<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Kemper Strategic
Income Trust
"... The first six months of the fiscal year was one of
those rare times when exactly what you think will happen does happen.
The result was strong relative performance for the fund. ..."
[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
- --------------------------------------------------------------------------------
KEMPER STRATEGIC INCOME TRUST
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 1999
<TABLE>
<CAPTION>
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER STRATEGIC
INCOME TRUST 2.71% 5.79%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE AND MARKET PRICE
- --------------------------------------------------------------------------------
AS OF AS OF
5/31/99 11/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $13.13 $13.68
- --------------------------------------------------------------------------------
MARKET PRICE $16.88 $16.94
- --------------------------------------------------------------------------------
</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 PRESENTS 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, 1999
<TABLE>
<CAPTION>
KEMPER STRATEGIC
INCOME TRUST
- --------------------------------------------------------------------------------
<S> <C>
SIX-MONTHS INCOME $0.9000
- --------------------------------------------------------------------------------
MAY DIVIDEND $0.1500
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE
(BASED ON NET ASSET VALUE) 13.71%
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE
(BASED ON MARKET VALUE) 10.66%
- --------------------------------------------------------------------------------
</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. MARKET PRICE,
NET ASSET VALUE, DISTRIBUTION RATES AND RETURNS ARE HISTORICAL AND WILL
FLUCTUATE AND DO NOT GUARANTEE FUTURE RESULTS. ADDITIONAL INFORMATION CONCERNING
PERFORMANCE IS CONTAINED IN THE FINANCIAL HIGHLIGHTS APPEARING AT THE END OF
THIS REPORT.
TERMS TO KNOW
EASE Occurs when the Federal Reserve Board of Governors changes monetary policy
by decreasing the federal funds rate.
FEDERAL FUNDS (Fed funds) Commercial banks are required to keep these funds on
deposit at the Federal Reserve Bank in their district. In order to meet these
reserve requirements, occasionally commercial banks need to borrow funds. These
funds are borrowed from banks that have an excess of the required amount on hand
in what is called the "Fed funds market." The interest rate on these loans is
called the "Fed funds rate" and is the key money market rate that influences all
other short-term rates.
FEDERAL FUNDS RATE The interest rate banks charge each other for overnight loans
that are needed to meet reserve requirements. Often considered the most
sensitive indicator of the direction of interest rates.
FLIGHT-TO-QUALITY BUYING A term describing investors who increase their
allocation to U.S. Treasuries and other high quality securities from riskier
securities in time of global economic uncertainty.
HEDGING A strategy used to help protect an investment. Financial managers can
use any number of technical and nontechnical procedures to hedge or help guard
against the possibility of a loss on an investment.
HIGH-YIELD BONDS Issued by companies, often without long track records of sales
and earnings, or by those with questionable credit strength and pay a higher
yield to investors to help compensate for their greater risk of loss to
principal and interest than higher quality bonds. High-yield bonds carry a
credit rating of BB or lower from either Moody's or Standard & Poor's bond
rating services and are considered to be "below investment grade" by these
rating agencies. Such bonds may also be unrated.
U.S. TREASURIES These debt securities are issued by the U.S. Treasury and
include Treasury bills, Treasury bonds and Treasury notes. They are considered
the safest of all securities. Their safety rests in the power of the U.S.
government to obtain tax revenues to repay its obligations, and in its
historical record of always having done so.
<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 PH.D. IN ECONOMICS FROM NORTHEASTERN UNIVERSITY IN BOSTON, MASS.
HE IS A MEMBER OF BOTH THE BLUE CHIP ECONOMIC AND FINANCIAL SURVEYS, AND SERVES
ON THE POLICY ADVISORY COMMITTEES OF THE FEDERAL RESERVE BOARDS OF CHICAGO AND
CLEVELAND.
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $280 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
As expected, the Federal Reserve Board raised its federal funds interest rate
(the rate at which banks lend to each other overnight) by one-fourth of a
percentage point in June. Although higher interest rates tend to have a
dampening effect on the market, investors rallied in response to this move. The
Dow Jones Industrial Average, which was down 50 points before the Fed's
statement on June 30, reversed course and ended the day at its highest closing
level in six weeks. The Dow went on to close at a record-setting high of 11,187
on July 7.
What led to the interest rate hike, and why does the market reaction suggest
that investors are happy about it?
It is generally recognized that a modest rate hike by the Fed may be effective
in slowing the economy sufficiently to suppress any simmering inflationary
pressures. Although the economy has been strong, there are concerns that it will
be unable to maintain its current rate of growth without prompting inflationary
pressures -- which is at the heart of the Fed's decision to raise interest
rates. The Fed is acting now to be proactive. In the past, Fed policy has been
reactive, which meant that the Fed tended to respond to inflation only when it
picked up. A rate hike now is intended to halt any future buildup in inflation.
Moreover, by hinting at an increase well in advance -- then by limiting the
increase to 25 basis points -- the Fed relieved worried investors and gave a
boost to the financial markets.
Despite the minor rate increase, the long-term economic situation appears to
be positive. The federal budget surplus continues to benefit from good revenue
gains (which are based on good income gains, especially for households), good
capital gains and continued restraint in federal spending. The surplus this year
is expected to approach $100 billion.
This positive environment is exactly what sometimes poses risk for investors,
and is key to understanding recent volatility in the market. A strong economy
has the potential to feed inflation fears and drive up interest rates. Indeed,
recent market events illustrate the domino effect of investors reacting to
positive economic news, which they consider troubling at this point, more than
eight years into the economic expansion. Prior to its strong close in the second
quarter, the steady stream of positive economic news led to a sell-off in the
financial markets based on fears that the strong pace of economic growth would
eventually lead to higher inflation. The benchmark 30-year Treasury bond yield
rose, which pulled stocks lower.
Where can we expect to go from here? The fundamentals by which we judge the
health of the economy suggest continued growth as we move into the second half
of 1999. For example, the gross domestic product (GDP), the value of all goods
and services produced in the U.S., is expected to rise at an annual rate of 4
percent in the first half of 1999, following a tremendous fourth-quarter surge
of 6 percent. This is very much in line with what we've grown accustomed to over
the past year -- over the four quarters of 1998, the U.S. economy expanded by
4.3 percent. Some people aren't surprised at all by strong GDP growth that once
would have alarmed them. That's partially because we've grown accustomed to a
strong economy. But it's also because we've been able to absorb growth without
driving up inflation. That's important for investors. If prices had been rising
as the economy was growing, the Fed would have most likely raised short-term
interest rates earlier and more drastically, and that would have changed the
financial market outlook.
However, we do see some vulnerability on the economic front. Trade is a weak
spot in the economy right now. Exports of U.S. goods and services dropped in the
first half of 1999, while imports soared. This reflects the fact that the U.S.
is one of the few countries financially fit enough to buy goods produced
elsewhere in the world. But for as long as less vibrant international economies
are unable to buy U.S. goods, the profitability of U.S. companies trying to
export will be challenged.
When you think about it, vulnerability in regard to the international economy
is nothing new. Globally, the outlook is slightly more positive than it was a
few months ago. For example, the European markets are slowing down, which has
already led to the European Central Bank lowering interest rates in order to
boost domestic spending. In many countries in Europe there are no fixed-rate
mortgages, only adjustable-rate mortgages. When interest rates go down, mortgage
payments are reduced and homeowners can spend money elsewhere. This has a huge
impact on consumer spending, and will help European equities over time.
Additionally, the situation in Japan remains unchanged. And, problems in the
emerging markets haven't had the negative impact many people expected -- both
the Mexican and Brazilian stock markets have actually risen in the past two
months.
But don't forget that international crises have the potential to affect the
U.S. markets dramatically. Although the Kosovo crisis seems to be waning, past
increases in military spending on Kosovo by the 11 European Monetary Union (EMU)
countries could force them to spend less in other areas, which could have
economic implications, including higher interest rates. That's because many
European countries (especially Italy) have small economies and
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 (6/30/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Ten Year Treasury Rate 5.90 4.81 5.65 6.69
Prime Rate 7.75 8.49 8.50 8.30
Inflation* 2.03 1.62 1.44 3.03
The U.S. Dollar* -2.4 4.31 4.88 8.58
Capital goods orders* 7.73 11.44 8.10 5.52
Industrial production * 1.72 3.58 5.05 5.86
Employment growth* 2.15 2.48 2.61 2.51
</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 MAY 31, 1999.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
little leeway in their budgets. Consequently, those countries financed unplanned
military expenditures by selling government bonds -- which, in Europe's small
bond market, typically raises interest rates. As an example, consider Italy,
which recently asked for more leeway on its deficit targets. When leeway was
granted, this led to a further sell-off in the eurodollar.
The international situation alone, however, is by no means an indicator of a
U.S. slowdown -- and without any such indications, complacency may be our
greatest concern. It's easy to look at the current U.S. economic situation and
behave as if no risk exists. But when you see the market soaring and are tempted
to jump in, note that the bull market grew to records on the strength of just a
few dozen stocks, while most other stock prices were flat or actually declined.
In summary, there are concerns that the current economy is unsustainable and
we soon could see an abrupt end. In many cases, however, people are looking for
a slowdown because they are fearful growth will drive up inflation these are
particularly older investors who are accustomed to inflation accompanying
growth. But again, sustained inflation seems unlikely, so a sharp slowdown is
not necessary. In the short term, we expect a modest economic slowdown but no
recession. The best approach now, as in any market, is to diversify and invest
for the long term.
Thank you for your continued support. 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 SILVIA AS OF JUNE 9, 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.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
MANAGEMENT TEAM
KEMPER STRATEGIC INCOME TRUST
PORTFOLIO MANAGEMENT TEAM
[BEIMFORD PHOTO]
J. PATRICK BEIMFORD, JR., JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1976 AND IS
A MANAGING DIRECTOR AND LEAD PORTFOLIO MANAGER OF KEMPER STRATEGIC INCOME TRUST.
HE IS A CHARTERED FINANCIAL ANALYST.
[DOYLE PHOTO]
DAN DOYLE IS A FIRST VICE PRESIDENT OF SCUDDER KEMPER INVESTMENTS AND A
PORTFOLIO MANAGER OF KEMPER STRATEGIC INCOME TRUST. HE IS ALSO A CHARTERED
FINANCIAL ANALYST.
[SALTZMAN PHOTO]
M. ISABEL SALTZMAN, A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS AND A
PORTFOLIO MANAGER OF KEMPER STRATEGIC INCOME TRUST, IS ALSO THE SENIOR PORTFOLIO
MANAGER FOR THE FIRM'S EMERGING MARKETS BOND GROUP. SHE JOINED THE ORGANIZATION
IN 1990.
[VANDENBERG PHOTO]
RICHARD VANDENBERG, WITH MORE THAN 25 YEARS OF INVESTMENT MANAGEMENT EXPERIENCE,
IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS AND IS LEAD PORTFOLIO
MANAGER OF SCUDDER KEMPER'S FIXED-INCOME GOVERNMENT AND MORTGAGE FUNDS.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
5
<PAGE> 6
PERFORMANCE UPDATE
KEMPER STRATEGIC INCOME TRUST ENJOYED STRONG PERFORMANCE VERSUS ITS PEERS DURING
THE FIRST SIX MONTHS OF THE FISCAL YEAR. HIGH-YIELD CORPORATE BONDS AND EMERGING
MARKET BONDS, TWO AREAS THE FUND HAD OVERWEIGHTED, RALLIED STRONGLY DURING THE
MAJORITY OF THE PERIOD. BELOW, LEAD PORTFOLIO MANAGER PAT BEIMFORD DISCUSSES THE
MARKET'S BEHAVIOR AND THE FUND'S PERFORMANCE.
Q PAT, FOR THE SIX-MONTH PERIOD, THE FUND'S TOTAL RETURN WAS 2.71 PERCENT
(BASED ON NET ASSET VALUE) VERSUS -0.48 PERCENT FOR ITS PEER GROUP AS MEASURED
BY THE LIPPER CLOSED-END FLEXIBLE INCOME FUND INDEX. BEFORE WE DISCUSS THE
FUND'S PERFORMANCE, COULD YOU DESCRIBE WHAT HAPPENED IN WORLDWIDE FIXED INCOME
MARKETS?
A Certainly. In a nutshell, the beginning of the fiscal year marked a
startling reversal of investor expectations. Last fall, we saw a worldwide
"flight-to-quality" (see Terms To Know on page 2) as turbulent overseas markets
prompted investors to seek a safe, liquid haven for their assets. U.S.
government bonds were the instruments of choice, and the powerful demand for
Treasuries pushed yields down substantially. This was at a time when the U.S.
economy appeared to be growing well without a hint of inflation.
All that began to change last fall. The Federal Reserve cut the Federal
funds rate three times to show support for international markets and to signal
its commitment to worldwide economic growth. As the ensuing months indicate, the
Fed's strategy worked well, perhaps TOO well. Asian economies began to show
signs of renewed life and Latin America managed to avoid the catastrophe that
many economists predicted. However, the U.S. economy continued to gain strength,
prompting investors to wonder if inflation might again become a threat. In the
early months of 1999, investors' fears began to intensify as U.S. GDP growth
topped 6 percent, the labor market became even tighter and oil prices began
trending up.
The result of all this was a "flight FROM quality" as investors, confident
that global economies were back on track, began to seek income rather than
stability. Emerging market bonds skyrocketed and high-yield corporate bonds
staged a powerful rally. Meanwhile interest rates in the U.S. moved up steadily,
depressing Treasury bond prices. By May 27, 1999, 30-year Treasury bond yields
had risen to 5.84 percent from 5.18 percent six months earlier.
In May, all fixed income markets suffered a setback as inflation fears
caused the Federal Reserve to change its bias from neutral to one predisposed to
tightening. With higher rates now more likely, high-yield bonds and emerging
market bonds retraced some of their gains, but remained in positive territory
year-to-date. For example, for the six-month period ended May 31, 1999,
high-yield bonds were up 2.53 percent according to the Lehman Brothers High
Yield Bond Index.* Emerging market bonds were up 3.19 percent as measured by the
JP Morgan Emerging Markets Composite Index.** In contrast, 10-year Treasuries+
were down 4.66 percent and the Lehman Brothers Long Government Bond Index++
tumbled 5.76 percent for the six-month period ended May 31, 1999.
* LEHMAN BROTHERS HIGH YIELD BOND INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE PERFORMANCE OF CORPORATE BOND RATES BELOW INVESTMENT
GRADE. THIS INDEX IS CALCULATED MONTHLY AND INCLUDES THE EFFECT OF
REINVESTMENT OF DIVIDENDS. SOURCE IS LIPPER ANALYTICAL SERVICES, INC.
** JP MORGAN EMERGING MARKETS COMPOSITE INDEX IS GENERALLY REPRESENTATIVE OF THE
PERFORMANCE OF EXTERNAL DEBT INSTRUMENTS IN THE EMERGING MARKETS. IT INCLUDES
THE EFFECT OF REINVESTMENT OF DIVIDENDS. SOURCE IS J.P. MORGAN AND CO., INC.
+ 10-YEAR TREASURIES GENERALLY REPRESENTATIVE OF THE RETURN FOR 10-YEAR
TREASURIES AND INCLUDES THE EFFECTS OF REINVESTMENT OF DIVIDENDS AND REFLECT
CUMULATIVE MONTHLY RETURNS. SOURCE IS TOWERSDATA SYSTEMS.
++ LEHMAN BROTHERS LONG GOVERNMENT BOND INDEX IS GENERALLY REPRESENTATIVE OF THE
PERFORMANCE OF GOVERNMENT AND AGENCY BONDS WITH A MATURITY OF TEN YEARS AND
GREATER. THE INDEX IS CALCULATED MONTHLY AND INCLUDES THE EFFECT OF
REINVESTMENT OF DIVIDENDS. SOURCE IS LIPPER ANALYTICAL SERVICES, INC.
Q HOW DID YOU POSITION THE FUND TO RESPOND?
A The first six months of the fiscal year was one of those rare times when
exactly what you think will happen does happen. The result was strong relative
performance for the fund.
Kemper Strategic Income Trust is designed to be a relatively aggressive,
income-focused fund. Therefore, we normally keep the fund substantially weighted
in emerging market bonds and high-yield corporate bonds. We can alter this
allocation if we strongly believe that other areas of the market will provide
more income, but as the fiscal year began, we anticipated that interest rates
would be flat or move higher. Such an environment would augur for government
bonds to underperform and that the fund's normal bias towards emerging market
bonds and high-yield bonds would be the optimum positioning. As it
6
<PAGE> 7
PERFORMANCE UPDATE
turned out, our asset allocation decision was right on target. The high-yield
market rallied since the Fed's rate cuts last fall, as have foreign currency
bonds. In May, during the downturn that affected all fixed income investments
both domestic and global, the fund's income-oriented positioning hurt it a bit
more than its competitors. But despite giving back a portion of its gains in
May, the fund outperformed its peer group average during the first half of the
fiscal year.
Q WHAT IS YOUR OUTLOOK FOR THE MULTI-MARKET BOND FUND MARKET?
A We anticipate the domestic economy will remain on solid footing. Interest
rates may continue to rise somewhat further. The market needs proof the economy
is going to slow down, although there is a natural stopping point to how high
rates can go when inflation is so low. For the time being, we feel the fund is
well positioned for this outlook. With the fund's flexibility to move in and out
of sectors, we believe it is in a good position to benefit from fluctuations in
different markets during various economic cycles.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 5/31/99 ON 11/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE PASS-THROUGHS 28% 32%
- --------------------------------------------------------------------------------
HIGH-YIELD CORPORATE BONDS 21 19
- --------------------------------------------------------------------------------
EMERGING MARKETS 47 44
- --------------------------------------------------------------------------------
OTHER 4 5
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 5/31/99 ON 11/30/98
LONG-TERM FIXED INCOME
SECURITIES RATINGS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 5/31/99 ON 11/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 36% 36%
- --------------------------------------------------------------------------------
A 8 7
- --------------------------------------------------------------------------------
BB 25 26
- --------------------------------------------------------------------------------
B 27 28
- --------------------------------------------------------------------------------
OTHER 4 3
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 5/31/99 ON 11/30/98
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 5/31/99 ON 11/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 8.3 years 9.5 years
- --------------------------------------------------------------------------------
</TABLE>
* PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC INCOME TRUST
PORTFOLIO OF INVESTMENTS AT MAY 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT
Federal National Mortgage Association
7.00%, 2027 $ 575 $ 575
7.50%, 2027 679 693
Government National Mortgage Association
7.50%, 2023-2028 8,909 9,117
8.00%, 2022-2026 6,465 6,731
----------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--27.8%
(Cost: $16,294) 17,116
----------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENTS
(PRINCIPAL AMOUNT
IN U.S. DOLLARS)
(b) Argentine Republic
4.894%, 2002 9,949 8,846
4.962%, 2007 5,378 4,248
(b) Federative Republic of Brazil,
8.00%, 2014 16,567 10,355
Republic of Panama,
6.08%, 2002 1,304 1,252
(b) Republic of Venezuela,
5.938%, 2007 643 473
United Mexican States
6.25%, 2019 2,500 1,856
11.50%, 2026 910 1,004
----------------------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS--45.5%
(Cost: $25,522) 28,034
----------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS
- -------------------------------------------------------------------------------------------------------------------------------
BASIC INDUSTRIES--5.3%
Bar Technologies, 13.50%, with warrants, 2001 500 525
Dimac Corp., 12.50%, 2008 600 420
Euramax International, PLC, 11.25%, 2006 400 416
Gaylord Container Corp.
9.75%, 2007 60 58
9.875%, 2008 190 167
Golden Northeast Aluminum, Inc., 12.00%, 2006 250 257
GS Technologies, 12.25%, 2005 100 90
Hines Horticulture, Inc., 11.75%, 2005 325 347
Huntsman Polymer Corp., 11.75%, 2004 170 180
Riverwood International Corp., 10.875%, 2008 740 721
Stone Container Corp., 11.50%, 2006 70 75
----------------------------------------------------------------------------------------
3,256
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--.9%
Day International Group, Inc., 11.125%, 2005 35 37
Fairchild Corp., 10.75%, 2009 250 249
Nortek, Inc., 9.875%, 2004 270 275
----------------------------------------------------------------------------------------
561
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--7.9%
(a) Allegiance Telecom, Inc., 11.75%, 2008 $ 500 $ 305
American Cellular Corp., 10.50%, 2008 320 331
Call-Net Enterprises
9.375%, 2009 100 95
(a) 10.80%, 2009 200 110
Intermedia Capital Partners, 11.25%, 2006 250 279
(a) Intermedia Communications of Florida, Inc.,
11.25%, 2007 520 374
KMC Telecom Holdings, Inc., 13.50%, 2009 100 100
Level 3 Communications, Inc., 9.125%, 2008 30 29
Metronet Communications,
12.00%, with warrants, 2007 100 119
MGC Communications, 13.00%, 2004 350 315
(a) Millicom International Cellular, S.A.,
13.50%, 2006 500 375
Nextlink Communications, Inc., 10.75%, 2008 140 140
(a) PTC International Finance, 10.75%, 2007 500 370
(a) Spectrasite Holdings, Inc., 11.25%, 2009 500 293
Teligent, Inc., 11.50%, 2007 250 243
(a) Triton Communications, L.L.C., 11.00%, 2008 200 120
U.S. Xchange, L.L.C., 15.00%, 2008 370 381
USA Mobile Communications Holdings, Inc., 14.00%,
2004 120 120
(a) Viatel, Inc., 12.50%, 2008 450 275
Western Wireless Corp., 10.50%, 2007 440 474
----------------------------------------------------------------------------------------
4,848
- -------------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--4.2%
Budget Group, 9.125%, 2006 80 77
Coinmach Corp., 11.75%, 2005 500 550
(c) Color Tile, Inc., 10.75%, 2001 330 3
Florida Panthers Holdings, 9.875%, 2009 250 243
Hovnanian Enterprises
11.25%, 2002 90 92
9.75%, 2005 10 10
National Vision Association, Ltd., 12.75%, 2005 500 520
Players International, Inc., 10.875%, 2005 470 496
Six Flags Entertainment Corp., 12.25%, 2005 550 615
----------------------------------------------------------------------------------------
2,606
- -------------------------------------------------------------------------------------------------------------------------------
CONSUMER NON-CYCLICALS--.7%
Advantica Restaurant Group, Inc.,
11.25%, 2008 250 248
Mastellone Hermonos, S.A., 11.75%, 2008 230 173
----------------------------------------------------------------------------------------
421
- -------------------------------------------------------------------------------------------------------------------------------
ENERGY--.3%
R&B Falcon Finance Corp., 9.50%, 2008 250 222
----------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
MEDIA--3.3%
(a) Australis Holdings
14.00%, 2000 500 8
(c) 15.00%, with warrants, 2002 21 16
CSC Holdings, Inc., 9.875%, 2013 450 493
(a) Diamond Cable Communications, PLC,
11.75%, 2005 175 156
Frontiervision Capital Corp., 11.00%, 2006 400 444
NTL, Inc.
11.50%, 2008 320 352
(a) 12.375%, 2008 500 335
Sinclair Broadcasting Group, Inc., 8.75%, 2007 250 244
----------------------------------------------------------------------------------------
2,048
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TRANSPORTATION--.1%
Trans World Airlines, Inc., 11.375%, 2006 $ 100 $ 50
----------------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--22.7%
(Cost: $14,732) 14,012
----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
- -----------------------------------------------------------------------------------------------------------------------------------
(c) Intermedia Communications of Florida, Inc., warrants 200shs. 19
Viatel, Inc. 1,825 82
----------------------------------------------------------------------------------------
TOTAL COMMON STOCK--.2%
(Cost: $9) 101
----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS
(d) Repurchase agreement
State Street Bank and Trust and Company,
dated 5/31/99, 4.80%, due 6/1/99 $ 369 369
Commercial paper
Yield--4.66% to 4.68%
Due--June 1999 2,000 1,996
----------------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--3.8%
(Cost: $2,365) 2,365
----------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $58,922) $61,628
----------------------------------------------------------------------------------------
</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 May 31, 1999 and
date shown represents the final maturity of the obligation.
(c) Non-income producing security. In the case of a bond, generally denotes that
the issuer has defaulted on the payment of principal or interest or has
filed for bankruptcy.
(d) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities. The collateral is monitored daily by the fund
so that its market value exceeds the carrying value of the repurchase
agreement.
Based on the cost of investments of $58,922,000, for federal income tax purposes
at May 31, 1999, the gross unrealized appreciation was $3,936,000, the gross
unrealized depreciation was $1,230,000 and the net unrealized appreciation on
investments was $2,706,000.
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1999 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
Investments, at value
(Cost: $58,922) $61,628
- -----------------------------------------------------------------------
Cash 184
- -----------------------------------------------------------------------
Interest receivable 662
- -----------------------------------------------------------------------
TOTAL ASSETS 62,474
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------
Liability under reverse repurchase agreements 16,796
- -----------------------------------------------------------------------
Payable for:
Interest expense 97
- -----------------------------------------------------------------------
Investments purchased 63
- -----------------------------------------------------------------------
Management fee 30
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 27
- -----------------------------------------------------------------------
Trustees' fee 10
- -----------------------------------------------------------------------
Total liabilities 17,023
- -----------------------------------------------------------------------
NET ASSETS $45,451
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------
Paid-in capital $48,463
- -----------------------------------------------------------------------
Accumulated net realized loss on sales of investments (6,233)
- -----------------------------------------------------------------------
Net unrealized appreciation on investments 2,706
- -----------------------------------------------------------------------
Undistributed net investment income 515
- -----------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $45,451
- -----------------------------------------------------------------------
NET ASSET VALUE PER SHARE, $.01 PAR VALUE
($45,451 / 3,462 shares outstanding) $ 13.13
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
Six months ended May 31, 1999 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Interest income $ 3,884
- -----------------------------------------------------------------------
Expenses:
Management fee 194
- -----------------------------------------------------------------------
Interest expense 439
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 53
- -----------------------------------------------------------------------
Professional fees 42
- -----------------------------------------------------------------------
Trustees' fees and other 59
- -----------------------------------------------------------------------
Total expenses 787
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 3,097
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized gain on sales of investments 133
- -----------------------------------------------------------------------
Change in net unrealized appreciation on investments (2,036)
- -----------------------------------------------------------------------
Net loss on investments (1,903)
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,194
- -----------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS AND CASH FLOWS
For the six months ended May 31, 1999 (unaudited) and for the year ended
November 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 3,097 6,128
- ------------------------------------------------------------------------------------
Net realized gain (loss) 133 (575)
- ------------------------------------------------------------------------------------
Change in net unrealized appreciation (2,036) (5,247)
- ------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,194 306
- ------------------------------------------------------------------------------------
Distribution from net investment income (3,102) (6,226)
- ------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
(3 shares and 6 shares, respectively) 37 113
- ------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (1,871) (5,807)
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------
Beginning of period 47,322 53,129
- ------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment income of $515
and $520, respectively) $45,451 47,322
- ------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------
Increase in net assets from operations $ 1,194 306
- ------------------------------------------------------------------------------------
Non-cash items 691 3,016
- ------------------------------------------------------------------------------------
Sale of investments 4,449 8,759
- ------------------------------------------------------------------------------------
Net cash provided by operating activities 6,334 12,081
- ------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------------------------------------------------------
Payments for reverse repurchase agreements (3,147) (5,464)
- ------------------------------------------------------------------------------------
Distributions to shareholders (3,065) (6,113)
- ------------------------------------------------------------------------------------
Net cash used in financing activities (6,212) (11,577)
- ------------------------------------------------------------------------------------
Net increase in cash 122 504
- ------------------------------------------------------------------------------------
CASH (OVERDRAFT) AT BEGINNING OF PERIOD 62 (442)
- ------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 184 62
- ------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES DESCRIPTION OF FUND. Kemper Strategic Income Trust,
(formerly named Kemper Strategic Income Fund), a
Massachusetts business trust, 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, whose 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. Money market instrument purchased
with an original maturity of sixty days or less are
valued at amortized cost. 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 $194,000 for the six months ended
May 31, 1999.
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 $3,000
for the six months ended May 31, 1999.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the six months ended May 31,
1999, the fund made no direct payments to its
officers and incurred trustees fees of $3,000 to
independent trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS For the six months ended May 31, 1999, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $6,905
Proceeds from sales 9,610
- --------------------------------------------------------------------------------
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
May 31, 1999, 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>
Demand $17,387,000 $16,893,000 4.52%
</TABLE>
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, -------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 13.68 15.39 15.34 13.12 12.60
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .90 1.77 1.79 1.75 1.68
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.55) (1.68) .06 2.25 .54
- ---------------------------------------------------------------------------------------------
Total from investment operations .35 .09 1.85 4.00 2.22
- ---------------------------------------------------------------------------------------------
Less distributions from net investment
income .90 1.80 1.80 1.78 1.70
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $ 13.13 13.68 15.39 15.34 13.12
- ---------------------------------------------------------------------------------------------
Market value, end of period $ 16.88 16.94 19.81 17.75 14.25
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Based on net asset value 2.71% .48 12.55 32.63 19.29
- ---------------------------------------------------------------------------------------------
Based on market value 5.79% (5.28) 23.53 39.99 20.70
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses before interest expense 1.51% 1.20 1.24 1.23 1.26
- ---------------------------------------------------------------------------------------------
Expenses after interest expense 3.41% 3.94 3.99 3.89 4.35
- ---------------------------------------------------------------------------------------------
Net investment income 13.43% 12.05 11.45 12.43 13.56
- ---------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------
Net assets at end of period (in
thousands) $45,451 47,322 53,129 52,944 44,776
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 21% 13 16 19 49
- ---------------------------------------------------------------------------------------------
</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. Data for the
period ended May 31, 1999 is unaudited.
16
<PAGE> 17
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 17, 1998, a special shareholders' meeting was held. Kemper Strategic
Income Trust shareholders were asked to vote on a new investment management
agreement with Scudder Kemper Investments, Inc. This item was approved. Below
are the results:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
2,648,343 26,427 45,040
</TABLE>
17
<PAGE> 18
NOTES
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
JAMES E. AKINS MARK S. CASADY MAUREEN E. KANE
Trustee President Assistant Secretary
JAMES R. EDGAR 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 G. WEITHERS
Trustee KATHRYN L. QUIRK
Vice President
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 STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
- --------------------------------------------------------------------------------
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
KSIT - 3 (7/23/99) 1080070
