<PAGE> 1
KEMPER
STRATEGIC MUNICIPAL
INCOME TRUST
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED NOVEMBER 30, 1996
" ...Despite a relatively volatile
municipal bond market, the fund delivered a stable
flow of dividends and favorable performance [during the year]."
[KEMPER FUNDS LOGO]
<PAGE> 2
TOTAL RETURNS
For the year ended November 30, 1996
<TABLE>
<CAPTION>
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
- ---------------------------------------------------
<S> <C> <C>
KEMPER STRATEGIC MUNICIPAL
INCOME TRUST 6.58% 9.19%
- ---------------------------------------------------
</TABLE>
NET ASSET VALUE AND
MARKET PRICE
<TABLE>
<CAPTION>
AS OF AS OF
11/30/96 11/30/95
- -------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $ 12.14 $ 12.19
- -------------------------------------------------
MARKET PRICE $12.375 $12.125
- -------------------------------------------------
</TABLE>
DIVIDEND REVIEW
The following table shows per share dividend and yield information for the fund
as of November 30, 1996.
<TABLE>
<S> <C>
ONE-YEAR INCOME: $0.816
- --------------------------------------------------
NOVEMBER DIVIDEND: $0.068
- --------------------------------------------------
ANNUALIZED DISTRIBUTION RATE: (BASED
ON NET ASSET VALUE) 6.72%
- --------------------------------------------------
ANNUALIZED DISTRIBUTION RATE: (BASED
ON MARKET PRICE) 6.59%
- --------------------------------------------------
TAX EQUIVALENT DISTRIBUTION RATE
(BASED ON NET ASSET VALUE AND A
37.1% FEDERAL INCOME TAX RATE) 10.68%
- --------------------------------------------------
TAX EQUIVALENT DISTRIBUTION RATE
(BASED ON MARKET PRICE AND A 37.1%
FEDERAL INCOME TAX RATE) 10.48%
- --------------------------------------------------
</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.
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.
HEDGING A strategy used to help protect an investment. Financial managers can
use any number of technical and nontechnical procedures to hedge or reduce the
possibility of a loss on an investment. There is no assurance that these
procedures will be successful.
REVENUE BOND INDEX (RBI) The average yield on 25 revenue bonds with 30-year
maturities compiled by THE BOND BUYER, a newspaper that covers the municipal
bond market.
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 a specified period, assuming the
reinvestment of all dividends. It represents the aggregate percentage or change
in the value of an investment in the fund over the period. Total return may be
based upon net asset value or market price.
2
At a Glance
Terms to Know
3
Economic Overview
CONTENTS
TERMS TO KNOW AT A GLANCE
5
Management Team
6
Performance Update
8
Largest Sectors
Portfolio Statistics
9
Portfolio of Investments
13
Report of
Independent Auditors
14
Financial Statements
16
Notes to
Financial Statements
18
Financial Highlights
19
Description of Dividend
Reinvestment Plan
<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 $79 BILLION IN ASSETS, INCLUDING $44 BILLION IN RETAIL
MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
As we begin a new year, it's remarkable how eventful 1996 was and yet,
economically, we are essentially where we were one year ago.
The fundamentals of the economy are remarkably similar. Long-term interest
rates are approximately 6.5% compared to the 6.5% to 7% range they were in
during the first half of 1996. We believe the economy is growing at a rate of
approximately 2.5%. Inflation continues to be well under control, at about 3.0%.
One significant difference between today and one year ago is that prices of
the stocks are on average up 20%. While price movements were more volatile in
1996 than in the past few years, the patient investor was amply rewarded. The
prime element sending the stock market higher was strong positive cash flows.
This liquidity in an environment of modestly increasing corporate profits and
relatively stable interest rates pushed stocks higher for most of the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in
recent years but positive nonetheless.
- INTEREST RATES. Rates should remain stable, and short-term interest rates
may even decline.
- LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, will continue to create strong demand
for securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
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 (12/31/96) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.30 6.87 5.65 7.78
PRIME RATE (2) 8.25 8.25 8.50 8.50
INFLATION RATE(3)* 3.19 2.75 2.60 2.61
THE U.S. DOLLAR (4) 4.36 8.55 -0.57 -5.29
CAPITAL GOODS ORDERS (5)* 2.69 1.85 13.09 3.68
INDUSTRIAL PRODUCTION (5)* 4.40 4.12 1.08 6.43
EMPLOYMENT GROWTH (6) 2.17 2.19 1.57 3.52
</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,
inflations 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 November 30, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter 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.
January 9, 1997
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
4
<PAGE> 5
MANAGEMENT TEAM
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
PORTFOLIO MANAGEMENT TEAM
[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 MANAGER OF
KEMPER STRATEGIC MUNICIPAL INCOME TRUST. HE HAS BEEN PORTFOLIO MANAGER SINCE THE
FUND'S INCEPTION IN 1989. MIER RECEIVED A B.A. DEGREE IN ECONOMICS FROM THE
UNIVERSITY OF MICHIGAN AND WENT ON TO RECEIVE HIS M.M. IN FINANCE FROM THE
KELLOGG GRADUATE SCHOOL OF MANAGEMENT AT NORTHWESTERN UNIVERSITY. HE IS A
CHARTERED FINANCIAL ANALYST.
[WILLSON PHOTO]
STEPHEN WILLSON IS A FIRST VICE PRESIDENT OF ZKI AND HAS BEEN WITH THE COMPANY
SINCE 1985. HE BECAME A VICE PRESIDENT AND PORTFOLIO CO-MANAGER OF THE FUND IN
1993. WILLSON EARNED A B.A. IN MATHEMATICS AND A MASTER'S DEGREE IN FINANCE FROM
NORTHERN ILLINOIS UNIVERSITY AND 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 MANAGEMENT
TEAM 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
THE YEAR ENDED NOVEMBER 30, 1996, WAS A PERIOD OF SHIFTING INTEREST RATES AND
POLITICAL RHETORIC, WHICH GREATLY IMPACTED THE MUNICIPAL BOND MARKET. THE KEMPER
STRATEGIC MUNICIPAL INCOME TRUST PORTFOLIO MANAGEMENT TEAM EXPLAINS HOW THEY
MANAGED THE STRUCTURE OF THE PORTFOLIO TO HELP ENHANCE PERFORMANCE.
Q WERE YOU PLEASED WITH THE FUND'S PERFORMANCE DURING THE YEAR?
A Yes, despite a relatively volatile municipal bond market, the fund
delivered a stable flow of dividends and favorable performance. The fund's 6.58
percent return on net asset value was slightly below the Lipper High Yield
Municipal Debt Category of 6.63 percent during the fiscal year.
Q DURING THE LAST FISCAL YEAR, MUNICIPAL BOND YIELDS HAVE FLUCTUATED QUITE A
BIT BUT ENDED THE YEAR VIRTUALLY UNCHANGED. WHAT CAUSED THE YIELD VOLATILITY AND
RECOVERY?
A The year began in the midst of a bond rally, sparked by weaker economic
data, relatively benign inflation and optimism that a federal budget resolution
would occur. This created a favorable climate for the municipal market, and bond
yields fell. THE BOND BUYER 25-Revenue Bond Index (RBI) -- a gauge of municipal
bond interest rates -- began the fiscal year at 5.78 percent on November 30,
1995, and then fell to a low of 5.63 percent on January 4, 1996.
Later in January, however, data was released that indicated the economic
slowdown may have been related mostly to the impact of severe weather as opposed
to any fundamental weakness. Moreover, with the start of the Republican party
presidential primaries, focus moved away from the federal budget and deficit
reduction proposals toward other issues. As optimism about deficit reduction
began to fade, yields began to rise.
This rise in yields was propelled in early March, when the U.S.
Department of Labor announced an unanticipated and dramatic increase in
employment growth. Many bond investors saw this information as evidence that
the economy was re-establishing a firm footing. The news caused a sell-off in
the market because more rapid growth is often associated with higher inflation,
which erodes the value of fixed-income investments. Yields jumped from 5.88
percent on March 7, to 6.13 percent on March 14 as measured by the RBI.
The municipal market traded in an irregular pattern until September, when it
became clear that the Federal Reserve Board would not raise interest rates. From
September through the end of the period, the market became more optimistic and
interest rates declined. The Revenue Bond Index yield was 5.80 percent on
November 27, 1996, just two basis points higher than at the start of the fiscal
year.
Q HOW WAS THE FUND'S PERFORMANCE IMPACTED BY THE CHANGES IN INTEREST RATES?
A The fund tended to be less sensitive to the shifts in rates due to a fairly
significant presence of premium bonds in the portfolio. These bonds enabled the
fund to provide more stable performance during a somewhat volatile year.
Q HOW WAS THE FUND MANAGED AS RATES SHIFTED DIRECTION?
A We kept the fund fully invested. From February to April we put on
moderately defensive hedges on a periodic basis. The hedges were used for short
periods of time to help insulate the fund from erosion of its principal.
Throughout the year, we experienced a modest level of bond calls. The proceeds
from these calls were used to purchase longer maturity bonds with good call
protection.
Q WERE THERE ANY SIGNIFICANT TRENDS WITHIN INDIVIDUAL STATES THAT AFFECTED
THE FUND'S PERFORMANCE?
A Like the nation, many states experienced an ongoing economic expansion and
higher rates of employment, which is generally positive for municipal credit
quality. In some states, such as California and Ohio, general obligation bond
ratings were upgraded. During the period, our direct exposure to New York City
issues was reduced due to an advanced refunding. We chose not to add any
additional New York City issues in response to the city's ongoing struggle with
balancing its budget.
6
<PAGE> 7
PERFORMANCE UPDATE
Q YOU MENTIONED THAT YOU MAINTAINED A REDUCED EXPOSURE TO THE NEW YORK CITY
CREDIT. HOW DO YOU DETERMINE WHEN TO ADD OR DECREASE PORTFOLIO EXPOSURE OR
DECIDE WHICH ISSUES TO PURCHASE?
A We are fortunate to have a staff of five research analysts dedicated to
following the municipal market. This group of seasoned professionals has more
than 50 years of combined industry experience, which makes them critical to the
portfolio selection process.
Each analyst covers a specific geographic area as well as industry
specialization. They have access, via computer subscription services, to all
relevant regional and national news and financial publications. The analysts
also have access to sophisticated investment databases. The information
available through the services, in many cases, is customized to meet Zurich
Kemper Investments' specific needs. 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.
Q WHAT CAN YOU TELL US ABOUT THE LEVEL OF MUNICIPAL SUPPLY?
A Supply picked up during the last few months of 1995 but remained lower than
1994 levels for the year as a whole. Early in 1996, supply was relatively high
but by the close of the year it was moving closer to 1995 levels on a monthly
year-over-year basis.
Q ARE MUNICIPAL BOND FUNDS A GOOD INVESTMENT IN THE CURRENT ECONOMIC
ENVIRONMENT?
A Municipal bonds can 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 in today's tax environment.
Municipal bonds and equities can both be important components of a balanced
portfolio. If your exposure to municipals has declined on a relative basis over
the last few years, now may be the right time to review your long-term goals and
rebalance your portfolio of investments to increase your exposure to municipal
bonds.
Q WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET?
A We expect moderate economic growth to continue, with a relatively low rate
of inflation. At the moment, rates on long-term Treasury bonds appear likely to
remain within a range of 6 to 7.25 percent. We look for levels of municipal
supply to remain relatively moderate, which would be positive for municipal
bonds and for Kemper Strategic Municipal Income Trust.
7
<PAGE> 8
LARGEST SECTORS
THE FUND'S LARGEST SECTORS*
REPRESENTING 57% OF THE FUND'S TOTAL NET ASSETS ON NOVEMBER 30, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
HOLDINGS PERCENT
- -------------------------------------------------------------------------
<S> <C> <C>
1. U.S. GOVERNMENT SECURED 19%
- -------------------------------------------------------------------------
2. SENIOR CARE BONDS 13%
- -------------------------------------------------------------------------
3. NON-SENIOR CARE BONDS 11%
- -------------------------------------------------------------------------
4. INDUSTRIAL REVENUE BONDS 7%
- -------------------------------------------------------------------------
5. HOSPITAL BONDS 7%
- -------------------------------------------------------------------------
</TABLE>
PORTFOLIO STATISTICS
SECURITIES RATINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
ON 11/30/96 ON 11/30/95
- -------------------------------------------------------------------------
<S> <C> <C>
AAA 4% 4%
- -------------------------------------------------------------------------
AA 7 10
- -------------------------------------------------------------------------
A 3 6
- -------------------------------------------------------------------------
BBB 26 22
- -------------------------------------------------------------------------
B 2 2
- -------------------------------------------------------------------------
NOT RATED+ 58 56
- -------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 11/30/96 ON 11/30/95
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 considered
by Zurich Kemper Investments, Inc. to be equivalent to the following: AAA 13%, A
5%, BBB 4%, BB 31% and B 5% for November 30, 1996, and AAA 7%, A 4%, BBB 9%, BB
31% and B 5% for November 30, 1995.
AVERAGE MATURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
ON 11/30/96 ON 11/30/95
- ------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 16.9 YEARS 17.2 YEARS
- ------------------------------------------------------------------------
</TABLE>
*Portfolio composition and holdings are subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS AT NOVEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
ADVANCED REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL AND
INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IL, Chicago:
O'Hare International Airport, General Airport
Rev., 8.20%, to be called 1-01-97 @ 102 $ 2,875 $ 2,944
Tax Increment Allocation, Central Station Proj.,
Rev., 8.90%, to be called 1-01-02 @ 102 2,170 2,633
IL, Itasca, Central Manufacturing District, Special
Service Area, Rev., 8.375%, to be called 12-01-00
@ 102 2,585 2,843
OH, Marion County, Health Care Facilities, United
Church Homes, Inc., Rev., 8.875%, to be called
12-01-99 @ 103 2,780 3,211
OH, Cuyahoga County, Health Care Facilities,
Judson Retirement Community Center, Rev., 8.875%,
to be called 11-15-99 @ 103 2,500 2,883
IN, Indianapolis, Local Public Improvement Bond
Bank, Rev., 8.50%, to be called 2-01-98 @ 102 3,000 3,212
FL, Volusia County, Health Facilities Auth.,
Memorial Health Systems Proj., Rev., 8.25%, to be
called 6-01-00 @ 102 2,390 2,736
FL, Greater Orlando, Aviation Auth., Airport
Facilities Rev., 8.00%, to be called 10-01-98 @
102 70 76
PA, Greene County, Gen. Oblg., 8.75% to be called
12-01-00 @ 100 1,835 2,120
OK, Woodward Municipal Auth., Hospital
Rev., 9.25%, to be called 11-01-00 @ 102 1,750 2,085
NY, New York City, Gen. Oblg., 7.50%, to be called
8-15-99 @ 101.50 10 11
----------------------------------------------------------------------------
TOTAL ADVANCED REFUNDED OBLIGATIONS--19.3%
(Cost: $21,934) 24,754
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------
ILLINOIS--9.9% Chicago, O'Hare International Airport, International
Terminal, Special Rev., 8.20%, 2024 1,200 1,423
Dev. Finance Auth., Catholic Health Partners
Services, Rev., 5.30%, 2018 250 240
Harvard, Multifamily Housing, Northfield Court
Proj., Rev., 9.50%, 2006 1,955 2,129
Health Facilities Auth., Bethany Home and Hospital
of the Methodist Church, Rev., 8.625%, 2009 2,500 2,787
Lombard, Tax Increment Rev., 8.80%, 2004 1,760 1,989
St. Charles, Multifamily Housing, Wessel Court
Proj., Rev., 7.60%, 2024 1,985 2,042
Village of University Park, Tax Increment, Governors
Gateway Industrial Park, Rev., 8.50%, 2011 1,970 2,139
----------------------------------------------------------------------------
12,749
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INDIANA--5.7% Fishers, Economic Dev. Auth., Indianapolis Water
Company Proj., Rev., 7.875%, 2019 $ 685 $ 721
Health Facilities Financing Auth., Fayette Memorial
Hospital Proj., Rev., 7.20%, 2022 2,800 2,936
Housing Finance Auth., Residential Mortgage, Rev.,
8.375%, 2020 1,610 1,680
Indianapolis Airport Auth., United Air Lines, Inc.
Proj., Rev., 6.50%, 2031 1,900 1,952
----------------------------------------------------------------------------
7,289
- ---------------------------------------------------------------------------------------------------------------------
ARIZONA--5.5% Coconino County, Industrial Dev. Auth., The Guidance
Center, Inc. Proj., Rev., 9.25%, 2011 1,825 2,019
Health Facilities Auth., The New Foundation Proj.,
Rev., 8.25%, 2019 2,450 2,590
Pima County Industrial Dev. Auth., Larson Company
Proj., Rev., 9.50%, 2010 2,200 2,475
----------------------------------------------------------------------------
7,084
- ---------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA--5.3% Columbia County, Industrial Dev. Auth., First
Mortgage, First Street Association Proj., Rev.,
9.00%, 2014 1,950 2,083
Higher Educational Facilities Auth., Philadelphia
College of Textiles & Science, Rev., 6.70%, 2014 2,000 2,078
Lehigh County General Purpose Auth., Wiley House,
Rev., 8.65%, 2004 2,580 2,684
----------------------------------------------------------------------------
6,845
- ---------------------------------------------------------------------------------------------------------------------
NEW YORK--5.3% Medical Care Facilities Finance Agcy., Rev., 7.30%,
2021 60 66
New York City, Gen. Oblg., 7.00% and 7.50%, 2010 3,725 3,923
Port Auth. of New York and New Jersey, LaGuardia
Airport Passenger Terminal, Rev., 9.125%, 2015 2,500 2,769
----------------------------------------------------------------------------
6,758
- ---------------------------------------------------------------------------------------------------------------------
FLORIDA--5.1% Greater Orlando Aviation Auth., Airport Facilities,
Rev., 8.00%, 2018 625 673
Manatee County, Industrial Dev., Meditrust Proj.,
Rev., 7.35%, 2015 1,775 1,866
Martin County Industrial Dev. Auth., Indiantown
Congeneration L.P. Proj., Rev., 7.875%, 2025 1,500 1,730
Nassau County, Amelia Island Care Center Proj.,
Rev., 9.75%, 2023 1,985 2,205
----------------------------------------------------------------------------
6,474
- ---------------------------------------------------------------------------------------------------------------------
CALIFORNIA--4.9% Foothill/Eastern Transportation Corridor Agcy., Toll
Road Rev., zero coupon, 2026 11,500 1,975
Sacramento County, Bradshaw Road Proj.,
Rev., 7.20%, 2015 1,250 1,290
Sacramento Power Auth., Cogeneration Proj.,
Rev., 5.875%, 2015 1,500 1,510
San Diego, Detention Facility, Certificates of
Participation, 8.00%, 2002 425 460
San Joaquin Hills Transportation Corridor Agcy.,
Senior Lien Toll Road Rev., zero coupon, 2020 4,300 1,064
----------------------------------------------------------------------------
6,299
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COLORADO--4.2% Arapahoe County, Capital Improvement Trust Fund,
E-470 Public Highway Auth., Rev., zero coupon,
2010 $ 5,000 $ 2,093
City and County of Denver, Airport System
Rev., 7.50% to 8.75%, 2023 through 2025 2,900 3,317
----------------------------------------------------------------------------
5,410
- ---------------------------------------------------------------------------------------------------------------------
MISSOURI--3.9% St. Louis, Tax Increment, Scullin Redev. Proj.,
Rev., 10.00%, 2010 2,290 2,760
West Plains, Industrial Dev. Auth., Ozarks Medical
Center Proj. Rev., 8.625%, 2020 2,000 2,190
----------------------------------------------------------------------------
4,950
- ---------------------------------------------------------------------------------------------------------------------
IOWA--3.3% Finance Auth., Healthcare Facilities, On With Life,
Inc. Proj., Rev., 7.25%, 2015 2,000 2,088
Lake City, Health Care Facility, Opportunity Living
Proj., Rev., 10.00%, 2015 2,000 2,192
----------------------------------------------------------------------------
4,280
- ---------------------------------------------------------------------------------------------------------------------
MINNESOTA--3.3% Housing Finance Agcy., Single Family Mortgage
Rev., 7.95%, 2022 1,975 2,094
Sauk Rapids, Industrial Dev., Gold N Plump Poultry
Proj., Rev., 9.50%, 2005 2,020 2,132
----------------------------------------------------------------------------
4,226
- ---------------------------------------------------------------------------------------------------------------------
MICHIGAN--2.6% Gogebic County, Hospital Finance Auth., Grand View
Hospital Proj., Rev., 8.75%, 2016 2,250 2,445
Madison Heights, Tax Increment Finance Auth.,
Rev., 8.50%., 2001 875 921
----------------------------------------------------------------------------
3,366
- ---------------------------------------------------------------------------------------------------------------------
NEVADA--2.2% Housing Division, Single Family Mortgage Program,
Rev., 7.90% and 6.50%, 2021 and 2028 2,765 2,882
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
NEW MEXICO--2.0% Albuquerque Nursing Home, West Mesa Center Proj.,
Rev., 9.75%, 2014 1,400 1,500
Truth or Consequences Nursing Home, Sierra Health
Care, Inc., Rev., 9.75%, 2014 935 1,002
----------------------------------------------------------------------------
2,502
- ---------------------------------------------------------------------------------------------------------------------
CONNECTICUT--1.7% Dev. Auth., Pierce Memorial Baptist Home, Inc.
Proj., Rev., 9.25%, 2018 2,000 2,211
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
TEXAS--1.7% Brazos River Auth., Collateralized Pollution
Control, Utilities Electric Company Proj., Rev.,
8.25%, 2019 2,000 2,159
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--1.7% Worcester, Briarwood Retirement Community,
Salem Community Corp., Rev., 9.25%, 2022 2,000 2,147
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE--1.6% Higher Educational and Health Facilities Auth.,
United Church of Christ--Havenwood, Rev., 7.45%,
2025 2,000 2,031
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UTAH--1.3% Housing Finance Agcy., Single Family Mortgage Rev.,
6.65%, 2026 $ 1,600 $ 1,659
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA--1.2% Aiken County, Hospital Facilities, Mattie C. Hall
Health Care Center Proj., Rev., 8.625%, 2010 1,500 1,588
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
KENTUCKY--1.2% Jefferson County, Pollution Control, Louisville Gas
& Electric Co. Proj., Rev., 7.75%, 2019 1,500 1,580
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
OKLAHOMA--1.2% Woodward Municipal Auth., Hospital Rev., 8.50%, 2014 1,335 1,489
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
STATES LESS THAN NJ, Educational Facilities Auth., Caldwell College,
ONE PERCENT--3.0% Rev., 7.25%, 2025 1,150 1,217
ND, Housing Finance Agcy., Single Family Mortgage
Rev., 8.375%, 2021 945 999
WA, Grant County, Public Utility District #2,
Wanapum HydroElectric, Rev., 5.875%, 2031 550 558
NE, Investment Finance Auth., Single Family Housing
Rev., 6.70%, 2026 500 521
WI, Housing & Economic Dev. Auth., Home Ownership,
Rev., 6.20%, 2027 500 502
----------------------------------------------------------------------------
3,797
----------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--77.8%
(Cost: $91,471) 99,775
----------------------------------------------------------------------------
----------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--97.1%
(Cost: $113,405) 124,529
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--3.90% to 4.25%
INSTRUMENTS--.9% Due--December 1996
(Cost: $1,200) 1,200 1,200
----------------------------------------------------------------------------
TOTAL INVESTMENTS--98.0%
(Cost: $114,605) 125,729
----------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--2.0% 2,505
----------------------------------------------------------------------------
NET ASSETS--100% $128,234
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $114,605,000 for federal income tax purposes
at November 30, 1996, the gross and net unrealized appreciation of investments
was $11,124,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Strategic Municipal Income
Trust as of November 30, 1996, the related statements of operations 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
1992. 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 generally accepted auditing
standards. 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, 1996, by correspondence with the custodian and brokers. 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 Municipal Income Trust at November 30, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the fiscal periods since 1992, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 17, 1997
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $114,605) $125,729
- ------------------------------------------------------------------------
Cash 198
- ------------------------------------------------------------------------
Interest receivable 2,901
- ------------------------------------------------------------------------
TOTAL ASSETS 128,828
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Investments purchased 502
- ------------------------------------------------------------------------
Management fee 64
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 4
- ------------------------------------------------------------------------
Trustees' fees and other 24
- ------------------------------------------------------------------------
Total liabilities 594
- ------------------------------------------------------------------------
NET ASSETS $128,234
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $117,310
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (599)
- ------------------------------------------------------------------------
Unrealized appreciation on investments 11,124
- ------------------------------------------------------------------------
Undistributed net investment income 399
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $128,234
- ------------------------------------------------------------------------
NET ASSET VALUE PER SHARE, $.01 PAR VALUE
($128,234 / 10,559 shares outstanding) $12.14
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------
Interest income $ 9,573
- ------------------------------------------------------------------------
Expenses:
Management fee 759
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 54
- ------------------------------------------------------------------------
Professional fees 40
- ------------------------------------------------------------------------
Reports to shareholders 24
- ------------------------------------------------------------------------
Trustees' fees and other 60
- ------------------------------------------------------------------------
Total expenses 937
- ------------------------------------------------------------------------
NET INVESTMENT INCOME 8,636
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Net realized gain on sales of investments (including
options purchased) 208
- ------------------------------------------------------------------------
Net realized gain from futures transactions 120
- ------------------------------------------------------------------------
Net realized gain 328
- ------------------------------------------------------------------------
Change in net unrealized appreciation on investments (882)
- ------------------------------------------------------------------------
Net loss on investments (554)
- ------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 8,082
- ------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1996 1995
- ---------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 8,636 8,704
- ---------------------------------------------------------------------------------------------
Net realized gain (loss) 328 (262)
- ---------------------------------------------------------------------------------------------
Change in net unrealized appreciation (882) 6,961
- ---------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 8,082 15,403
- ---------------------------------------------------------------------------------------------
Distribution from net investment income (8,611) (8,542)
- ---------------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
(74 shares and 25 shares, respectively) 919 294
- ---------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 390 7,155
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------
Beginning of year 127,844 120,689
- ---------------------------------------------------------------------------------------------
END OF YEAR
(including undistributed net investment income
of $399 and $368, respectively) $128,234 127,844
- ---------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES DESCRIPTION OF FUND. 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 and therefore no
federal income tax provision is required. The
accumulated net realized loss on sales of
investments for federal income tax purposes at
November 30, 1996, amounting to approximately
$314,000, 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 $759,000 for the year
ended November 30, 1996.
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, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended November 30, 1996,
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
the Fund made no direct payments to its officers
and incurred trustees' fees of $21,000 to
independent trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS For the year ended November 30, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $39,596
Proceeds from sales 38,332
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $12.19 11.54 12.36 11.86 11.65
- --------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .82 .83 .83 .83 .84
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.05) .64 (.80) .58 .30
- --------------------------------------------------------------------------------------------------------
Total from investment operations .77 1.47 .03 1.41 1.14
- --------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .82 .82 .82 .89 .83
- --------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- .03 .02 .10
- --------------------------------------------------------------------------------------------------------
Total dividends .82 .82 .85 .91 .93
- --------------------------------------------------------------------------------------------------------
Net asset value, end of year $12.14 12.19 11.54 12.36 11.86
- --------------------------------------------------------------------------------------------------------
MARKET VALUE, END OF YEAR $12.38 12.13 11.63 12.38 12.13
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN
- --------------------------------------------------------------------------------------------------------
Based on net asset value 6.58% 13.09 .12 12.32 10.14
- --------------------------------------------------------------------------------------------------------
Based on market value 9.19% 11.70 .74 9.99 8.19
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------------
Expenses .74% .76 .75 .74 .77
- --------------------------------------------------------------------------------------------------------
Net investment income 6.82% 6.97 6.92 6.87 7.17
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $128,234 127,844 120,689 128,564 122,035
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate 31% 8 11 8 10
- --------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return based on net asset value reflects changes in the Fund's net
asset value during the year. 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
year.
FEDERAL TAX STATUS OF 1996 DIVIDENDS
All of the dividends paid from net investment income by the Fund constitute
tax-exempt interest that is not taxable for federal income tax purposes;
however, a portion of the dividends paid may be includable in the alternative
minimum tax calculation.
18
<PAGE> 19
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 MUNICIPAL 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 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 "Distributions."
- --------------------------------------------------------------------------------
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 419066
Kansas City, Missouri 64141-6066
1-800-294-4366
19
<PAGE> 20
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 participants 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.
20
<PAGE> 21
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 their 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.
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
JAMES E. AKINS DALE R. BURROW
Trustee Vice President
ARTHUR R. GOTTSCHALK CHARLES R. MANZONI, JR.
Trustee Vice President
FREDERICK T. KELSEY CHRISTOPHER J. MIER
Trustee Vice President
DOMINIQUE P. MORAX JOHN E. NEAL
Trustee Vice President
FRED B. RENWICK STEPHEN R. WILLSON
Trustee Vice President
JOHN B. TINGLEFF PHILIP J. COLLORA
Trustee Vice President
and Secretary
JOHN G. WEITHERS
Trustee JEROME L. DUFFY
Treasurer
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT 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
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
222 South Riverside Plaza
Chicago, IL 60606
http://www.kemper.com
[RECYCLE LOGO]
Printed on recycled paper.
KSMIT - 2 (1/97) 1027630
Printed in the U.S.A. [KEMPER FUNDS LOGO]
