<PAGE> 1
KEMPER
STRATEGIC INCOME FUND
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED MAY 31, 1997
" . . . The fund provided strong
performance in terms of both market
price and net asset value ."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Management Team
6
Performance Update
8
Portfolio Statistics
9
Portfolio of
Investments
12
Financial Statements
14
Notes to
Financial Statements
16
Financial Highlights
17
Shareholders' Meeting
AT A GLANCE
- -------------------------------------------------------------------------------
TOTAL RETURNS
- -------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 1997
<TABLE>
<CAPTION>
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
- -------------------------------------------------------------------------------
<S> <C> <C>
KEMPER STRATEGIC
INCOME FUND 8.52% 9.13%
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NET ASSET VALUE
AND MARKET PRICE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
5/31/97 11/30/96
- -------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $15.70 $15.34
- -------------------------------------------------------------------------------
MARKET PRICE $18.375 $17.75
- -------------------------------------------------------------------------------
</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 May 31, 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
<S> <C>
SIX-MONTH INCOME: $ 0.9020
- -------------------------------------------------------------------------------
MAY DIVIDEND: $ 0.1470
- -------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON NET ASSET VALUE) 11.24%
- -------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON MARKET VALUE) 9.60%
- -------------------------------------------------------------------------------
</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
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 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. Total return
assumes the reinvestment of all dividends and it represents the aggregate
percentage or dollar value change 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
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 $80 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 consistently good news on the domestic economy and the recent agreement
between the White House and Republican leaders in Congress to balance the
federal budget has provided the basis for strong stock and bond markets. This
progress on balancing the budget, an initiative that the bond market was
anticipating resolution of more than one year ago, has very positive long term
implications for financial markets.
The next several weeks will find Congress and the Clinton administration
negotiating toward a final agreement. Unlike previous failed proposals that
sought to balance the budget principally by increasing income taxes, the current
plan -- which starts from the base of a relatively small deficit -- proposes to
slow the growth of federal spending. As such, its prospects are promising.
Natural skeptics are waiting to see specific legislation to see if the
agreement has teeth. While we are optimistic, we need to temper our enthusiasm.
Much of the good news associated with a balanced budget has been discounted in
the higher prices in the stock and bond markets.
Of particular interest to equity investors is the agreement to reduce the
maximum tax rate on capital gains. Although details of the reduction are yet to
be known, the prospect of more favorable tax treatment on gains will have the
short-term effect of supporting stocks -- investors can be expected to postpone
selling until they can qualify for the lower tax rate. With equity sales
essentially "frozen" until the effective date is known, the stock market should
have a considerable underpinning. Once an effective date is determined, we would
expect the pent-up selling to occur. However, then we shall enjoy the long-term
positive effect of the lower tax rate on gains.
Talk of a balanced budget has shifted the spotlight away from the Federal
Reserve Board's upward pressure on interest rates. Having declined to raise
rates in May, the Fed may still act again at a later date. However, this action
may be the last for a while because the economy seems to be slowing down in the
second quarter, after the rapid 5.6 percent annualized growth in the first
quarter of the year. A slower economy would reduce the threat of inflation and
reduce the need for further rate hikes by the Fed.
In fact, a review of the standard measures of the economy shows little to
be concerned about and much to be encouraged by. As has been the pattern for
more than five years, a few strong quarters followed by a few weak quarters have
produced an overall 2 to 3 percent rate of growth in gross domestic product
(GDP). Job creation and the unemployment rate are consistent with a moderately
expanding economy. Corporate profits continue to grow at an expected 4 to 5
percent rate in 1997. The Consumer Price Index continues to track at a 2.5 to
3.0 percent rate.
Leadership in the stock market has been quite narrow and concentrated in
the first half of 1997 in large, multinational companies with familiar consumer
brand names. The recent rally after the announcement of a balanced budget
agreement suggests that valuations of smaller capitalization stocks are
compelling and the market is broadening.
A natural response to increased volatility in the U.S. equity market is to
look abroad. In fact, the valuations of many international markets are more
attractive than the U.S. However, the weak German and Japanese economies make it
difficult to identify many exciting near-term opportunities without careful
research.
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 (6/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.49 6.58 6.87 6.28
PRIME RATE(2) 8.5 8.25 8.25 8.8
INFLATION RATE(3) 2.3 3.04 2.95 2.76
THE U.S. DOLLAR(4) 5.52 4.59 8.35 -7.04
CAPITAL GOODS ORDERS(5)* 8.17 2.23 2.44 8.24
INDUSTRIAL PRODUCTION(5) 3.84 4.84 3.38 2.36
EMPLOYMENT GROWTH(6) 2.12 2.41 2.18 2.46
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. 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 May 31, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
Our recommendation to shareholders is to stay the course and to fight the
temptation to try to time when and where you should be invested without help.
Financial assets react much quicker today to events. Volatility has returned to
the market and with it heightened uncertainty. Now is the time to rely on your
financial representative for the expertise and the long-term investing
discipline that he or she can provide.
With this commentary 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 11, 1997
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 OF ZKI 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 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
20 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
THE PORTFOLIO MANAGEMENT TEAM OF KEMPER STRATEGIC INCOME FUND DISCUSSES THE
PERFORMANCE OF THE FIXED-INCOME MARKET DURING THE LAST SIX MONTHS. THEY EXPLAIN
THE IMPACT THE FEDERAL RESERVE BOARD'S INTEREST RATE INCREASE HAD ON THE OVERALL
BOND MARKET AS COMPARED WITH THE FUND.
Q HOW DID THE FUND PERFORM DURING THE SEMIANNUAL PERIOD DECEMBER 1, 1996
THROUGH MAY 31, 1997?
A The fund provided strong performance for the six-month period. On a market
value basis the fund returned 9.13 percent, while on a net asset value basis,
the fund returned 8.52%.
Q DURING THE FUND'S SEMIANNUAL PERIOD -- THE FEDERAL RESERVE BOARD (THE FED)
INCREASED SHORT-TERM INTEREST RATES. WHAT WAS BEHIND THE FED'S ACTION?
A Signs of stronger economic growth and concerns of potentially higher
inflation led to the Fed's 0.25 percent interest rate tightening. Here's what
was going on.
The fixed-income market was volatile in the first half of the period as a
result of the ongoing concern about the direction of interest rates. In December
the market suffered when Federal Reserve Board Chairman Alan Greenspan commented
that investors were acting with "irrational exuberance" and that he believed
there were many overvalued securities. Signs of strong retail sales and low
unemployment figures also concerned the market as it signaled that economic
growth might be gaining momentum. In February, relatively high gross domestic
product figures were released that confirmed the market's fear that the economy
had been strong at the end of 1996. Greenspan then intimated that a rate
increase would likely be necessary to slow economic growth and ward off
inflation. Greenspan again expressed his concern in February about the high
valuations in the market. The Fed raised interest rates in late March and a
sell-off ensued in both bond and equity markets. As a result, bond yields rose
and prices of securities fell.
By the end of April, however, signs of the economy slowing began to surface
and inflation remained benign. This helped fixed-income investments begin to
gain back some of the ground they had lost earlier. Market yields declined the
last two months of the period with the perception that the economy was losing
some of its earlier momentum. In May the market rallied when the Fed met and
chose not to adjust interest rates.
Q HOW DID YOU MANAGE THE FUND IN LIGHT OF THE CHANGING INTEREST RATE
ENVIRONMENT?
A Because of the income-oriented structure of the fund, we did not
aggressively buy and sell issues within the portfolio in anticipation of the
Fed's rate hike. We generally ride out short periods of interest rate
turbulence, allowing the fund to benefit from the high level of income generated
by its portfolio. This enables the fund to address its primary investment
objective -- generating a high level of current income.
Although the fluctuation in rates did not impact the fund's portfolio
composition, it did have an impact on our leveraging activities. As you may
know, about one third of the fund is leveraged in order to help support its high
level of income. As a result, we work diligently to anticipate the direction of
interest rates to secure the most beneficial and appropriate types of financing
for the fund.
Q CAN YOU ELABORATE ON THE FUND'S LEVERAGING ACTIVITIES?
A The use of leveraging is an important means of generating income. We borrow
short-term funds at market rates to increase our investment in bonds that pay
higher rates of interest, which increases income. Since the fund's inception,
approximately one-third of its net assets have been leveraged -- or used as
collateral for the loans.
The fund's mortgage investments play a substantial role in our ability to
leverage. Lenders will generally allow us to borrow almost the full value of our
mortgages because of their high credit rating and level of liquidity.
Q IS THERE A RISK TO LEVERAGING?
A The stated objective of this fund is to provide a high level of current
income. As such, we will seek to incur only the risk necessary to achieve that
objective. The higher the potential for return, the higher the risk
6
<PAGE> 7
PERFORMANCE UPDATE
involved. Yet, we are cautious about the risks and how we employ our investment
tools. For instance, the terms of our loans are staggered. This reduces the
chance that sudden rate changes would significantly impact the entire portfolio.
Leveraging is important to maintain the fund's income level and is an
integral part of our investment strategy. However, investors should realize that
leveraging presents special risk considerations and can exaggerate the
volatility of the net asset value of the fund's shares and its yield.
Q WHAT WAS THE BEST PERFORMING SECTOR FOR THE FUND?
A During the six-month period, emerging market investments significantly
outperformed the other sectors in which the fund invests. This was in spite of a
brief correction that occurred in March due to the Fed's interest rate increase.
We believe that emerging market investments offer extremely attractive
rates of income and have the potential for continued strong performance. The
countries in which we are invested are benefiting from economic reform.
This has provided broad-based benefits for their economies and consequently the
fund's investments in those countries.
As a result of these improving fundamentals, we have witnessed a
tightening of spreads, which we believe is warranted. Remember, a spread
indicates the difference in yield between various types of securities. The more
risky an asset, the higher yield it generally pays. When spreads tighten, it
means that yields may be falling relative to the risk or the risk of the
security may be reduced relative to the yield. This tightening of spreads in
the emerging markets sector makes sense because investors are becoming more
comfortable investing in these types of foreign markets and in many cases those
economies are improving. This provides a favorable backdrop for ongoing
emerging markets performance.
For these reasons, we continued to increase the fund's investment in this
sector over the course of the last six months. Historically, the fund had been
relatively evenly split among investments in emerging markets, high yield bonds
and mortgages. At the end of May, emerging market investments represented 43
percent of the fund's assets, while mortgages and high yield bonds accounted for
33 and 22 percent respectively. It is important to note that this shift in
assets is to seek to optimize income through emerging market investments. It
does not indicate any loss of confidence in the high yield market.
Q HOW DID THE FUND'S HIGH YIELD BONDS PERFORM?
A High yield bonds performed well during the period, although they
experienced some short-lived turbulence at about the time the Fed raised
interest rates. High yield bonds were also impacted by comments made earlier by
Fed Chairman Alan Greenspan. He noted the historically tight spreads in the high
yield market and expressed his concern about whether or not the market would be
able to sustain its performance. These comments, combined with the rate
increase, caused a brief correction and a slight widening of spreads in March.
In April, investors returned to the high yield market believing the drop in
values to be a short-term correction, not the start of any extended downturn.
High yield bonds performed well through the end of the period and the
fundamentals of the high yield market look strong today. Economic growth is
moderate, inflation is benign and there are virtually no defaults in the high
yield market.
Q WHAT'S YOUR OUTLOOK FOR THE FUND AND THE OVERALL BOND MARKET?
A We are optimistic about the potential for the fund in the current economic
environment. Moderate economic growth and benign inflation are positive for the
bond market and the fund.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 5/31/97 ON 11/30/96
- -------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE PASS-THROUGHS 33% 32%
- -------------------------------------------------------------------------------
HIGH YIELD CORPORATE BONDS 22 26
- -------------------------------------------------------------------------------
EMERGING MARKETS 43 40
- -------------------------------------------------------------------------------
OTHER 2 2
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 5/31/97 ON 11/30/96
LONG-TERM FIXED INCOME SECURITIES RATINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 5/31/97 ON 11/30/96
- -------------------------------------------------------------------------------
<S> <C> <C>
AAA 35% 35%
- -------------------------------------------------------------------------------
A 6 6
- -------------------------------------------------------------------------------
BB 25 23
- -------------------------------------------------------------------------------
B 33 35
- -------------------------------------------------------------------------------
OTHER 1 1
- -------------------------------------------------------------------------------
100% 100%
</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 S&P or Moody's ratings. Portfolio composition will change over time. Ratings
are relative and subjective and not absolute standards of quality.
[PIE CHART] [PIE CHART]
ON 5/31/97 ON 11/30/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 5/31/97 ON 11/30/96
- -------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 12.5 YEARS 13.4 YEARS
- -------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS AT MAY 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT--48.6% Federal National Mortgage Association
7.50%, 2027 $ 988 $ 984
Government National Mortgage Association
7.50%, 2023-2027 13,015 13,008
8.00%, 2022-2026 12,086 12,344
-----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost: $25,521) 26,336
-----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENTS--63.4% (b)Republic of Argentina
5.703%, 2002 8,900 10,350
5.703%, 2007 6,693 6,042
Federal Republic of Brazil, 8.00%, 2014, PIK 15,474 12,268
(b)United Mexican States
6.25%, 2019 2,500 1,886
11.50%, 2026 910 1,011
(b)Republic of Panama, 6.546%, 2002 2,390 2,363
(b)Republic of Venezuela, 6.50%, 2007 500 456
-----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $24,576) 34,376
-----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS
- ----------------------------------------------------------------------------------------------------------------------
AGRICULTURE AND Hines Horticulture, 11.75%, 2005 500 531
CHEMICALS--1.8% Pioneer Americas Acquisition Corp., 13.375%, 2005 140 167
Polymer Group Inc., 12.25%, 2002 90 99
Rexene Corp., 11.75%, 2004 170 190
-----------------------------------------------------------------------------
987
- ----------------------------------------------------------------------------------------------------------------------
BROADCASTING, Affinity Group, Inc., 11.50%, 2003 500 535
CABLESYSTEMS AND (a)Australis Holdings, 15.00%, 2004 500 307
PUBLISHING--8.4% (a)Bell Cablemedia PLC, 11.95%, 2004 370 329
Cablevision Systems Corp., 9.875%, 2013 450 451
Frontiervision, 11.00%, 2006 400 414
Intermedia Capital Partners, 11.25%, 2006 250 265
(a)International Cabletel Inc., 12.75%, 2005 1,130 847
Newsquest Capital PLC, 11.00%, 2006 400 431
Sinclair Broadcasting Group, Inc., 10.00%, 2003 500 518
(a)UIH Australia Pacific, Inc., 14.00%, 2006 400 219
(a)Videotron Holdings PLC, 11.125%, 2004 250 223
-----------------------------------------------------------------------------
4,539
- ----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--4.0% (a)Call-Net Enterprises Inc., 13.25%, 2004 330 283
Communication and Power Industry, Inc., 12.00%,
2005 150 165
Intermedia Communications of Florida Inc., 13.50%,
2005, with warrants expiring 2000 200 233
(a)McCaw Cellular International, zero coupon, 2007 900 436
(a)Millicom International Cellular S.A., 13.50%,
2006 500 367
USA Mobile Communications, Inc. II, 14.00%, 2004 140 151
Western Wireless, 10.50%, 2007 500 507
-----------------------------------------------------------------------------
2,142
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL SERVICES, HOMEBUILDERS Coinmach Corp., 11.75%, 2005 $ 500 $ 555
AND REAL ESTATE--2.9% Hovnanian Kent, 11.25%, 2002 500 521
J.M. Peters Co., 12.75%, 2002 180 180
Presley Companies, 12.50%, 2001 320 318
-----------------------------------------------------------------------------
1,574
- ----------------------------------------------------------------------------------------------------------------------
LODGING AND GAMING--2.3% Empress River Casino, 10.75%, 2002 200 213
Players International, 10.875%, 2005 470 489
(a)Six Flags Theme Park, 12.25%, 2005 550 558
-----------------------------------------------------------------------------
1,260
- ----------------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS AND Aftermarket Technology, 12.00%, 2004 375 416
MINING--8.6% Alvey Systems, 11.375%, 2003 500 515
Bar Technologies, 13.50%, with warrants, 2001 500 515
(a)Building Materials Corporation of America,
11.75%, 2004 1,100 993
Day International Group, Inc., 11.125%, 2005 40 42
Euramax International PLC, 11.25%, 2006 400 423
(a)Foamex -- JPS Automotive L.P., 14.00%, with
warrants, 2004 150 139
GS Technologies, 12.25%, 2005 100 110
Gulf States Steel, 13.50%, with warrants, 2003 130 129
IMO Industries, 11.75%, 2006 500 503
Jordan Industries, 10.375%, 2003 150 151
Nortek, Inc., 9.875%, 2004 270 275
Weirton Steel Corp., 11.375%, 2004 400 422
-----------------------------------------------------------------------------
4,633
- ----------------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS AND Gaylord Container Corp., 12.75%, 2005 500 548
CONTAINERS--3.5% Maxxam Group, Inc., 11.25%, 2003 500 515
National Fiberstock Corp., 11.625%, 2002 500 515
Riverwood International, 10.875%, 2008 300 273
Stone Container Corp., 11.50%, 2006 70 71
-----------------------------------------------------------------------------
1,922
- ----------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--1.1% (c)Color Tile, Inc., 10.75%, 2001 330 11
Magellan Health Services, 11.25%, 2004 500 557
Pathmark Stores, Inc., 11.625%, 2002 20 19
-----------------------------------------------------------------------------
587
-----------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--32.6%
(Cost: $16,918) 17,644
-----------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS(C) SHARES OR PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EchoStar Communications 2,350 shs. $ 31
Beatrice Foods, Inc. 7,896 9
Empire Gas Corp. 359 2
-----------------------------------------------------------------------------
TOTAL COMMON STOCK--.1%
(Cost: $22) 42
-----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.90%
INSTRUMENT--1.1% Due--June 1997
(Cost: $586) $ 586 586
-----------------------------------------------------------------------------
TOTAL INVESTMENTS--145.8%
(Cost: $67,623) 78,984
-----------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(45.8%) (24,801)
-----------------------------------------------------------------------------
NET ASSETS--100% $54,183
-----------------------------------------------------------------------------
</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 May 31, 1997 and
date shown represents the final maturity of the obligation.
(c) Non-income producing securities. In the case of a bond, generally denotes
that issuer has defaulted on payment of principal or interest or has filed
for bankruptcy.
Based on the cost of investments of $67,623,000 for federal income tax purposes
at May 31, 1997, the gross unrealized appreciation was $11,856,000, the gross
unrealized depreciation was $495,000 and the net unrealized appreciation on
investments was $11,361,000.
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
Investments, at value
(Cost: $67,623) $78,984
- -----------------------------------------------------------------------
Interest rate swap agreements, at value 65
- -----------------------------------------------------------------------
Cash 204
- -----------------------------------------------------------------------
Receivable for:
Investments sold 201
- -----------------------------------------------------------------------
Interest 805
- -----------------------------------------------------------------------
Deferred organization costs 20
- -----------------------------------------------------------------------
TOTAL ASSETS 80,279
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------
Liability under reverse repurchase agreements 25,526
- -----------------------------------------------------------------------
Payable for:
Investments purchased 498
- -----------------------------------------------------------------------
Management fee 38
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 20
- -----------------------------------------------------------------------
Trustees' fees and other 14
- -----------------------------------------------------------------------
Total liabilities 26,096
- -----------------------------------------------------------------------
NET ASSETS $54,183
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------
Paid-in capital $48,260
- -----------------------------------------------------------------------
Accumulated net realized loss on sales of investments (6,066)
- -----------------------------------------------------------------------
Net unrealized appreciation on investments 11,426
- -----------------------------------------------------------------------
Undistributed net investment income 563
- -----------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $54,183
- -----------------------------------------------------------------------
NET ASSET VALUE PER SHARE, $.01 PAR VALUE
($54,183 / 3,450 shares outstanding) $15.70
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Interest income $ 4,087
- -----------------------------------------------------------------------
Expenses:
Management fee 226
- -----------------------------------------------------------------------
Interest expense 702
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 53
- -----------------------------------------------------------------------
Professional fees 33
- -----------------------------------------------------------------------
Trustees' fees and other 34
- -----------------------------------------------------------------------
Total expenses 1,048
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 3,039
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized loss on sales of investments (182)
- -----------------------------------------------------------------------
Change in net unrealized appreciation on investments 1,483
- -----------------------------------------------------------------------
Net gain on investments 1,301
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,340
- -----------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS AND CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
MAY 31, NOVEMBER 30,
1997 1996
- ------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 3,039 6,046
- ------------------------------------------------------------------------------------------
Net realized gain (loss) (182) 319
- ------------------------------------------------------------------------------------------
Change in net unrealized appreciation 1,483 7,362
- ------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,340 13,727
- ------------------------------------------------------------------------------------------
Distribution from net investment income (3,101) (6,137)
- ------------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
of 37 shares in 1996 -- 578
- ------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 1,239 8,168
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------
Beginning of period 52,944 44,776
- ------------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment
income of $563 and $637, respectively) $54,183 52,944
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------
Increase in net assets from operations $ 4,340 13,727
- ------------------------------------------------------------------------------------------
Non-cash items (2,638) (10,769)
- ------------------------------------------------------------------------------------------
Purchase of investments (341) (322)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,361 2,636
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------------------------------------------------------------
Proceeds from reverse repurchase agreements 1,548 2,741
- ------------------------------------------------------------------------------------------
Distributions to shareholders (3,101) (5,559)
- ------------------------------------------------------------------------------------------
Net cash used in financing activities (1,553) (2,818)
- ------------------------------------------------------------------------------------------
Net decrease in cash (192) (182)
- ------------------------------------------------------------------------------------------
CASH AT BEGINNING OF PERIOD 396 578
- ------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 204 396
- ------------------------------------------------------------------------------------------
</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 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 for the six
months ended May 31, 1997. The accumulated net
realized loss on sales of investments for federal
income tax purposes at May 31, 1997, amounting to
approximately $6,054,000, is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 2002 through
2005.
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 $226,000 for the six
months ended May 31, 1997. Zurich Investment
Management Limited, an affiliate of ZKI, serves as
sub-advisor with respect to foreign securities
investments in the Fund, and is paid by ZKI for its
services.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) (formerly
known as Kemper Service Company) is the shareholder
service agent of the Fund. Under the agreement,
ZKSvC received shareholder services fees of $12,000
for the six months ended May 31, 1997.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the six months ended May 31, 1997, the Fund
made no direct payments to its officers and
incurred trustees fees of $7,000 to independent
trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS For the six months ended May 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $14,031
Proceeds from sales 12,571
- --------------------------------------------------------------------------------
4 REVERSE REPURCHASE
AGREEMENTS The Fund has entered into reverse repurchase
agreements with third parties. Approximately
$2,400,000 and $11,300,000 of the agreements mature
within thirty days and ninety days, respectively,
with the remainder maturing within five months. The
weighted average interest rate is 5.85%. Securities
valued at $26,300,000 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, 1997, 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, 1997 amounted to $65,000. 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 NOVEMBER 30, APRIL 29
MAY 31, ------------------------ TO NOVEMBER 30,
1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.34 13.12 12.60 13.97
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .88 1.75 1.68 .87
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .38 2.25 .54 (1.60)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.26 4.00 2.22 (.73)
- ---------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .90 1.78 1.70 .64
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $15.70 15.34 13.12 12.60
- ---------------------------------------------------------------------------------------------------------------------
Market value, end of period $18.38 17.75 14.25 13.50
- --------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------------------
Based on net asset value 8.52% 32.63 19.29 (5.43)
- ---------------------------------------------------------------------------------------------------------------------
Based on market value 9.13% 39.99 20.70 (5.61)
- --------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------------------
Expenses before interest expense 1.26% 1.23 1.26 1.13
- ---------------------------------------------------------------------------------------------------------------------
Expenses after interest expense 3.90% 3.89 4.35 3.41
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 11.27% 12.43 13.56 10.95
- --------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $54,183 52,944 44,776 42,390
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 15% 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.
16
<PAGE> 17
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
On May 29, 1997, 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 2,786,903 35,537
Arthur R. Gottschalk 2,791,693 30,747
Frederick T. Kelsey 2,792,697 29,743
Dominique P. Morax 2,791,586 30,854
Fred B. Renwick 2,790,986 31,454
Stephen B. Timbers 2,795,890 26,550
John B. Tingleff 2,793,928 28,512
John G. Weithers 2,795,521 26,919
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
2,777,119 30,055 15,265
</TABLE>
17
<PAGE> 18
NOTES
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR. PHILIP J. COLLORA
President and Trustee Vice President Vice President and
Secretary
JAMES E. AKINS CHARLES R. MANZONI, JR.
Trustee Vice President JEROME L. DUFFY
Treasurer
ARTHUR R. GOTTSCHALK MICHAEL A. MCNAMARA
Trustee Vice President
FREDERICK T. KELSEY JOHN E. NEAL
Trustee Vice President
DOMINIQUE P. MORAX ROBERT C. PECK
Trustee Vice President
FRED B. RENWICK HARRY E. RESIS, JR.
Trustee Vice President
JOHN B. TINGLEFF JONATHAN W. TRUTTER
Trustee Vice President
JOHN G. WEITHERS RICHARD L. VANDENBERG
Trustee Vice President
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT ZURICH 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.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
KSIF - 3 (7/97) 1034770
Printed in the U.S.A. [KEMPER FUNDS LOGO]
