<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED NOVEMBER 30, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
KEMPER STRATEGIC
INCOME TRUST
"... We are maintaining our present configuration, with assets deployed in three
major areas: high yield bonds, emerging market bonds and mortgages. ..."
[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
22
DESCRIPTION OF
REINVESTMENT PLAN
25
SHAREHOLDERS' MEETING
AT A GLANCE
KEMPER STRATEGIC INCOME TRUST
TOTAL RETURNS
FOR THE YEAR ENDED NOVEMBER 30, 1999
<TABLE>
<S> <C>
BASED ON NET ASSET VALUE 6.03%
- --------------------------------------------------------
BASED ON MARKET PRICE -5.67%
- --------------------------------------------------------
</TABLE>
KEMPER STRATEGIC INCOME TRUST CHANGE
IN NET ASSET VALUE AND MARKET PRICE
<TABLE>
<CAPTION>
AS OF AS OF
11/30/99 11/30/98
- ---------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $12.88 $13.68
- ---------------------------------------------------------
MARKET PRICE $14.19 $16.94
- ---------------------------------------------------------
</TABLE>
THE FUND MAY INVEST IN LOWER-RATED AND NON-RATED SECURITIES, WHICH PRESENT
GREATER RISK OF LOSS TO PRINCIPAL AND INTEREST THAN HIGHER-RATED SECURITIES. THE
FUND MAY ALSO INVEST A SIGNIFICANT PORTION OF ITS ASSETS IN FOREIGN SECURITIES,
WHICH PRESENT SPECIAL RISKS INCLUDING FLUCTUATING EXCHANGE RATES, GOVERNMENT
REGULATIONS AND DIFFERENCES IN LIQUIDITY THAT MAY AFFECT THE VOLATILITY OF YOUR
INVESTMENT.
DIVIDEND REVIEW
THE FOLLOWING TABLE SHOWS DIVIDEND INFORMATION FOR THE FUND AS OF NOVEMBER 30,
1999.
<TABLE>
<CAPTION>
KEMPER STRATEGIC
INCOME TRUST
- ------------------------------------------------------
<S> <C>
ONE-YEAR INCOME: $ 1.800
- ------------------------------------------------------
NOVEMBER DIVIDEND: $0.1500
- ------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE
(BASED ON NET ASSET VALUE) 13.98%
- ------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE
(BASED ON MARKET VALUE) 12.69%
- ------------------------------------------------------
</TABLE>
STATISTICAL NOTE: CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY
DIVIDEND SHOWN AS AN ANNUALIZED PERCENTAGE OF NET ASSET VALUE/MARKET PRICE ON
THE DATE SHOWN. DISTRIBUTION RATE SIMPLY MEASURES THE LEVEL OF DIVIDENDS AND IS
NOT A COMPLETE MEASURE OF PERFORMANCE. TOTAL RETURN MEASURES AGGREGATE CHANGE IN
NET ASSET VALUE/MARKET PRICE ASSUMING REINVESTMENT OF DIVIDENDS. RETURNS ARE
HISTORICAL AND DO NOT REPRESENT FUTURE PERFORMANCE. MARKET PRICE, NET ASSET
VALUE AND RETURNS FLUCTUATE. ADDITIONAL INFORMATION CONCERNING PERFORMANCE IS
CONTAINED IN THE FINANCIAL HIGHLIGHTS APPEARING AT THE END OF THIS REPORT.
DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
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) The funds that commercial banks are required to keep
on deposit at the Federal Reserve Bank in their district. In order to meet these
reserve requirements, occasionally 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 that 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 general increase by investors in their allocation to
U.S. Treasuries and other high-quality securities from riskier securities in
time of global economic uncertainty.
HIGH-YIELD BOND A bond issued by a company, often without a long track record of
sales and earnings or with questionable credit strength, that pays a higher
yield to investors to help compensate for their greater risk of loss to
principal and interest than higher-quality bonds. High-yield bonds carry a
credit rating of BB or lower from either Moody's or Standard & Poor's
bond-rating services and are considered to be "below investment grade" by these
rating agencies. Such bonds may also be unrated.
U.S. TREASURY A debt security issued by the U.S. Treasury, such as a Treasury
bill, Treasury bond or Treasury note. Treasuries are considered the safest of
all securities. Their safety rests in the power of the U.S. government to obtain
tax revenues to repay its obligations, and in its historical record of always
having done so.
<PAGE> 3
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.
ECONOMIC OVERVIEW
DEAR KEMPER FUNDS SHAREHOLDER:
The end of the metaphorical millennium, it turns out, was not a disaster.
Instead, it was an excuse to party. And why not? As our technological revolution
gained critical mass, its vast potential came into better focus. Capital
spending on information technology didn't slow down; it accelerated. Inflation
remained dormant. The budget surplus nearly doubled, with the promise of oceans
of black ink yet to come. Even the government delivered good news: Its
statisticians toyed with the national accounts to reveal a more productive
economy. It's no wonder the prevailing sentiment could be summed up with the
quintessentially American yelp of glee: Yahoo!
Now, with the potential Y2K crisis seemingly averted, the question hanging
over the economy is whether the Federal Reserve Board will boost interest rates
to soak up extra liquidity caused by its pre-Y2K infusion of cash into the
economy. And unfortunately, all parties end. This one will, too. The questions
are when and how.
The "when" should be before the second half of the year. The Fed has already
raised interest rates three times, and is likely to raise them again on Feb. 2.
Fed officials said they left the rate at 5.5 percent in December mainly because
of "market uncertainties associated with the century-date change." But the Fed
expressed concern that "increases in demand" will foster "inflationary
imbalances" that could spark rate increases once the Y2K issue has been handled.
Although some investors have expressed fear that the Fed's sucking cash out of
banks will jolt the financial system (causing some stock indexes, as well as the
bond markets, to drop sharply in early January), the "how" is likely to be a
slow winding down, thanks to persistent low inflation.
Yes, some prices are higher: Filling up the SUV's gas tank definitely costs
more. But the rate of inflation for non-energy goods and services has actually
slowed during the past year. Although most analysts are worried that the
reprieve won't last -- assuming that higher commodity prices, a softer dollar
and the scarcity of skilled workers will show up as higher prices at the
checkout counter -- we'd turn that worry on its head. If inflation hasn't
accelerated after three years of over 4-percent gross domestic product (GDP)
growth and an unprecedented credit explosion, prices aren't likely to increase
if growth slows and lenders get stingier.
More good news stems from the technological investment boom. While executives
have pared capital budgets in traditional areas such as industrial machinery and
buildings, they've boosted outlays on computers and software. Thanks to the
sheer force of technology spending, overall business investment has grown two to
four times as fast as GDP in every year since 1993. And that expansion should
continue, with more than 20 percent growth likely in high-tech through 2000 and
even beyond. And technology hurts inflation. It saves on labor and inventory,
increases capacity, creates new competitors, cuts out middlemen, gives shoppers
comparative price information and enables global auctions.
Our outlook is for inflation to stay centered around 2 percent, and we expect
the Fed to raise the federal funds rate and the discount rate by one quarter of
a point (0.25%) each on Feb. 2. (More extreme possibilities bandied about by
bearish investors -- including a half-point rise or an emergency move before the
Fed's February meeting -- are unlikely.) We project that the result will be a
gentle slowing of growth from 4 percent in 1999 to around 3.5 percent in 2000
and just under 2.5 percent in 2001.
Despite this positive outlook, the rowdiness of Y2K preparations and
celebration should be sufficient to show us that risks exist in today's markets
and remind us that we could be in for a serious hangover.
The prospect of sparkling growth with no inflation has excited equity
investors, but there's a catch: declining corporate pricing power. If companies
don't have the ability to increase prices, profit growth will decline -- and
it's already happening. For the five years ending in June 1999, S&P 500
operating earnings averaged 9 percent, two and a half percentage points per year
slower than analysts had predicted. Profits did recover strongly in the second
half of 1999, but we suspect that they will soon sputter again. And the
economy's newfound productivity won't change the rules and allow companies to
make money even if they can't raise prices. Productivity gains do produce a
windfall, but historically customers and employees have grabbed the lion's
share. Web sites and dot.coms haven't changed this
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (12/31/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.00 5.50 4.80 5.90
Prime rate (2) 8.50 7.75 8.00 8.50
Inflation rate (3)* 2.60 2.30 1.50 2.00
The U.S. dollar (4) -0.7 -0.9 1.20 9.40
Capital goods orders (5)* 12.60 2.50 -0.6 6.40
Industrial production (5)* 3.30 2.90 3.50 6.90
Employment growth (6) 2.10 2.10 2.30 2.70
</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 11/30/99.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
one iota. As a result, we expect profits to be virtually flat in all of 2000 and
to decline as the economy slows in 2001.
Debt is another drink that could bring on future headaches. America has been
swigging it in prodigious amounts. Companies have borrowed heavily to fund
mergers, share buybacks and new investments. Homeowners have increased their
debt with new home equity loans and bigger mortgages. Financial institutions
have issued record amounts of new paper to fund aggressive growth. There's no
hard and fast rule for determining if the debt America is taking on is too much,
but warning bells should sound when debt grows by orders of magnitude faster
than necessary to fund economic activity. That happened in 1985 and 1986, when
excess credit created a commercial real estate bubble and funded dubious
leveraged buyouts with suspect junk bonds, and it's happening again now. Both
the commercial real estate and the high yield markets took years to recover.
Today, the sheer size of the excesses could make the "morning after" even more
painful.
The end result: Given the continuing thrust of growth from the technological
revolution, an improving world economy and the Fed's experience and skill, 2000
could turn out to be a good year. But it's highly unlikely to be as good a year
as 1999.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
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 JANUARY 6, 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 BEIMFORD, JR.]
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.
[DAN DOYLE]
DAN DOYLE IS A SENIOR VICE PRESIDENT OF SCUDDER KEMPER INVESTMENTS AND A
PORTFOLIO MANAGER ON KEMPER'S HIGH-YIELD BOND FUNDS. HE HAS BEEN INVOLVED WITH
THE FUNDS IN BOTH RESEARCH AND TRADING SINCE 1986.
[M. ISABEL SALTZMAN]
M. ISABEL SALTZMAN, A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC., IS
THE SENIOR PORTFOLIO MANAGER FOR THE FIRM'S EMERGING MARKETS BOND GROUP.
SALTZMAN JOINED THE ORGANIZATION IN 1990.
[RICHARD VANDENBERG]
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
DURING THE 12-MONTH PERIOD ENDED NOVEMBER 30, 1999, INVESTORS WITNESSED A NEARLY
UNABATED RISE IN INTEREST RATES. IN THIS SECTION, PAT BEIMFORD, LEAD PORTFOLIO
MANAGER OF KEMPER STRATEGIC INCOME TRUST, DISCUSSES THE FORCES BEHIND THE RISE
IN RATES, THE EFFECT IT HAD ON BOND MARKETS, AND HOW THE FUND WAS POSITIONED TO
RESPOND.
Q PAT, KEMPER STRATEGIC INCOME TRUST HAS PERFORMED WELL IN A TOUGH YEAR. ITS
TOTAL RETURN ON AN NAV BASIS WAS 6.03 PERCENT FOR THE FISCAL YEAR, COMPARED WITH
0.50 PERCENT FOR THE LIPPER CLOSED-END FLEXIBLE INCOME FUND AVERAGE. WHAT WAS
BEHIND THE FUND'S STRONG RELATIVE PERFORMANCE?
A To answer that question, you have to consider what was going on in the
bond markets during the year. The actions of the Federal Reserve Board provide a
clear framework.
As the fiscal year began, the Fed instituted its third interest rate cut of
the last quarter of 1998. At that time, the global investment community was in
the grip of a "flight to quality" (see Terms To Know on page 2) brought on by
turbulence in international markets. Russia had defaulted on part of its debt,
Asian economies and currency markets were battered by uncertainty, and the
stability of Latin American markets was coming into question. In addition,
European bonds were not as stable an option as usual, because much of Europe was
converting to the euro at year-end. For nervous investors, about the only safe
bet in town was U.S. Treasury bonds (see Terms To Know on page 2). As a result,
money poured into the U.S. Treasury market, and the demand pushed yields down to
historically low levels. On December 3, the yield on 30-year U.S. Treasury bonds
was 5.2 percent.
To help combat the uncertainty and ward off a worsening of the situation, the
Federal Reserve instituted three rate cuts in the last quarter of 1998. The
Fed's plan, in part, was to inject liquidity into the global financial system by
stimulating the U.S. economy-and thereby other economies-and make the yields on
foreign bonds look more attractive in comparison with U.S. securities.
Q DID THE FED'S PLAN WORK?
A Yes, it did. Investors gained confidence that foreign economies could
bring their problems under control, and assets shifted from the United States to
other markets. At the same time, some investors feared that the Fed's stimulus,
which was uncharacteristically applied during a time of strong U.S. economic
growth, would ignite inflation. Both these factors acted to push 30-year T-bond
yields up from 5.21 percent at the beginning of December 1998 to 6.11 percent at
the end of November 1999. That's a substantial move for such a low-risk
security.
As the fiscal year came to a close, the Federal Reserve was compelled to put
the brakes on the U.S. economy. In essence, the Fed began rescinding its rate
cuts of last fall by raising rates on August 24, September 30 and again on
November 15.
Q WHAT EFFECT DID RISING RATES HAVE ON THE BOND MARKETS?
A Because bond prices fall when interest rates rise, these last 12 months
have been a challenging period for bond investors. This difficulty is reflected
in the returns of bond indices. Bond returns varied widely by asset class.
Treasuries and high-quality corporate bonds, which offer relatively low income,
couldn't offset falling prices and thereby fared the worst. For example, the
Lehman Long Government Bond index's* total return for the 12-month period ended
November 30, 1999, was -7.52 percent. Mortgages and high-yield bonds fared
somewhat better: the Lipper U.S. Mortgage Fund Category Average* was up 1.39
percent, and the Lehman High Yield Bond index* gained 1.36 percent for the
period. Emerging-market bonds, which offer relatively high income and were best
able to offset falling prices, performed best. In addition, emerging-market debt
at the beginning of the fiscal year was recovering from a terrible beating in
1998 and responded spectacularly to the turnaround in sentiment. The Lipper
Emerging Market Debt Category Average* returned 15.30 percent for the year. As
you can see, bond investors had their work cut out for them this year. Unless
you were willing to go 100 percent into risky emerging-market debt, you
struggled to break even.
* THE LEHMAN BROTHERS LONG-TERM GOVERNMENT BOND INDEX IS A TOTAL RETURN INDEX
GENERALLY CONSIDERED REPRESENTATIVE OF THE MARKET FOR TREASURIES AND
GOVERNMENT AGENCY SECURITIES WITH MATURITIES GREATER THAN TEN YEARS. LIPPER
U.S. MORTGAGE FUND IS AN EQUALLY-WEIGHTED, TOTAL RETURN INDEX OF THE LARGEST
FUNDS IN LIPPER ANALYTICAL SERVICES U.S. MORTGAGE FUND CATEGORY. THE LEHMAN
HIGH YIELD INDEX IS A TOTAL RETURN INDEX CONSIDERED GENERALLY REPRESENTATIVE
OF THE MARKET FOR BONDS RATED BELOW INVESTMENT GRADE. LIPPER EMERGING MARKET
DEBT IS AN EQUALLY-WEIGHTED, TOTAL RETURN INDEX OF THE LARGEST FUNDS IN LIPPER
ANALYTICAL SERVICES EMERGING MARKET DEBT CATEGORY. INVESTORS CANNOT INVEST IN
THE INDICES.
6
<PAGE> 7
PERFORMANCE UPDATE
Q HOW DID YOU POSITION KEMPER STRATEGIC INCOME TRUST GIVEN THESE DIFFICULT
CONDITIONS?
A Kemper Strategic Income Trust is designed to be a relatively aggressive,
income-focused fund. Therefore, we normally keep the fund substantially weighted
in emerging-market bonds and high-yield corporate bonds. We can alter this
allocation if we strongly believe that other areas of the market will provide
more income, but as the fiscal year began, we anticipated that interest rates
would be flat or move higher. Such an environment would augur for government
bonds to underperform and that the fund's normal bias toward emerging-market
bonds and high-yield bonds would be the optimum positioning. As it turned out,
our asset-allocation decision was right on target. The emerging-market position,
in particular, has performed very well and was primarily responsible for the
fund's outperformance versus its peers. High-yield bonds also delivered good
gains during the first half of the fiscal year, but they have struggled in the
last half due to credit concerns.
Q WHAT'S YOUR OUTLOOK FOR 2000?
A We believe Kemper Strategic Income Trust is very well positioned for the
new year. We are maintaining our present configuration, with assets deployed in
three major areas: high-yield bonds, emerging-market bonds and mortgages.
The high-yield market has struggled recently because of a malaise created by
rising rates and an increase in defaults. However, there are reasons for
optimism. The market's default rate began to trend down at midyear. We believe
that defaults will drop off significantly in the future, since most subpar deals
have already fallen by the wayside and because the deals done this year are of
substantively higher quality. In addition, if economic growth in the United
States continues at a good pace, it should enable high-yield issuers to
comfortably meet their debt payment obligations. If interest rates continue to
be steady or to rise, the income offered by these bonds - and the good value
they represent after a year of flat returns - should make them very attractive
to investors.
We expect that emerging markets will continue their recovery. Asia has led the
rebound, and Latin American markets appear ready to follow, so barring a major
negative event, we plan to maintain our emerging-market position.
Longer-term, it's also important to keep in mind that the Federal Reserve has
shown its desire to proactively curb inflation at the earliest opportunity. The
rate hikes may be painful near-term, but longer-term they should serve to slow
the economy, stabilize rates, and create a good environment for bonds.
In short, while 1999 has been a difficult year for bond investors, we believe
it has laid the foundation for sharply better performance in the year ahead.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 11/30/99 ON 11/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE PASS-THROUGHS 28% 32%
- --------------------------------------------------------------------------------
HIGH-YIELD CORPORATE BONDS 21 19
- --------------------------------------------------------------------------------
EMERGING MARKETS 49 44
- --------------------------------------------------------------------------------
OTHER 2 5
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
LONG-TERM FIXED-INCOME SECURITIES RATINGS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 11/30/99 ON 11/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 29% 36%
- --------------------------------------------------------------------------------
A -- 7
- --------------------------------------------------------------------------------
BB 29 26
- --------------------------------------------------------------------------------
B 32 28
- --------------------------------------------------------------------------------
OTHER 10 3
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
THE RATINGS OF STANDARD& POOR'S CORPORATION (S&P)
AND MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
REPRESENT THEIR OPINIONS AS TO THE QUALITY OF
SECURITIES THAT THEY UNDERTAKE TO RATE. THE
PERCENTAGE SHOWN REFLECTS THE HIGHER OF S&P OR
MOODY'S RATINGS. PORTFOLIO COMPOSITION WILL CHANGE
OVER TIME. RATINGS ARE RELATIVE AND SUBJECTIVE AND
NOT ABSOLUTE STANDARDS OF QUALITY.
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 11/30/99 ON 11/30/98
<S> <C> <C>
AVERAGE MATURITY 8.01 years 9.5 years
- --------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC INCOME TRUST
PORTFOLIO OF INVESTMENTS AT NOVEMBER 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT--0.7% PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
State Street Bank and Trust Company, dated
11/29/1999, 5.20%, to be repurchased at
$407 on 12/01/1999(b) $ 407 $ 407
(Cost: $407)
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM NOTES--2.6%
- ------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank, 5.57%**, 12/01/1999
(Cost: $1,500) 1,500 1,500
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--27.5%
- ------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
7.00%, 08/01/2027 571 559
7.50%, 04/01/2027 638 638
Government National Mortgage Association
7.00%, 06/15/2029 747 729
7.50%, with various maturities to 03/15/2028 8,066 8,064
8.00%, with various maturities to 09/15/2026 5,702 5,812
-----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost: $15,414) 15,802
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS--48.5%
- ------------------------------------------------------------------------------------------------------------------------
Federative Republic of Brazil C Bond,
4.5% with 3.5% Interest Capitalization,
04/15/2014(a) 16,816 11,435
Republic of Argentina, Floating Rate Note(c)
5.406%, 09/01/2002 8,459 7,789
5.406%, 04/01/2007 5,034 4,137
Republic of Panama, Floating Rate Note,
LIBOR plus 1.00%, 7.00125%, 05/14/2002(c) 1,087 1,062
Republic of Venezuela, Debt Conversion Bond,
Floating Rate Note, Series DL,
LIBOR plus 0.875%, 6.3125%, 05/14/2002(c) 607 472
United Mexican States, Collateralized Par
Bond
(Detachable Oil Priced Indexed Value
Recovery Rights), Series W-A, 6.25%,
12/31/2019 2,500 1,936
United Mexican States,
11.50%, 05/15/2026 910 1,055
-----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $24,641) 27,886
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS--20.6%
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY--2.5%
Advantica Restaurant Group, Inc., 11.25%,
01/15/2008 250 194
Boca Resorts, Inc., 9.88%, 04/15/2009 250 239
Hines Horticulture, Inc., 11.75%, 10/15/2005 325 331
National Vision Association, Ltd., 12.75%,
10/15/2005 510 194
Players International, 10.875%, 04/15/2005 470 494
-----------------------------------------------------------------------------
1,452
CONSUMER STAPLES--0.1%
Jafra Cosmetics International, Inc., 11.75%,
05/01/2008 40 37
-----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--7.5%
Allegiance Telecom, Inc., Step-up Coupon,
0.00% to 02/15/2003, 11.75% to 02/15/2008 $ 500 $ 350
American Cellular Corp., 10.50%, 05/15/2008 320 352
Call-Net Enterprises, Inc.
Step-up Coupon, 0.00% to 05/15/2004, 10.80%
to 05/15/2009 200 98
9.375%, 05/15/2009 100 84
Intermedia Communications of Florida, Inc.,
Step-up Coupon, 0.00% to 07/15/2002, 11.25%
to 07/15/2007 520 381
KMC Telecom Holdings, Inc., 13.50%,
05/15/2009 100 97
Level 3 Communications, Inc., 9.125%,
05/01/2008 30 28
MGC Communications, 13.00%, 10/01/2004 350 343
MetroNet Communications Corp., 12.00%,
08/15/2007 100 115
Millicom International Cellular, S.A.,
Step-up Coupon, 0.00% to 06/01/2001, 13.50%
to 06/01/2006 500 398
Nextlink Communications, Inc., 10.75%,
11/15/2008 140 143
PTC International Finance, Step-up Coupon,
0.00% to 07/01/2002, 10.75% to 07/01/2007 500 330
Teligent, Inc., 11.50%, 12/01/2007 250 240
Triton Communications, L.L.C., Step-up
Coupon, 0.00% to 05/01/2003, 11.00% to
05/01/2008 200 142
U.S. Xchange, L.L.C., 15.00%, 07/01/2008 370 344
USA Mobile Communications Holdings, Inc.,
14.00%, 11/01/2004 110 98
Viatel, Inc., Step-up Coupon, 0.00% to
04/15/2003, 12.50% to 04/15/2008 450 280
Western Wireless Corp., 10.50%, 02/01/2007 440 475
-----------------------------------------------------------------------------
4,298
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL--0.5%
Spectrasite Holdings, Inc., Step-up Coupon,
0.00% to 4/15/2004, 11.25% to 04/15/2009 540 281
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MEDIA--3.5%
Australis Holdings, Step-up Coupon, 0.00% to
11/01/2000, 15.00% to 11/01/2002 500 5
Australis Holdings, Zero coupon,
11/01/2000 16 12
CSC Holdings, Inc., 9.875%, 02/15/2013 450 469
Diamond Cable Communications, PLC, Step-up
Coupon, 0.00% to 12/15/2000, 11.75% to
12/15/2005 175 161
Frontiervision, 11.00%, 10/15/2006 400 428
NTL Communications Corp., Step-up Coupon,
0.00% to 10/01/2003, 12.375% to 10/01/2008 500 342
NTL, Inc., 11.50%, 10/01/2008 320 346
Sinclair Broadcasting Group, Inc., 8.75%,
12/15/2007 250 231
-----------------------------------------------------------------------------
1,994
- ------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--0.9%
Coinmach Corp., 11.75%, 11/15/2005 500 515
Color Tile, Inc., 10.75%, 12/15/2001* 330 3
-----------------------------------------------------------------------------
518
</TABLE>
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DURABLES--0.3%
Fairchild Corp., 10.750%, 04/15/2009 $ 230 $ 195
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--2.7%
Day International Group, Inc., 11.125%,
06/01/2005 35 36
GS Technologies, 12.25%, 10/01/2005
Gaylord Container Corp., 100 55
9.75%, 06/15/2007 30 29
9.875%, 02/15/2008 260 227
Huntsman Package, 11.75%, 12/01/2004 170 173
Riverwood International Corp., 10.875%,
04/01/2008 950 950
Stone Container Corp., 11.50%, 08/15/2006 70 75
-----------------------------------------------------------------------------
1,545
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--0.3%
R&B Falcon Corp., 9.50%, 12/15/2008 180 179
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--1.3%
Euramax International, PLC, 11.25%,
10/01/2006 400 404
Republic Tech International, 13.75%,
07/15/2009 510 357
-----------------------------------------------------------------------------
761
- ------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--0.9%
Dimac Corp., 12.50%, 10/01/2008 600 270
Hovnanian Enterprises, Inc., 9.75%,
06/01/2005 10 9
Nortek, Inc., 9.875%, 03/01/2004 270 267
-----------------------------------------------------------------------------
546
- ------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--0.1%
Trans World Airlines, Inc., 11.375%,
03/01/2006 100 43
-----------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost: $13,511) 11,849
-----------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
OTHER--0.1% NUMBER OF SHARES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--0.1%
Intermedia Communications of Florida,
Warrants* (expire 06/01/2000) 200 20
MetroNet Communications Corp., Warrants*
(expire 08/15/2007) 100 9
-----------------------------------------------------------------------------
29
- ------------------------------------------------------------------------------------------------------------------------
MEDIA--0.0%
UIH Australia Pacific, Inc., Warrants*
(expire 05/15/2006) 280 8
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--0.0%
Bar Technologies, Warrants* (expire
04/01/2001) 500 10
-----------------------------------------------------------------------------
TOTAL OTHER
(Cost: $30) 47
-----------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $55,503)(a) $57,491
-----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
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.
** Annualized yield at time of purchase, not a coupon rate.
(a) The cost for federal income tax purposes was $55,506. At November 30, 1999,
net unrealized appreciation for all securities based on tax cost was $1,985.
This consisted of aggregate gross unrealized appreciation for all securities
in which there was an excess of market value over tax cost of $4,059 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $2,074.
(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 November 30,
1999 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 NOVEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
Investments in securities, at value (cost $55,503) $57,491
- -----------------------------------------------------------------------
Cash 35
- -----------------------------------------------------------------------
Interest receivable 643
- -----------------------------------------------------------------------
TOTAL ASSETS 58,169
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
LIABILITIES
- -----------------------------------------------------------------------
Payable for investments purchased 64
- -----------------------------------------------------------------------
Liability under reverse repurchase agreements 13,284
- -----------------------------------------------------------------------
Interest payable 99
- -----------------------------------------------------------------------
Accrued management fee 30
- -----------------------------------------------------------------------
Other accrued expenses and payables 74
- -----------------------------------------------------------------------
Total liabilities 13,551
- -----------------------------------------------------------------------
NET ASSETS, AT VALUE $44,618
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income (loss) $ 509
- -----------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investment securities 1,988
- -----------------------------------------------------------------------
Accumulated net realized gain (loss) (6,080)
- -----------------------------------------------------------------------
Paid-in capital 48,201
- -----------------------------------------------------------------------
NET ASSETS, AT VALUE $44,618
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET ASSET VALUE
- -----------------------------------------------------------------------
NET ASSET VALUE PER SHARE ($44,618 / 3,464 outstanding
shares of beneficial interest, $.01 par value, unlimited
number of shares authorized) $12.88
- -----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
INVESTMENT INCOME
- -----------------------------------------------------------------------
Interest $ 7,313
- -----------------------------------------------------------------------
Expenses:
Management fee 383
- -----------------------------------------------------------------------
Services to shareholders 30
- -----------------------------------------------------------------------
Custodian 27
- -----------------------------------------------------------------------
Auditing 73
- -----------------------------------------------------------------------
Legal 18
- -----------------------------------------------------------------------
Trustees' fees and expenses 13
- -----------------------------------------------------------------------
Reports to shareholders 59
- -----------------------------------------------------------------------
Interest expense 820
- -----------------------------------------------------------------------
Other 31
- -----------------------------------------------------------------------
Total expenses, before expense reductions 1,454
- -----------------------------------------------------------------------
Expense reductions (1)
- -----------------------------------------------------------------------
Total expenses, after expense reductions 1,453
- -----------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 5,860
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
- -----------------------------------------------------------------------
Net realized gain (loss) from:
Investments 347
- -----------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments (2,754)
- -----------------------------------------------------------------------
Net gain (loss) on investment transactions (2,407)
- -----------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 3,453
- -----------------------------------------------------------------------
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------
1999 1998
<S> <C> <C>
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- ------------------------------------------------------------------------------------------
Operations:
Net investment income $ 5,860 $ 6,128
- ------------------------------------------------------------------------------------------
Net realized gain (loss) 347 (575)
- ------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (2,754) (5,247)
- ------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 3,453 306
- ------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (6,231) (6,226)
- ------------------------------------------------------------------------------------------
Fund share transactions:
Reinvestment of distributions 74 113
- ------------------------------------------------------------------------------------------
Increase (decrease) in net assets (2,704) (5,807)
- ------------------------------------------------------------------------------------------
NET ASSETS AT BEGINNING OF PERIOD 47,322 53,129
- ------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including undistributed of net
investment income of $509 and $520, respectively) $44,618 $47,322
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
OTHER INFORMATION
- ------------------------------------------------------------------------------------------
Shares outstanding at beginning of period 3,459 3,453
- ------------------------------------------------------------------------------------------
Shares issued to shareholders in reinvestment of dividends 5 6
- ------------------------------------------------------------------------------------------
Net increase in Fund shares 5 6
- ------------------------------------------------------------------------------------------
Shares outstanding at end of period 3,464 3,459
- ------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- -----------------------------------------------------------------------
Investment income received $ 5,324
- -----------------------------------------------------------------------
Payment of interest expense (1,003)
- -----------------------------------------------------------------------
Payment of operating expenses (319)
- -----------------------------------------------------------------------
Proceeds from sale and maturities of investments 18,212
- -----------------------------------------------------------------------
Purchases of investments (9,142)
- -----------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 13,072
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- -----------------------------------------------------------------------
Distributions paid (net of reinvestment of dividends) (6,157)
- -----------------------------------------------------------------------
Net decrease in liability under reverse repurchase
agreements (6,942)
- -----------------------------------------------------------------------
Cash used by financing activities (13,099)
- -----------------------------------------------------------------------
Decrease in cash (27)
- -----------------------------------------------------------------------
Cash at beginning of period 62
- -----------------------------------------------------------------------
CASH AT END OF PERIOD $ 35
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
RECONCILIATION OF NET INCREASE IN NET ASSETS FROM OPERATIONS TO CASH
PROVIDED BY OPERATING ACTIVITIES
- -----------------------------------------------------------------------
Net increase in net assets resulting from operations $ 3,453
- -----------------------------------------------------------------------
Net decrease in investments 8,199
- -----------------------------------------------------------------------
Decrease in interest receivable 233
- -----------------------------------------------------------------------
Decrease in receivable for investments sold 912
- -----------------------------------------------------------------------
Increase in payable for investments purchased 64
- -----------------------------------------------------------------------
Increase in interest payable 99
- -----------------------------------------------------------------------
Decrease in interest rate swap agreements 80
- -----------------------------------------------------------------------
Increase in accrued expenses and payables 32
- -----------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $13,072
- -----------------------------------------------------------------------
</TABLE>
16 The accompanying notes are an integral part of the financial statements.
<PAGE> 17
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS AND MARKET PRICE DATA.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 13.68 15.39 15.34 13.12 12.60
- -----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 1.69(a) 1.77 1.79 1.75 1.68
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.69) (1.68) .06 2.25 .54
- -----------------------------------------------------------------------------------------------------
Total from investment operations 1.00 .09 1.85 4.00 2.22
- -----------------------------------------------------------------------------------------------------
Less distributions from net investment income (1.80) (1.80) (1.80) (1.78) (1.70)
- -----------------------------------------------------------------------------------------------------
Net asset value, end of year $ 12.88 13.68 15.39 15.34 13.12
- -----------------------------------------------------------------------------------------------------
Market value, end of year $ 14.19 16.94 19.81 17.75 14.25
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN
- -----------------------------------------------------------------------------------------------------
Based on net asset value (%) 6.03 .48 12.55 32.63 19.29
- -----------------------------------------------------------------------------------------------------
Based on market value (%) (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) 44,618 47,322 53,129 52,944 44,776
- -----------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 3.21 3.94 3.99 3.89 4.35
- -----------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 3.21 3.94 3.99 3.89 4.35
- -----------------------------------------------------------------------------------------------------
Ratio of expenses before interest expense (%) 1.40 1.20 1.24 1.23 1.26
- -----------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 12.94 12.05 11.45 12.43 13.56
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 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.
(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"),
(formerly named Kemper Strategic Income 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 generally accepted accounting
principles 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. 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 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
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
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 November 30, 1999.
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 year ended November 30, 1999, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $ 9,243
Proceeds from sales 17,309
- --------------------------------------------------------------------------------
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 $383,000 for the year ended
November 30, 1999.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the fund. Under the agreement,
KSvC received shareholder services fees of $24,000
for the year ended November 30, 1999.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the year ended November 30,
1999, the Fund made no direct payments to its
officers and incurred trustees fees of $13,000 to
independent trustees.
19
<PAGE> 20
NOTES TO FINANCIAL
STATEMENTS
- --------------------------------------------------------------------------------
4 REVERSE REPURCHASE
AGREEMENTS The Fund has entered into reverse repurchase
agreements with third parties involving its
holdings in U.S. Government Agency securities. At
November 30, 1999, 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. $ 2,147,000 $ 2,142,000 83 days
Salomon Smith Barney 11,311,000 11,142,000 76 days
----------- -----------
$13,458,000 $13,284,000
=========== ===========
</TABLE>
20
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND TRUST SHAREHOLDERS
KEMPER STRATEGIC INCOME TRUST
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Strategic Income Trust as of
November 30, 1999, the related statements of operations and cash flows for the
year then ended and changes in net assets for each of the two years in the
period then ended and the financial highlights for each of the fiscal periods
since 1995. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of November 30, 1999, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Strategic Income Trust at November 30, 1999, the results of its operations, the
changes in its net assets and cash flows and the financial highlights for the
periods referred to above in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
January 21, 2000
21
<PAGE> 22
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
1 PARTICIPATION We invite you to review the description of the
Dividend Reinvestment Plan (the "Plan") which is
available to you as a shareholder of KEMPER
STRATEGIC INCOME TRUST (the "fund"). If you wish to
participate and your shares are held in your own
name, simply contact Kemper Service Company, whose
address and phone number are provided in Paragraph
4 of the Plan for the appropriate form. If your
shares are held in the name of a brokerage firm,
bank, or other nominee, you must instruct that
nominee to re-register your shares in your name so
that you may participate in the Plan, unless your
nominee has made the Plan available on shares held
by them. Shareholders who so elect will be deemed
to have appointed United Missouri Bank, n.a.
("UMB") as their agent and as agent for the fund
under the Plan.
- --------------------------------------------------------------------------------
2 DIVIDEND INVESTMENT
ACCOUNT The fund's transfer agent and dividend disbursing
agent or its delegate ("Agent") will establish a
Dividend Investment Account (the "Account") for
each shareholder participating in the Plan. Agent
will credit to the Account of each participant
funds it receives from the following sources: (a)
cash dividends and capital gains distributions paid
on shares of beneficial interest (the "Shares") of
the fund registered in the participant's name on
the books of the fund; (b) cash dividends and
capital gains distributions paid on Shares
registered in the name of Agent but credited to the
participant's Account. Sources described in clauses
(a) and (b) of the preceding sentence are
hereinafter called "Distribution."
- --------------------------------------------------------------------------------
3 INVESTMENT OF
DISTRIBUTION FUNDS
HELD IN EACH ACCOUNT If on the record date for a Distribution (the
"Record Date"), Shares are trading at a discount
from net asset value per Share (according to the
evaluation most recently made on Shares of the
fund), funds credited to a participant's Account
will be used to purchase Shares (the "Purchase").
UMB will attempt, commencing five days prior to the
Payment Date and ending at the close of business on
the Payment Date ("Payment Date" as used herein
shall mean the last business day of the month in
which such Record Date occurs), to acquire Shares
in the open market. If and to the extent that UMB
is unable to acquire sufficient Shares to satisfy
the Distribution by the close of business on the
Payment Date, the fund will issue to UMB Shares
valued at net asset value per Share (according to
the evaluation most recently made on Shares of the
fund) in the aggregate amount of the remaining
value of the Distribution. If, on the Record Date,
Shares are trading at a premium over net asset
value per Share, the fund will issue on the Payment
Date, Shares valued at net asset value per Share on
the Record Date to Agent in the aggregate amount of
the funds credited to the participants' accounts.
- --------------------------------------------------------------------------------
4 ADDITIONAL
INFORMATION Address all notices, correspondence, questions, or
other communication regarding the Plan to:
KEMPER SERVICE COMPANY
P.O. Box 219066
Kansas City, Missouri 64121-6066
1-800-294-4366
22
<PAGE> 23
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
5 ADJUSTMENT OF
PURCHASE PRICE The fund will increase the price at which Shares
may be issued under the Plan to 95% of the fair
market value of the shares on the Record Date if
the net asset value per Share of the Shares on the
Record Date is less than 95% of the fair market
value of the Shares on the Record Date.
- --------------------------------------------------------------------------------
6 DETERMINATION OF
PURCHASE PRICE The cost of Shares and fractional Shares acquired
for each participant's Account in connection with a
purchase shall be determined by the average cost
per Share, including brokerage commissions as
described in Paragraph 7 hereof, of the Shares
acquired by UMB in connection with that purchase.
Shareholders will receive a confirmation showing
the average cost and number of Shares acquired as
soon as practicable after Agent has received or UMB
has purchased Shares. Agent may mingle the cash in
a participant's account with similar funds of other
participants of the fund for whom UMB acts as agent
under the Plan.
- --------------------------------------------------------------------------------
7 BROKERAGE CHARGES There will be no brokerage charges with respect to
Shares issued directly by the fund as a result of
Distributions. However, each participant will pay a
pro rata share of brokerage commissions incurred
with respect to UMB's open market purchases in
connection with the reinvestment of Distributions.
Brokerage charges for purchasing small amounts of
Shares for individual Accounts through the Plan can
be expected to be less than the usual brokerage
charges for such transactions, as UMB will be
purchasing Shares for all participants in blocks
and prorating the lower commission thus attainable.
- --------------------------------------------------------------------------------
8 SERVICE CHARGES There is no service charge by Agent or UMB to
shareholders who participate in the Plan other than
service charges specified in Paragraph 12 hereof.
However, the fund reserves the right to amend the
Plan in the future to include a service charge.
- --------------------------------------------------------------------------------
9 TRANSFER OF SHARES
HELD BY AGENT Agent will maintain the participant's Account, hold
the additional Shares acquired through the Plan in
safekeeping and furnish the participant with
written confirmation of all transactions in the
Account. Shares in the Account are transferable
upon proper written instructions to Agent. Upon
request to Agent, a certificate for any or all full
Shares in a participant's Account will be sent to
the participant.
- --------------------------------------------------------------------------------
10 SHARES NOT HELD IN
SHAREHOLDER'S
NAME Beneficial owners of Shares which are held in the
name of a broker or nominee will not be
automatically included in the Plan and will receive
all distributions in cash. Such shareholders should
contact the broker or nominee in whose name their
Shares are held to determine whether and how they
may participate in the Plan.
- --------------------------------------------------------------------------------
11 AMENDMENTS Experience under the Plan may indicate that changes
are desirable. Accordingly, the fund reserves the
right to amend or terminate the Plan, including
provisions with respect to any Distribution paid
subsequent to notice thereof sent to participants
in the Plan at least ninety days before the record
date for such Distribution.
23
<PAGE> 24
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
12 WITHDRAWAL FROM
PLAN Shareholders may withdraw from the Plan at any time
by giving Agent a written notice. If the proceeds
are $25,000 or less and the proceeds are to be
payable to the shareholder of record and mailed to
the address of record, a signature guarantee
normally will not be required for notices by
individual account owners (including joint account
owners), otherwise a signature guarantee will be
required. In addition, if the certificate is to be
sent to anyone other than the registered owner(s)
at the address of record, a signature guarantee
will be required on the notice. A notice of
withdrawal will be effective for the next
Distribution following receipt of the notice by the
Agent provided the notice is received by the Agent
at least ten days prior to the Record Date for the
Distribution. When a participant withdraws from the
Plan, or when the Plan is terminated in accordance
with Paragraph 11 hereof, the participant will
receive a certificate for full Shares in the
Account, plus a check for any fractional Shares
based on market price; or if a Participant so
desires, Agent will notify UMB to sell his Shares
in the Plan and send the proceeds to the
participant, less brokerage commissions and a $2.50
service fee.
- --------------------------------------------------------------------------------
13 TAX IMPLICATIONS Shareholders will receive tax information annually
for personal records and to assist in preparation
of Federal income tax returns. If shares are
purchased at a discount, the amount of the discount
is considered taxable income and is added to the
cost basis of the purchased shares.
24
<PAGE> 25
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
An annual shareholders' meeting was held on July 14, 1999, 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 3,335,639 15,502
James R. Edgar 3,335,782 15,359
Arthur R. Gottschalk 3,336,972 14,169
Frederick T. Kelsey 3,339,124 12,012
Thomas W. Littauer 3,340,424 10,717
Fred B. Renwick 3,340,424 10,717
John G. Weithers 3,340,424 10,717
</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>
3,342,384 2,772 5,985
</TABLE>
25
<PAGE> 26
NOTES
26
<PAGE> 27
NOTES
27
<PAGE> 28
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
JAMES E. AKINS MARK S. CASADY MAUREEN E. KANE
Trustee President Assistant Secretary
JAMES R. EDGAR PHILIP J. COLLORA CAROLINE PEARSON
Trustee Vice President and Assistant Secretary
Secretary
ARTHUR R. GOTTSCHALK BRENDA LYONS
Trustee JOHN R. HEBBLE Assistant Treasurer
Treasurer
FREDERICK T. KELSEY
Trustee J. PATRICK BEIMFORD, JR.
Vice President
THOMAS W. LITTAUER
Trustee and Vice President ANN M. MCCREARY
Vice President
FRED B. RENWICK
Trustee ROBERT C. PECK, JR.
Vice President
JOHN G. WEITHERS
Trustee KATHRYN L. QUIRK
Vice President
LINDA J. WONDRACK
Vice President
................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
...............................................................................
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 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
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
KSIT - 2 (1/25/00) 1099460
