<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 2000
KEMPER STRATEGIC
INCOME TRUST
"... Emerging-market bonds were the trust's bright spot, as returns from
domestic high-yield bonds were weak. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
MANAGEMENT TEAM
6
PERFORMANCE UPDATE
8
PORTFOLIO STATISTICS
9
PORTFOLIO OF
INVESTMENTS
13
FINANCIAL STATEMENTS
17
FINANCIAL HIGHLIGHTS
18
NOTES TO
FINANCIAL STATEMENTS
21
SHAREHOLDERS' MEETING
AT A GLANCE
KEMPER STRATEGIC INCOME TRUST
TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 2000
<TABLE>
<S> <C> <C> <C>
........................................................
BASED ON NET ASSET VALUE 2.06%
........................................................
BASED ON MARKET PRICE 5.09%
........................................................
</TABLE>
NET ASSET VALUE AND MARKET PRICE
<TABLE>
<CAPTION>
AS OF AS OF
5/31/00 11/30/99
........................................................
<S> <C> <C> <C> <C>
NET ASSET VALUE $12.29 $12.88
........................................................
MARKET PRICE $13.94 $14.19
........................................................
</TABLE>
THE TRUST MAY INVEST IN LOWER-RATED AND NONRATED SECURITIES, WHICH PRESENT
GREATER RISK OF LOSS TO PRINCIPAL AND INTEREST THAN HIGHER-RATED SECURITIES, AND
IN FOREIGN SECURITIES, WHICH PRESENT SPECIAL RISK CONSIDERATIONS INCLUDING
FLUCTUATING FOREIGN EXCHANGE RATES, FOREIGN GOVERNMENT REGULATIONS AND DIFFERING
DEGREES OF LIQUIDITY.
DIVIDEND REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE
TRUST AS OF MAY 31, 2000.
<TABLE>
<CAPTION>
KEMPER STRATEGIC
INCOME TRUST
............................................................
<S> <C> <C> <C>
SIX-MONTHS INCOME $0.90
............................................................
MAY DIVIDEND $0.15
............................................................
ANNUALIZED DISTRIBUTION RATE
(BASED ON NET ASSET VALUE) 14.64%
............................................................
ANNUALIZED DISTRIBUTION RATE
(BASED ON MARKET VALUE) 12.91%
............................................................
</TABLE>
STATISTICAL NOTE: CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY
DIVIDEND SHOWN AS AN ANNUALIZED PERCENTAGE OF NET ASSET VALUE/MARKET PRICE ON
THE DATE SHOWN. DISTRIBUTION RATE SIMPLY MEASURES THE LEVEL OF DIVIDENDS AND IS
NOT A COMPLETE MEASURE OF PERFORMANCE. TOTAL RETURN MEASURES AGGREGATE CHANGE IN
NET ASSET VALUE/MARKET PRICE ASSUMING REINVESTMENT OF DIVIDENDS. RETURNS ARE
HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS. MARKET PRICE, NET ASSET VALUE,
DISTRIBUTION RATES AND RETURNS ARE HISTORICAL AND WILL FLUCTUATE. ADDITIONAL
INFORMATION CONCERNING PERFORMANCE IS CONTAINED IN THE FINANCIAL HIGHLIGHTS
APPEARING AT THE END OF THIS REPORT.
TERMS TO KNOW
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5 percent to 6 percent is 100
basis points.
CREDIT SPREAD The difference in yields between higher-quality and lower-quality
bonds, typically comparing the same types of bonds. For example, if AAA-rated
corporate bonds yield 5 percent, and BBB-rated corporate bonds yield 6 percent,
the credit spread is 1 percent. When the spread becomes less because the higher
yield drops or the lower yield rises, the spread is said to narrow. When the
opposite occurs, the spread is said to widen.
DEFAULT Failure of a borrower to pay what is owed when it is owed. The default
rate of high-yield bonds can be measured as the percentage of bond issuers who
are not meeting their obligations at a given point in time.
FEDERAL FUNDS RATE The interest rate that banks charge each other on overnight
loans. The Federal Reserve Board's Open Market Committee sets a target rate to
either make credit more easily available or tighten monetary policy in an
attempt to avoid economic imbalances such as high inflation.
INVERTED YIELD CURVE A market phenomenon in which intermediate-term bonds
(securities with two- to 10-year maturities) have higher income potential and
current yields than long-term bonds (securities with 10- to 30-year maturities).
Historically it has occurred during a period of rising short-term interest rates
and been viewed as an indicator of a future economic slowdown.
<PAGE> 3
ECONOMIC OVERVIEW
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 $290 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,
When an irresistible force such as the ebullient U.S. economy meets an immovable
object, such as a determined Federal Reserve Board, the old song is right:
Something's gotta give. One possibility -- the economy could slow down as the
Fed has ordered. Or, if market volatility becomes true distress, the Fed could
back off, as it has in the past. A third possibility is that neither the Fed nor
the economy will give way until it's too late, which could lead to a recession.
Recent evidence suggests, however, that the economy probably will slow down as
ordered.
Before explaining why, perhaps it's best to start with a review of how
monetary policy works. Central bankers often sound like witch doctors reading
animal entrails, so it's understandable that many people are confused about
monetary policy. But monetary policy still works in the same way it always has.
First, it changes the price and availability of money. More subtly, it alters
people's perceptions about and confidence in the future, thereby adjusting their
willingness to take risks.
It's a bit early to tell how the Fed's monetary policy is working so far. The
policymakers only started raising interest rates about a year ago, and it takes
at least that long for higher rates to impact borrowers. There are two reasons.
First, interest rates on many existing loans are fixed. And, a family who has
just selected a dream house isn't going to walk away if mortgage rates rise a
notch. Similarly, a company that has just approved an expansion program won't
stop cold because the prime rate is higher. So it's foolish to think that
America's economy has become less interest-sensitive because the economy roared
through the first several months of this year. Americans are more in hock than
ever, so higher interest rates will hurt more than ever. The May dip in housing
starts and auto sales -- especially the higher priced, gas guzzling sport
utility vehicles -- is probably the first sign that higher rates are biting.
They will bite harder in coming months. We look for both housing starts and
vehicle sales to drop about 10 percent in 2001.
Confidence is harder to measure, but there are some early flutters of
weakness. It's true that consumers remain cheerily upbeat. But corporate bond
markets, the most sensitive barometer of business confidence and a vital source
of corporate funds, have been nervous. Investors are demanding a big premium
before they'll buy lower quality bonds, which means there's less new money for
companies to spend. Corporate bond issuance through mid-June was 35 percent
below the first five and a half months of 1999.
So far, companies have been able to get around the bond market stinginess by
turning to their bankers. Banks lent businesses 8 percent more from January
through May of this year than they did during the first five months of 1999. But
some banks are beginning to worry, too. Bank examiners have been questioning the
quality of loans and the level of reserves. In response, more bankers are
tightening lending standards and raising rates. This is a textbook case of how
tighter monetary policy eventually slows an economy.
Aren't bond market and banker concerns overdone? As long as the economy keeps
growing at 3 percent or so, won't that guarantee such good profits that paying
the bills will be a cinch? Not necessarily. Profits are far more cyclical than
economic growth. Earnings actually fell during 1998, even though the economy
continued to roll. That was a global crisis, when foreign earnings fell sharply.
But take a look at the last "soft landing" during 1995. Revenue growth dipped
and pricing power fell, squeezing profits. The same thing is likely to happen
again in the coming slowdown -- and this time, tight labor markets could make it
even tougher for companies to control costs quickly. Assuming growth is between
2.5 percent and 3 percent by the end of 2001, we believe year-over-year profit
comparisons will have turned slightly negative.
A profit slowdown when new lines of credit are hard to come by will take its
toll on capital spending. We expect growth in business outlays for buildings and
equipment to slip from over 12 percent this year to around 8 percent in 2001.
That's still quite robust, and the "high-tech imperative" is the reason why.
Executives believe that they have no option but to keep up with the
technological revolution that is transforming the world. The fact that high-tech
gear keeps getting cheaper year after year and also helps save on expensive
labor makes the decision to buy it easy. Indeed, unit sales of computers and
peripherals to businesses have sustained growth rates in excess of 40 percent
since 1995. And the rush is on to lay down the infrastructure for the next
generation of wireless communications. We estimate that the sector will see unit
growth of about 50 percent this year, double the growth in 1999. It's hard even
for superstars to sustain these stratospheric
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 (5/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.40 6.00 5.50 5.60
Prime rate (2) 9.50 8.50 7.75 8.50
Inflation rate (3)* 3.00 2.60 2.30 1.50
The U.S. dollar (4) 4.30 -0.70 -0.90 6.40
Capital goods orders (5)* 17.00 12.30 2.50 14.50
Industrial production (5)* 6.10 3.70 2.90 5.20
Employment growth (6) 2.60 2.20 2.30 2.60
</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 4/30/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
compound growth rates forever, and we do expect some moderation next year.
However, high-tech orders continue to ratchet upwards, and the shortage in
semiconductors and other components has persisted long enough to cause major
players to announce huge capacity additions.
Another battle the Fed must win before it succeeds in slowing the economy is
bringing consumers to heel. Most families still feel better off than they were
last year and much richer than they were five years ago. That's a powerful
incentive to spend and enjoy. Indeed, total real consumption has been galloping
at a 5 percent rate or better since early 1998. But consumers are so important
to the economy that if they don't start spending less freely, there won't be a
slowdown. We expect the Fed to be successful and slow down shoppers in the
months ahead -- but the victory won't be an easy one. We expect at least one
more rate hike and a few more financial fireworks before consumers and the
economy hoist the white flag.
So what will the slowdown look like? During the spring, retail sales, housing
starts and job creation slowed, but strength in high tech orders and capital
equipment production probably will help keep the slowdown from becoming too
abrupt. We expect about 3.5 percent growth in the second half. That would still
produce a hearty 5 percent growth for full year 2000. During 2001, the full
impact of the Fed's recent tightening will probably rein growth in to just 3
percent.
Sincerely,
Scudder Kemper Investments Economics Group
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 THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF JUNE 29, 2000, 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
[J. PATRICK BIEMFORD, JR. 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.
[ROBERT CESSINE PHOTO]
ROBERT CESSINE IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC. AND
PORTFOLIO MANAGER OF KEMPER STRATEGIC INCOME TRUST. HE JOINED THE COMPANY IN
1993. HE IS A CHARTERED FINANCIAL ANALYST.
[DAN DOYLE PHOTO]
DAN DOYLE IS A FIRST VICE PRESIDENT OF SCUDDER KEMPER INVESTMENTS, INC. AND A
HIGH-YIELD BOND TRADER. HE IS A CHARTERED FINANCIAL ANALYST.
[RICHARD VANDENBERG 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
PRESERVING CAPITAL PROVED CHALLENGING AS DOMESTIC BONDS FACED A SUBSTANTIAL
TIGHTENING IN FEDERAL RESERVE MONETARY POLICY. EMERGING-MARKET BONDS PROVIDED
STRONG RETURNS SINCE NOVEMBER FOR INVESTORS WILLING TO ASSUME HIGHER RISKS.
Q HOW DID GLOBAL FIXED-INCOME MARKETS BEHAVE AND KEMPER STRATEGIC INCOME
TRUST PERFORM DURING THE FIRST HALF OF FISCAL YEAR 2000?
A The period between November 30, 1999, and May 31, 2000, was a challenging
time for fixed-income investors around the world. Emerging-market bonds were the
trust's bright spot, as returns from domestic high-yield bonds were weak. In
most established bond markets, returns for the first half of fiscal year 2000
were disappointing. For the trust, preserving capital was challenging as the
Federal Reserve tightened monetary policy.
Kemper Strategic Income Trust's 2.06 percent total return (at net asset value)
for the six months ended May 31 outpaced both the average 0.66 percent return of
the trust's Lipper peers (closed-end flexible income funds) and the 1.47 percent
return of the trust's unmanaged benchmark, the Lehman Brothers
Government/Corporate index, a group of investment-grade bonds that vary in
maturity and quality.
Q HIGH-YIELD BONDS WERE A SIGNIFICANT COMPONENT OF THE PORTFOLIO DURING THE
FIRST HALF OF FISCAL YEAR 2000. COULD YOU ELABORATE ON MARKET CONDITIONS IN THE
HIGH-RISK DEBT MARKET SINCE NOVEMBER?
A The returns from high-yield bonds were modest for the six months ended May
31, 2000. The total return of the unmanaged Merrill Lynch High Yield Master
index, a group of lower-rated bonds that vary in quality, was -2.28 percent for
the period. The price component of the index fell 6.59 percent. For many
high-yield investors, preserving capital was a challenge, as income did not
offset losses in principal value.
One reason for the high-yield market's weakness was anemic investor demand.
This past winter, the lure of potentially higher returns from equity
investments, particularly technology stocks, prompted some investors to
liquidate high-yield holdings and redeploy assets. As the U.S. economy enjoyed
solid growth, some investors behaved as if high-yield bonds faced the worst of
times. Ironically, in January, February, April and May, high-yield bonds
outperformed the unmanaged Standard & Poor's 500 stock index.
Q COULD YOU DESCRIBE HOW THE TRUST'S HIGH-YIELD BONDS WERE POSITIONED DURING
THE PERIOD?
A In a difficult environment, we believed success depended on not losing
sight of the fact that the underpinnings of the high-yield debt market were
sound. Since mid-1999, commodity prices have rebounded, helping many
"old-economy" companies meet debt payments. During the period, we focused on
larger, more liquid bond issues, and on companies with relatively solid cash
flow and proven management.
Since November 1999, the difference in yield, or spread, between 10-year
Treasuries and comparable-maturity high-yield bonds widened to 678 basis points
(6.78 percent). Given that 10-year Treasury bonds yielded 6.27 percent at the
end of May 2000, high-yield bonds offered double the yield of government bonds
for investors willing to assume additional risk. That's why we had a majority of
the trust's assets in the high-yield category.
Q WHAT HAS BEEN THE HISTORICAL EXPERIENCE OF THE HIGH-YIELD BOND MARKET
DURING PERIODS OF STOCK MARKET WEAKNESS?
A For seven times since October 1987, high-yield bonds outperformed the
Standard & Poor's 500 stock index (S&P 500) during months when the S&P 500
declined 5 percent or more. While we can't say this pattern will continue, we
believe that high-yield bonds deserve a place in a well-balanced portfolio now
more than ever. After five years of strong equity market performance, many
investors have portfolios that are heavily laden with large-cap stocks. We think
it would be a mistake for investors to overlook the opportunity to maintain the
diversification that this asset class offers.
Q HOW HAVE OTHER TYPES OF DOMESTIC BONDS FARED SINCE NOVEMBER?
A Strong economic growth prompted the Federal Reserve to raise its
short-term interest-rate target three times since November by a total of 100
basis points (1 percent) to 6.50 percent. This past winter, the government also
announced a buyback plan for 30-year Treasuries. These two events decreased the
attractiveness of most
6
<PAGE> 7
PERFORMANCE UPDATE
types of intermediate-term (two- to 10-year) bonds. Prices of intermediate,
investment-grade corporate bonds and other non-Treasury debt such as mortgages
generally fell. GNMA mortgages generally outperformed FNMA mortgages for most of
the period. Overall, the Lehman Brothers U.S. Agency index rose 0.87 percent for
the six months ended May 31, 2000.
Q YOU SAID THAT EMERGING-MARKET BONDS WERE THE PORTFOLIO'S BRIGHT SPOT. HOW
WELL HAVE THEY DONE AND WHY?
A Investors are expecting that growth will pick up steam in emerging markets
in the coming months. Bonds in some countries such as Mexico have rallied since
November as rating services have upgraded certain government debt to
investment-grade. The trust benefited from this trend because we had made Mexico
one of the trust's largest emerging-market holdings. Overall, the Lehman
Brothers Emerging Markets Bond index rose 7.50 percent for the six months ended
May 31, 2000. The index is an unmanaged group of higher-risk overseas debt
issued by governments and corporations in either U.S. dollars or local
currencies.
Q FINALLY, HOW ARE YOU POSITIONING THE PORTFOLIO FOR THE ROAD AHEAD?
A At some point, we believe there is potential for equity-like returns from
domestic high-yield securities and higher prices for most categories of U.S. and
overseas bonds. First, however, the Fed needs to be convinced that domestic
inflation will not become problematic. This would help alleviate the need for
emerging-market countries to raise interest rates to match the Fed and protect
the purchasing power of their currencies.
Although we think short-term bond market volatility may continue for the rest
of fiscal year 2000, some long-term positive trends are in place. A robust U.S.
economy and a recovering global economy are helping debtors meet their bond
obligations.
We are confident in the long-term soundness of our investment strategy, and we
believe investors share that confidence, given the fact that the trust sold at a
more than 10 percent premium to its net asset value as of May 31, 2000. Today's
exceptionally dynamic global bond market environment demands patience from
fixed-income investors, and we appreciate the confidence that investors have
shown in our team.
HIGH-YIELD BOND PERFORMANCE VS. S&P 500 INDEX
During months when the S&P 500 index declined by 5 percent 1987 to 2000.
[BAR CHART]
<TABLE>
<CAPTION>
Merrill Lynch High Yield Master Index II* S&P 500 Index
----------------------------------------- -------------
<S> <C> <C>
10/87 -2.67% -21.53%
11/87 2.53% -8.24%
1/90 -1.95% -6.71%
8/90 -3.83% -9.03%
8/97 -0.17% -5.60%
8/98 -4.32% -14.45%
1/00 -0.38% -5.02%
</TABLE>
*THE MERRILL LYNCH HIGH YIELD MASTER INDEX II IS AN UNMANAGED GROUP OF LOWER
QUALITY BONDS THAT VARY IN MATURITY AND QUALITY.
SOURCES: BLOOMBERG BUSINESS NEWS AND MERRILL LYNCH
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 5/31/00 ON 11/30/99
<S> <C> <C> <C> <C>
GNMA AND OTHER MORTGAGES 30% 28%
................................................................................
HIGH-YIELD CORPORATE BONDS 18 21
................................................................................
EMERGING MARKET BONDS 48 49
................................................................................
OTHER 4 2
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
LONG-TERM FIXED INCOME SECURITIES RATINGS+
<TABLE>
<CAPTION>
ON 5/31/00 ON 11/30/99
<S> <C> <C> <C> <C>
AAA 36% 29%
................................................................................
BBB 6 --
................................................................................
BB 14 29
................................................................................
B 40 32
................................................................................
OTHER 4 10
--------------------------------------------------------------------------------
100% 100%
</TABLE>
+THE RATINGS OF STANDARD AND POOR'S CORPORATION (S&P) AND MOODY'S INVESTORS
SERVICES, INC. (MOODY'S) REPRESENT THEIR OPINIONS AS TO THE QUALITY OF
SECURITIES THAT THEY UNDERTAKE TO RATE. THE PERCENTAGE SHOWN REFLECTS THE
HIGHER OF S&P OR MOODY'S RATINGS. PORTFOLIO COMPOSITION WILL CHANGE OVER TIME.
RATINGS ARE RELATIVE AND SUBJECTIVE AND NOT ABSOLUTE STANDARDS OF QUALITY.
[PIE CHART] [PIE CHART]
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 5/31/00 ON 11/30/99
<S> <C> <C> <C> <C>
AVERAGE MATURITY 8.10 years 8.01 years
--------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC INCOME TRUST
Portfolio of Investments at May 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
REPURCHASE AGREEMENT--0.3% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
State Street Bank and Trust Company,
6.37%, to be repurchased at $175,031 on
06/01/2000(b)
(Cost: $175,000) $ 175,000 $ 175,000
------------------------------------------------------------------------------
SHORT-TERM OBLIGATION--4.5%
Student Loan Marketing Association, 6.30%,
06/01/2000
(Cost: $2,500,000) 2,500,000 2,500,000
------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY PASS-THRUS--29.5%
Federal National Mortgage Association
7.50% with various maturities to
04/01/2027 628,789 611,891
7.00% with various maturities to
08/01/2027 543,836 517,324
Government National Mortgage Association
8.00% with various maturities to 9/15/2026 5,237,460 5,264,663
7.50% with various maturities to
07/15/2029 9,610,356 9,459,123
7.00% with various maturities to
06/15/2029 743,364 713,165
------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY PASS-THRUS
(Cost: $16,445,117) 16,566,166
------------------------------------------------------------------------------
FOREIGN BONDS--47.6%
Federative Republic of Brazil C Bond,
8.00%, 04/15/2014(c) 17,003,328 11,923,584
Republic of Argentina:
6.178%, 09/01/2002(c) 6,969,850 6,585,337
6.178%, 04/01/2007(c) 4,691,389 3,856,313
Republic of Panama, Floating Rate Note,
LIBOR plus 1%, 7.00%, 05/10/2002(c) 869,300 853,001
Republic of Venezuela, Debt Conversion
Bond, Floating Rate Bond, Series DL,
LIBOR plus .875%, 7.00%, 12/18/2007(c) 571,429 449,286
United Mexican States, Collateralized Par
Bond, Series A, 6.25% 12/31/2019 2,500,000 1,993,750
United Mexican States, 11.50%, 05/15/2026 910,000 1,020,337
------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost: $23,728,876) 26,681,608
------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
CORPORATE BONDS--18.0% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
CONSUMER
DISCRETIONARY--2.2%
Advantica Restaurant Co., 11.25%,
01/15/2008 $ 50,000 $ 33,250
Boca Resorts, Inc., 9.875%, 04/15/2009 250,000 231,250
Color Tile, Inc., 10.75%, 12/15/2001* 330,000 3,300
Hines Horticulture, Inc., 11.75%,
10/15/2005 325,000 325,812
National Vision Association, Ltd.,
12.750%, 10/15/2005* 510,000 173,400
Players International, 10.875%, 04/15/2005 470,000 487,625
------------------------------------------------------------------------------
1,254,637
------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--0.1%
Jafra Cosmetics International, Inc.,
11.75%, 05/01/2008 40,000 38,400
------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--6.9%
Allegiance Telecom, Inc., 12.875%,
05/15/2008 390,000 417,300
Call-Net Enterprises, Inc., Step-up
Coupon, 0% to 05/15/2004, 10.80% to
05/15/2009, 150,000 48,000
9.375%, 05/15/2009 100,000 58,000
Intermedia Communications of Florida,
Inc., Step-up Coupon, 0% to 07/15/2002,
11.25% to 07/15/2007 520,000 386,100
KMC Telecom Holdings, Inc., 13.50%,
05/15/2009 100,000 87,000
Level 3 Communications Inc., 11.250%,
03/15/2010 20,000 19,000
9.125%, 05/01/2008 10,000 8,625
MGC Communications, 13.000%, 10/01/2004 350,000 364,875
MetroNet Communications Corp., 12.00%,
08/15/2007 100,000 110,750
Millicom International Cellular, S.A.,
Step-up Coupon, 0% to 06/01/2001,
13.50% to 06/01/2006 460,000 384,100
Nextlink Communications, Inc., 10.75%,
11/15/2008 140,000 134,400
PTC International Finance,
Step-up Coupon, 0% to 07/01/2002,
10.75% to 07/01/2007 500,000 345,000
Teligent, Inc., 11.500%, 12/01/2007 250,000 188,750
Triton Communications, L.L.C.,
Step-up Coupon, 0% to 05/01/2003,
11.00% to 05/01/2008 200,000 144,500
U.S. Xchange, L.L.C., 15.00%, 07/01/2008 370,000 403,300
USA Mobile Communications Holdings, Inc.,
14.00%, 11/01/2004 60,000 50,400
Viatel, Inc., Step-up Coupon, 0% to
04/15/2003, 12.50% to 04/15/2008 450,000 225,000
Western Wireless Corp., 10.50%, 02/01/2007 440,000 464,200
------------------------------------------------------------------------------
3,839,300
------------------------------------------------------------------------------------------------------------------------
FINANCIAL--0.7%
Spectrasite Holdings, Inc., Step-up
Coupon, 0% to 07/15/2003, 12.000% to
07/15/2008 50,000 31,500
0% to 04/15/2004, 11.250% to 04/15/2009 670,000 358,450
------------------------------------------------------------------------------
389,950
------------------------------------------------------------------------------------------------------------------------
MEDIA--3.3%
Australis Holdings, Step-up Coupon, 0% to
11/01/2000, 15.00% to 11/01/2002* 500,000 5,000
Zero coupon, 11/01/2000 15,515 11,791
CSC Holdings, Inc., 9.875%, 02/15/2013 450,000 444,375
</TABLE>
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Diamond Cable Communications, PLC,
Step-up Coupon, 0% to
12/15/2000, 11.75% to 12/15/2005 $ 175,000 $ 163,625
Frontiervision LP, 11.00%, 10/15/2006 400,000 401,000
NTL Communications Corp.,
Step-up Coupon 0% to
10/01/2003, 12.375% to 10/01/2008 500,000 320,000
NTL, Inc., 11.50%, 10/01/2008 320,000 321,600
Sinclair Broadcasting Group, Inc., 8.75%,
12/15/2007 250,000 207,500
------------------------------------------------------------------------------
1,874,891
------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--0.8%
Coinmach Corp., 11.75%, 11/15/2005 500,000 460,000
------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
DURABLES--0.2%
Fairchild Corp., 10.75%, 04/15/2009 130,000 85,800
------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--2.1%
Day International Group, Inc., 11.125%,
06/01/2005 35,000 35,000
GS Technologies, 12.25%, 10/01/2005 100,000 40,000
Gaylord Container Corp.,
9.875%, 02/15/2008 40,000 29,600
9.75%, 06/15/2007 70,000 59,500
Huntsman Package, 11.75%, 12/01/2004 170,000 171,700
Riverwood International Corp., 10.875%,
04/01/2008 830,000 771,900
Stone Container Corp., 11.50%, 08/15/2006 70,000 72,800
------------------------------------------------------------------------------
1,180,500
------------------------------------------------------------------------------------------------------------------------
ENERGY--0.1%
R&B Falcon Corp., 9.50%, 12/15/2008 60,000 58,800
------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--0.8%
Euramax International, PLC, 11.25%,
10/01/2006 400,000 384,000
Republic Technologies International,
13.75%, 07/15/2009 510,000 63,750
------------------------------------------------------------------------------
447,750
------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--0.6%
Dimac Corp., 12.500%, 10/01/2008 600,000 6,000
Hovnanian Enterprises, Inc., 9.75%,
06/01/2005 10,000 8,875
Lennar Corp., 7.625%, 03/01/2009 100,000 84,000
Nortek, Inc., 9.875%, 03/01/2004 270,000 254,475
------------------------------------------------------------------------------
353,350
------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--0.2%
FairPoint Communications, Inc., 12.50%,
05/01/2010 100,000 100,500
------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost: $12,803,148) 10,083,878
------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF
COMMON STOCK--.0% SHARES VALUE
<S> <C> <C> <C> <C> <C>
COMMUNICATIONS--0.0%
AT&T Canada Inc.* 342 $ 13,338
------------------------------------------------------------------------------
RIGHTS & WARRANTS*--.1%
COMMUNICATIONS--0.1%
Intermedia Communications of Florida, Inc. 200 32,000
------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
MEDIA--0.0%
UIH Australia Pacific, Inc. 280 8,400
Australis Holdings 510 0
------------------------------------------------------------------------------
8,400
------------------------------------------------------------------------------------------------------------------------
ENERGY--0.0%
Empire Gas Corp. 359 36
------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--0.0%
Gulf States Steel 150 2
Republic Technologies International 510 5
------------------------------------------------------------------------------
7
------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--0.0%
Bar Technologies 500 10,000
------------------------------------------------------------------------------
TOTAL RIGHTS & WARRANTS
(Cost: $31,897) 50,443
------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost: $55,684,038) (a) $56,070,433
------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* 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.
(a) The cost for federal income tax purposes was $55,684,038. At May 31, 2000,
net unrealized appreciation for all securities based on tax cost was
$386,395. This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost of
$3,387,004 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $3,000,609.
(b) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
(c) Variable rate security. Rate shown is the effective rate on May 31, 2000
and the date shown represents the final maturity of the obligation.
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
As of May 31, 2000 (Unaudited)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $55,684,038) $56,070,433
---------------------------------------------------------------------------
Receivable for investments sold 7,744
---------------------------------------------------------------------------
Interest receivable 612,454
---------------------------------------------------------------------------
TOTAL ASSETS 56,690,631
---------------------------------------------------------------------------
LIABILITIES
Due to custodian bank 497,330
---------------------------------------------------------------------------
Payable for investments purchased 7,694
---------------------------------------------------------------------------
Liability under reverse of repurchase agreements 13,318,000
---------------------------------------------------------------------------
Interest payable 169,265
---------------------------------------------------------------------------
Accrued management fee 31,202
---------------------------------------------------------------------------
Other accrued expenses 51,579
---------------------------------------------------------------------------
Total liabilities 14,075,070
---------------------------------------------------------------------------
NET ASSETS, AT VALUE $42,615,561
---------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income (loss) $ 241,115
---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
securities 386,395
---------------------------------------------------------------------------
Accumulated net realized gain (loss) (6,253,103)
---------------------------------------------------------------------------
Paid-in capital 48,241,154
---------------------------------------------------------------------------
NET ASSETS, AT VALUE $42,615,561
---------------------------------------------------------------------------
NET ASSET VALUE
NET ASSET VALUE, per share ($42,615,561 / 3,466,478 shares
of beneficial interest, $.01 par value, unlimited number of
shares authorized) $12.29
---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended May 31, 2000 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $ 3,568,152
---------------------------------------------------------------------------
Dividends 51
---------------------------------------------------------------------------
Total Income 3,568,203
---------------------------------------------------------------------------
Expenses:
Management fee 192,208
---------------------------------------------------------------------------
Services to shareholders 13,882
---------------------------------------------------------------------------
Custodian fees 5,411
---------------------------------------------------------------------------
Auditing 19,947
---------------------------------------------------------------------------
Legal 4,772
---------------------------------------------------------------------------
Trustees' fees and expenses 6,222
---------------------------------------------------------------------------
Reports to shareholders 35,924
---------------------------------------------------------------------------
Interest expense 411,853
---------------------------------------------------------------------------
Other 23,713
---------------------------------------------------------------------------
Total expenses, before expense reductions 713,932
---------------------------------------------------------------------------
Expense reductions (2,165)
---------------------------------------------------------------------------
Total expenses, after expense reductions 711,767
---------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 2,856,436
---------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from investments (173,064)
---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on investment transactions (1,601,357)
---------------------------------------------------------------------------
Net gain (loss) on investment transactions (1,774,421)
---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 1,082,015
---------------------------------------------------------------------------
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MAY 31, YEAR ENDED
2000 NOVEMBER 30,
(UNAUDITED) 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 2,856,436 $ 5,860,337
---------------------------------------------------------------------------------------------
Net realized gain (loss) (173,064) 346,926
---------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (1,601,357) (2,754,248)
---------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 1,082,015 3,453,015
---------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (3,124,397) (6,230,795)
---------------------------------------------------------------------------------------------
Fund share transactions:
Reinvestment of distributions 39,444 74,399
---------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions 39,444 74,399
---------------------------------------------------------------------------------------------
Increase (decrease) in net assets (2,002,938) (2,703,381)
---------------------------------------------------------------------------------------------
Net assets at beginning of period 44,618,499 47,321,880
---------------------------------------------------------------------------------------------
Net assets at end of period (including undistributed net
investment income of $241,115 and $509,076, respectively) $42,615,561 $44,618,499
---------------------------------------------------------------------------------------------
OTHER INFORMATION
Shares outstanding at beginning of period 3,463,535 3,459,198
---------------------------------------------------------------------------------------------
Shares issued to shareholders in reinvestment of
distributions 2,943 4,337
---------------------------------------------------------------------------------------------
Net increase in Fund Shares 2,943 4,337
---------------------------------------------------------------------------------------------
Shares outstanding at end of period 3,466,478 3,463,535
---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
Six months ended May 31, 2000 (Unaudited)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Investment income received $ 2,356,877
---------------------------------------------------------------------------
Payment of operating expenses (671,546)
---------------------------------------------------------------------------
Proceeds from sale and maturities of investments 4,416,329
---------------------------------------------------------------------------
Purchases of investments (3,583,019)
---------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 2,518,641
---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions paid (net of reinvestment of dividends) (3,084,953)
---------------------------------------------------------------------------
Net increase in liability under reverse repurchase
agreements 34,000
---------------------------------------------------------------------------
Cash provided by financing activities (3,050,953)
---------------------------------------------------------------------------
Decrease in cash (532,064)
---------------------------------------------------------------------------
Cash at beginning of period 34,734
---------------------------------------------------------------------------
CASH AT END OF PERIOD $ (497,330)
---------------------------------------------------------------------------
RECONCILIATION OF NET INCREASE IN NET ASSETS FROM OPERATIONS TO CASH
PROVIDED BY ACTIVATING ACTIVITIES
Net increase in net assets resulting from operations $ 1,082,015
---------------------------------------------------------------------------
Net decrease in cost of investments 1,419,759
---------------------------------------------------------------------------
Decrease in interest receivable 30,103
---------------------------------------------------------------------------
Increase in receivable for investments sold (7,744)
---------------------------------------------------------------------------
Decrease in payable for investments purchased (56,522)
---------------------------------------------------------------------------
Increase in interest payable 70,561
---------------------------------------------------------------------------
Decrease in accrued expenses and payables (19,531)
---------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 2,518,641
---------------------------------------------------------------------------
</TABLE>
16 The accompanying notes are an integral part of the financial statements.
<PAGE> 17
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS AND MARKET PRICE DATA.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MAY 31, YEARS ENDED NOVEMBER 30,
2000 -----------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $12.88 13.68 15.39 15.34 13.12 12.60
------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .82(a) 1.69(a) 1.77 1.79 1.75 1.68
------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.51) (.69) (1.68) .06 2.25 .54
------------------------------------------------------------------------------------------------------------------
Total from investment operations .31 1.00 .09 1.85 4.00 2.22
------------------------------------------------------------------------------------------------------------------
Less distributions from net investment income (.90) (1.80) (1.80) (1.80) (1.78) (1.70)
------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $12.29 12.88 13.68 15.39 15.34 13.12
------------------------------------------------------------------------------------------------------------------
Market value, end of year $13.94 14.19 16.94 19.81 17.75 14.25
------------------------------------------------------------------------------------------------------------------
TOTAL RETURN
------------------------------------------------------------------------------------------------------------------
Based on net asset value (%) 2.06** 6.03 .48 12.55 32.63 19.29
------------------------------------------------------------------------------------------------------------------
Based on market value (%) 5.09** (5.67) (5.28) 23.53 39.99 20.70
------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 42,616 44,618 47,322 53,129 52,944 44,776
------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 3.21* 3.21 3.94 3.99 3.89 4.35
------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 3.20* 3.21 3.94 3.99 3.89 4.35
------------------------------------------------------------------------------------------------------------------
Ratio of expenses before interest expense (%) 1.35* 1.40 1.20 1.24 1.23 1.26
------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 12.85* 12.94 12.05 11.45 12.43 13.56
------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 13* 19 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.
* Annualized
** Not annualized
(a) Based on monthly average shares outstanding during the period.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper Strategic Income Trust (the "Fund"), is
registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as a closed-end,
diversified management investment company organized
as a Massachusetts business trust.
The Fund's financial statements are prepared in
accordance with accounting principles generally
accepted in the United States which require the use
of management estimates. The policies described
below are followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Investments are stated at value
determined as of the close of regular trading on
the New York Stock Exchange. Securities which are
traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on
the exchange on which the security is traded most
extensively. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation is used. Securities quoted on the Nasdaq
Stock Market ("Nasdaq"), for which there have been
sales, are valued at the most recent sale price
reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are
not quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the
calculated mean between the most recent bid and
asked quotations on such market. If there are no
such bid and asked quotations, the most recent bid
quotation shall be used.
Portfolio debt securities purchased with an
original maturity greater than sixty days are
valued by pricing agents approved by the officers
of the trust, 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 instruments purchased with an original
maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow
through the use of reverse repurchase agreements
whereby the Fund agrees to sell and simultaneously
agrees to repurchase certain securities at a
mutually agreed date and price. At the time the
Fund enters into a reverse repurchase agreement, it
is required to pledge securities subject to
repurchase. The sale of these securities is not
recorded and the Fund agrees to later repay cash
plus interest. Should the securities' value decline
below the repurchase price, the Fund may be
obligated to pledge additional collateral to the
lender in the form of cash or securities. Reverse
repurchase agreements involve the risk that the
market value of the securities purchased with the
proceeds from the sale of securities subject to
reverse repurchase agreements may decline below the
amount the Fund is
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
obligated to pay to repurchase these securities.
The risk in borrowing, as with any extension of
credit, consists of the possible delay in the
recovery of securities or possible loss of rights
in the collateral should the counterparty fail
financially. Additionally, there is the risk that
the expense associated with the transaction may be
greater than the income earned from the investment
of the proceeds of the transaction.
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, 1999, the Fund had a net tax basis
capital loss carryforward of approximately
$6,077,000, which may be applied against any
realized net taxable capital gains of each
succeeding year until fully utilized or until
November 30, 2002 ($293,000), November 30, 2003
($5,154,000), and November 30, 2006 ($630,000) the
expiration dates.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made monthly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
STATEMENT OF CASH FLOWS. Information of financial
transactions which have been settled through the
receipt and disbursement of cash is presented in
the Statement of Cash Flows. The cash amount shown
in the statement of cash flows is the amount
reported as cash in the Fund's Statement of Assets
and Liabilities and represents the cash position in
its custodian bank at May 31, 2000. Significant
non-cash activity from market discount accretion
has been excluded from the Statement of Cash Flows.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Realized gains and losses from
investment transactions are recorded on an
identified cost basis. All discounts are accreted
for both tax and financial reporting purposes.
--------------------------------------------------------------------------------
2 PURCHASES AND SALES
OF SECURITIES For the six months ended May 31, 2000, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $ 3,590,713
Proceeds from sales 5,572,367
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 .85%
of average weekly net assets. The Fund incurred a
management fee of $192,208 for the six months ended
May 31, 2000.
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 $12,000
for the six months ended May 31, 2000.
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,
2000, the Fund made no direct payments to its
officers and incurred trustees fees of $6,222 to
independent trustees.
--------------------------------------------------------------------------------
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, 2000, the Fund had outstanding reverse
repurchase agreements as follows:
<TABLE>
<CAPTION>
VALUE OF ASSETS SOLD WEIGHTED
UNDER AGREEMENT REPURCHASE AVERAGE
COUNTERPARTY TO REPURCHASE LIABILITY MATURITY
------------ -------------------- ----------- --------
<S> <C> <C> <C>
Merrill Lynch & Co. $ 1,463,940 $ 1,457,000 128 days
Salomon Smith
Barney 12,302,151 11,861,000 61 days
----------- -----------
$13,766,091 $13,318,000
=========== ===========
</TABLE>
--------------------------------------------------------------------------------
5 EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the Fund's
expenses. During the six months ended May 31, 2000,
the Fund's custodian and transfer agent fees were
reduced by $1,629 and $536, respectively, under
these arrangements.
--------------------------------------------------------------------------------
6 LINE OF CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility for temporary or emergency
purposes. The Participants are charged an annual
commitment fee which is allocated pro rata among
each of the Participants. Interest is calculated
based on the market rate at the date of the
borrowing. The Fund may borrow up to a maximum of
33 percent of its net assets under the agreement.
20
<PAGE> 21
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
An annual shareholders' meeting was held on May 25, 2000, for Kemper Strategic
Income Trust. Shareholders were asked to vote on two separate issues: election
of members to the Board of Trustees, and ratification of Ernst & Young LLP as
independent auditors. The following are the results for each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
James E. Akins 3,281,455 62,129
Linda C. Coughlin 3,279,725 63,859
James R. Edgar 3,285,033 58,551
Arthur R. Gottschalk 3,286,133 57,451
Frederick T. Kelsey 3,284,880 58,604
Thomas W. Littauer 3,286,922 56,662
Fred B. Renwick 3,281,018 62,566
John G. Weithers 3,288,827 54,757
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund. This item was approved.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
3,315,365 5,063 23,157
</TABLE>
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JAMES E. AKINS MARK S. CASADY MAUREEN E. KANE
Trustee President Assistant Secretary
LINDA C. COUGHLIN PHILIP J. COLLORA CAROLINE PEARSON
Trustee Vice President and Assistant Secretary
Secretary
JAMES R. EDGAR BRENDA LYONS
Trustee JOHN R. HEBBLE Assistant Treasurer
Treasurer
ARTHUR R. GOTTSCHALK
Trustee J. PATRICK BEIMFORD, JR.
Vice President
FREDERICK T. KELSEY
Trustee ANN M. MCCREARY
Vice President
THOMAS W. LITTAUER
Trustee and Vice President KATHRYN L. QUIRK
Vice President
FRED B. RENWICK
Trustee LINDA J. WONDRACK
Vice President
JOHN G. WEITHERS
Trustee
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
.............................................................................................
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 219066
Kansas City, MO 64121-6066
.............................................................................................
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
.............................................................................................
INDEPENDENT ERNST & YOUNG LLP
AUDITORS 233 South Wacker Drive
Chicago, IL 60606
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Long-term investing in a short-term world(SM)
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KSIT - 3 (7/25/00) 1116500
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
