<PAGE> 1
KEMPER
STRATEGIC MUNICIPAL
INCOME TRUST
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED MAY 31, 1997
" . . . the fund delivered positive
performance despite modest upward pressure on
interest rates and the Fed's rate hike. "
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
7
Largest Sectors
Portfolio Statistics
8
Portfolio of Investments
12
Financial Statements
14
Notes to
Financial Statements
16
Financial Highlights
17
Shareholders' Meeting
AT A GLANCE
- --------------------------------------------------------------------------------
TOTAL RETURNS
- --------------------------------------------------------------------------------
For the six-month period ended May 31, 1997
<TABLE>
<CAPTION>
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER STRATEGIC MUNICIPAL
INCOME TRUST 2.67% 4.47%
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NET ASSET VALUE AND
MARKET PRICE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
5/31/97 11/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $12.05 $ 12.14
- --------------------------------------------------------------------------------
MARKET PRICE $12.50 $12.375
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
The following table shows per share dividend and yield information for the fund
as of May 31, 1997.
<TABLE>
<S> <C>
SIX-MONTH INCOME: $0.4080
- --------------------------------------------------------------------------------
MAY DIVIDEND: $0.0680
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE: (BASED
ON NET ASSET VALUE) 6.77%
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE: (BASED
ON MARKET PRICE) 6.53%
- --------------------------------------------------------------------------------
TAX EQUIVALENT DISTRIBUTION RATE
(BASED ON NET ASSET VALUE AND A
37.1% FEDERAL INCOME TAX RATE AND AN
ASSUMED $150,000 OF TAXABLE INCOME
FOR A JOINT RETURN) 10.76%
- --------------------------------------------------------------------------------
TAX EQUIVALENT DISTRIBUTION RATE
(BASED ON MARKET PRICE AND A 37.1%
FEDERAL INCOME TAX RATE AND AN
ASSUMED $150,000 OF TAXABLE INCOME
FOR A JOINT RETURN) 10.38%
- --------------------------------------------------------------------------------
</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.
Income may be subject to state and local taxes and a portion of the income may
be subject to the alternative minimum tax for certain investors.
TERMS TO KNOW
DURATION Duration is a measure of the interest rate sensitivity of a fixed-
income investment or portfolio. The longer the duration, the greater the
interest rate risk.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the specified period. Total return
assumes the reinvestment of all dividends and it represents the aggregate
percentage or dollar value change over the period. Total return may be based
upon net asset value or market price.
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $80 BILLION IN ASSETS, INCLUDING $45 BILLION IN RETAIL MUTUAL
FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD
UNIVERSITY.
DEAR SHAREHOLDER,
The consistently good news on the domestic economy and the recent agreement
between the White House and Republican leaders in Congress to balance the
federal budget has provided the basis for strong stock and bond markets. This
progress on balancing the budget, an initiative that the bond market was
anticipating resolution of more than one year ago, has very positive long term
implications for financial markets.
The next several weeks will find Congress and the Clinton administration
negotiating toward a final agreement. Unlike previous failed proposals that
sought to balance the budget principally by increasing income taxes, the current
plan -- which starts from the base of a relatively small deficit -- proposes to
slow the growth of federal spending. As such, its prospects are promising.
Natural skeptics are waiting to see specific legislation to see if the
agreement has teeth. While we are optimistic, we need to temper our enthusiasm.
Much of the good news associated with a balanced budget has been discounted in
the higher prices in the stock and bond markets.
Of particular interest to equity investors is the agreement to reduce the
maximum tax rate on capital gains. Although details of the reduction are yet to
be known, the prospect of more favorable tax treatment on gains will have the
short-term effect of supporting stocks -- investors can be expected to postpone
selling until they can qualify for the lower tax rate. With equity sales
essentially "frozen" until the effective date is known, the stock market should
have a considerable underpinning. Once an effective date is determined, we would
expect the pent-up selling to occur. However, then we shall enjoy the long-term
positive effect of the lower tax rate on gains.
Talk of a balanced budget has shifted the spotlight away from the Federal
Reserve Board's upward pressure on interest rates. Having declined to raise
rates in May, the Fed may still act again at a later date. However, this action
may be the last for a while because the economy seems to be slowing down in the
second quarter, after the rapid 5.6 percent annualized growth in the first
quarter of the year. A slower economy would reduce the threat of inflation and
reduce the need for further rate hikes by the Fed.
In fact, a review of the standard measures of the economy shows little to
be concerned about and much to be encouraged by. As has been the pattern for
more than five years, a few strong quarters followed by a few weak quarters have
produced an overall 2 to 3 percent rate of growth in gross domestic product
(GDP). Job creation and the unemployment rate are consistent with a moderately
expanding economy. Corporate profits continue to grow at an expected 4 to 5
percent rate in 1997. The Consumer Price Index continues to track at a 2.5 to
3.0 percent rate.
Leadership in the stock market has been quite narrow and concentrated in
the first half of 1997 in large, multinational companies with familiar consumer
brand names. The recent rally after the announcement of a balanced budget
agreement suggests that valuations of smaller capitalization stocks are
compelling and the market is broadening.
A natural response to increased volatility in the U.S. equity market is to
look abroad. In fact, the valuations of many international markets are more
attractive than the U.S. However, the weak German and Japanese economies make it
difficult to identify many exciting near-term opportunities without careful
research.
3
<PAGE> 4
ECONOMIC OVERVIEW
- -------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- -------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund
performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The
10-year Treasury rate and the prime rate are prevailing interest rates. The
other data report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (6/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.49 6.58 6.87 6.28
PRIME RATE(2) 8.5 8.25 8.25 8.8
INFLATION RATE(3) 2.3 3.04 2.95 2.76
THE U.S. DOLLAR(4) 5.52 4.59 8.35 -7.04
CAPITAL GOODS ORDERS(5)* 8.17 2.23 2.44 8.24
INDUSTRIAL PRODUCTION(5) 3.84 4.84 3.38 2.36
EMPLOYMENT GROWTH(6) 2.12 2.41 2.18 2.46
</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%. The low, moderate inflation of the last
few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of May 31, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
Our recommendation to shareholders is to stay the course and to fight the
temptation to try to time when and where you should be invested without help.
Financial assets react much quicker today to events. Volatility has returned to
the market and with it heightened uncertainty. Now is the time to rely on your
financial representative for the expertise and the long-term investing
discipline that he or she can provide.
With this commentary as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
July 11, 1997
4
<PAGE> 5
PERFORMANCE UPDATE
[MIER PHOTO]
CHRIS MIER JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1986 AND IS NOW
SENIOR VICE PRESIDENT OF ZKI AND A VICE PRESIDENT AND PORTFOLIO CO-MANAGER OF
KEMPER STRATEGIC MUNICIPAL INCOME TRUST. MIER RECEIVED A B.A. DEGREE IN
ECONOMICS FROM THE UNIVERSITY OF MICHIGAN AND RECEIVED AN M.M. IN FINANCE FROM
THE KELLOGG GRADUATE SCHOOL OF MANAGEMENT AT NORTHWESTERN UNIVERSITY. HE IS A
CHARTERED FINANCIAL ANALYST.
[BURROW PHOTO]
DALE BURROW HAS BEEN WITH ZKI SINCE 1987 AND IS A FIRST VICE PRESIDENT. HE
BECAME A VICE PRESIDENT AND PORTFOLIO CO-MANAGER OF THE FUND IN 1993. BURROW
RECEIVED A B.A. DEGREE FROM THE UNIVERSITY OF OKLAHOMA AND AN M.B.A. FROM DEPAUL
UNIVERSITY. HE IS A CHARTERED FINANCIAL ANALYST.
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.
KEMPER STRATEGIC MUNICIPAL INCOME TRUST PORTFOLIO CO-MANAGERS CHRIS
MIER AND DALE BURROW DISCUSS THE PERFORMANCE OF THE MUNICIPAL BOND MARKET
DURING THE LAST SIX MONTHS. THEY EXPLAIN THE IMPACT THE FEDERAL RESERVE BOARD'S
INTEREST RATE INCREASE HAD ON THE OVERALL MUNICIPAL BOND MARKET AS COMPARED
WITH THE FUND.
Q MUNICIPAL BOND YIELDS HAVE FLUCTUATED QUITE A BIT DURING THE LAST SIX
MONTHS. WHAT IMPACT DID THIS HAVE ON THE MUNICIPAL MARKET?
A During the first three months of the period, yields in the municipal market
fluctuated, but tended to be range-bound. The rise and fall of interest rates
was based partly on the market's changing expectations about whether or not the
Federal Reserve Board (the Fed) would move to raise short-term interest rates.
The market was looking for signs that the Fed would raise short-term rates if
the economy was growing too quickly and faced a possible emergence of inflation.
In March, with accumulating evidence of strong first quarter growth, the Fed
raised short-term interest rates by 0.25 percent. In reaction to this
tightening, market yields in all sectors of the municipal market rose and
overall bond performance suffered. Yields continued to rise into April and then
reversed direction in May as it appeared the economy might be losing some of its
earlier steam and a second Fed tightening was not imminent. Additionally, an
agreement in Washington was reached to balance the budget, which also had a
positive impact on the market. At the end of May, market yields were just 0.11
percent higher than at the start of the fiscal year in December.
Q WHAT IMPACT DID THE FEDERAL RESERVE BOARD'S INTERVENTION HAVE ON THE FUND?
A The Fed's rate hike did not have a profound impact on the performance of
the fund. In anticipation of a potential rate increase, however, we closely
monitored economic data releases. We varied duration as appropriate and made
minor adjustments to the fund to mitigate some market risk.
Because of the income-oriented structure of the fund, we did not
aggressively buy and sell issues within the portfolio. We generally ride out
short periods of interest rate turbulence. The fund continues to benefit from a
high level of income from its investments, which enables it to address its
primary investment objective of generating a high level of current income. As a
result, the fund delivered positive performance despite modest upward pressure
on interest rates and the Fed's rate hike.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUND DURING THE PERIOD?
A The fund's portfolio is designed to generate a high level of income from a
portfolio
5
<PAGE> 6
PERFORMANCE UPDATE
of investment-grade bonds. Although we consistently monitor the performance of
the issues, we haven't made significant changes to the portfolio composition.
During the reporting period, we focused on efficiently reinvesting proceeds from
maturing bonds or issues that were called away early. We also reinvested the
fund's interest earnings. We invested in issues with maturities of 20 to 30
years offering good call protection features and attractive yields, with
acceptable credit risk.
Q CAN YOU TELL US ABOUT THE FUND'S CREDIT SELECTION PROCESS?
A We are fortunate to have a staff of four research analysts dedicated to
following the municipal market. This group of seasoned professionals has more
than 40 years of combined industry experience, which makes them critical to the
portfolio selection process.
Each analyst covers a specific geographic area as well as an industry
specialization. They have access, via computer subscription services, to an
abundant array of regional and national news and financial publications. In
addition, the research analysts regularly meet with issuers and often travel to
conduct on-site visits.
This multi-faceted approach to research enables us to make informed decisions
quickly as issues are offered. This is especially crucial in keeping the fund
fully invested.
Q ARE MUNICIPAL BOND FUNDS A GOOD INVESTMENT IN THE CURRENT ECONOMIC
ENVIRONMENT?
A Municipal bonds may play an important role in rounding out a
well-diversified portfolio of investments. The tax-exempt income that municipal
bond funds provide may be especially helpful now as many investors may be
under-invested in tax-exempt assets. Municipal bonds and equities are both
important components of a balanced portfolio. If your exposure to municipal
bonds has declined on a relative basis, now could be the right time to review
your long-term goals and rebalance your portfolio of investments.
Q WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET?
A We are optimistic about the municipal market. We believe that municipal
bonds may continue to outperform Treasuries. New supply in the market is low and
there continues to be strong demand for municipal bonds from individuals and
property and casualty insurance companies, creating a favorable supply and
demand situation. Additionally, interest rates appear to have stabilized
somewhat and we don't anticipate any significant surges in rates. Inflation
remains relatively benign. All of these factors create a positive environment
for municipal bonds.
6
<PAGE> 7
PORTFOLIO STATISTICS LARGEST SECTORS
THE FUND'S LARGEST SECTORS*
Representing 56% of the fund's total net assets on May 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HOLDINGS PERCENT
- --------------------------------------------------------------------------------
<S> <C> <C>
1. U.S. GOVERNMENT SECURED BONDS 17%
- --------------------------------------------------------------------------------
2. SENIOR CARE BONDS 13%
- --------------------------------------------------------------------------------
3. NON-SENIOR CARE BONDS 11%
- --------------------------------------------------------------------------------
4. HOSPITAL BONDS 8%
- --------------------------------------------------------------------------------
5. INDUSTRIAL REVENUE BONDS 7%
- --------------------------------------------------------------------------------
</TABLE>
SECURITIES RATINGS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
ON 5/31/97 ON 11/30/96
- -----------------------------------------------------------------------------------
<S> <C> <C>
AAA 4% 4%
- -----------------------------------------------------------------------------------
AA 7 7
- -----------------------------------------------------------------------------------
A -- 3
- -----------------------------------------------------------------------------------
BBB 25 26
- -----------------------------------------------------------------------------------
BB 3 --
- -----------------------------------------------------------------------------------
B 4 2
- -----------------------------------------------------------------------------------
NOT RATED+ 57 58
- -----------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 5/31/97 ON 11/30/96
The ratings of Standard & 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 Moody's or S&P ratings. Portfolio composition will change over time. Ratings
are relative and subjective and not absolute standards of quality.
+ These securities are not rated by S&P or Moody's, however they are rated by
Zurich Kemper Investments, Inc. as follows: AAA 17%, A 2%, BBB 4%, BB 29%, B 5%
at May 31, 1997, and AAA 13%, A 5%, BBB 4%, BB 31% and B 5% at November 30,
1996.
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 5/31/97 ON 11/30/96
- -----------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 16.7 YEARS 16.9 YEARS
- -----------------------------------------------------------------------------------
</TABLE>
*Portfolio holdings and composition are subject to change.
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
Portfolio of Investments at May 31, 1997
[DOLLARS IN THOUSANDS]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL VALUE
AMOUNT
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL AND
INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OH, Marion County, Health Care Facilities, United
Church Homes, Inc., Rev., 8.875%, to be called
12-01-99 @ 103 $ 2,780 $ 3,144
OH, Cuyahoga County, Health Care Facilities, Judson
Retirement Community Center, Rev., 8.875%, to be
called 11-15-99 @ 103 2,500 2,823
IL, Itasca, Central Manufacturing District, Special
Service Area, Rev., 8.375%, to be called 12-01-00
@ 102 2,480 2,824
IL, Chicago, Tax Increment Allocation, Central
Station Proj., Rev., 8.90%, to be called 1-01-02 @
102 2,100 2,501
IN, Indianapolis, Local Public Improvement Bond
Bank, Rev., 8.50%, to be called 2-01-98 @ 102 3,000 3,151
FL, Volusia County, Health Facilities Auth.,
Memorial Health Systems Proj., Rev., 8.25%, to be
called 6-01-00 @ 102 2,390 2,674
FL, Greater Orlando, Aviation Auth., Airport
Facilities Rev., 8.00%, to be called 10-01-98 @
102 70 75
OK, Woodward Municipal Auth., Hospital Rev., 9.25%,
to be called 11-01-00 @ 102 1,750 2,033
PA, Greene County, Gen. Oblg., 8.75%, to be called
12-01-00 @ 100 1,770 1,991
NY, New York City, Gen. Oblg., 7.50%, to be called
8-15-99 @ 101.50 420 454
NY, Medical Care Facilities Finance Agcy., Rev.,
7.30%, to be called 8-15-01 @ 102 40 45
----------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--17.0%
(Cost: $19,221) 21,715
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ILLINOIS--9.7% Chicago, O'Hare International Airport, International
Terminal, Special Rev., 8.20%, 2024 1,200 1,412
Dev. Finance Auth., Catholic Health Partners
Services, Rev., 5.30%, 2018 250 232
Harvard, Multifamily Housing, Northfield Court
Proj., Rev., 9.50%, 2006 1,955 2,113
Health Facilities Auth., Bethany Home and Hospital
of the Methodist Church, Rev., 8.625%, 2009 2,395 2,632
Lombard, Tax Increment Rev., 8.80%, 2004 1,625 1,799
St. Charles, Multifamily Housing, Wessel Court
Proj., Rev., 7.60%, 2024 1,960 2,006
Village of University Park, Tax Increment, Governors
Gateway Industrial Park, Rev., 8.50%, 2011 1,970 2,172
----------------------------------------------------------------------------
12,366
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INDIANA--5.6% Fishers, Economic Dev. Auth., Indianapolis Water Co.
Proj., Rev., 7.875%, 2019 $ 685 $ 713
Health Facilities Finance Auth., Fayette Memorial
Hospital Proj., Rev., 7.20%, 2022 2,800 2,942
Housing Finance Auth., Residential Mortgage, Rev.,
8.375%, 2020 1,470 1,526
Indianapolis Airport Auth., United Air Lines, Inc.
Proj., Rev., 6.50%, 2031 1,900 1,954
----------------------------------------------------------------------------
7,135
- ---------------------------------------------------------------------------------------------------------------------
ARIZONA--5.5% Coconino County, Industrial Dev. Auth., The Guidance
Center, Inc. Proj., Rev., 9.25%, 2011 1,825 2,008
Health Facilities Auth., The New Foundation Proj.,
Rev., 8.25%, 2019 2,415 2,559
Pima County Industrial Dev. Auth., Larson Co. Proj.,
Rev., 9.50%, 2010 2,200 2,472
----------------------------------------------------------------------------
7,039
- ---------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA--5.3% Columbia County, Industrial Dev. Auth., First
Mortgage, First Street Association Proj., Rev.,
9.00%, 2014 1,890 2,018
Higher Educational Facilities Auth., Philadelphia
College of Textiles & Science, Rev., 6.70%, 2014 2,000 2,067
Lehigh County General Purpose Auth., Wiley House,
Rev., 8.65%, 2004 2,580 2,682
----------------------------------------------------------------------------
6,767
- ---------------------------------------------------------------------------------------------------------------------
FLORIDA--5.0% Greater Orlando Aviation Auth., Airport Facilities,
Rev., 8.00%, 2018 625 663
Manatee County, First Mortgage, Meditrust Proj.,
Rev., 7.35%, 2015 1,730 1,867
Martin County Industrial Dev. Auth., Indiantown
Congeneration L.P. Proj., Rev., 7.875%, 2025 1,500 1,695
Nassau County, Amelia Island Care Center Proj.,
Rev., 9.75%, 2023 1,980 2,212
----------------------------------------------------------------------------
6,437
- ---------------------------------------------------------------------------------------------------------------------
NEW YORK--4.9% Medical Care Facilities Finance Agcy., Rev. 7.30%,
2021 20 22
New York City, Gen. Oblg., 7.00% and 7.50%, 2010 3,315 3,460
Port Auth. of New York and New Jersey, LaGuardia
Airport Passenger Terminal, Rev., 9.125%, 2015 2,500 2,825
----------------------------------------------------------------------------
6,307
- ---------------------------------------------------------------------------------------------------------------------
NEW MEXICO--4.7% Albuquerque Nursing Home, West Mesa Center Proj.,
Rev., 9.75%, 2014 1,375 1,453
Farmington, Pollution Control, San Juan Proj., Rev.,
6.30% and 6.95%, 2016 and 2020 3,500 3,588
Truth or Consequences Nursing Home, Sierra Health
Care, Inc., Rev., 9.75%, 2014 915 966
----------------------------------------------------------------------------
6,007
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COLORADO--4.3% Arapahoe County, Capital Improvement Trust Fund,
E-470 Public Highway Auth., Rev., zero coupon,
2010 $ 5,000 $ 2,194
City and County of Denver, Airport System Rev.,
7.50% to 8.75%, 2023 through 2025 2,900 3,283
----------------------------------------------------------------------------
5,477
- ---------------------------------------------------------------------------------------------------------------------
MISSOURI--3.8% St. Louis, Tax Increment, Scullin Redev. Proj.,
Rev., 10.00%, 2010 2,290 2,748
West Plains, Industrial Dev. Auth., Ozarks Medical
Center Proj., Rev., 8.625%, 2020 2,000 2,176
----------------------------------------------------------------------------
4,924
- ---------------------------------------------------------------------------------------------------------------------
CALIFORNIA--3.7% Foothill/Eastern Transportation Corridor Agcy., Toll
Road Rev., zero coupon, 2026 11,500 1,920
Sacramento County, Bradshaw Road Proj., Rev., 7.20%,
2015 1,225 1,264
San Diego, Detention Facility, Certificates of
Participation, 8.00%, 2002 425 453
San Joaquin Hills Transportation Corridor Agcy.,
Senior Lien Toll Road Rev., zero coupon, 2020 4,300 1,066
----------------------------------------------------------------------------
4,703
- ---------------------------------------------------------------------------------------------------------------------
IOWA--3.3% Finance Auth., Healthcare Facilities, On With Life,
Inc. Proj., Rev., 7.25%, 2015 2,000 2,095
Lake City, Health Care Facility, Opportunity Living
Proj., Rev., 10.00%, 2015 2,000 2,165
----------------------------------------------------------------------------
4,260
- ---------------------------------------------------------------------------------------------------------------------
MINNESOTA--3.2% Housing Finance Agcy., Single Family Mortgage Rev.,
7.95%, 2022 1,925 2,027
Sauk Rapids, Industrial Dev., Gold N Plump Poultry
Proj., Rev., 9.50%, 2005 2,020 2,127
----------------------------------------------------------------------------
4,154
- ---------------------------------------------------------------------------------------------------------------------
TEXAS--3.2% Brazos River Auth., Collateralized Pollution
Control, Utilities Electric Co. Proj., Rev.,
8.25%, 2019 2,000 2,132
Houston, Airport System Special Facilities,
Continental Airlines, Inc. Improvement Projs.,
Rev., 6.125%, 2027 2,000 1,948
----------------------------------------------------------------------------
4,080
- ---------------------------------------------------------------------------------------------------------------------
MICHIGAN--2.6% Gogebic County, Hospital Finance Auth., Grand View
Hospital Proj., Rev., 8.75%, 2016 2,250 2,437
Madison Heights, Tax Increment Finance Auth., Rev.,
8.50%, 2001 825 868
----------------------------------------------------------------------------
3,305
- ---------------------------------------------------------------------------------------------------------------------
NEVADA--2.2% Housing Division, Single Family Mortgage Program,
Rev., 7.90% and 6.50%, 2021 and 2028 2,675 2,779
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
CONNECTICUT--1.7% Dev. Auth., Pierce Memorial Baptist Home, Inc.
Proj., Rev., 9.25%, 2018 2,000 2,197
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MASSACHUSETTS--1.7% Worcester, Briarwood Retirement Community, Salem
Community Corp., Rev., 9.25%, 2022 $ 1,985 $ 2,131
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE--1.6% Higher Educational and Health Facilities Auth.,
United Church of Christ--Havenwood, Rev., 7.45%,
2025 2,000 2,040
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
UTAH--1.3% Housing Finance Agcy., Single Family Mortgage Rev.,
6.65%, 2026 1,540 1,595
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA--1.2% Aiken County, Hospital Facilities, Mattie C. Hall
Health Care Center Proj., Rev., 8.625%, 2010 1,500 1,574
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
KENTUCKY--1.2% Jefferson County, Pollution Control, Louisville Gas
& Electric Co. Proj., Rev., 7.75%, 2019 1,500 1,559
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
OKLAHOMA--1.2% Woodward Municipal Auth., Hospital Rev., 8.50%, 2014 1,335 1,488
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
MARYLAND--1.1% Health and Higher Educational Facilities Auth.,
Doctors Community Hospital Proj., Rev., 5.50%,
2024 1,500 1,367
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
STATES LESS THAN ND, Housing Finance Agcy., Single Family Mortgage
ONE PERCENT--2.5% Rev., 8.375%, 2021 880 925
NE, Investment Finance Auth., Single Family Housing
Rev., 6.70%, 2026 500 518
NJ, Educational Facilities Auth., Caldwell College,
Rev., 7.25%, 2025 1,150 1,201
WI, Housing and Economic Dev. Auth., Home Ownership,
Rev., 6.20%, 2027 500 505
----------------------------------------------------------------------------
3,149
----------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--80.5%
(Cost: $95,005) 102,840
============================================================================
TOTAL MUNICIPAL OBLIGATIONS--97.5%
(Cost: $114,226) 124,555
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--4.35%
INSTRUMENTS--.7% Due--June 1997
(Cost: $900) 900 900
----------------------------------------------------------------------------
TOTAL INVESTMENTS--98.2%
(Cost: $115,126) 125,455
----------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES--1.8% 2,363
----------------------------------------------------------------------------
NET ASSETS--100% $127,818
----------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $115,126,000 for federal income tax purposes
at May 31, 1997, the gross unrealized appreciation on investments was
$10,329,000 and there was no gross unrealized depreciation.
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $115,126) $125,455
- ------------------------------------------------------------------------
Interest receivable 2,863
- ------------------------------------------------------------------------
TOTAL ASSETS 128,318
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Cash overdraft 395
- ------------------------------------------------------------------------
Payable for:
Investments purchased 15
- ------------------------------------------------------------------------
Management fee 66
- ------------------------------------------------------------------------
Trustees' fees and other 24
- ------------------------------------------------------------------------
Total liabilities 500
- ------------------------------------------------------------------------
NET ASSETS $127,818
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $117,872
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (696)
- ------------------------------------------------------------------------
Unrealized appreciation on investments 10,329
- ------------------------------------------------------------------------
Undistributed net investment income 313
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $127,818
- ------------------------------------------------------------------------
NET ASSET VALUE PER SHARE, $.01 PAR VALUE
($127,818 / 10,604 shares outstanding) $12.05
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------------------
Interest income $4,742
- ------------------------------------------------------------------------------------
Expenses:
Management fee 382
- ------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 34
- ------------------------------------------------------------------------------------
Professional fees 30
- ------------------------------------------------------------------------------------
Reports to shareholders 8
- ------------------------------------------------------------------------------------
Trustees' fees and other 42
- ------------------------------------------------------------------------------------
Total expenses 496
- ------------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,246
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
- ------------------------------------------------------------------------------------
Net realized loss on sales of investments (34)
- ------------------------------------------------------------------------------------
Net realized loss from futures transactions (63)
- ------------------------------------------------------------------------------------
Net realized loss (97)
- ------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (795)
- ------------------------------------------------------------------------------------
Net loss on investments (892)
- ------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,354
- ------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MAY 31, NOVEMBER 30,
1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------------
Net investment income $ 4,246 8,636
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) (97) 328
- --------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (795) (882)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,354 8,082
- --------------------------------------------------------------------------------------------------
Distribution from net investment income (4,332) (8,611)
- --------------------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
(45 shares and 74 shares, respectively) 562 919
- --------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (416) 390
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------------
Beginning of period 128,234 127,844
- --------------------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment income
of $313 and $399, respectively) $127,818 128,234
- --------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES DESCRIPTION OF FUND. Kemper Strategic Municipal
Income Trust (the Fund) is registered under the
Investment Company Act of 1940 as a non-
diversified, closed-end management investment
company.
INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Exchange traded financial futures
and options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Over-the-counter
traded options are valued based upon prices
provided by market makers. Other securities and
assets are valued at fair value as determined in
good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes premium and original
issue discount amortization on fixed income
securities. Realized gains and losses from
investment transactions are reported on an
identified cost basis.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended May 31, 1997. The accumulated net
realized loss on sales of investments for federal
income tax purposes at May 31, 1997, amounting to
approximately $410,000, is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 2002 through
2005.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
from generally accepted accounting principles.
- --------------------------------------------------------------------------------
2 TRANSACTIONS
WITH AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI) and pays a management fee at an annual rate
of .60% of average weekly net assets. The Fund
incurred a management fee of $382,000 for the six
months ended May 31, 1997.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) (formerly
known as Kemper Service Company) is the shareholder
service agent of the Fund. Under the agreement,
ZKSvC received shareholder services fees of $12,000
for the six months ended May 31, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the six months ended May 31, 1997,
14
<PAGE> 15
the Fund made no direct payments to its officers
and incurred trustees' fees of $8,000 to
independent trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS For the six months ended May 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $13,918
Proceeds from sales 13,063
- --------------------------------------------------------------------------------
4 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts in order to help protect itself
from anticipated market conditions and, as such,
bears the risk that arises from entering into these
contracts.
At the time a Fund enters into a futures contract,
it is required to make a margin deposit with its
custodian. Subsequently, gain or loss is recognized
and payments are made on a daily basis between the
Fund and its broker as the market value of the
futures contract fluctuates. At May 31, 1997, the
market value of assets pledged by the Fund to cover
margin requirements for open futures positions was
$111,000. The Fund also had liquid securities in
its portfolio in excess of the face amount of the
following short futures position open at May 31,
1997:
<TABLE>
<CAPTION>
FACE EXPIRATION LOSS AT
TYPE AMOUNT MONTH 5/31/97
-------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Note $2,143,000 June '97 $(8,000)
----------------------------------------------------------------------------
</TABLE>
15
NOTES TO FINANCIAL STATEMENTS
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, ---------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.14 12.19 11.54 12.36 11.86
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .40 .82 .83 .83 .83
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.08) (.05) .64 (.80) .58
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .32 .77 1.47 .03 1.41
- ----------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .41 .82 .82 .82 .89
- ----------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- .03 .02
- ----------------------------------------------------------------------------------------------------------
Total dividends .41 .82 .82 .85 .91
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.05 12.14 12.19 11.54 12.36
- ----------------------------------------------------------------------------------------------------------
MARKET VALUE, END OF PERIOD $12.50 12.38 12.13 11.63 12.38
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------
Based on net asset value 2.67% 6.58 13.09 .12 12.32
- ----------------------------------------------------------------------------------------------------------
Based on market value 4.47% 9.19 11.70 .74 9.99
- ----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------
Expenses .78% .74 .76 .75 .74
- ----------------------------------------------------------------------------------------------------------
Net investment income 6.66% 6.82 6.97 6.92 6.87
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $127,818 128,234 127,844 120,689 128,564
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 21% 31 8 11 8
- ----------------------------------------------------------------------------------------------------------
</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.
16
<PAGE> 17
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
On May 29, 1997, an annual shareholders' meeting was held. Kemper Strategic
Municipal Income Trust shareholders were asked to vote on two separate issues:
re-election of the eight members to the Board of Trustees and ratification of
Ernst & Young LLP as independent auditors. We are pleased to report that all
nominees were elected and the selection of Ernst & Young LLP as the fund's
auditors was ratified. Following are the results for each issue:
1) Re-election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
James E. Akins 8,408,283 146,418
Arthur R. Gottschalk 8,447,454 107,247
Frederick T. Kelsey 8,449,554 105,147
Dominique P. Morax 8,421,913 132,788
Fred B. Renwick 8,418,189 136,512
Stephen B. Timbers 8,461,524 93,177
John B. Tingleff 8,459,184 95,517
John G. Weithers 8,457,684 97,017
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
8,425,745 28,933 100,022
</TABLE>
17
<PAGE> 18
NOTES
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES OFFICERS
STEPHEN B. TIMBERS DALE R. BURROW
President and Trustee Vice President
JAMES E. AKINS
Trustee CHARLES R. MANZONI, JR.
Vice President
ARTHUR R. GOTTSCHALK
Trustee CHRISTOPHER J. MIER
Vice President
FREDERICK T. KELSEY
Trustee JOHN E. NEAL
Vice President
DOMINIQUE P. MORAX
Trustee ROBERT C. PECK
Vice President
FRED B. RENWICK
Trustee PHILIP J. COLLORA
Vice President
JOHN B. TINGLEFF and Secretary
Trustee
JEROME L. DUFFY
JOHN G. WEITHERS Treasurer
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT ZURICH KEMPER SERVICE COMPANY
P.O. Box 419066
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
KSMIT - 3 (7/97) 1034810
Printed in the U.S.A.
[KEMPER FUNDS LOGO]
