<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED NOVEMBER 30, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
KEMPER STRATEGIC
INCOME FUND
"... We consistently kept 60 percent or more of the
fund's resources allocated in emerging markets and high-
yield bonds throughout the year, feeling the increased
risk associated with these investments was offset by the
potential for higher income. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Management Team
6
Performance Update
7
Shareholders' Meeting
Year 2000
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, 1998
<TABLE>
<CAPTION>
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER STRATEGIC
INCOME FUND 0.48% -5.28%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE AND MARKET PRICE
- --------------------------------------------------------------------------------
AS OF AS OF
11/30/98 11/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $13.68 $15.39
- --------------------------------------------------------------------------------
MARKET PRICE $16.94 $19.81
- --------------------------------------------------------------------------------
</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. The
fund may also invest a significant portion of its assets in foreign securities,
which present special risks including fluctuating exchange rates, government
regulation and differences in liquidity that may affect the volatility of your
investment.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS DIVIDEND INFORMATION FOR THE FUND AS OF NOVEMBER 30,
1998
<TABLE>
<CAPTION>
KEMPER STRATEGIC
INCOME FUND
- --------------------------------------------------------------------------------
<S> <C>
ONE-YEAR INCOME: $1.80
- --------------------------------------------------------------------------------
NOVEMBER DIVIDEND: $0.15
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE
(BASED ON NET ASSET VALUE) 13.16%
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE
(BASED ON MARKET PRICE) 10.63%
- --------------------------------------------------------------------------------
</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, distribution
rates, 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 considered to be in
the initial stages of its industrial cycle. Developing or "emerging" markets
involve more risk because of 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.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS.
SILVIA HOLDS A BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND A MASTER'S DEGREE IN ECONOMICS FROM BROWN UNIVERSITY IN
PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS WITH THE HARRIS
BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $245 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES, AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
If you're like most investors, you may be wondering if you should allow yourself
to breathe a sigh of relief as 1999 begins. After several months of generally
declining stock prices and extreme volatility, the U.S. stock market seems to
have rediscovered its resiliency. In the fourth quarter, the Standard & Poor's
500, an unmanaged index generally representative of the U.S. stock market,
bounced back into the 1200-point range, up approximately 20 percent from its
third-quarter low of 957. The blue chip Dow Jones Industrial Average enjoyed a
comparable rise. Investor confidence suddenly overtook the investor uncertainty
that had plagued the markets at summer's end. While financial volatility appears
to be continuing, the mood for investors definitely has improved.
To what can we attribute the change? Simply this -- the cumulative effect of
some good news, not the least of which was a long-awaited series of interest
rate reductions by the Federal Reserve Board. In September, the Fed reduced the
federal funds rate a modest quarter of a percentage point, however, this first
cut disappointed some investors who were expecting a more dramatic gesture. Two
weeks later, the Fed came back with an additional quarter of a percentage point
reduction. This was an unexpected cut that seemed to have a positive effect on
Wall Street. In November, a third rate cut of a quarter of a percentage point
also boosted investor confidence. Investors were further surprised by
better-than-expected corporate earnings reports early in the fourth quarter.
Finally, economic data regarding retail sales, employment and home sales
suggested continued economic growth and very little prospect of recession.
In many ways, 1998's market activity provides a study in how investor
perceptions can upstage economic realities. Certainly, the tumultuous lessons of
Russia and Southeast Asia renewed investors' awareness of risk in 1998, which
was an important wake-up call. At all times, investors must understand and
consider risk. But over the course of 1998, U.S. economic fundamentals have
essentially remained strong. In fact, inflation has remained low for the entire
year. Economic growth has been solid. Our consumer confidence remained fairly
high, although not quite as high as in 1997. The nation's budget surplus for
1998 came in at $60 billion, with another budget surplus expected for fiscal
1999.
Growth in the nation's gross domestic product (GDP), which represents the
total value of all goods and services produced within the U.S. economy, has
remained remarkably steady. GDP is expected to have grown at an annualized rate
of 3 percent for the second half of 1998 and is anticipated to hover around 2
percent to 2.5 percent for the first half of 1999. The consumer price index
(CPI) remains in a range of 1.5 percent to 2 percent.
While employment growth has slowed a bit, the slowdown in wage gains may
provide the Fed with an incentive to reduce interest rates even further. U.S.
corporate profits have generally been flat, so we may see a decrease in capital
spending. Banks appear to be only a little less willing to lend, so the threat
of a general credit crunch is minimal.
Investors may take comfort in the fact that the U.S. markets and economy have
withstood the test of 1998's tumultuous third quarter. Similarly, while certain
countries, such as Malaysia, Indonesia, Brazil and Russia, are still suffering
from economic crises, others, including the Philippines, South Korea, Thailand
and China, appear to have survived. As long as the Fed and the Group of Seven
leading industrial nations (G7) are committed to avoiding recession on national
and global levels respectively, investors have a good chance of experiencing a
more stable economic environment.
At home, there has been somewhat of a slowdown in manufacturing, as reduced
U.S. exports reflect foreign economic turmoil. But the global impact of the
Asian crisis still has not hit the U.S. as hard as was expected. Indeed, Asian
turmoil has not affected U.S. trade as much as it has lowered import prices and
helped reduce global interest rates.
In Europe, the much anticipated Economic and Monetary Union (EMU) is on the
move, with a focus on more flexibility and growth potential for the region.
European equities may be the beneficiaries of increased spending, as governments
seek to foster growth and reduce unemployment.
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 (12/31/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 4.65 5.50 5.81 6.30
Prime rate(2) 7.75 8.50 8.50 8.25
Inflation rate(3)* 1.55 1.75 1.89 3.18
The U.S. dollar(4) -2.45 9.54 10.26 4.36
Capital goods orders(5)* 7.82 9.52 8.53 4.82
Industrial production(5)* 1.47 5.10 6.56 5.32
Employment growth(6)* 2.28 2.65 2.70 2.33
</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 percent. 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, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
If you're a long-term investor in today's short-term world, go ahead and
breathe that sigh of relief -- but be on your toes in 1999. It's going to be an
interesting year as the EMU emerges, the race for the next presidency heats up
and the year 2000 approaches. And, remember: Investors don't like uncertainty,
be it economic or political. More trauma in the White House, continuing disputes
with Iraq or any other hints of crisis could prompt a downward spike in our
markets in the short run. In the long run, the keys to investment performance
remain moderate growth, low inflation and limited taxation and regulation.
Thank you for choosing to invest with Kemper Funds. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ John E. Silvia
JOHN E. SILVIA
The information contained in this piece has been taken from sources believed to
be reliable, but the accuracy of the information is not guaranteed. The opinions
and forecasts expressed are those of Dr. John E. Silvia as of January 4, 1999,
and may not actually come to pass. This information is subject to change. No
part of this material is intended as an investment recommendation.
4
<PAGE> 5
MANAGEMENT TEAM
KEMPER STRATEGIC INCOME FUND
PORTFOLIO MANAGEMENT TEAM
[BEIMFORD PHOTO]
J. PATRICK BEIMFORD, JR. JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1976 AND IS
THE LEAD PORTFOLIO MANAGER OF KEMPER STRATEGIC INCOME FUND. HE RECEIVED A B.S.
IN INDUSTRIAL MANAGEMENT FROM PURDUE UNIVERSITY AND EARNED AN M.B.A. FROM THE
UNIVERSITY OF CHICAGO.
[MCNAMARA PHOTO]
MIKE MCNAMARA HAS BEEN WITH SCUDDER KEMPER INVESTMENTS SINCE 1972 AND IS A
MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS AND A PORTFOLIO 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.
[SALTZMAN PHOTO]
M. ISABEL SALTZMAN, A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC. IS
THE SENIOR PORTFOLIO MANAGER FOR THE FIRM'S EMERGING MARKETS BOND GROUP AND A
PORTFOLIO MANAGER FOR KEMPER STRATEGIC INCOME FUND. SALTZMAN JOINED THE
ORGANIZATION IN 1990. SHE RECEIVED A B.A. IN POLITICAL SCIENCE AND ECONOMICS
FROM TUFTS UNIVERSITY AND AN M.I.A. DEGREE FROM THE SCHOOL OF INTERNATIONAL
AFFAIRS, COLUMBIA UNIVERSITY.
[RESIS PHOTO]
HARRY RESIS IS A MANAGING DIRECTOR WITH SCUDDER KEMPER INVESTMENTS. HE JOINED
THE COMPANY IN 1988 AND IS A PORTFOLIO MANAGER OF KEMPER STRATEGIC INCOME FUND.
RESIS RECEIVED A B.A. IN FINANCE FROM MICHIGAN STATE UNIVERSITY.
[VANDENGERG PHOTO]
RICHARD VANDENBERG JOINED SCUDDER KEMPER INVESTMENTS IN MARCH 1996, AS A
MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS AND PORTFOLIO MANAGER OF KEMPER
STRATEGIC INCOME FUND. VANDENBERG HAS MORE THAN 20 YEARS OF FIXED-INCOME
PORTFOLIO MANAGEMENT EXPERIENCE. HE RECEIVED BOTH A B.A. 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 SECOND HALF OF THE 12-MONTH REPORTING PERIOD -- DECEMBER 1, 1997 THROUGH
NOVEMBER 30, 1998 -- WAS DRASTICALLY DIFFERENT FROM THE FIRST HALF. THROUGH MAY
31, 1998, THERE WAS A RELATIVE CALM BEFORE A STORMY PERIOD IN LATE SUMMER AND
EARLY FALL. THE PORTFOLIO MANAGEMENT TEAM OF KEMPER STRATEGIC INCOME FUND
FOCUSED ON MANAGING THE FUND TO ACHIEVE ITS INCOME-EARNING OBJECTIVES.
Q HOW DID KEMPER STRATEGIC INCOME FUND PERFORM DURING ITS FISCAL YEAR, WHICH
ENDED NOVEMBER 30, 1998?
A The total net asset value return for the fund was 0.48 percent. In market
value, the fund lost 5.28 percent. Kemper Strategic Income Fund continued to
trade at a premium to net asset value during the period. On November 30, 1998,
the market price per share was $16.94, while the net asset value per share was
$13.68.
Q WHAT CAN YOU TELL US ABOUT THE GLOBAL ECONOMY AND HOW IT AFFECTED THE
MARKETS IN WHICH THE FUND INVESTS?
A To understand the markets for the period beginning December 1, 1997, we'll
need to start actually with October 27, 1997, just a month before the fund's
reporting period began. That is the day, now referred to as Gray Monday, that
severe declines were registered in world markets as a result of economic crisis
in Southeast Asia. The uncertainty in the markets drove many investors to U.S.
Treasuries and mortgage securities. This was called "flight-to-quality". Foreign
bonds became very cheap, and even high-yield investors were opting for the
higher quality of the below-investment-grade bonds.
The result of the flight-to-quality was a Treasury rally in December,
pushing the benchmark 30-year Treasury yield to new lows, which meant their
prices were at new highs since a bond's yield and price are inversely related.
For a period during the first part of 1998, confidence returned to the
markets and equities and emerging market investments returned to the spotlight.
Continued strong economic growth turned fears toward inflation and rising
interest rates. These fears were squashed, however, as it became clear Asia's
financial crisis was affecting the U.S. economy. For one, devalued currencies in
other parts of the world caused imported goods to sell for far below what
domestic manufacturers could charge. Also, domestic manufacturing slowed
somewhat due to decreased demand overseas of U.S. products and the strike at
General Motors in the spring and early summer.
Uncertainty returned to the markets when economic problems in Russia and
Latin America came to the world's attention in August. The tottering of the
equity and bond markets moved the Federal Reserve Board to do something twice
within one month that it had not done since 1996 -- cut interest rates, by 0.25
percent September 29 and by the same amount October 16. The second cut finally
had the effect the Fed was looking for -- appeasing markets and showing
America's commitment to supporting economies worldwide. Global financial markets
rebounded with the second cut.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUND?
A Our focus in managing the fund continues to be to maximize income for
shareholders, while managing credit risk. As we did during the first half of the
year, we found a great deal of potential in the emerging markets sector and
continued to increase our investment in that sector. Since there is more risk
associated with emerging market investments, they pay a higher rate of income.
We consistently kept 60 percent or more of the fund's resources allocated in
emerging markets and high-yield bonds throughout the year, feeling the increased
risk associated with these investments was offset by the potential for higher
income.
Q HOW WERE THE FUND'S OTHER INVESTMENTS POSITIONED?
A Mortgages still represented between 30-36 percent of the fund in any given
month, helping boost the fund's overall credit quality and acting as a good
portfolio diversification tool.
Q WHAT'S YOUR OUTLOOK FOR THE BOND MARKETS AND FOR KEMPER STRATEGIC INCOME
FUND?
A Right now, we realize investors are paying increased attention to the
relatively safer bond market, and regardless of what happens in the stock
market, we think that will continue. Overall, we remain optimistic, cautiously
so, as we wait to see how international leaders resolve their economies'
problems. The economy seems to be slowing a bit. The flight-to-quality has
dissipated, but the Fed's easings will likely keep the domestic economy out of a
recession. The money that poured into Treasury bonds during the year will likely
be redeployed into the other bond sectors, improving those markets.
6
<PAGE> 7
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
An annual shareholders' meeting was held on October 22, 1998 for Kemper
Strategic Income Fund. Shareholders were asked to vote on two separate issues:
election of members to the Board of Trustees and ratification of Ernst & Young
LLP as independent auditors. The following are the results for each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
James E. Atkins 3,287,861 123,037
Arthur R. Gottschalk 3,290,094 120,804
Frederick T. Kelsey 3,327,639 83,259
Thomas W. Littauer 3,325,541 85,357
Daniel Pierce 3,326,241 84,657
Fred B. Renwick 3,288,461 122,437
John B. Tingleff 3,327,474 83,424
John G. Weithers 3,328,374 82,524
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund. This item was approved.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
3,324,097 46,447 40,352
</TABLE>
YEAR 2000
YEAR 2000 ISSUE
Like other registered investment companies and financial and business
organizations worldwide, the fund could be adversely affected if computer
systems on which the fund relies, which primarily include those used by the
investment manager, its affiliates or other service providers, are unable to
correctly process date-related information on and after January 1, 2000. This
risk is commonly called the Year 2000 Issue. Failure to successfully address the
Year 2000 Issue could result in interruptions to and other material adverse
effects on the fund's business and operations, such as problems with calculating
net asset value. The investment manager has commenced a review of the Year 2000
Issue as it may affect the fund and is taking steps it believes are reasonably
designed to address the Year 2000 Issue, although there can be no assurances
that these steps will be sufficient. In addition, there can be no assurances
that the Year 2000 Issue will not have an adverse effect on the companies whose
securities are held by the fund or on global markets or economies generally.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 11/30/98 ON 11/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE PASS-THROUGHS 32% 34%
- --------------------------------------------------------------------------------
HIGH-YIELD CORPORATE BONDS 19 21
- --------------------------------------------------------------------------------
EMERGING MARKETS 44 42
- --------------------------------------------------------------------------------
OTHER 5 3
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 11/30/98 ON 11/30/97
LONG-TERM FIXED INCOME SECURITIES RATINGS+
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 11/30/98 ON 11/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 36% 37%
- --------------------------------------------------------------------------------
A 7 6
- --------------------------------------------------------------------------------
BB 26 26
- --------------------------------------------------------------------------------
B 28 31
- --------------------------------------------------------------------------------
OTHER 3 --
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 11/30/98 ON 11/30/97
+ 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.
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 11/30/98 ON 11/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 9.5 years 11.2 years
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS AT NOVEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
GOVERNMENT OBLIGATIONS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT--45.6% Federal National Mortgage Association
7.00%, 2027 $ 772 $ 788
7.50%, 2027 830 853
Government National Mortgage Association
7.50%, 2023-2028 11,044 11,406
8.00%, 2022-2026 8,170 8,516
---------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost: $20,436) 21,563
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENTS--62.6% (b)Republic of Argentina,
(PRINCIPAL AMOUNT 5.198%, 2002-2007 16,853 14,373
IN U.S. DOLLARS) (b)Federal Republic of Brazil,
6.82%, 2014 16,020 10,553
United Mexican States
6.25%, 2019 2,500 1,917
11.50%, 2026 910 972
Republic of Panama,
6.191%, 2002 1,521 1,433
Republic of Venezuela,
6.625%, 2007 679 388
---------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $25,887) 29,636
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------------
BROADCASTING, Affinity Group, Inc., 11.50%, 2003 500 523
CABLESYSTEMS AND
PUBLISHING--6.6% (a)(c)Australis Holdings,
15.00%, with warrants, 2002 500 15
Australis Media, Ltd., 14.00%, 2000 21 16
CSC Holdings, Inc., 9.875%, 2013 450 500
Frontiervision, 11.00%, 2006 400 448
Intermedia Capital Partners, 11.25%, 2006 250 279
NTL, Inc.
11.50%, 2008 320 352
(a) 12.375%, 2008 500 320
Newsquest Capital, PLC, 11.00%, 2006 240 264
Sinclair Broadcasting Group, Inc., 8.75%,
2007 250 251
(a)UIH Australia Pacific, Inc.,
14.00%, with warrants, 2006 280 144
---------------------------------------------------------------------------
3,112
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS AND Hines Horticulture, Inc., 11.75%, 2005 325 343
AGRICULTURE--1.1% Huntsman Polymers Corp., 11.75%, 2004 170 181
---------------------------------------------------------------------------
524
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--7.1% American Cellular Corp., 10.50%, 2008 $ 320 $ 320
(a)Call-Net Enterprises, Inc., 13.25%,
2004 330 320
Communication and Power Industry, Inc.,
12.00%, 2005 150 158
(a)Intermedia Communication of Florida,
Inc., 11.25%, 2007 520 365
Level 3 Communications, 9.125%, 2008 30 30
Metronet Communications, 12.00%, with
warrants, 2007 100 111
(a)Millicom International Cellular,
S.A., 13.50%, 2006 500 351
Nextlink Communications, 10.75%, 2008 140 145
(a)PTC International Finance, B.V.,
10.75%, 2007 500 338
USA Mobile Communications, Inc. II,
14.00%, 2004 120 120
US Xchange, LLC, 15.00%, 2008 370 387
(a)Viatel, Inc., 12.50%, 2008 450 257
Western Wireless Corp., 10.50%, 2007 440 467
---------------------------------------------------------------------------
3,369
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS Coinmach Corp., 11.75%, 2005 500 546
AND SERVICES--3.4% Mastellone Hermonos, 11.75%, 2008 500 425
Six Flags Theme Park, 12.25%, 2005 550 611
---------------------------------------------------------------------------
1,582
- ------------------------------------------------------------------------------------------------------------------------
HOMEBUILDERS AND Hovnanian Enterprises, Inc.
REAL ESTATE--.2% 11.25%, 2002 10 10
9.75%, 2005 90 91
---------------------------------------------------------------------------
101
- ------------------------------------------------------------------------------------------------------------------------
LODGING AND GAMING--1.5% Empress River Casino, 10.75%, 2002 200 214
Players International, 10.875%, 2005 470 504
---------------------------------------------------------------------------
718
- ------------------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS AND Aftermarket Technology, 12.00%, 2004 375 394
MINING--4.4%
Alvey Systems, 11.375%, 2003 348 348
Bar Technologies, 13.50%, with warrants,
2001 500 563
Day International Group, Inc., 11.125%,
2005 35 38
Euramax International, PLC, 11.25%, 2006 400 398
GS Technologies, 12.25%, 2005 100 70
Nortek, Inc., 9.875%, 2004 270 280
---------------------------------------------------------------------------
2,091
- ------------------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS Riverwood International, 10.875%, 2008 290 274
AND CONTAINERS--.8% Stone Container Corp., 11.50%, 2006 70 77
---------------------------------------------------------------------------
351
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT OR
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MISCELLANEOUS--1.4% (c)Color Tile, Inc., 10.75%, 2001 $ 330 $ 3
DIMAC Corp., 12.50%, 2008 600 600
Trans World Airlines, Inc., 11.375%, 2006 100 71
---------------------------------------------------------------------------
674
---------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--26.5%
(Cost: $12,791) 12,522
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
COMMON AND PREFERRED STOCK
- ------------------------------------------------------------------------------------------------------------------------
(c)EchoStar Communications Corp. 1,150 shs. 45
(c)Foamex International, warrants 160 3
(c)Intermedia Communications of Florida,
Inc., warrants 200 9
Viatel, Inc., PIK, preferred 226 14
---------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCK--.1%
(Cost: $16) 71
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.26%
INSTRUMENTS--4.0% Due--December 1998
(Cost: $1,898) $ 1,900 1,898
---------------------------------------------------------------------------
TOTAL INVESTMENTS--138.8%
(Cost: $61,028) 65,690
---------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(38.8)% (18,368)
---------------------------------------------------------------------------
NET ASSETS--100% $ 47,322
---------------------------------------------------------------------------
</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 the effective rate on November 30,
1998 and date shown represents the final maturity of the obligation.
(c) Non-income producing security. In the case of a bond, generally denotes that
issuer has defaulted on payment of principal or interest or has filed for
bankruptcy.
PIK denotes that dividend is paid in kind.
Based on the cost of investments of $61,028,000 for federal income tax purposes
at November 30, 1998, the gross unrealized appreciation was $5,854,000, the
gross unrealized depreciation was $1,192,000 and the net unrealized appreciation
on investments was $4,662,000.
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, 1998, the related statements of operations for the year then ended
and changes in net assets and cash flows 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, 1998, by correspondence with the custodian. 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, 1998, the results of its operations, the
changes in its net assets and cash flows and the financial highlights for the
periods referred to above in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 19, 1999
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
Investments, at value
(Cost: $61,028) $65,690
- -----------------------------------------------------------------------
Interest rate swap agreements, at value 80
- -----------------------------------------------------------------------
Cash 62
- -----------------------------------------------------------------------
Receivable for:
Investments sold 912
- -----------------------------------------------------------------------
Interest 876
- -----------------------------------------------------------------------
TOTAL ASSETS 67,620
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------
Liability under reverse repurchase agreements 20,226
- -----------------------------------------------------------------------
Payable for:
Management fee 33
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 31
- -----------------------------------------------------------------------
Trustees' fees 8
- -----------------------------------------------------------------------
Total liabilities 20,298
- -----------------------------------------------------------------------
NET ASSETS $47,322
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------
Paid-in capital $48,426
- -----------------------------------------------------------------------
Accumulated net realized loss on sales of investments (6,366)
- -----------------------------------------------------------------------
Net unrealized appreciation on investments 4,742
- -----------------------------------------------------------------------
Undistributed net investment income 520
- -----------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $47,322
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET ASSET VALUE PER SHARE, $.01 PAR VALUE
($47,322 / 3,459 shares outstanding) $ 13.68
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
<S> <C>
Interest income $ 8,131
- -----------------------------------------------------------------------
Expenses:
Management fee 431
- -----------------------------------------------------------------------
Interest expense 1,392
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 90
- -----------------------------------------------------------------------
Professional fees 37
- -----------------------------------------------------------------------
Trustees' fees and other 53
- -----------------------------------------------------------------------
Total expenses 2,003
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 6,128
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized loss on sales of investments (575)
- -----------------------------------------------------------------------
Change in net unrealized appreciation on investments (5,247)
- -----------------------------------------------------------------------
Net loss on investments (5,822)
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 306
- -----------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS AND CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1998 1997
- -----------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 6,128 6,185
- -----------------------------------------------------------------------------------------
Net realized gain (loss) (575) 100
- -----------------------------------------------------------------------------------------
Change in net unrealized appreciation (5,247) 46
- -----------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 306 6,331
- -----------------------------------------------------------------------------------------
Distribution from net investment income (6,226) (6,211)
- -----------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
(6 shares and 3 shares, respectively) 113 65
- -----------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (5,807) 185
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------
Beginning of year 53,129 52,944
- -----------------------------------------------------------------------------------------
END OF YEAR
(including undistributed net investment income of $520 and
$605, respectively) $ 47,322 53,129
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES
- -----------------------------------------------------------------------------------------
Increase in net assets from operations $ 306 6,331
- -----------------------------------------------------------------------------------------
Non-cash items 3,016 (2,903)
- -----------------------------------------------------------------------------------------
Sale of investments 8,759 250
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 12,081 3,678
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES
- -----------------------------------------------------------------------------------------
Proceeds from (payments for) reverse repurchase agreements (5,464) 1,630
- -----------------------------------------------------------------------------------------
Distributions to shareholders (6,113) (6,146)
- -----------------------------------------------------------------------------------------
Net cash used in financing activities (11,577) (4,516)
- -----------------------------------------------------------------------------------------
Net increase (decrease) in cash 504 (838)
- -----------------------------------------------------------------------------------------
CASH (OVERDRAFT) AT BEGINNING OF YEAR (442) 396
- -----------------------------------------------------------------------------------------
CASH (OVERDRAFT) AT END OF YEAR $ 62 (442)
- -----------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES DESCRIPTION OF FUND. Kemper Strategic Income Fund
is registered under the Investment Company Act of
1940 as a diversified, closed-end management
investment company.
SECURITY VALUATION. Investments are stated at
value. Portfolio debt securities are valued by
pricing agents approved by the officers of the
fund, which quotations reflect broker/dealer
supplied valuations and electronic data processing
techniques. If the pricing agents are unable to
provide such quotations, the most recent bid
quotation supplied by a bona fide market maker
shall be used. Financial futures and options are
valued at the most recent settlement price.
Over-the-counter traded options and interest rate
swap agreements are valued based upon prices
provided by market makers. All other securities and
assets are valued at fair market value as
determined in good faith by the Valuation Committee
of the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis and includes discount
amortization on fixed income 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's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies, and to distribute
all of its taxable income to its shareholders.
Accordingly, the fund paid no federal income taxes
and no federal income tax provision was required.
At November 30, 1998, the fund had a tax basis net
loss carryforward of approximately $6,360,000 which
may be applied against any realized net taxable
gains of each succeeding year until fully utilized
or it will expire during the period 2002 through
2006.
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 Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the annual rate of .85%
of average weekly net assets. The fund incurred a
management fee of $431,000 for the year ended
November 30, 1998.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's business to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, the fund's
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Trustees of the fund has
approved a new
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
investment management agreement with Scudder
Kemper, which is substantially identical to the
former investment management agreement, except for
the dates of execution and termination.
Shareholders approved the new investment management
agreement through a proxy solicitation that
concluded in mid-December.
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 services fees of $24,000
for the year ended November 30, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the year ended November 30,
1998, the fund made no direct payments to its
officers and incurred trustees fees of $12,000 to
independent trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS For the year ended November 30, 1998, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $22,779
Proceeds from sales 29,218
- --------------------------------------------------------------------------------
4 REVERSE REPURCHASE
AGREEMENTS The fund has entered into reverse repurchase
agreements with third parties involving its
holdings in U.S. Government Agency securities. At
November 30, 1998, the fund had outstanding reverse
repurchase agreements as follows:
<TABLE>
<CAPTION>
VALUE OF ASSETS SOLD WEIGHTED
UNDER AGREEMENT REPURCHASE AVERAGE
MATURITY TO REPURCHASE LIABILITY INTEREST RATE
-------- -------------------- ----------- -------------
<S> <C> <C> <C>
Up to 30 days $12,240,000 $11,481,000 5.46%
30-90 days 5,156,000 4,836,000 5.69
Over 90 days 4,167,000 3,909,000 5.37
</TABLE>
- --------------------------------------------------------------------------------
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 effectively convert
investments in floating rate obligations into fixed
rate obligations. At November 30, 1998, 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
or loss on the swap agreements is included in the
financial statements. The unrealized gain on
outstanding interest rate swap agreements at
November 30, 1998 amounted to $80,000. 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,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.39 15.34 13.12 12.60 13.97
- ----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 1.77 1.79 1.75 1.68 .87
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (1.68) .06 2.25 .54 (1.60)
- ----------------------------------------------------------------------------------------------------------------------
Total from investment operations .09 1.85 4.00 2.22 (.73)
- ----------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income 1.80 1.80 1.78 1.70 .64
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.68 15.39 15.34 13.12 12.60
- ----------------------------------------------------------------------------------------------------------------------
Market value, end of period $16.94 19.81 17.75 14.25 13.50
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------------------
Based on net asset value .48% 12.55 32.63 19.29 (5.43)
- ----------------------------------------------------------------------------------------------------------------------
Based on market value (5.28)% 23.53 39.99 20.70 (5.61)
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------------------
Expenses before interest expense 1.20% 1.24 1.23 1.26 1.13
- ----------------------------------------------------------------------------------------------------------------------
Expenses after interest expense 3.94% 3.99 3.89 4.35 3.41
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 12.05% 11.45 12.43 13.56 10.95
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $47,322 53,129 52,944 44,776 42,390
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 13% 16 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.
18
<PAGE> 19
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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.
19
<PAGE> 20
DESCRIPTION OF DIVIDEND REINVESTMENT 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.
- --------------------------------------------------------------------------------
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 AND OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY MAUREEN E. KANE
Chairman and Trustee President Assistant Secretary
JAMES E. AKINS PHILIP J. COLLORA CAROLINE PEARSON
Trustee Vice President and Assistant Secretary
Secretary
ARTHUR R. GOTTSCHALK ELIZABETH C. WERTH
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
FREDERICK T. KELSEY BRENDA LYONS
Trustee J. PATRICK BEIMFORD, JR. Assistant Treasurer
Vice President
THOMAS W. LITTAUER
Trustee and Vice President ANN M. MCCREARY
Vice President
FRED B. RENWICK
Trustee ROBERT C. PECK, JR.
Vice President
JOHN B. TINGLEFF
Trustee KATHRYN L. QUIRK
Vice President
JOHN G. WEITHERS
Trustee LINDA J. WONDRACK
Vice President
- ------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- ------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419066
Kansas City, MO 64141-6066
- ------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 127 West 10th Street
Kansas City, MO 64105
- ------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
KSIF - 2 (1/27/99) 1064340
