506
(b)Australis Media Corporation, 14.00%, 2003 120 75
(b)Bell Cablemedia PLC, 11.95%, 2004 370 265
Cablevision Industries Corporation, 9.25%, 2008 500 521
Cablevision Systems Corporation, 9.875%, 2013 450 432
CF Cable TV, Inc., 11.625%, 2005 110 120
Continental Cablevision, Inc., 9.50%, 2013 250 267
(b)Echostar Communications, 12.875%, 2004 700 609
(b)International Cabletel Incorporated, 12.75%, 2005 1,130 742
NewsQuest Capital PLC, 11.00%, 2006 400 401
Sinclair Broadcasting Group, Inc., 10.00%, 2003 500 487
(b)UIH Australia Pacific, Inc., 14.00%, 2006 800 424
(b)Videotron Holdings PLC, 11.125%, 2004 250 188
Young Broadcasting Inc. 11.75%, 2004 100 106
-----------------------------------------------------------------------------
5,143
- --------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES, HOME
BUILDING AND REAL ESTATE
- --3.6%
Coinmach Corporation, 11.75%, 2005 500 523
Hovnanian Kent, 11.25%, 2002 500 464
Outdoor Systems, Inc., 10.75%, 2003 500 510
Presley Companies, 12.50%, 2001 250 241
-----------------------------------------------------------------------------
1,738
- --------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--2.5%
(b)Call-Net Enterprises, Inc., 13.25%, 2004 $ 330 $ 243
(a)(b)Celcaribe S.A., 13.50%, 2004 300 306
Century Communications, 11.875%, 2003 90 96
Communication and Power Industry, Inc., 12.00%, 2005 150 158
Intermedia Communications of Florida, Inc., 13.50%,
with warrants, 2005 200 231
USA Mobile Communications, Inc. II, 14.00%, 2004 150 174
-----------------------------------------------------------------------------
1,208
- --------------------------------------------------------------------------------------------------------------
DRUGS AND HEALTH
CARE--1.7%
Magellan Health Services, 11.25%, 2004 500 549
Ornda Healthcorporation, 12.25%, 2002 250 271
-----------------------------------------------------------------------------
820
- --------------------------------------------------------------------------------------------------------------
ENERGY AND
TRANSPORTATION--.3%
(d)Burlington Motor Holdings Inc., 11.50%, 2003 500 46
Chesapeake Energy Corporation, 10.50%, 2002 80 84
-----------------------------------------------------------------------------
130
- --------------------------------------------------------------------------------------------------------------
HOTEL, GAMING AND
ENTERTAINMENT--2.9%
Bally's Park Place Funding, Inc., 9.25%, 2004 500 505
Cinemark USA, Inc., 12.00%, 2002 200 217
Empress River Casino, 10.75%, 2002 200 209
Players International, 10.875%, 2005 470 482
-----------------------------------------------------------------------------
1,413
- --------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS
AND TECHNOLOGY
- --9.3%
Aftermarket Technology, 12.00%, 2004 500 535
Alvey Systems, 11.375%, 2003 500 516
Bar Technologies, 13.50%, 2001 500 506
(b)Building Materials Corp. of America, 11.75%, 2004 1,100 822
Day International Group, 11.125%, 2005 40 41
(b)Foamex - JPS Automotive L.P., 14.00%, with
warrants, 2004 160 112
Great Dane Holdings, Inc., 12.75%, 2001 200 193
GS Technologies, 12.25%, 2005 150 155
Gulf States Steel, 13.50%, with warrants, 2003 150 137
IMO Industries, 11.75%, 2006 500 517
Jordan Industries, 10.375%, 2003 150 141
Nortek, 9.875%, 2004 780 735
NS Group Inc., 13.50%, 2003 70 67
-----------------------------------------------------------------------------
4,477
- --------------------------------------------------------------------------------------------------------------
PAPER AND FOREST
PRODUCTS--5.9%
Crown Paper, 11.00%, 2005 550 521
Gaylord Container Corporation, 12.75%, 2005 500 526
Maxxam Group, Inc., 11.25%, 2003 500 498
Repap New Brunswick, Inc., 10.625%, 2005 525 488
Riverwood International Corp., 10.875%, 2008 300 296
Sweetheart Cup Company, Inc., 10.50%, 2003 500 493
-----------------------------------------------------------------------------
2,822
- --------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RETAILING, FOOD
AND BEVERAGE--4.0%
(d)Beatrice Foods, Inc., 12.00%, 2001 $ 500 $ 150
(d)Color Tile Inc., 10.75%, 2001 330 17
P&C Food Markets, Inc., 11.50%, 2001 350 354
Pathmark Stores, Inc., 11.625%, 2001 600 611
Penn Traffic Company, 11.50%, 2006 400 404
Thrifty Payless, Inc., 12.25%, 2004 325 364
-----------------------------------------------------------------------------
1,900
-----------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--43.0%
(Cost: $20,860) 20,647
-----------------------------------------------------------------------------
TOTAL INVESTMENTS--146.2%
(Cost: $64,689) 70,154
-----------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(46.2)% (22,178)
-----------------------------------------------------------------------------
NET ASSETS--100% $ 47,976
-----------------------------------------------------------------------------
</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 May 31, 1996 the value of the Fund's restricted
security was $306,000 which represented .64% 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 $80.13
----------------------------------------------------------------------------------------------------
</TABLE>
(b) Deferred interest obligations; currently zero coupon under terms of the
initial offering.
(c) Variable rate securities. The rates shown are effective rates on May 31,
1996. The dates shown represent the final maturity of the obligations.
(d) Non-income producing securities. Issuer has defaulted on the payment of
interest.
"PIK" denotes that all or a portion of interest is paid in kind.
Based on the cost of investments of $64,689,000 for federal income tax purposes
at May 31, 1996 the gross unrealized appreciation was $6,759,000, the gross
unrealized depreciation was $1,294,000 and the net unrealized appreciation of
investments was $5,465,000.
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $64,689) $70,154
- -------------------------------------------------------------------------------------------------------
Interest rate swap agreements, at value 66
- -------------------------------------------------------------------------------------------------------
Cash 312
- -------------------------------------------------------------------------------------------------------
Receivable for:
Investments sold 159
- -------------------------------------------------------------------------------------------------------
Interest 789
- -------------------------------------------------------------------------------------------------------
Deferred organization costs 30
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 71,510
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Liability under reverse repurchase agreements 23,054
- -------------------------------------------------------------------------------------------------------
Payable for:
Investments purchased 422
- -------------------------------------------------------------------------------------------------------
Management fee 34
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 14
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 10
- -------------------------------------------------------------------------------------------------------
Total liabilities 23,534
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO 3,435 SHARES OUTSTANDING,
$.01 PAR VALUE, EQUIVALENT TO $13.97 PER SHARE $47,976
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $48,002
- -------------------------------------------------------------------------------------------------------
Accumulated net realized loss on sales of investments (6,167)
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,531
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 610
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $47,976
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE ($47,976 divided by 3,435 shares outstanding) $13.97
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
Six months ended May 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Interest Income $ 3,935
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 203
- -------------------------------------------------------------------------------------------------------
Interest expense 654
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 46
- -------------------------------------------------------------------------------------------------------
Professional fees 26
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 7
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 29
- -------------------------------------------------------------------------------------------------------
Total expenses 965
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,970
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments 32
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 2,950
- -------------------------------------------------------------------------------------------------------
Net gain on investments 2,982
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,952
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS AND CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, NOVEMBER 30,
1996 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------
Net investment income $ 2,970 5,723
- ---------------------------------------------------------------------------------------------------------
Net realized gain (loss) 32 (4,905)
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation 2,950 6,733
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 5,952 7,551
- ---------------------------------------------------------------------------------------------------------
Distribution from net investment income (3,084) (5,792)
- ---------------------------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
(22 shares and 48 shares, respectively) 332 627
- ---------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 3,200 2,386
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of period 44,776 42,390
- ---------------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment income
of $610 and $724, respectively) 47,976 44,776
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------
Increase in net assets from operations 5,952 7,551
- ---------------------------------------------------------------------------------------------------------
Non-cash items (4,728) (4,107)
- ---------------------------------------------------------------------------------------------------------
Sale (purchase) of investments (715) 577
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 509 4,021
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------
Proceeds from reverse repurchase agreements 1,977 702
- ---------------------------------------------------------------------------------------------------------
Distributions to shareholders (2,752) (5,165)
- ---------------------------------------------------------------------------------------------------------
Net cash used in financing activities (775) (4,463)
- ---------------------------------------------------------------------------------------------------------
Net decrease in cash (266) (442)
- ---------------------------------------------------------------------------------------------------------
Cash at beginning of period 578 1,020
- ---------------------------------------------------------------------------------------------------------
Cash at end of period $ 312 578
- ---------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
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 includes discount
amortization on all fixed income securities and
premium amortization on mortgage-backed securities.
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.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended May 31, 1996. The accumulated net
realized loss on sales of investments for federal
income tax purposes at May 31, 1996, amounting to
approximately $6,159,000, is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 2002 through
2004.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded 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 MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI) (formerly known as Kemper Financial Services,
Inc.), and pays a management fee at an annual rate
of .85% of average weekly net assets. The Fund
incurred a management fee of $203,000 for the six
months ended May 31, 1996.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
shareholder service agent of the Fund. Under the
agreement, KSvC received shareholder service fees
of $12,000 for the six months ended May 31, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the six months ended May 31, 1996, the Fund
made no direct payments to its officers and
incurred trustees fees of $12,000 to independent
trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT TRANSACTIONS For the six months ended May 31, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
<TABLE>
<S> <C> <C>
Purchases $13,824
Proceeds from sales 11,153
</TABLE>
- --------------------------------------------------------------------------------
4 REVERSE REPURCHASE
AGREEMENTS The Fund has entered into reverse repurchase
agreements with third parties. Approximately
$10,399,000 of the agreements mature within thirty
days, with the remainder maturing within six
months. The weighted average interest rate is
5.42%. Securities valued at $23,250,000 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 May 31, 1996, 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 5/31/99 LIBOR 6.97 %
---------------------------------------------------------------------------------
Lehman Brothers Special
Financing Inc. 5,000,000 5/31/99 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 May
31, 1996 amounted to $66,000. The Fund also bears
the credit risk that the counterparty will not
perform under the contract.
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED APRIL 29, 1994
MAY 31, NOVEMBER 30, TO NOVEMBER 30,
1996 1995 1994
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $13.12 12.60 13.97
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .87 1.68 .87
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .88 .54 (1.60)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.75 2.22 (.73)
- --------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .90 1.70 .64
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.97 13.12 12.60
- --------------------------------------------------------------------------------------------------------------------
Market value, end of period $16.88 14.25 13.50
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------
Based on net asset value 13.61% 19.29 (5.43)
- --------------------------------------------------------------------------------------------------------------------
Based on market value 25.51 20.03 (5.67)
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------
Expenses before interest expense 1.32% 1.26 1.13
- --------------------------------------------------------------------------------------------------------------------
Expenses after interest expense 4.04 4.35 3.41
- --------------------------------------------------------------------------------------------------------------------
Net investment income 12.45 13.56 10.95
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $ 47,976 44,776 42,390
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 23% 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.
16
<PAGE> 17
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
On May 29, 1996, an annual shareholders' meeting was held. Kemper Strategic
Income Fund shareholders were asked to vote on two separate issues: re-election
of the eight members to the Board of Trustees and ratification of Ernst & Young
LLP as independent auditors. We are pleased to report that all nominees were
elected and the selection of Ernst & Young LLP as the fund's auditors was
ratified. Following are the results for each issue:
1) Re-election of Trustees:
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
James E. Akins 3,145,540 28,567
Arthur R. Gottschalk 3,147,762 26,345
Frederick T. Kelsey 3,148,397 25,710
Dominique P. Morax 3,146,175 27,932
Fred B. Renwick 3,146,492 27,615
Stephen B. Timbers 3,149,666 24,441
John B. Tingleff 3,150,301 23,806
John G. Weithers 3,150,301 23,806
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
3,118,854 16,269 38,983
</TABLE>
17
<PAGE> 18
NOTES
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS JOHN E. NEAL PHILIP J. COLLORA
President and Trustee Vice President Vice President and
Secretary
JAMES E. AKINS JOHN E. PETERS
Trustee Vice President CHARLES F. CUSTER
Vice President and
ARTHUR R. GOTTSCHALK J. PATRICK BEIMFORD, JR. Assistant Secretary
Trustee Vice President
JEROME L. DUFFY
FREDERICK T. KELSEY MICHAEL A. MCNAMARA Treasurer
Trustee Vice President
DOMINIQUE P. MORAX HARRY E. RESIS, JR.
Trustee Vice President
FRED B. RENWICK JONATHAN W. TRUTTER
Trustee Vice President
JOHN B. TINGLEFF RICHARD L. VANDENBERG
Trustee Vice President
JOHN G. WEITHERS
Trustee
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
120 South LaSalle Street Chicago, IL 60603
http://www.kemper.com
[RECYCLED LOGO] [KEMPER LOGO]
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