<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED APRIL 30, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
OFFERING INVESTORS THE OPPORTUNITY
FOR HIGH CURRENT RETURN
KEMPER STRATEGIC INCOME FUND
"... Our answer was to exit U.S. Treasuries and move into other income-enhancing
sectors, mostly high-yield bonds and emerging market bonds. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
Contents
3
Economic Overview
5
Management Team
6
Performance Update
7
Terms to Know
8
Portfolio Statistics
9
Portfolio of Investments
18
Financial Statements
20
Notes to Financial Statements
23
Financial Highlights
25
Shareholders' Meeting
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER STRATEGIC INCOME FUND
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CLASS A 6.57%
CLASS B 6.06%
CLASS C 6.31%
LIPPER MULTI-SECTOR INCOME CATEGORY AVERAGE* 6.12%
- --------------------------------------------------------------------------------
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
* LIPPER ANALYTICAL SERVICES, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES
IN NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE
EFFECT OF SALES CHARGES AND, IF THEY HAD, RESULTS MAY HAVE BEEN LESS
FAVORABLE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
4/30/99 10/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER STRATEGIC INCOME FUND CLASS A $5.70 $5.60
- --------------------------------------------------------------------------------
KEMPER STRATEGIC INCOME FUND CLASS B $5.69 $5.59
- --------------------------------------------------------------------------------
KEMPER STRATEGIC INCOME FUND CLASS C $5.73 $5.62
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER STRATEGIC INCOME FUND
RANKINGS AS OF 4/30/99*
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER MULTI-SECTOR INCOME FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #37 OF 94 FUNDS #55 OF 94 FUNDS #48 OF 94 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #10 OF 32 FUNDS N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #1 OF 6 FUNDS N/A N/A
- --------------------------------------------------------------------------------
15-YEAR #2 OF 10 FUNDS N/A N/A
- --------------------------------------------------------------------------------
20-YEAR #1 OF 1 FUNDS N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF APRIL 30, 1999
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME $.2625 $.2345 $.2396
- --------------------------------------------------------------------------------
APRIL DIVIDEND $.0365 $.0317 $.0328
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE+ 7.68% 6.69% 6.87%
- --------------------------------------------------------------------------------
SEC YIELD+ 8.00% 7.28% 7.47%
- --------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on April 30, 1999. Distribution
rate simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended April 30, 1999, shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with the
standardized method prescribed by the Securities and Exchange Commission.
Yields and distribution rates are historical and will fluctuate.
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 your investment.
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR INCOME STYLE BOX
- --------------------------------------------------------------------------------
[MORNINGSTAR INCOME STYLE BOX]
Source: Morningstar, Inc., Chicago, IL (312) 696-6000. The Income Style Box
placement is based on a fund's average effective maturity or duration and the
average credit rating of the bond portfolio. The Style Box represents a snapshot
of a fund's portfolio on a single day. Please note that style boxes do not
represent an exact assessment of risk and do not represent future performance.
the fund's portfolio changes from day-to-day. A longer-term view is represented
by the fund's Morningstar category, which is based on its actual investment
style as measured by its underlying portfolio holdings over the past
three-years. Morningstar has placed Kemper Strategic Income Fund in the
multisector income category. Please consult the prospectus for a description of
investment policies.
<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 INVESTMENTS, HE WAS WITH
THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
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:
In April, investor enthusiasm drove the market to its second milestone in a
year -- the Dow Jones Industrial Average rose to 11,000 just a month after it
broke 10,000 for the first time. In May, expectations of rising inflation and
higher short-term interest rates led to a slowdown. But in early June, the
market rallied again. What drove the market rallies, and what, at the same time,
led to investor anxiety?
Inflation worries have been seeping into the market for months. The growing
conviction that Asian and Latin American economies are recovering is raising
commodity prices, particularly oil. The price of West Texas Intermediate oil
surged from less than $12 in February to almost $19 in early May. That alone
almost guarantees a rise in the "headline" inflation rate this year, which is
the rate of inflation as measured by the entire CPI. But it's important to note
that the Federal Reserve Board looks primarily at the core inflation rate, which
is the CPI minus food and energy -- and the core inflation rate looks at if it
will remain low at about 2 percent this year. Investors should note, however,
that the Federal Reserve Board also considers what will happen to inflation next
year -- and all indications are that the Fed expects inflation to increase in
2000.
As a result, the Fed is considering a change in monetary policy. Recent Fed
policy has been reactive, not proactive, which means that the Fed tends to
respond to inflation only when it picks up. That may change as the Fed tries to
preemptively halt inflation momentum. Such a change in monetary policy would
likely lead to an increase in short-term interest rates before the end of the
year. However, the change is likely to be small. Because we don't see pressure
toward sustained inflation, there's no reason for the Fed to want a sharp
slowdown in the overall economy.
The long-term economic situation, however, 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. In April, 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., rose at an annual rate of 4.5 percent in the
first quarter, 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 by now,
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 quarter 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.
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 (5/31/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10 Year Treasury Rate(1) 5.54 5.34 5.57 6.42
Prime Rate(2) 7.75 8.5 8.5 8.25
Inflation Rate(3)* 2.28 1.68 1.63 3.04
The U.S. Dollar(4) -1.22 8.17 5.05 7.67
Capital goods orders(5)* 11.67 3.05 12.61 3.93
Industrial production (5)* 2.01 2.71 5.92 6.44
Employment growth(6) 2.14 2.67 2.76 2.44
</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 APRIL 30, 1999.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
But don't forget that international crises have the potential to affect the
U.S. markets dramatically. An increase 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 have small economies and little leeway in
their budgets. Consequently, those countries finance 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 FUND
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 FUND.
HE IS ALSO A CHARTERED FINANCIAL ANALYST.
[CESSINE PHOTO]
ROBERT CESSINE IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS AND
PORTFOLIO MANAGER OF KEMPER STRATEGIC INCOME FUND. HE JOINED THE COMPANY IN
1993. HE IS ALSO A CHARTERED FINANCIAL ANALYST.
[MCNAMARA PHOTO]
MIKE MCNAMARA HAS BEEN WITH THE ORGANIZATION SINCE 1972 AND IS A MANAGING
DIRECTOR OF SCUDDER KEMPER INVESTMENTS AND A PORTFOLIO MANAGER OF KEMPER
STRATEGIC INCOME FUND.
[RESIS PHOTO]
HARRY RESIS IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS. HE JOINED THE
COMPANY IN 1988 AND IS A PORTFOLIO MANAGER OF KEMPER STRATEGIC INCOME FUND.
[SALTZMAN PHOTO]
M. ISABEL SALTZMAN, A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS AND
PORTFOLIO MANAGER OF THE KEMPER STRATEGIC INCOME FUND, IS ALSO THE SENIOR
PORTFOLIO MANAGER FOR THE FIRM'S EMERGING MARKETS BOND GROUP. SALTZMAN JOINED
THE ORGANIZATION IN 1990.
[VANDERBURG PHOTO]
RICHARD VANDENBERG, WITH MORE THAN 25 YEARS OF INVESTMENT MANAGEMENT EXPERIENCE,
IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC. 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 FUND STARTED ITS SIX-MONTH REPORTING PERIOD UNDER ITS
FORMER NAME, KEMPER DIVERSIFIED INCOME FUND. THE NAME CHANGED FEBRUARY 5, 1999
TO MAKE IT MORE DESCRIPTIVE OF THE WAY THE FUND IS MANAGED AND TO REFLECT THE
INDUSTRY'S STANDARD LANGUAGE DESCRIBING FUNDS THAT INVEST IN MULTIPLE SECTORS OF
THE BOND MARKET. ITS OBJECTIVE -- HIGH CURRENT RETURN -- AND MANAGEMENT TEAM
REMAIN THE SAME. FOR THE PERIOD ENDED APRIL 30, 1999, THE FUND BENEFITED FROM
MOVES MADE BY ITS PORTFOLIO MANAGEMENT TEAM, WHICH INCLUDES SECTOR EXPERTS WHO
ARE PART OF THE UNPARALLELED FIXED-INCOME EXPERTISE AT KEMPER FUNDS. HERE, LEAD
PORTFOLIO MANAGER PATRICK BEIMFORD DISCUSSES THOSE ACTIONS.
Q PAT, BEFORE WE GET INTO THE SPECIFIC PERFORMANCE OF KEMPER STRATEGIC
INCOME FUND, PLEASE TELL US A LITTLE ABOUT THE ECONOMIC ENVIRONMENT IN WHICH YOU
WERE MANAGING THE FUND DURING THIS REPORTING PERIOD, NOVEMBER 1, 1998 THROUGH
APRIL 30, 1999.
A The period is defined by what happened at its beginning -- the Federal
Reserve Board (the Fed) cut rates three times in the second half of
1998 -- September 29, October 15, both before this reporting period started, and
again November 17.
One of the fund's largest sector weightings, the high-yield market,
bottomed out with the October 15 easing (see Terms To Know on page 7), and has
rallied ever since, boosting the fund's return for this period. On the flip
side, another sector the fund can invest in, U.S. Treasuries (see Terms To Know
on page 7), was hurt during the period.
Q WHY WOULD THE FED'S RATE CUTS SPUR A RALLY?
A When the Fed lowers the Federal Fund's rate (see Terms To Know on page 7),
it is making money less expensive to borrow. The goal is to help stimulate the
economy, which is typically weak when the Fed cuts rates.
For instance, a cut in the Fed funds rate typically trickles down to lower
mortgage rates, so more people are likely to purchase homes because borrowing
the money to do so is not as expensive.
Similarly, corporations are more likely to borrow money when it's cheap to
borrow, to expand their businesses.
Additionally, when the Fed lowers the Fed Funds rate (termed Fed easing),
it usually has a very strong positive psychological impact on the financial
markets, particularly stocks. The Fed's aggressive easing last fall sent a
positive signal to the U.S. and global equity markets that the Fed would do
whatever it took to keep the world economy from slowing down dramatically.
Q KEMPER STRATEGIC INCOME FUND'S CUMULATIVE TOTAL RETURN FOR THE SIX-MONTH
PERIOD WAS 6.57 PERCENT (FOR CLASS A SHARE UNADJUSTED FOR ANY SALES CHARGES),
COMPARED WITH THE LIPPER MULTI-SECTOR INCOME CATEGORY'S AVERAGE OF 6.12 PERCENT.
WHAT SORTS OF STEPS DID YOU TAKE DURING THE PAST SIX MONTHS TO HAVE OUTPERFORMED
THE AVERAGE?
A Late last year we determined interest rates on high quality U.S. bonds
(I.E., Treasuries, mortgages) would likely remain unchanged, or would possibly
move higher. As interest rates rise, prices fall on bonds. When you're looking
at flat or rising interest rates, you want to look for income. We asked
ourselves what investment vehicles, in which the fund can invest, are more
likely to provide income in this interest-rate environment. Our answer was to
exit U.S. Treasuries and move into other income-enhancing sectors, mostly
high-yield bonds and emerging market bonds.
One year ago, about 30 percent of the fund was invested in U.S.
Treasuries, 6 percent in mortgages and 59 percent in high-yield and emerging
market bonds. This 36 percent weighting in Treasuries and mortgages reflected
our belief that interest rates still had a bias to move lower as the global
economy was under pressure. These securities helped support the fund as interest
rates declined throughout the year into early October in response to global
economic turmoil.
When it became apparent to us late last year that the global economic
crisis was subsiding (helped in large part by the Fed's aggressive easings in
October and November), we began to shift these assets into high yield, emerging
markets and foreign Treasuries.
That all changed over the last six months -- there was even a "flight-
from-quality." The fund has made a complete shift. Now we have 55 percent of the
portfolio invested in high-yield, 19 percent in emerging markets and nothing in
Treasuries or mortgages.
And, as I mentioned earlier, the high-yield market has really rallied
6
<PAGE> 7
PERFORMANCE UPDATE
since the Fed's rate cuts last fall. The Lipper High Yield Bond Index*
experienced a 11.72 percent gain November 1, 1998 through April 30, 1999. The
emerging markets sector showed even stronger performance during the six-month
period, demonstrated by the Lipper Emerging Market Index's* return of 29.56
percent.
* LIPPER HIGH YIELD BOND INDEX AND LIPPER EMERGING MARKET INDEX ARE EQUALLY
WEIGHTED PERFORMANCE INDICES ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND
INCOME DIVIDENDS, OF THE LARGEST QUALIFYING FUNDS IN THE INVESTMENT OBJECTIVE.
SOURCE IS LIPPER ANALYTICAL, INC.
Also performing relatively well for the fund were foreign currency bonds.
While interest rates have moved steadily higher in the U.S. Treasury market,
rates have been essentially unchanged in the markets we're involved with.
Unfortunately, the currency these bonds are denominated in has not performed
well.
Q CAN YOU ELABORATE A LITTLE ON THE CURRENCY TO WHICH YOU'RE REFERRING?
A Our confidence in the new European Union currency, the euro, seems to have
been premature. The euro has lost more than nine percent in value since
January's post-launch highs. It did not perform as well as we had hoped for
several reasons, including:
- Strengthened U.S. economy
- Economic weakness in euro-zone countries
- The Kosovo crisis
Still, we believe that in the long term, it is a good diversifier for the fund
and believe as European economic growth improves, it should boost the euro.
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.
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 reduce 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.
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 the period, assuming the
reinvestment of all dividends. It represents the aggregate percentage or dollar
value change over the period.
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.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
ON 4/30/99 ON 10/31/98
- -----------------------------------------------------------------------------------
<S> <C> <C>
HIGH YIELD CORPORATES 54% 50%
- -----------------------------------------------------------------------------------
EMERGING MARKETS 19 4
- -----------------------------------------------------------------------------------
FOREIGN CURRENCY BONDS 24 30
- -----------------------------------------------------------------------------------
HIGH GRADE CORPORATES 1 --
- -----------------------------------------------------------------------------------
CASH AND EQUIVALENTS 1 16
- -----------------------------------------------------------------------------------
OTHER 1 --
- -----------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 4/30/99 ON 10/31/98
YEARS TO MATURITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
ON 4/30/99 ON 10/31/98
- -----------------------------------------------------------------------------------
<S> <C> <C>
CASH EQUIVALENTS 1% 16%
- -----------------------------------------------------------------------------------
1-10 YEARS 83 71
- -----------------------------------------------------------------------------------
11-21 YEARS 10 5
- -----------------------------------------------------------------------------------
21+YEARS 6 8
- -----------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 4/30/99 ON 10/31/98
DURATION
<TABLE>
<CAPTION>
<S> <C> <C>
AVERAGE MATURITY 8.9 YEARS 8.7 YEARS
- -----------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS AT APRIL 30, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS--43.5% PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(PRINCIPLE AMOUNT
IN U.S. DOLLARS)
Argentine Republic
11.00%, 2006 $15,000 $ 14,925
11.375%, 2017 18,750 18,703
9.75%, 2027 3,750 3,281
Federative Republic of Brazil
11.625%, 2004 2,875 2,796
(a) 5.875%, 2006 4,275 3,412
9.375%, 2008 6,250 5,313
(a) 5.938%, 2009 7,750 5,541
(a) 5.00%, 2014 4,489 3,115
German Bundesrepublic
6.00%, 2007 95,165 115,657
5.625%, 2028 22,783 26,691
Italian Treasury, 6.75%, 2007 25,000 31,287
(a) Kingdom of Morocco, 6.063%, 2009 7,143 5,848
Kingdom of Spain, 6.00%, 2008 26,000 31,371
(a) Republic of Bulgaria 5.875%, 2011 27,500 18,597
Republic of Korea, 8.875%, 2008 6,250 6,797
Republic of Panama
(a) 4.00%, 2014 4,000 3,140
8.875%, 2027 13,750 13,011
Republic of Phillipines, 8.875%, 2008 15,650 15,924
(a) Republic of Venezuela, 5.938%, 2007 6,429 5,191
United Mexican States
9.875%, 2007 9,650 10,144
10.375%, 2009 3,550 3,807
11.375%, 2016 10,000 11,475
11.50%, 2026 10,000 11,895
----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $377,415) 367,921
----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--55.6%
BASIC INDUSTRIES--7.3%
Allied Waste Industries, 7.625%, 2006 590 577
Atlantis Group, Inc., 11.00%, 2003 1,328 1,355
Bar Technologies, 13.50%, 2001 2,030 2,111
Dimac Corp., 12.50%, 2008 1,980 1,584
Doman Industries, Ltd.
8.75%, 2004 780 569
9.25%, 2007 1,100 759
Euramax International, PLC, 11.25%,
2006 3,405 3,609
Gaylord Container Corp.
9.75%, 2007 2,050 1,999
9.875%, 2008 3,190 2,807
Golden Northeast Aluminum, Inc.,
12.00%, 2006 1,360 1,408
GS Technologies
12.00%, 2004 940 818
12.25%, 2005 1,260 1,087
Hines Horticulture, Inc., 11.75%, 2005 1,748 1,910
Huntsman Polymer Corp., 11.75%, 2004 2,100 2,258
Jorgensen (Earl M) Co., 9.50%, 2005 1,860 1,767
Metal Management, Inc., 10.00%, 2008 1,090 872
Millar Western Forest Products, Ltd.,
9.875%, 2008 1,760 1,632
MMI Products, Inc., 11.25%, 2007 2,340 2,521
Neenah Corp., 11.125%, 2007 1,150 1,161
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Norampac, Inc., 9.50%, 2008 $ 1,830 $ 1,935
Packaging Corporation of America,
9.625%, 2009 640 659
Pen Holdings, Inc., 9.875%, 2008 1,205 1,247
Plainwell, Inc., 11.00%, 2008 2,200 1,760
Renco Steel Holdings Co., 10.875%, 2005 2,180 1,962
Riverwood International Corp.
10.25%, 2006 280 287
10.625%, 2007 685 716
10.875%, 2008 6,785 6,666
Spinnaker Industries, 10.75%, 2006 5,110 3,884
Stone Container Corp.
12.25%, 2002 190 191
11.50%, 2006 950 1,036
Tembec Industries, Inc., 8.625%, 2009 880 911
Terra Industries, Inc.
10.75%, 2003 1,920 1,920
10.50%, 2005 680 680
Texas Petrochemicals Corp., 11.125%,
2006 2,370 2,062
UCC Investors Holdings, Inc., 10.50%,
2002 1,460 1,602
United Rentals, Inc., 9.25%, 2009 1,420 1,431
Wells Aluminum Corp., 10.125%, 2005 1,870 1,879
----------------------------------------------------------------------------
61,632
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--5.7%
AEP Industries, Inc., 9.875%, 2007 650 676
Axiohm Transaction Solutions, Inc.,
9.75%, 2007 1,060 973
BE Aerospace, Inc., 9.50%, 2008 640 683
Berry Plastics Corp., 12.25%, 2004 505 537
BPC Holdings Corp., 12.50%, 2006 2,810 2,979
Building Materials Corp., 8.00%, 2008 1,160 1,145
Congoleum Corp., 8.625%, 2008 3,160 3,120
Consumers International, 10.25%, 2005 1,220 1,287
Day International Group, Inc., 11.125%,
2005 2,660 2,840
DeCrane Aircraft Holdings, Inc.,
12.00%, 2008 2,740 2,822
Desa International, 9.875%, 2007 1,740 1,357
Fairchild Corp., 10.75%, 2009 1,240 1,252
Falcon Building Products, Inc.
9.50%, 2007 2,600 2,470
10.50%, 2007 130 84
Eagle-Picher Holdings, Inc., 9.375%,
2008 2,510 2,454
Foamex, L.P., 13.50%, with warrants,
2005 890 714
Fonda Group, 9.50%, 2007 2,000 1,660
Graham Packaging Co.
8.75%, 2008 60 61
(b) 10.75%, 2009 610 430
(b) Grove Holdings, L.L.C., 11.625%, 2009 340 126
Grove Investors, PIK, 14.50%, 2010 750 495
IMPAC Group, Inc., 10.125%, 2008 2,370 2,376
Integrated Electrical Services, Inc.,
9.375%, 2009 1,120 1,134
Kevco, Inc., 10.375%, 2007 1,740 1,044
Knoll, Inc., 10.875%, 2006 1,638 1,802
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nortek, Inc.
9.875%, 2004 $ 130 $ 135
9.125%, 2007 2,390 2,486
8.875%, 2008 420 433
Printpack, Inc.
9.875%, 2004 100 101
10.625%, 2006 1,700 1,649
(b) SF Holdings Group, Inc., 12.75%, with
warrants, 2008 1,000 306
Terex Corp., 8.875%, 2008 2,930 2,915
Transdigm, Inc., 10.375%, 2008 930 944
U.S. Can Corp., 10.125%, 2006 1,030 1,097
(b) Waxman Industries, Inc., 12.75%, with
warrants, 2004 370 200
Werner Holdings, Inc., 10.00%, 2007 3,070 3,139
----------------------------------------------------------------------------
47,926
- --------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--12.9%
Allegiance Telecom, Inc.
(b) 11.75%, 2008 1,520 1,018
12.875%, 2008 1,750 1,977
American Cellular Corp., 10.50%, 2008 3,060 3,282
Birch Telecom, Inc., 14.00%, with
warrants, 2008 640 605
(b) Call-Net Enterprises
13.25%, 2004 820 843
9.27%, 2007 1,080 751
8.94%, 2008 1,080 670
Centennial Cellular, 10.75%, 2008 510 553
ComCast Cellular, 9.50%, 2007 110 124
(b) Communications Cellular, zero coupon,
with warrants, 2005 160 106
(b) Crown Castle International Corp.,
10.625%, 2007 3,850 2,772
Dobson Communication Corp., 11.75%,
2007 1,680 1,882
(b) Econophone, Inc., 11.00%, with
warrants, 2008 530 370
Esprit Telecom Group, PLC
11.50%, 2007 2,345 2,568
10.875%, 2008 800 862
Global Crossing Holdings, Ltd., 9.625%,
2008 1,230 1,368
Global Telesystems Group, 9.875%, 2005 820 832
(b) ICG Holdings, Inc., 13.50%, with
warrants, 2005 6,545 6,040
Impsat Corp., 12.375%, 2008 1,765 1,694
Intermedia Capital Partners, 11.25%,
2006 1,360 1,527
Intermedia Communications of Florida,
Inc.
(b) 12.50%, 2006 1,700 1,462
8.875%, with warrants, 2007 770 891
(b) 11.25%, 2007 2,080 1,581
(b) KMC Telecom Holdings, Inc., 12.50%,
with warrants, 2008 3,280 1,845
Level 3 Communications, Inc.
9.125%, 2008 3,170 3,233
(b) 10.50%, 2008 1,400 903
Long Distance International, Inc.,
12.25%, with warrants, 2008 1,300 848
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
McLeod USA, Inc.
9.25%, 2007 $ 550 $ 573
(b) 10.50%, 2007 3,640 2,930
9.50%, 2008 370 396
Metronet Communications
(b) 10.75%, 2007 700 567
12.00%, with warrants, 2007 560 694
(b) 9.95%, 2008 2,505 1,948
10.625%, 2008 1,150 1,348
MGC Communications, 13.00%, 2004 2,250 2,091
(b) Millicom International Cellular, S.A.,
13.50%, 2006 3,850 2,984
Netia Holdings
10.25%, 2007 560 532
(b) 11.25%, 2007 875 604
(b) Nextel Communications, Inc.
9.75%, 2004 2,930 3,040
9.75%, 2007 955 740
10.65%, 2007 1,825 1,433
9.95%, 2008 1,600 1,224
Nextlink Communications, Inc.
12.50%, 2006 2,545 2,806
(b) 9.45%, 2008 930 600
10.75%, 2008 1,550 1,655
(b) Pinnacle Holdings, Inc., 10.00%, 2008 3,580 2,229
Price Communications Wireless, Inc.,
9.125%, 2006 790 830
Primus Telecommunications Group, Inc.
11.75%, with warrants, 2004 2,430 2,554
9.875%, 2008 180 176
11.25%, 2009 680 707
(b) PTC International Finance, 10.75%, 2007 8,390 6,376
RCN Corp.
10.00%, 2007 1,080 1,123
(b) 11.00%, 2008 880 563
Rogers Cantel Mobile Communications,
Inc.
9.375%, 2008 2,550 2,805
9.75%, 2016 460 531
Satelites Mexicanos, S.A. de C.V.,
10.125%, 2004 860 735
(b) SBA Communications Corp., 12.00%, 2008 1,610 1,063
(b) Spectrasite Holdings, Inc.
12.00%, 2008 2,280 1,459
11.25%, 2009 1,070 629
(b) Telecorp, Inc., 11.625%, 2009 1,580 889
Teligent, Inc.
11.50%, 2007 1,770 1,779
(b) 11.50%, 2008 1,100 638
(b) Triton Communications, L.L.C., 11.00%,
2008 8,850 5,598
U.S. Xchange, L.L.C., 15.00%, 2008 1,090 1,172
USA Mobile Communications Holdings,
Inc., 14.00%, 2004 2,510 2,560
Versatel Telecom, 13.25%, with
warrants, 2008 1,420 1,633
Viatel, Inc.
11.25%, 2008 2,980 3,069
(b) 12.50%, 2008 1,740 1,114
Winstar Communications, 15.00%, 2007 490 514
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Winstar Equipment II, 12.50%, 2004 $ 1,560 $ 1,607
----------------------------------------------------------------------------
109,125
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--7.9%
(b) American Lawyer Media, Inc., 12.25%,
2008 230 152
AMF Bowling Worlwide, Inc.
10.875%, 2006 2,160 1,685
(b) 12.25%, 2006 405 233
Budget Group, 9.125%, 2006 1,240 1,240
CEX Holdings, Inc., 9.625%, 2008
Cinemark USA, Inc., 9.625%, 2008 3,030 3,151
Circus Circus Enterprises, Inc., 9.25%,
2005 1,010 1,058
Coinmach Corp., 11.75%, 2005 4,170 4,597
Cole National Group, Inc., 9.875%, 2006 720 749
Corporate Express, Inc., 4.50%, 2000 2,850 2,547
Eldorado Resorts, 10.50%, 2006 1,120 1,179
Finlay Enterprises, Inc., 9.00%, 2008 2,050 1,994
Finlay Fine Jewelry Corp., 8.375%, 2008 110 109
Florida Panthes Holdings, 9.875%, 2009 610 613
Forecast Group, L.P., 11.375%, 2000 1,125 1,114
Fortress Group, 13.75%, 2003 2,560 2,394
Galey & Lord, Inc., 9.125%, 2008 1,250 962
Guitar Center Management, 11.00%, 2006 307 325
Harvey's Casino Resorts, 10.625%, 2006 2,630 2,794
Hovnanian Enterprises
11.25%, 2002 374 381
9.75%, 2005 490 478
9.125%, 2009 920 920
Imax Corp., 7.875%, 2005 100 99
Imperial Home Decor Group, Inc.,
11.00%, 2008 810 672
Iron Age Corp.
9.875%, 2008 630 460
(b) 12.125%, 2009 570 160
J. Crew Group, Inc.
10.375%, 2007 2,520 2,470
(b) 13.50%, 2008 4,820 2,796
Kindercare Learning Centers, Inc.,
9.50%, 2009 1,650 1,728
La Petite Academy, Inc., 10.00%, 2008 2,910 2,903
Mohegan Tribal Gaming Authority
8.125%, 2006 320 327
8.75%, 2009 960 994
Motors and Gears, Inc., 10.75%, 2006 860 886
National Vision Association, Ltd.,
12.75%, 2005 4,830 5,047
Nine West Group, Inc., 9.00%, 2007 2,002 2,092
Pamida Holdings Corp., 11.75%, 2003 780 772
Phillips-Van Heusen Corp., 9.50%, 2008 1,340 1,367
Players International, Inc., 10.875%,
2005 1,585 1,692
Premier Parks, Inc., 12.00%, 2003 660 708
Regal Cinemas, Inc.
9.50%, 2008 840 840
8.875%, 2008 140 135
Six Flags Entertainment Corp., 12.25%,
2005 2,980 3,285
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Specialty Retailers, Inc.
8.50%, 2005 $ 360 $ 292
9.00%, 2007 1,760 1,232
(b) Spincycle, Inc., 12.75%, 2005 4,010 1,484
Station Casinos, Inc.
10.125%, 2006 790 845
9.75%, 2007 630 669
Toll Corp., 8.125%, 2009 680 680
United Artists Theatre Circuit, Inc.,
9.75%, 2008 3,600 3,078
Venture Holdings Corp., 9.50%, 2005 840 848
----------------------------------------------------------------------------
67,236
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER NON-CYCLICALS--4.2%
Abbey Healthcare Group, Inc., 9.50%,
2002 2,630 2,643
Advantica Restaurant Group, Inc.,
11.25%, 2008 2,985 3,075
AFC Enterprises, Inc., 10.25%, 2007 3,240 3,450
Agrilink Foods, Inc., 11.875%, 2008 440 474
(b) ALARIS Medical Systems, Inc., 11.125%,
2008 4,910 2,946
Ameriking, Inc., 10.75%, 2006 2,099 2,225
Carrols Corp., 9.50%, 2008 1,330 1,357
Dade International, Inc., 11.125%, 2006 1,000 1,105
Doskocil Manufacturing Co., 10.125%,
2007 830 564
Grupo Azucarero Mexico, S.A. de C.V.,
11.50%, 2005 710 277
Hedstrom Corp., 10.00%, 2007 3,330 2,897
Herff Jones, Inc., 11.00%, 2005 1,050 1,134
Jafra Cosmetics International, Inc.,
11.75%, 2008 1,275 1,109
Krystal, Inc., 10.25%, 2007 2,620 2,764
Magellan Health Services, Inc., 9.00%,
2008 2,400 2,022
(b) Mariner Post-Acute Network, Inc.,
10.50%, 2007 5,020 1,606
MEDIQ, Inc., 11.00%, 2008 2,390 2,079
Perkins Family Restaurants, L.P.,
10.125%, 2007 1,280 1,373
(b) Restaurant Co., 11.25%, 2008 1,420 938
Sealy Mattress Co.
9.875%, 2007 330 332
(b) 10.875%, 2007 1,595 1,037
Vencor, Inc., 9.875%, 2005 970 103
----------------------------------------------------------------------------
35,510
- --------------------------------------------------------------------------------------------------------------------------
ENERGY--1.6%
Benton Oil & Gas Co., 11.625%, 2003 2,510 1,757
Chesapeake Energy Corp., 9.625%, 2005 1,000 910
Continental Resources, Inc., 10.25%,
2008 1,310 992
Gulfmark Offshore, Inc., 8.75%, 2008 770 735
HS Resources, Inc., 9.25%, 2006 620 632
Mariner Energy, Inc., 10.50%, 2006 3,520 3,151
Ocean Energy, Inc., 10.375%, 2005 620 664
Pacalta Resources, Ltd., 10.75%, 2004 2,760 3,064
Parker Drilling Corp., 9.75%, 2006 90 83
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
R&B Falcon Finance Corp.
11.00%, 2006 $ 50 $ 52
9.50%, 2008 910 846
11.375%, 2009 50 53
RAM Energy, Inc., 11.50%, 2008 600 312
----------------------------------------------------------------------------
13,251
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL--6.2%
Banco Nacional de Desenvolvi, 15.224%,
2008 25,250 22,283
HMH Properties, Inc., 7.875%, 2008 1,620 1,563
Intertek Finance, PLC, 10.25%, 2006 650 647
Riverside Loan Trust, 7.098%, 2008 30,000 28,491
----------------------------------------------------------------------------
52,984
- --------------------------------------------------------------------------------------------------------------------------
MEDIA--7.4%
Adelphia Communications Corp., 7.875%,
2009 470 469
Avalon Cable Holdings, Inc.
9.375%, 2008 270 286
(b) 11.875%, 2008 1,760 1,192
Bresnan Communications Co., L.P.
8.00%, 2009 330 338
(b) 9.25%, 2009 690 476
(b) Capstar Broadcasting Corp., 12.75%,
2009 3,330 2,864
Chancellor Media Corp.
8.125%, 2007 1,150 1,159
8.00%, 2008
9.00%, 2008 440 469
Charter Communication Holdings, L.L.C.
8.25%, 2007 3,360 3,444
(b) 9.92%, 2011 4,300 2,806
(b) Comcast UK Cable Partners, Ltd.,
11.20%, 2007 4,200 3,874
CSC Holdings, Inc.
9.25%, 2005 130 139
8.125%, 2009 1,370 1,456
10.50%, 2016 1,200 1,425
9.875%, 2023 1,000 1,119
(b) Diamond Cable Communications, PLC,
13.25%, 2004 2,025 2,109
(b) Diva Systems Corp., 12.625%, with
warrants, 2008 3,080 1,106
EchoStar DBS Corp.
9.25%, 2006 940 982
9.375%, 2009 610 637
Falcon Holding Group, L.P.
8.375%, 2010 3,020 3,073
(b) 9.285%, 2010 1,740 1,262
Frontiervision Capital Corp.
11.00%, 2006 1,200 1,344
(b) 11.875%, 2007 2,560 2,246
Interep National Radio Sales, Inc.,
10.00%, 2008 840 873
Mediacom, L.L.C., 8.50%, 2008 1,080 1,110
Metromedia Fiber Network, Inc., 10.00%,
2008 1,530 1,652
NTL, Inc.
11.50%, 2008 3,335 3,760
(b) 12.375%, 2008 740 516
Ono Financial, PLC, 13.00%, 2009 550 561
Outdoor Systems, Inc., 9.375%, 2006 2,410 2,597
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b) Radio Unica Corp., 11.75%, 2006 $ 1,180 $ 667
Salem Communications Corp., 9.50%, 2007 980 1,031
SFX Entertainment, Inc., 9.125%, 2008 3,135 3,221
Sinclair Broadcasting Group, Inc.,
8.75%, 2007 830 834
Star Choice, 13.00%, with warrants,
2005 875 946
TeleWest Communications, PLC
(b) 11.00%, 2007 2,395 2,131
11.25%, 2008 1,250 1,441
(b) 9.25%, 2009 180 122
Transwestern Publishing Co., L.L.C.
9.625%, 2007 1,340 1,400
(b) 11.875%, 2008 3,100 2,232
(b) 21st Century Telecommunications, Inc.,
12.25%, with warrants, 2008 3,630 1,674
(b) United International Holdings, Inc.,
10.75%, 2008 3,000 2,033
----------------------------------------------------------------------------
63,076
- --------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--1.0%
Cherokee International Corp., 10.50%,
2009 600 612
Communications and Power Industry,
Inc., 12.00%, 2005 550 583
(b) IPC Information Systems, 10.875%, 2008 2,910 2,183
PSINet, Inc.
10.00%, 2005 1,180 1,239
11.50%, 2008 1,590 1,769
Viasystems, Inc., 9.75%, 2007 2,180 2,027
----------------------------------------------------------------------------
8,413
- --------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.4%
Accuride Corp., 9.25%, 2008 760 771
Airxcel, 11.00%, 2007 3,430 3,421
Canadian Airlines, 10.00%, 2005 540 390
Petro Stopping Centers, 10.50%, 2007 2,200 2,360
TFM, S.A. de C.V., 10.25%, 2007 1,320 1,238
Trans World Airlines, Inc., 11.375%,
2006 960 470
(b) Transtar Holdings, Inc., 13.375%, 2003 670 664
Travelcenters America, 10.25%, 2007 2,180 2,294
----------------------------------------------------------------------------
11,608
----------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--55.6%
(Cost: $477,997) 470,761
----------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON AND PREFERRED STOCK--.9%
(c) Capital Pacific Holdings, warrants 4,345shs. $ 2
Clark USA, PIK, preferred 4,134 270
Crown American Realty Trust, preferred 24,970 1,167
Dobson Communications, PIK, preferred 918 890
(c) Eagle-Picher Holdings, Inc., preferred 180 949
(c) Empire Gas Corp., warrants 2,208 1
(c) Global Crossing, Ltd., PIK, preferred 13,000 1,502
MGC Communications, Inc. 8,086 275
Nextel Communications, PIK, preferred 704 785
(c) SF Holdings Group, Inc. 3,110 6
(c) SF Holdings Group, Inc., PIK, preferred 33 119
Sinclair Capital, preferred 13,500 1,471
(c) 21st Century Telecommunications Group,
Inc., preferred 251 125
Viatel, Inc., preferred 1,438 345
----------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCK--.9%
(Cost: $7,558) 7,907
----------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $862,970) $846,589
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Variable rate security. Rate shown is the effective rate on April 30, 1999
and date shown represents the final maturity of the obligation.
(b) Deferred interest obligation; currently zero coupon under terms of the
initial offering.
(c) Non-income producing security. In the case of a bond, generally denotes that
issuer has defaulted on the payment of principal or interest or has filed
for bankruptcy.
PIK denotes that interest or dividend is paid in kind.
Based on the cost of investments of $862,970,000 for federal income tax purposes
at April 30, 1999, the gross unrealized appreciation was $28,424,000, the gross
unrealized depreciation was $44,805,000 and the net unrealized depreciation on
investments was $16,381,000.
See accompanying Notes to Financial Statements.
17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $862,970) $846,589
- ------------------------------------------------------------------------
Receivable for:
Investments sold 4,301
- ------------------------------------------------------------------------
Fund shares sold 360
- ------------------------------------------------------------------------
Interest 18,886
- ------------------------------------------------------------------------
TOTAL ASSETS 870,136
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Cash overdraft 7,727
- ------------------------------------------------------------------------
Payable for:
Investments purchased 4,549
- ------------------------------------------------------------------------
Fund shares redeemed 1,925
- ------------------------------------------------------------------------
Management fee 403
- ------------------------------------------------------------------------
Distribution services fee 185
- ------------------------------------------------------------------------
Administrative services fee 178
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 573
- ------------------------------------------------------------------------
Trustees' fees and other 98
- ------------------------------------------------------------------------
Total liabilities 15,638
- ------------------------------------------------------------------------
NET ASSETS $854,498
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $935,224
- ------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (63,314)
- ------------------------------------------------------------------------
Net unrealized depreciation on:
Investments (16,381)
- ------------------------------------------------------------------------
Foreign currency related transactions (340)
- ------------------------------------------------------------------------
Accumulated net investment loss (691)
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $854,498
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share ($559,830 /
98,203 shares outstanding) $5.70
- ------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
4.71% of net asset value or 4.50% of offering price) $5.97
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($259,376 /
45,575 shares outstanding) $5.69
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($35,292 /
6,163 shares outstanding) $5.73
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
18
<PAGE> 19
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Dividends $ 317
- -----------------------------------------------------------------------
Interest income 42,140
- -----------------------------------------------------------------------
Total investment income 42,457
- -----------------------------------------------------------------------
Expenses:
Management fee 2,439
- -----------------------------------------------------------------------
Distribution services fee 1,136
- -----------------------------------------------------------------------
Administrative services fee 1,020
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,362
- -----------------------------------------------------------------------
Professional fees 18
- -----------------------------------------------------------------------
Reports to shareholders 30
- -----------------------------------------------------------------------
Trustees' fees and other 214
- -----------------------------------------------------------------------
Total expenses 6,219
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 36,238
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized loss on:
Investments (8,130)
- -----------------------------------------------------------------------
Foreign currency transactions (79)
- -----------------------------------------------------------------------
(8,209)
- -----------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) on:
Investments 26,283
- -----------------------------------------------------------------------
Foreign currency related transactions (340)
- -----------------------------------------------------------------------
25,943
- -----------------------------------------------------------------------
Net gain on investments 17,734
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $53,972
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the six months ended April 30, 1999 (unaudited), and the year ended
October 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 36,238 62,686
- -------------------------------------------------------------------------------------------
Net realized gain (loss) (8,209) 646
- -------------------------------------------------------------------------------------------
Change in net unrealized appreciation 25,943 (55,916)
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 53,972 7,416
- -------------------------------------------------------------------------------------------
Distribution from net investment income (38,723) (63,792)
- -------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions (11,279) 45,361
- -------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 3,970 (11,015)
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------
Beginning of period 850,528 861,543
- -------------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment income
of $1,794 in 1998) $854,498 850,528
- -------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Strategic Income Fund (formerly known as
Kemper Diversified Income Fund) is an open-end
management investment company organized as a
business trust under the laws of Massachusetts. The
fund offers four classes of shares. Class A shares
are sold to investors subject to an initial sales
charge. Class B shares are sold without an initial
sales charge but are subject to higher ongoing
expenses than Class A shares and a contingent
deferred sales charge payable upon certain
redemptions. Class B shares automatically convert
to Class A shares six years after issuance. Class C
shares are sold without an initial sales charge but
are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge
payable upon certain redemptions within one year of
purchase. Class C shares do not convert into
another class. Class I shares (none issued at April
30, 1999) are offered to a limited group of
investors, and not subject to initial or contingent
deferred sales charges and generally have lower
ongoing expenses than other classes. Differences in
class expenses will result in the payment of
different per share income dividends by class. All
shares of the fund have equal rights with respect
to voting, dividends and assets, subject to class
specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES 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. Forward foreign currency contracts
are valued at the prevailing forward exchange rate
of the underlying currencies on that day. All other
securities are valued at their fair market value as
determined in good faith by the Valuation Committee
of the Board of Trustees.
FOREIGN CURRENCY TRANSLATION. The books and records
of the fund are maintained in U.S. dollars.
Investment securities and other assets and
liabilities denominated in a foreign currency are
translated into U.S. dollars at the prevailing
rates of exchange. Purchases and sales of
investment securities, income and expenses are
translated into U.S. dollars at the prevailing
exchange rates on the respective dates of the
transactions.
Net realized and unrealized gains and losses on
foreign currency transactions represent net gains
and losses from sales and maturities of forward
foreign currency exchange contracts, disposition of
foreign currencies, and the difference between the
amount of net investment income accrued and the
U.S. dollar amount actually received. That portion
of both realized and unrealized gains and losses on
investments that result from fluctuations in
foreign currency exchange grates is not separately
disclosed.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Dividend income is recorded on
the ex-dividend date, and interest income is
recorded on the accrual basis. Interest income
includes discount amortization on all fixed income
securities. Realized gains and losses from
investment transactions are reported on an
identified cost basis.
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the close of the Exchange. The net
asset value per share is determined separately for
each class by dividing the fund's net assets
attributable to that class by the number of shares
of the class outstanding.
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 October 31, 1998, the fund had a tax basis net
loss carryforward of approximately $54,943,000,
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.
- --------------------------------------------------------------------------------
3 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 .58%
of the first $250 million of average daily net
assets declining to .42% of average daily net
assets in excess of $12.5 billion. The fund
incurred a management fee of $2,439,000 for the six
months ended April 30, 1999.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended April
30, 1999 are $138,000.
For services under the distribution services
agreement, the fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the six months ended April 30, 1999 are
$1,480,000, of which $2,000 was paid by KDI to
affiliates.
ADMINISTRATIVE SERVICES AGREEMENT. The fund has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, the fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
assets of fund accounts the firms service.
Administrative services fees paid by the fund to
KDI for the six months ended April 30, 1999 are
$1,020,000.
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 $976,000
for the six months ended April 30, 1999.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the six months ended April 30,
1999, the fund made no payments to its officers and
incurred trustees' fees of $9,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended April 30, 1999, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $641,416
Proceeds from sales 523,383
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1999 OCTOBER 31, 1998
---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 8,537 $ 48,555 18,405 $ 111,129
-------------------------------------------------------------------------------
Class B 6,403 36,377 16,699 99,712
-------------------------------------------------------------------------------
Class C 1,990 11,364 3,606 21,649
-------------------------------------------------------------------------------
Class I -- -- 1 2
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 2,900 16,502 4,474 26,626
-------------------------------------------------------------------------------
Class B 1,356 7,705 2,192 13,033
-------------------------------------------------------------------------------
Class C 172 980 188 1,122
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES REDEEMED
Class A (15,185) (86,502) (24,547) (147,027)
-------------------------------------------------------------------------------
Class B (6,901) (39,168) (12,394) (74,303)
-------------------------------------------------------------------------------
Class C (1,245) (7,112) (1,105) (6,571)
-------------------------------------------------------------------------------
Class I -- -- (2) (11)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 3,768 21,478 7,838 47,017
-------------------------------------------------------------------------------
Class B (3,773) (21,458) (7,849) (47,017)
-------------------------------------------------------------------------------
NET INCREASE (DECREASE)
FROM CAPITAL
SHARE TRANSACTIONS $(11,279) $ 45,361
-------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------
CLASS A
---------------------------------------------
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, ---------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $5.60 5.96 5.99 5.98 5.77
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .25 .44 .46 .46 .55
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency .11 (.35) .01 .12 .16
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .36 .09 .47 .58 .71
- ------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .26 .45 .50 .57 .50
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.70 5.60 5.96 5.99 5.98
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.57% 1.28 8.13 10.27 12.90
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.07% 1.04 1.03 1.03 1.09
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 8.65% 7.36 7.68 7.72 9.43
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------
CLASS B
SIX MONTHS ---------------------------------------------
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, ---------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $5.59 5.96 5.99 5.98 5.77
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .21 .38 .40 .41 .49
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency .12 (.36) .01 .12 .16
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .33 .02 .41 .53 .65
- ------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .23 .39 .44 .52 .44
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.69 5.59 5.96 5.99 5.98
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.06% .12 7.13 9.23 11.87
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------------
Expenses 2.08% 2.01 1.98 1.96 2.04
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 7.64% 6.39 6.73 6.79 8.48
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
SIX MONTHS ---------------------------------------------
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, ---------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $5.62 5.99 6.01 6.00 5.79
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .23 .39 .42 .41 .50
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency .12 (.36) .01 .12 .16
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .35 .03 .43 .53 .66
- ------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .24 .40 .45 .52 .45
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.73 5.62 5.99 6.01 6.00
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.31% .28 7.37 9.33 11.95
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.87% 1.84 1.85 1.86 1.86
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 7.85% 6.56 6.86 6.89 8.68
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, ----------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $854,498 850,528 861,543 778,752 754,222
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 129% 751 347 310 286
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Per share
data was determined based on average shares outstanding during the year ended
October 31, 1998. Data for the period ended April 30, 1999 is unaudited.
24
<PAGE> 25
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 17, 1998, a special shareholders' meeting was held and adjourned to
January 15,1999. Kemper Strategic Income Fund shareholders were asked to vote on
two separate issues: approval of the new Investment Management Agreement between
the fund and Scudder Kemper Investments, Inc., and to modify or eliminate
certain policies and to eliminate the shareholder approval requirements as to
certain other matters. The following are the results.
1) Approval of the new Investment Management Agreement between the fund and
Scudder Kemper Investments, Inc. This item was approved.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
94,840,838 1,883,394 4,485,498
</TABLE>
2) To modify or eliminate certain policies and to eliminate the shareholder
approval requirements as to certain other matters. These items were approved.
Investment objectives
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
70,102,991 4,210,474 7,963,355
</TABLE>
Investment policies
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
70,096,748 4,216,716 7,963,355
</TABLE>
Diversification
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
70,106,168 4,207,297 7,963,355
</TABLE>
Borrowing
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
70,025,942 4,287,522 7,963,355
</TABLE>
Senior securities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
70,138,812 4,174,652 7,963,355
</TABLE>
Concentration
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
70,130,019 4,183,446 7,963,355
</TABLE>
Underwriting of securities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
70,143,616 4,169,848 7,963,355
</TABLE>
Investment in real estate
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
70,104,120 4,209,344 70,963,355
</TABLE>
Purchase of commodities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
70,039,065 4,274,400 7,963,355
</TABLE>
Lending
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
70,047,072 4,266,393 7,963,355
</TABLE>
Margin purchases and short sales
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
69,979,120 4,334,344 7,963,355
</TABLE>
Pledging of assets
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
70,025,424 4,288,041 7,963,355
</TABLE>
Purchases of options and warrants
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
70,090,079 4,223,385 7,963,355
</TABLE>
25
<PAGE> 26
NOTES
26
<PAGE> 27
NOTES
27
<PAGE> 28
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY MAUREEN E. KANE
Chairman and Trustee President Assistant Secretary
JOHN W. BALLANTINE PHILIP J. COLLORA CAROLINE PEARSON
Trustee Vice President and Assistant Secretary
Secretary
LEWIS A. BURNHAM ELIZABETH C. WERTH
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
DONALD L. DUNAWAY BRENDA LYONS
Trustee J. PATRICK BEIMFORD, JR. Assistant Treasurer
Vice President
ROBERT B. HOFFMAN
Trustee ANN M. MCCREARY
Vice President
DONALD R. JONES
Trustee ROBERT C. PECK, JR.
Vice President
THOMAS W. LITTAUER
Trustee and Vice President KATHRYN L. QUIRK
Vice President
SHIRLEY D. PETERSON
Trustee LINDA J. WONDRACK
Vice President
WILLIAM P. SOMMERS
Trustee
- ----------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- ----------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- ----------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
Printed on recycled paper in the U.S.A.
This report is not to be distributed unless preceded
or accompanied by a Kemper Income Funds prospectus.
KSIF1-3 (6/21/99) 1076870
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
