<PAGE> 1
KEMPER
STRATEGIC INCOME FUND
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED NOVEMBER 30, 1996
" . . . The additional exposure to
emerging markets was the primary force behind the
fund's outstanding returns . . ."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
2
At a Glance
2
Terms to Know
3
Economic Overview
5
Management Team
6
Performance Update
8
Portfolio Statistics
9
Portfolio of Investments
12
Report of Independent Auditors
13
Financial Statements
15
Notes to Financial Statements
17
Financial Highlights
18
Description of Dividend Reinvestment Plan
AT A GLANCE
- --------------------------------------------------------------------------------
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER STRATEGIC
INCOME FUND 32.63% 39.99%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE AND MARKET PRICE
- --------------------------------------------------------------------------------
AS OF AS OF
11/30/96 11/30/95
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $15.34 $13.12
- --------------------------------------------------------------------------------
MARKET PRICE $17.75 $14.25
- --------------------------------------------------------------------------------
</TABLE>
The fund may invest in lower-rated and non-rated securities, which present
greater risk of loss to principal and interest than higher rated securities, and
in foreign securities which present special risk considerations including
fluctuating foreign exchange rates, foreign government regulations and differing
degrees of liquidity.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF NOVEMBER 30, 1996.
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ONE-YEAR INCOME: $ 1.78
- --------------------------------------------------------------------------------
NOVEMBER DIVIDEND: $ 0.1470
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON NET ASSET VALUE) 11.50%
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON MARKET VALUE) 9.94%
- --------------------------------------------------------------------------------
</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 price 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
EMERGING MARKETS A developing or emerging 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 specified 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.
2
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $79 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:
As we begin a new year, it's remarkable how eventful 1996 was and yet,
economically, we are essentially where we were one year ago.
The fundamentals of the economy are remarkably similar. Long-term interest
rates are approximately 6.5% compared to the 6.5% to 7% range they were in
during the first half of 1996. We believe the economy is growing at a rate of
approximately 2.5%. Inflation continues to be well under control, at about 3.0%.
One significant difference between today and one year ago is that prices of
the stocks are on average up 20%. While price movements were more volatile in
1996 than in the past few years, the patient investor was amply rewarded. The
prime element sending the stock market higher was strong positive cash flows.
This liquidity in an environment of modestly increasing corporate profits and
relatively stable interest rates pushed stocks higher for most of the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in
recent years but positive nonetheless.
- INTEREST RATES. Rates should remain stable, and short-term interest rates
may even decline.
- LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, will continue to create strong demand
for securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
3
<PAGE> 4
ECONOMIC OVERVIEW
- ------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- ------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund
performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The 10-year
Treasury rate and the prime rate are prevailing interest rates. The other data
report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (12/31/96) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.30 6.87 5.65 7.78
PRIME RATE (2) 8.25 8.25 8.50 8.50
INFLATION RATE(3)* 3.19 2.75 2.60 2.61
THE U.S. DOLLAR (4) 4.36 8.55 -0.57 -5.29
CAPITAL GOODS ORDERS (5)* 2.69 1.85 13.09 3.68
INDUSTRIAL PRODUCTION (5)* 4.40 4.12 1.08 6.43
EMPLOYMENT GROWTH (6) 2.17 2.19 1.57 3.52
</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,
inflations 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 family income and retail sales.
* Data as of November 30, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter 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.
January 9, 1997
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
4
<PAGE> 5
MANAGEMENT TEAM
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 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 AND IS SENIOR VICE PRESIDENT OF ZKI
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 WITH ZKI. HE JOINED THE COMPANY IN 1988
AND IS A 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 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 ZKI IN MARCH 1996, AS SENIOR VICE PRESIDENT OF ZKI 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
BACHELOR'S DEGREE AND AN M.B.A. FROM THE UNIVERSITY OF WISCONSIN.
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 WAS RANKED NUMBER ONE IN ITS LIPPER PEER GROUP FOR
THE YEAR ENDED NOVEMBER 30, 1996. BELOW, THE PORTFOLIO MANAGEMENT TEAM EXPLAINS
THE FUND'S STRONG PERFORMANCE DURING A PERIOD WHEN THE OVERALL BOND MARKET
STRUGGLED.
Q HOW WOULD YOU ASSESS KEMPER STRATEGIC INCOME FUND'S PERFORMANCE DURING SUCH
A VOLATILE YEAR FOR THE OVERALL BOND MARKET?
A The fund enjoyed outstanding performance this year. On a market price
basis, its return was 39.99 percent. On a net asset value basis, it was number
one of 12 funds in the Lipper Analytical Services, Inc. flexible income category
for the year ended November 30, 1996.+ Its net asset value return of 32.63
percent was more than double the 13.82 percent average return of its Lipper peer
group.+ Additionally, on a total return basis, the fund outperformed the Dow
Jones industrial average* and the New York Stock Exchange Composite Index** for
its fiscal year period.
* Dow Jones industrial average is a price-weighted average of 30 blue-chip
stocks that are generally the leaders in their industry and are listed on the
New York Stock Exchange.
** New York Stock Exchange Composite Index is a capitalization-weighted index
which includes all companies listed on the New York Stock Exchange.
+ Lipper Analytical Services, Inc. returns and rankings are based upon changes
in net asset value with all dividends reinvested.
Q WHAT WAS BEHIND THE FUND'S STRONG PERFORMANCE DURING A PERIOD WHEN MANY
BOND FUNDS STRUGGLED?
A The sectors in which the fund invests -- high yield bonds, mortgage-backed
securities and bonds from emerging markets -- were three of the best performing
sectors in the fixed-income market.
Since ours is an income-oriented fund, we had the flexibility to really
take advantage of the stellar performance in the emerging markets sector.
Generally, our strategy is to maintain an equal amount of exposure to each of
the three sectors. However, we maintained a larger weighting in emerging
markets during the year to take advantage of the sector's strong performance.
For the 12-month period, emerging markets advanced 43.27 percent according to
the Salomon Brothers Brady Bond Index***. Emerging market investments
represented between 33 to 40 percent of the fund's investments throughout the
year.
*** Salomon 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 WHAT CONTRIBUTED TO SUCH STRONG EMERGING MARKET PERFORMANCE?
A Fundamental economic changes continued to be implemented by the
administrations of most of the major emerging market issuers. These changes are
likely to lead to an overall improvement in the sovereign creditworthiness of
these countries. Additionally, the emerging markets as a whole showed great
resiliency from the Mexican peso crisis of 1994-95. This fostered greater
confidence in the debt market and lower volatility ensued. Globally, we are
experiencing a rather low interest rate environment. This should be positive for
emerging markets because the cost of financing is lower.
KEMPER STRATEGIC INCOME FUND OUTPERFORMS EQUITY INDEXES
The chart below illistrates the cumulative total return of Kemper Strategic
Income Fund at net asset value compared to two major equity indexes from
November 30, 1995 through November 30, 1996.
[LINE GRAPH]
<TABLE>
<CAPTION>
11/30/95 3/29/96 6/28/96 9/30/96 11/30/96
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper Strategic Income Fund 0 9.94 15.62 23.86 32.63
Dow Jones Industrial Average* 0 10.91 12.86 18.12 31.46
NYSE Composite Index** 0 7.94 12.40 15.60 25.86
</TABLE>
Return are historical and do not represent future performance.
6
<PAGE> 7
PERFORMANCE UPDATE
Additionally, because of the lower rate environment, investors are
looking for higher rates of income. They are also becoming more willing to take
on the additional risk of emerging market investments to seek a higher rate of
income. This has been very positive for the emerging markets sector.
Q HOW DID YOUR INCREASED INVESTMENT IN THE EMERGING MARKETS SECTOR AFFECT THE
FUND'S PORTFOLIO COMPOSITION?
A Our allocation to mortgages remained relatively stable at about one-third
of the portfolio's assets, while our high yield allocation fluctuated between 26
to 30 percent of the fund's assets during most of the year.
Q WHY WAS THE FUND'S EXPOSURE TO HIGH YIELD BONDS REDUCED IN FAVOR OF
MORTGAGES AND EMERGING MARKET INVESTMENTS, WHEN THE HIGH YIELD MARKET ENJOYED
SUCH STRONG PERFORMANCE IN 1996?
A We maintained a higher exposure to mortgages not so much for their
performance, which was positive, but for 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. This additional financing has given us the
flexibility to purchase more securities which have helped us maintain a
relatively high level of income. Kemper Strategic Income Fund's dividend has
been increased at least once each year since the fund's inception. The dividend
was increased in May to an annualized rate of $1.764 per share from $1.74 per
share.
We have been and remain bullish on high yield bonds. From a portfolio
composition standpoint, exposure to high yield bonds was reduced by only about 5
percent. This was done to take advantage of the even better performing emerging
markets sector and to capitalize on our leveraging capabilities. 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 WERE HIGH YIELD BONDS A SIGNIFICANT CONTRIBUTOR TO THE FUND'S RETURN?
A Most definitely. The growing U.S. economy continued to drive strong high
yield bond returns during the fiscal year. That's because stronger economic
growth fueled corporate earnings, which enabled most companies to meet the
interest payments on their outstanding bond issues. The strong stock market was
also positive for high yield bonds. It facilitated an increased number of
initial public offerings by high yield issuers, which enabled many issuers to
prepay their debt.
Q WHAT'S YOUR OUTLOOK FOR THE BOND MARKET?
A Our outlook for the market is optimistic. We expect that long-term rates
will remain within a range of between 6 to 7 percent. For rates to move to the
low end of that range, some credible progress would need to be made by the
President and Congress in agreeing to reduce the federal budget deficit. Any
progress on the budget would obviously be very beneficial for the bond market.
If rates move higher, it would probably be the result of inflationary concerns,
which would of course upset the market. We believe the current environment is
definitely positive for the overall bond market and Kemper Strategic Income
Fund.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 11/30/96 ON 11/30/95
- --------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES 32% 33%
- --------------------------------------------------------------------------------
HIGH YIELD CORPORATE BONDS 26 31
- --------------------------------------------------------------------------------
EMERGING MARKETS 40 33
- --------------------------------------------------------------------------------
OTHER 2 3
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 11/30/96 ON 11/30/96
LONG-TERM FIXED INCOME
SECURITIES RATINGS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 11/30/96 ON 11/30/95
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 35% 36%
- --------------------------------------------------------------------------------
A 6 7
- --------------------------------------------------------------------------------
BB 23 21
- --------------------------------------------------------------------------------
B 35 33
- --------------------------------------------------------------------------------
OTHER 1 3
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 11/30/96 ON 11/30/96
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 S&P or Moody's ratings. Portfolio composition will change over time. Ratings
are relative and subjective and not absolute standards of quality.
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 11/30/96 ON 11/30/95
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 13.4 YEARS 11.3 YEARS
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS AT NOVEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL
GOVERNMENT OBLIGATIONS AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT--46.5% Government National Mortgage Association
7.50%, 2023-2026 $11,280 $11,469
8.00%, 2022-2026 12,742 13,172
-----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $23,439) 24,641
-----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENTS--57.7% (b)Republic of Argentina
5.375%, 2002 8,900 9,323
5.375%, 2007 5,125 5,520
Federal Republic of Brazil, 8.00%, 2014, PIK 15,208 11,106
(b)United Mexican States, 6.25%, 2019 2,500 1,847
(b)Republic of Panama, 6.628%, 2002 2,390 2,326
(b)Republic of Venezuela, 6.625%, 2007 500 430
-----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $22,351) 30,552
-----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------
AGRICULTURE AND
CHEMICALS--1.8% Hines Horticulture, 11.75%, 2005 500 526
Pioneer Americas Acquisition Corp., 13.375%, 2005 140 157
Polymer Group Inc., 12.25%, 2002 90 98
Rexene Corporation, 11.75%, 2004 170 192
-----------------------------------------------------------------------------
973
- --------------------------------------------------------------------------------------------------------------
BROADCASTING,
CABLESYSTEMS AND
PUBLISHING--9.4% Affinity Group, Inc., 11.50%, 2003 500 524
(a)Bell Cablemedia PLC, 11.95%, 2004 370 316
Cablevision Systems Corporation, 9.875%, 2013 450 439
Century Communications Corporation, 11.875%, 2003 90 96
Echostar Communications
(a) 12.875%, 2004 550 455
(c) 2,350 Class A common stock 63
Frontiervision, 11.00%, 2006 400 397
Intermedia Capital Partners, 11.25%, 2006 250 254
(a)International Cabletel Incorporated, 12.75%,
2005 1,130 802
NewsQuest Capital PLC, 11.00%, 2006 400 408
Sinclair Broadcast Group, Inc., 10.00%, 2003 500 507
(a)UIH Australia Pacific, Inc., 14.00%, 2006 770 408
(a)Videotron Holdings PLC, 11.125%, 2004 250 213
Young Broadcasting Inc., 11.75%, 2004 100 107
-----------------------------------------------------------------------------
4,989
- --------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES,
HOME BUILDERS AND
REAL ESTATE--2.4% Coinmach Corporation, 11.75%, 2005 500 540
Hovnanian Kent, 11.25%, 2002 500 503
Presley Companies, 12.50%, 2001 250 236
-----------------------------------------------------------------------------
1,279
- --------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--1.6% (a)Call-Net Enterprises Inc., 13.25%, 2004 $ 330 $ 266
Communication and Power Industry, Inc., 12.00%,
2005 150 163
Intermedia Communications of Florida Inc., 13.50%,
with warrants, 2005 200 240
USA Mobile Communications, Inc. II, 14.00%, 2004 150 169
-----------------------------------------------------------------------------
838
- --------------------------------------------------------------------------------------------------------------
DRUGS AND HEALTH
CARE--1.5% Magellan Health Services, 11.25%, 2004 500 555
Ornda Healthcorporation, 12.25%, 2002 250 268
-----------------------------------------------------------------------------
823
- --------------------------------------------------------------------------------------------------------------
ENERGY AND (c)Burlington Motor Holdings Inc., 11.50%, 2003 500 11
TRANSPORTATION--.2%
Chesapeake Energy Corporation, 10.50%, 2002 80 88
-----------------------------------------------------------------------------
99
- --------------------------------------------------------------------------------------------------------------
LODGING AND
GAMING--3.3% Bally's Park Place Funding, Inc., 9.25%, 2004 500 551
Empress River Casino, 10.75%, 2002 200 215
Players International, 10.875%, 2005 470 465
(a)Six Flags Theme Park, 12.25%, 2005 550 507
-----------------------------------------------------------------------------
1,738
- --------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS
AND MINING--10.3% Aftermarket Technology, 12.00%, 2004 500 555
Alvey Systems, 11.375%, 2003 500 521
Bar Technologies, 13.50%, with warrants, 2001 500 533
(a)Building Materials Corporation of America,
11.75%, 2004 1,100 946
Day International Group, Inc., 11.125%, 2005 40 42
Euramax International PLC, 11.25%, 2006 400 410
(a)Foamex - JPS Automotive L.P., 14.00%, with
warrants, 2004 160 130
Great Dane Holding Company, 12.75%, 2001 200 200
GS Technologies, 12.25%, 2005 150 157
Gulf States Steel, 13.50%, with warrants, 2003 150 142
IMO Industries, 11.75%, 2006 500 473
Jordan Industries, 10.375%, 2003 150 145
Nortek, Inc., 9.875%, 2004 780 784
Weirton Steel Corp., 11.375%, 2004 400 394
-----------------------------------------------------------------------------
5,432
- --------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS,
AND CONTAINERS--5.0% Crown Paper, 11.00%, 2005 775 715
Gaylord Container Corporation, 12.75%, 2005 500 547
Maxxam Group, Inc., 11.25%, 2003 500 515
National Fiberstock, 11.625%, 2002 500 523
Riverwood International, 10.875%, 2008 300 272
Stone Container Corporation, 11.50%, 2006 70 72
-----------------------------------------------------------------------------
2,644
- --------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RETAILING AND
CONSUMER SERVICES--2.8% Beatrice Foods, Inc., 12.00%, 2001 $ 500 $ 445
(c)Color Tile, Inc., 10.75%, 2001 330 17
Pathmark Stores, Inc., 11.625%, 2002 600 622
Thrifty Payless, Inc., 12.25%, 2004 325 377
-----------------------------------------------------------------------------
1,461
-----------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--38.3%
(Cost: $19,969) $20,276
-----------------------------------------------------------------------------
TOTAL INVESTMENTS--142.5%
(Cost: $65,759) 75,469
-----------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(42.5)% (22,525)
-----------------------------------------------------------------------------
NET ASSETS--100% $52,944
-----------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
(a) Deferred interest obligation; currently zero coupon under terms of the
initial offering.
(b) Variable rate security. Rate shown is effective rate on November 30, 1996
and date shown represents the final maturity of the obligation.
(c) Non-income producing security. Issuer has defaulted on the payment of
interest.
Based on the cost of investments of $65,759,000 for federal income tax purposes
at November 30, 1996, the gross unrealized appreciation was $10,661,000, the
gross unrealized depreciation was $951,000 and the net unrealized appreciation
was $9,710,000.
See accompanying Notes to Financial Statements.
11
<PAGE> 12
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, 1996, the related statements of operations for the year then ended
and cash flows and changes in net assets for each of the two years in the period
then ended and the financial highlights for each of the fiscal periods since
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, 1996, 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, 1996, 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 17, 1997
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $65,759) $75,469
- -------------------------------------------------------------------------------------------------------
Interest rate swap agreements, at value 233
- -------------------------------------------------------------------------------------------------------
Cash 396
- -------------------------------------------------------------------------------------------------------
Interest receivable 828
- -------------------------------------------------------------------------------------------------------
Deferred organization costs 24
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 76,950
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Liability under reverse repurchase agreements 23,943
- -------------------------------------------------------------------------------------------------------
Payable for:
Management fee 37
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 14
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 12
- -------------------------------------------------------------------------------------------------------
Total liabilities 24,006
- -------------------------------------------------------------------------------------------------------
NET ASSETS $52,944
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $48,248
- -------------------------------------------------------------------------------------------------------
Accumulated net realized loss on sales of investments (5,884)
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 9,943
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 637
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $52,944
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE, $.01 PAR VALUE
($52,944 / 3,450 shares outstanding) $15.34
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
- -------------------------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
Interest income $ 7,942
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 414
- -------------------------------------------------------------------------------------------------------
Interest expense 1,298
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 92
- -------------------------------------------------------------------------------------------------------
Professional fees 40
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 12
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 40
- -------------------------------------------------------------------------------------------------------
Total expenses 1,896
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 6,046
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments 319
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 7,362
- -------------------------------------------------------------------------------------------------------
Net gain on investments 7,681
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $13,727
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS AND CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 6,046 5,723
- ---------------------------------------------------------------------------------------------------------
Net realized gain (loss) 319 (4,905)
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation 7,362 6,733
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 13,727 7,551
- ---------------------------------------------------------------------------------------------------------
Distribution from net investment income (6,137) (5,792)
- ---------------------------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
(37 shares and 48 shares, respectively) 578 627
- ---------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 8,168 2,386
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of year 44,776 42,390
- ---------------------------------------------------------------------------------------------------------
END OF YEAR
(including undistributed net investment
income of $637 and $724, respectively) $ 52,944 44,776
- ---------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Increase in net assets from operations $ 13,727 7,551
- ---------------------------------------------------------------------------------------------------------
Non-cash items (10,769) (4,107)
- ---------------------------------------------------------------------------------------------------------
Sale (purchase) of investments (322) 577
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,636 4,021
- ---------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from reverse repurchase agreements 2,741 702
- ---------------------------------------------------------------------------------------------------------
Distributions to shareholders (5,559) (5,165)
- ---------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,818) (4,463)
- ---------------------------------------------------------------------------------------------------------
Net decrease in cash (182) (442)
- ---------------------------------------------------------------------------------------------------------
CASH AT BEGINNING OF YEAR 578 1,020
- ---------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 396 578
- ---------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
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 financial futures
and options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Over-the-counter
traded options and interest rate swap agreements
are valued based upon prices provided by market
makers. 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 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 and therefore no
federal income tax provision is required. The
accumulated net realized loss on sales of
investments for federal income tax purposes at
November 30, 1996, amounting to approximately
$5,872,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 2002 through 2003.
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.
- --------------------------------------------------------------------------------
2 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI), and pays a management fee at an annual rate
of .85% of average weekly net assets. The Fund
incurred a management fee of $414,000 for the year
ended November 30, 1996.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder service fees of $24,000
for the year ended November 30, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended November 30, 1996,
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
the Fund made no direct payments to its officers
and incurred trustees fees of $17,000 to
independent trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS For the year ended November 30, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $23,570
Proceeds from sales 20,116
- --------------------------------------------------------------------------------
4 REVERSE REPURCHASE
AGREEMENTS The Fund has entered into reverse repurchase
agreements with third parties. Approximately
$8,300,000 of the agreements mature within ninety
days, with the remainder maturing within five
months. The weighted average interest rate is
5.59%. Securities valued at $24,641,000 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, 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
November 30, 1996 amounted to $233,000. The Fund
also bears the credit risk that the counterparty
will not perform under the contract.
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, APRIL 29
------------------------ 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 1.75 1.68 .87
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 2.25 .54 (1.60)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.00 2.22 (.73)
- --------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income 1.78 1.70 .64
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $15.34 13.12 12.60
- --------------------------------------------------------------------------------------------------------------------
Market value, end of period $17.75 14.25 13.50
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------
Based on net asset value 32.63% 19.29 (5.43)
- --------------------------------------------------------------------------------------------------------------------
Based on market value 39.99% 20.70 (5.61)
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------
Expenses before interest expense 1.23% 1.26 1.13
- --------------------------------------------------------------------------------------------------------------------
Expenses after interest expense 3.89% 4.35 3.41
- --------------------------------------------------------------------------------------------------------------------
Net investment income 12.43% 13.56 10.95
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $52,944 44,776 42,390
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 19% 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.
17
<PAGE> 18
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
18
<PAGE> 19
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 charges 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 notice thereof sent to participants
in the Plan at least ninety days before the record
date for such Distribution.
19
<PAGE> 20
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
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 Federal income tax returns. 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.
20
<PAGE> 21
NOTES
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
JAMES E. AKINS CHARLES R. MANZONI, JR.
Trustee Vice President
ARTHUR R. GOTTSCHALK MICHAEL A. MCNAMARA
Trustee Vice President
FREDERICK T. KELSEY JOHN E. NEAL
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 PHILIP J. COLLORA
Trustee Vice President and
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 ZURICH KEMPER INVESTMENTS, INC.
222 South Riverside Plaza
Chicago, IL 60606
http://www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
KSIF - 2 (1/97) 1027730
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