<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
KEMPER STRATEGIC
MUNICIPAL INCOME TRUST
"... While other fixed income asset classes, such as corporate
bonds and Treasuries, experienced a rough ride during the last six months,
municipal bonds remained relatively stable. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
7
Portfolio Composition
Portfolio Statistics
8
Portfolio of Investments
13
Financial Statements
15
Notes to Financial Statements
16
Financial Highlights
17
Shareholders' Meeting
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER STRATEGIC MUNICIPAL
INCOME TRUST TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 1999
<TABLE>
<CAPTION>
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER STRATEGIC MUNICIPAL
INCOME TRUST 1.28% -4.34%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE AND MARKET PRICE
- --------------------------------------------------------------------------------
AS OF AS OF
5/31/99 11/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $12.01 $12.24
- --------------------------------------------------------------------------------
MARKET PRICE $11.88 $12.81
- --------------------------------------------------------------------------------
</TABLE>
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.
INVESTMENT BY THE FUND IN LOWER RATED SECURITIES PRESENTS SPECIAL RISK
CONSIDERATIONS.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF MAY 31, 1999
<TABLE>
<CAPTION>
KEMPER STRATEGIC
MUNICIPAL
INCOME TRUST
- --------------------------------------------------------------------------------
<S> <C>
- --------------------------------------------------------------------------------
SIX-MONTHS INCOME $0.3750
- --------------------------------------------------------------------------------
MAY DIVIDEND $0.0625
- --------------------------------------------------------------------------------
LONG-TERM CAPITAL GAIN $0.0100
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE
(BASED ON NET ASSET VALUE) 6.24%
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE
(BASED ON MARKET PRICE) 6.31%
- --------------------------------------------------------------------------------
TAX EQUIVALENT DISTRIBUTION
RATE(BASED ON NET ASSET VALUE AND A
37.1% FEDERAL INCOME TAX RATE) 9.92%
- --------------------------------------------------------------------------------
TAX EQUIVALENT DISTRIBUTION
RATE(BASED ON MARKET PRICE AND A
37.1% FEDERAL INCOME TAX RATE) 10.03%
- --------------------------------------------------------------------------------
</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. MARKET PRICE,
DISTRIBUTION RATES, NET ASSET VALUE AND RETURNS ARE HISTORICAL AND WILL
FLUCTUATE AND DO NOT GUARANTEE FUTURE RESULTS. ADDITIONAL INFORMATION CONCERNING
PERFORMANCE IS CONTAINED IN THE FINANCIAL HIGHLIGHTS APPEARING AT THE END OF
THIS REPORT.
TERMS TO KNOW
BOND RATINGS Grades assigned by credit-rating agencies to corporate and
municipal debt securities, based on the borrower's expected ability to repay.
The higher the grade, the lower the interest rate a borrower will usually pay.
The two major credit rating firms are Moody's Investors Service, Inc. and
Standard and Poor's.
DURATION A measure of the interest rate sensitivity of a fixed income investment
or portfolio, incorporating time to maturity and coupon size. The longer a
portfolio's duration, the greater its sensitivity to interest rate changes.
REVENUE BOND INDEX (RBI) The RBI is the average yield on 25 revenue bonds with
30-year maturities generally rated single "A," compiled by The Bond Buyer, a
newspaper that reports on the municipal bond market.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS.
SILVIA HOLDS A PH.D. IN ECONOMICS FROM NORTHEASTERN UNIVERSITY IN BOSTON, MASS.
HE IS A MEMBER OF BOTH THE BLUE CHIP ECONOMIC AND FINANCIAL SURVEYS, AND SERVES
ON THE POLICY ADVISORY COMMITTEES OF THE FEDERAL RESERVE BOARDS OF CHICAGO AND
CLEVELAND.
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $280 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
As expected, the Federal Reserve Board raised its federal funds interest rate
(the rate at which banks lend to each other overnight) by one-fourth of a
percentage point in June. Although higher interest rates tend to have a
dampening effect on the market, investors rallied in response to this move. The
Dow Jones Industrial Average, which was down 50 points before the Fed's
statement on June 30, reversed course and ended the day at its highest closing
level in six weeks. The Dow went on to close at a record-setting high of 11,187
on July 7.
What led to the interest rate hike, and why does the market reaction suggest
that investors are happy about it?
It is generally recognized that a modest rate hike by the Fed may be effective
in slowing the economy sufficiently to suppress any simmering inflationary
pressures. Although the economy has been strong, there are concerns that it will
be unable to maintain its current rate of growth without prompting inflationary
pressures -- which is at the heart of the Fed's decision to raise interest
rates. The Fed is acting now to be proactive. In the past, Fed policy has been
reactive, which meant that the Fed tended to respond to inflation only when it
picked up. A rate hike now is intended to halt any future buildup in inflation.
Moreover, by hinting at an increase well in advance -- then by limiting the
increase to 25 basis points -- the Fed relieved worried investors and gave a
boost to the financial markets.
Despite the minor rate increase, the long-term economic situation appears to
be positive. The federal budget surplus continues to benefit from good revenue
gains (which are based on good income gains, especially for households), good
capital gains and continued restraint in federal spending. The surplus this year
is expected to approach $100 billion.
This positive environment is exactly what sometimes poses risk for investors,
and is key to understanding recent volatility in the market. A strong economy
has the potential to feed inflation fears and drive up interest rates. Indeed,
recent market events illustrate the domino effect of investors reacting to
positive economic news, which they consider troubling at this point, more than
eight years into the economic expansion. Prior to its strong close in the second
quarter, the steady stream of positive economic news led to a sell-off in the
financial markets based on fears that the strong pace of economic growth would
eventually lead to higher inflation. The benchmark 30-year Treasury bond yield
rose, which pulled stocks lower.
Where can we expect to go from here? The fundamentals by which we judge the
health of the economy suggest continued growth as we move into the second half
of 1999. For example, the gross domestic product (GDP), the value of all goods
and services produced in the U.S., is expected to rise at an annual rate of 4
percent in the first half of 1999, following a tremendous fourth-quarter surge
of 6 percent. This is very much in line with what we've grown accustomed to over
the past year -- over the four quarters of 1998, the U.S. economy expanded by
4.3 percent. Some people aren't surprised at all by strong GDP growth that once
would have alarmed them. That's partially because we've grown accustomed to a
strong economy. But it's also because we've been able to absorb growth without
driving up inflation. That's important for investors. If prices had been rising
as the economy was growing, the Fed would have most likely raised short-term
interest rates earlier and more drastically, and that would have changed the
financial market outlook.
However, we do see some vulnerability on the economic front. Trade is a weak
spot in the economy right now. Exports of U.S. goods and services dropped in the
first half of 1999, while imports soared. This reflects the fact that the U.S.
is one of the few countries financially fit enough to buy goods produced
elsewhere in the world. But for as long as less vibrant international economies
are unable to buy U.S. goods, the profitability of U.S. companies trying to
export will be challenged.
When you think about it, vulnerability in regard to the international economy
is nothing new. Globally, the outlook is slightly more positive than it was a
few months ago. For example, the European markets are slowing down, which has
already led to the European Central Bank lowering interest rates in order to
boost domestic spending. In many countries in Europe there are no fixed-rate
mortgages, only adjustable-rate mortgages. When interest rates go down, mortgage
payments are reduced and homeowners can spend money elsewhere. This has a huge
impact on consumer spending, and will help European equities over time.
Additionally, the situation in Japan remains unchanged. And, problems in the
emerging markets haven't had the negative impact many people expected -- both
the Mexican and Brazilian stock markets have actually risen in the past two
months.
But don't forget that international crises have the potential to affect the
U.S. markets dramatically. Although the Kosovo crisis seems to be waning, past
increases in military spending on Kosovo by the 11 European Monetary Union (EMU)
countries could force them to spend less in other areas, which could have
economic implications, including higher interest rates. That's because many
European countries (especially Italy) have small economies and
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 (6/30/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Ten Year Treasury Rate 5.90 4.81 5.65 6.69
Prime Rate 7.75 8.49 8.50 8.30
Inflation* 2.03 1.62 1.44 3.03
The U.S. Dollar* -2.4 4.31 4.88 8.58
Capital goods orders* 7.73 11.44 8.10 5.52
Industrial production * 1.72 3.58 5.05 5.86
Employment growth* 2.15 2.48 2.61 2.51
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION
OF THE LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
* DATA AS OF MAY 31, 1999.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
little leeway in their budgets. Consequently, those countries financed unplanned
military expenditures by selling government bonds -- which, in Europe's small
bond market, typically raises interest rates. As an example, consider Italy,
which recently asked for more leeway on its deficit targets. When leeway was
granted, this led to a further sell-off in the eurodollar.
The international situation alone, however, is by no means an indicator of a
U.S. slowdown -- and without any such indications, complacency may be our
greatest concern. It's easy to look at the current U.S. economic situation and
behave as if no risk exists. But when you see the market soaring and are tempted
to jump in, note that the bull market grew to records on the strength of just a
few dozen stocks, while most other stock prices were flat or actually declined.
In summary, there are concerns that the current economy is unsustainable and
we soon could see an abrupt end. In many cases, however, people are looking for
a slowdown because they are fearful growth will drive up inflation these are
particularly older investors who are accustomed to inflation accompanying
growth. But again, sustained inflation seems unlikely, so a sharp slowdown is
not necessary. In the short term, we expect a modest economic slowdown but no
recession. The best approach now, as in any market, is to diversify and invest
for the long term.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
John E. Silvia
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF DR. JOHN SILVIA AS OF JUNE 9, 1999, AND MAY
NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF
THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[CONDON PHOTO]
PHILIP G. CONDON JOINED THE FIRM IN 1983 AND IS LEAD PORTFOLIO MANAGER OF THE
FUND AND MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS' MUNICIPAL BOND GROUP.
HE HAS ALSO SERVED AS DIRECTOR OF THE MUNICIPAL BOND RESEARCH DEPARTMENT.
[WILSON PHOTO]
REBECCA L. WILSON IS PORTFOLIO MANAGER OF THE FUND AND A VICE PRESIDENT OF
SCUDDER KEMPER INVESTMENTS, INC. SHE JOINED THE ORGANIZATION IN 1986 AND HAS
SERVED AS A TRADER FOR SEVERAL LONG TERM MUNICIPAL BOND FUNDS.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
AS THE FISCAL YEAR BEGAN, INVESTOR FOCUS SHIFTED FROM TURBULENCE OVERSEAS TO
UNEXPECTEDLY STRONG ECONOMIC GROWTH IN THE U.S. WHILE FEARS OF POTENTIALLY
HIGHER INTEREST RATES CAUSED GOVERNMENT AND CORPORATE BOND YIELDS TO FLUCTUATE
SUBSTANTIALLY, MUNICIPAL BONDS HELD THEIR GROUND IN THE MIDST OF THE TURMOIL.
BEL0W, THE MANAGEMENT TEAM DISCUSS THE MARKET'S PERFORMANCE AND HOW THE FUND WAS
POSITIONED IN RESPONSE.
Q HOW DID THE MUNICIPAL BOND MARKET PERFORM DURING THE LAST SIX MONTHS
RELATIVE TO OTHER FIXED-INCOME ASSET CLASSES?
A While other fixed income asset classes, such as corporate bonds and
Treasuries, experienced a rough ride during the last six months, municipal bonds
remained relatively stable.
For example, the Lehman Brothers Municipal Bond Index* gained 0.81 percent
for the six-month period ended May 31, 1999. That may not seem like much, but
compare it to the Lehman Brothers Long Government Bond Index**, which fell 5.76
percent, and the Lehman Brothers Government/Corporate Bond Index***, which was
off 1.73 percent. And of course, the municipal bond index return doesn't take
into account the tax advantage municipals offer. So municipal bonds were a good
place to be if you were a fixed income investor, especially a nervous one.
* LEHMAN BROTHERS MUNICIPAL BOND INDEX IS GENERALLY REPRESENTATIVE OF THE
PERFORMANCE OF LONG-TERM INVESTMENT-GRADE MUNICIPAL BONDS. THE INDEX IS
CALCULATED MONTHLY AND INCLUDES THE EFFECT OF REINVESTMENT OF DIVIDENDS.
SOURCE IS LIPPER ANALYTICAL SERVICES, INC.
** LEHMAN BROTHERS LONG GOVERNMENT BOND INDEX IS GENERALLY REPRESENTATIVE OF
THE PERFORMANCE OF GOVERNMENT AND AGENCY BONDS WITH A MATURITY OF TEN YEARS
AND GREATER. THIS INDEX IS CALCULATED MONTHLY AND INCLUDES THE EFFECT OF
INVESTMENT OF DIVIDENDS. SOURCE IS LIPPER ANALYTICAL SERVICES, INC.
*** LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX IS GENERALLY REPRESENTATIVE
OF THE PERFORMANCE OF GOVERNMENT, AGENCY AND INVESTMENT-GRADE CORPORATE
BONDS. THIS INDEX IS CALCULATED MONTHLY AND INCLUDES THE EFFECT OF
REINVESTMENT OF DIVIDENDS. SOURCE IS LIPPER ANALYTICAL SERVICES, INC.
Q WHAT CAUSED THE DOWNTURN IN OTHER ASSET CLASSES?
A The sell-off in U.S. government bonds was due to an about-face by
investors. Last summer, turbulence in foreign markets prompted a massive
flight-to-quality as global investors sought a safe, liquid haven for their
assets. Since U.S. government bonds were the obvious choice, billions of dollars
poured into the U.S. bond market. This demand pushed prices up and yields down,
particularly on Treasury bonds.
At the start of the fiscal year, that situation began to reverse itself. As
the months progressed, the U.S. economy's strong growth continued unabated. Oil
prices began to move higher, the labor market remained robust, and investors
became concerned that higher interest rates were around the corner. In addition,
foreign markets, particularly in Asia, started to settle down. This all prompted
a flight from quality, and yields began to rise. For example, on November 25,
1998, before the start of the fiscal year, 30-year Treasuries yielded 5.18
percent. By May 27, 1999, yields had moved up to 5.84 percent.
5
<PAGE> 6
PERFORMANCE UPDATE
Q WHY DID MUNICIPAL BONDS SEEM TO BE IMMUNE TO ALL THIS?
A "Immune" is probably too strong a word. To compare to the Treasury yield
rise mentioned above, A-rated municipal bond yields increased from 5.25 percent
at the start of the fiscal year to 5.41 percent. Clearly, that isn't as dramatic
as what took place in the Treasury market, but bond prices declined nonetheless.
However, the turbulence had less of an impact because different forces were
acting to limit a municipal sell-off. When Treasuries and other fixed income
classes were being pummeled, two factors helped support municipal bond prices.
First, supply decreased dramatically. Second, municipal bonds offered a very
attractive value to investors who don't usually buy them. The previous dramatic
yield decline on U.S. government bonds had caused municipal bonds to actually
outyield similar maturity Treasuries (based on The Bond Buyer Revenue Bond
Index). Historically, that's very unusual. Normally, long-maturity municipal
bonds typically yield about 80-90 percent of a similar maturity Treasury because
the tax-advantage of municipal bonds is typically "built in" to the price. Thus,
municipal bonds represented a great value throughout the six-month period, which
attracted some non-traditional buyers and helped support prices when the
Treasury market was under pressure.
According to the Revenue Bond Index, municipals now yield about 93 percent
of what similar maturity Treasuries do -- that's less than in previous months,
but historically municipals are still very attractive.
Q HOW DID THE FUND RESPOND TO THE MARKET'S CONDITIONS?
A Since Kemper Strategic Municipal Income Trust is an income-oriented
vehicle, we are always on the lookout for issues that can provide high income,
but do so with an acceptable level of risk. In the rising rate environment of
the last few months, that has been somewhat of a challenge. The reason is that
yields on high-yielding municipal bonds didn't move up in tandem with
higher-quality paper. So we're often not being compensated to take extra risk.
Therefore, we've primarily been content to be patient and wait for yields on
bonds of different credit quality to adjust to more attractive levels. The
bright side is that the recent increase in municipal bond yields may be
favorable for the fund over the longer term. Higher yields in the overall market
should translate into very attractive yields on lower-quality bonds, and our
leveraging ability should enable us to stock up on those issues that we believe
offer particularly good value.
Secondarily, we also traded selectively to increase the fund's call
protection and offset gains with losses as appropriate to help the fund operate
more efficiently on a tax basis.
The net result of our efforts was that the fund performed in line with its
peer group average during the first half of the fiscal year. The fund achieved a
total return of 1.28 percent (based on net asset value), slightly less than the
1.29 percent return for the Lipper Closed-end High Yield Municipal Debt Index.
Q HOW DO YOU VIEW THE ATTRACTIVENESS OF MUNICIPAL BONDS FOR THE REST OF THE
YEAR VERSUS OTHER TYPES OF BONDS?
A We think there are several reasons why municipals should continue to
perform relatively well. First, the municipal market should be more stable than
the government and corporate bond markets. As the first half of the fiscal year
drew to a close, it appeared that investors were expecting the Federal Reserve
to raise rates at least once. If the Fed does tighten, Treasuries and corporate
bonds would likely remain volatile as investors try to interpret the
ramifications of higher rates on both the domestic and global economies.
Meanwhile, municipal investors tend to pay less close attention to global
markets or corporate profits. They are typically more reliable buyers, and their
steady demand should help dampen volatility in the municipal bond market.
Second, the municipal market continues to offer attractive value, with
long-maturity yields still attractive relative to Treasuries. As we mentioned,
municipals now yield more than 90 percent of similar maturity Treasuries. Third,
strong municipal finances should help alleviate credit concerns. And finally,
issuance has so far remained about 20 percent below last year's levels, and that
lack of supply should help support prices.
For these reasons, we think that municipal bonds will continue to offer
investors an attractive alternative to other fixed-income investments.
6
<PAGE> 7
PORTFOLIO COMPOSITION
PORTFOLIO COMPOSITION*
REPRESENTING THE FUND'S COMPOSITION ON MAY 31, 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------
HOLDINGS PERCENT
- ----------------------------------------------------------
<S> <C> <C>
- ----------------------------------------------------------
1. REVENUE BONDS 70%
- ----------------------------------------------------------
2. U.S. GOVERNMENT SECURED 29%
- ----------------------------------------------------------
3. GENERAL OBLIGATIONS 1%
- ----------------------------------------------------------
</TABLE>
PORTFOLIO STATISTICS
SECURITIES RATINGS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
ON 5/31/99 ON 11/30/98
- -----------------------------------------------------------------------------------------
<S> <C> <C>
AAA 29% 10%
.........................................................................................
AA 1 2
.........................................................................................
A 1 1
.........................................................................................
BBB 12 19
.........................................................................................
BB 8 3
.........................................................................................
B 2 4
.........................................................................................
NOT RATED+ 47 61
- -----------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 5/31/99 ON 11/30/98
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 SCUDDER KEMPER
INVESTMENTS, INC. AS FOLLOWS: AAA 11%, A 4%, BBB
5%, BB 23% AND B 4% FOR MAY 31, 1999, AND AAA 15%,
A 3%, BBB 8%, BB 31% AND B 4% FOR NOVEMBER 30,
1998.
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 5/31/99 ON 11/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 15.5 years 16.3 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, 1999 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM MUNICIPAL INVESTMENTS
- ---------------------------------------------------------------------------------------------------------------------------
ARIZONA--6.5% Coconino County, AZ, Industrial Development Authority,
Guidance Center, Inc. Project, Revenue, Prerefunded
6/1/01 @ 102, 9.25%, 06/01/2011 $ 1,645 $ 1,837
Flagstaff Industrial Development Authority, Revenue,
6.3%, 9/1/2038 2,000 1,932
Health Facilities Authority, The New Foundation Project,
Revenue, 8.25%, 03/01/2019 2,330 2,168
Pima County Industrial Development Authority, Larson
County Project, Revenue, 9.5%, 08/01/2010 2,000 2,297
-----------------------------------------------------------------------------------------
8,234
- ----------------------------------------------------------------------------------------------------------------------------
CALIFORNIA--6.0% Foothill/Eastern Transportation Corridor Agency, Toll
Road, zero coupon, 01/01/2026 11,500 2,679
Sacramento County, Bradshaw Road Project, Revenue, 7.2%,
9/2/2015 1,225 1,266
Sacramento, California Financing Authority, Revenue Bond,
Convention Center Hotel, Series A, 6.25%, 01/01/2030 2,000 1,991
San Diego, Detention Facility, Certificates of
Participation, Revenue, 8.0%, 06/01/2002 275 290
San Joaquin Hills, Transportation Corridor Agency, Senior
Lien Toll Road, Revenue, zero coupon, 01/01/2020 4,300 1,491
-----------------------------------------------------------------------------------------
7,717
- ----------------------------------------------------------------------------------------------------------------------------
COLORADO--4.7% Arapahoe County, CO, Capital Improvement Trust Fund,
Capital Improvement Trust Fund, Revenue, Prerefunded
8/31/05 @ 71.45, zero coupon, 08/31/2030 5,000 2,726
City and County of Denver, Airport System, Revenue,
8.75%, 11/15/2023 735 818
City and County of Denver, Airport System, Revenue,
Prerefunded 11/15/01 @ 100, 8.0%, 11/15/2025 240 263
City and County of Denver, Airport System, Revenue, 7.5%,
11/15/2023 830 940
City and County of Denver, Airport System, Revenue,
Prerefunded 11/15/01 @ 102, 8.75%, 11/15/2023 265 300
City and County of Denver, Airport System, Revenue,
Prerefunded 11/15/04 @ 102, 7.5%, 11/15/2023 170 200
City and County of Denver, Airport System, Revenue, 8.0%,
11/15/2025 660 710
-----------------------------------------------------------------------------------------
5,957
- ----------------------------------------------------------------------------------------------------------------------------
CONNECTICUT--4.1% Connecticut State Development Authority Pierce Memorial
Baptist Home, Inc., Prerefunded 10/01/00 @ 103, 9.25%,
10/01/2018 2,000 2,205
Greenwich Housing Authority, Multifamily Housing,
Revenue, 6.35%, 09/01/2027 2,000 2,051
Mashantucket Western Pequot Tribe, Special Revenue, zero
coupon, 09/01/2017 2,000 682
Mashantucket Western Pequot Tribe, Special Revenue, zero
coupon, 09/01/2018 1,000 320
-----------------------------------------------------------------------------------------
5,258
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FLORIDA--4.5%
Nassau County, Amelia Island Care Center Project,
Revenue, 9.75%, 01/01/2023 $ 1,960 $ 2,222
Orlando, FL, Special Assessment Revenue, Conroy Road
Interchange, Series A, 5.8%, 05/01/2026 1,000 977
Volusia County, FL, Health Facilities Authority, Memorial
Health Systems Project, Revenue, Prerefunded 6/1/00 @
102, 8.25%, 6/1/2020 2,390 2,548
---------------------------------------------------------------------------------
5,747
- --------------------------------------------------------------------------------------------------------------------
ILLINOIS--12.5%
Chicago, IL, O'Hare International Airport, International
Terminal, Special Revenue, 8.2%, 12/01/2024 1,200 1,405
Chicago, IL, Tax Increment Allocation, Central Station
Project, Revenue, Prerefunded 1/1/05 @ 100, 8.9%,
01/01/2011 1,930 2,292
Harvard, IL, Multifamily Housing, Northfield Court
Project, Revenue, 9.5%, 06/01/2006 1,910 2,033
Health Facility Authority, Bethany Home & Hospital,
Revenue, Prerefunded 2/15/00 @ 102, 8.625%, 02/15/2009 540 570
Health Facility Authority, Bethany Home and Hospital,
Revenue, 8.625%, 02/15/2009 1,600 1,690
Itasca, IL, Central Manufacturing District, Special
Service Area, Revenue, Prerefunded 12/1/00 @ 102,
8.375%, 12/01/2009 2,245 2,444
Lombard, IL, Tax Increment Revenue, Prerefunded 6/1/00 @
102, 8.8%, 12/01/2004 1,315 1,411
St. Charles, Multifamily Housing, Wessel Court Project,
Revenue, 7.6%, 04/01/2024 1,900 1,968
University Park, Governors Gateway Industrial Park, Tax
Allocation, 6.65%, 07/01/2026 1,855 2,094
---------------------------------------------------------------------------------
15,907
- --------------------------------------------------------------------------------------------------------------------
INDIANA--6.2%
Health Facilities Finance Authority, Fayette Memorial
Hospital Project, Revenue, 7.2%, 10/01/2022 2,800 2,995
Indiana Health Facilities Financing Authority, Franciscan
Eldercare Community Services, 5.875%, 05/15/2029 3,000 2,904
Indianapolis Airport Authority, United Air Lines, Inc.,
Project, Revenue, 6.5%, 11/15/2031 1,900 2,051
---------------------------------------------------------------------------------
7,950
- --------------------------------------------------------------------------------------------------------------------
IOWA--4.9%
Finance Authority Healthcare Facilities, On With Life,
Inc. Project, Revenue, 7.25%, 08/01/2015 2,000 2,135
Lake City Iowa Health Care Facility Revenue, Refinancing-
Opportunity Living Project, 6.45%, 05/01/2011 2,100 2,100
Lake City, Health Care Facility, Opportunity Living
Project, Revenue, 10.0%, 05/01/2015 2,000 2,047
---------------------------------------------------------------------------------
6,282
- --------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--1.7%
Worcester, Briarwood Retirement Community, Salem
Community Corporation, Revenue, 9.25%, 12/01/2022 1,945 2,176
---------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MICHIGAN--6.7%
Gogebic County, Hospital Finance Authority, Grand View
Hospital Project, Revenue, Prerefunded 10/01/01 @ 102,
8.75%, 10/01/2016 $ 2,250 $ 2,532
Hillsdale Hospital Finance Authority, Revenue, 5.25%,
5/15/2026 1,450 1,340
Madison Heights, Tax Increment Finance Authority,
Revenue, 8.5%, 03/15/2001 450 471
Strategic Funding, Ltd., Holland Home Corporation,
Revenue, 5.75%, 11/15/2028 2,000 1,928
Tawas City, Hospital Finance Authority, St. Joseph Health
System, Revenue, 5.6%, 02/15/2013 520 514
Tawas City, Hospital Finance Authority, St. Joseph Health
System, Revenue, 5.75%, 02/15/2023 1,300 1,287
Wayne Charter County, MI, Detroit-Metro Wayne County,
Revenue, 5.0%, 12/01/2022 500 475
---------------------------------------------------------------------------------
8,547
- --------------------------------------------------------------------------------------------------------------------
MINNESOTA--1.4%
Sauk Rapids, Industrial Development, Gold N Plump Poultry
Project, Revenue, 9.5%, 09/01/2005 1,705 1,783
---------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
MISSOURI--3.7%
St. Louis, Tax Increment, Scullin Redevelopment Project,
Revenue, 10.0%, 08/01/2010 2,115 2,644
West Plains, MO, Industrial Development Authority, Ozarks
Medical Center Project, Revenue, Prerefunded 9/15/00 @
102, 8.625%, 09/15/2020 1,940 2,103
---------------------------------------------------------------------------------
4,747
- --------------------------------------------------------------------------------------------------------------------
NEBRASKA--.4%
Nebraska Investment Finance Authority, Single Family
Housing, Revenue, 6.7%, 09/01/2026 500 531
---------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
NEVADA--3.2%
Housing Division, Single Family Mortgage Program,
Revenue, Series B2, 7.9%, 10/01/2021 1,070 1,104
Housing Division, Single Family Mortgage Program,
Revenue, 6.5%, 04/01/2028 1,000 1,066
Nevada, General Obligation, 5.0%, 05/15/2022 2,000 1,930
---------------------------------------------------------------------------------
4,100
- --------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE--1.7%
Higher Educational and Health Facilities Authority,
United Church of Christ-Havenwood, Revenue, 7.45%,
01/01/2025 2,000 2,168
---------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
NEW JERSEY--1.1%
Educational Facilities Authority, Caldwell College,
Revenue, 7.25%, 07/01/2025 1,100 1,184
New Jersey Economic Development Authority, Educational
Testing Service, Revenue, 5.875%, 12/01/2026 200 203
---------------------------------------------------------------------------------
1,387
- --------------------------------------------------------------------------------------------------------------------
NEW MEXICO--1.8%
Albuquerque Nursing Home, West Mesa Center Project,
Revenue, 9.75%, 12/01/2014 1,305 1,358
Truth or Consequences Nursing Home, West Mesa Center
Project, Revenue, 9.75%, 12/01/2014 875 904
---------------------------------------------------------------------------------
2,262
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEW YORK--4.1%
Medical Care Facilities Finance Agency, Revenue,
Prerefunded 8/15/01 @ 102, 7.3%, 2/15/2021 $ 40 $ 44
New York City General Obligation, Series C, 7.0%,
2/1/2010 315 318
New York City, General Obligation, Series I, Prerefunded
8/15/99 @ 101.5, 7.5%, 8/15/2010 2,045 2,094
New York City, NY, General Obligation, Prerefunded
8/15/99 @ 101.5, 7.5%, 08/15/2010 105 107
New York State Medical Care Facilities Finance Agency,
Mental Health Center, 7.3%, 02/15/2021 20 22
Port Authority of New York and New Jersey, La Guardia
Airport Passenger Terminal, Revenue, 9.125%, 12/01/2015 2,500 2,708
---------------------------------------------------------------------------------
5,293
- --------------------------------------------------------------------------------------------------------------------
NORTH DAKOTA--.4%
North Dakota Housing Finance Agency, Single Family
Mortgage, Revenue, 8.375%, 07/01/2021 545 562
---------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
OHIO--4.4%
Cuyahoga County, OH, Health Care Facilities Judson
Retirement Community Center, Revenue, Prerefunded
11/15/99 @ 103, 8.875%, 11/15/2019 2,500 2,636
Marion County, OH, Health Care Facilities, United Church
Homes, Inc., Revenue, Prerefunded 12/1/99 @ 103,
8.875%, 12/1/2012 2,780 2,938
---------------------------------------------------------------------------------
5,574
- --------------------------------------------------------------------------------------------------------------------
OKLAHOMA--2.8%
Woodward Municipal Authority, Hospital Revenue, 8.5%,
11/1/2014 1,335 1,496
Woodward Municipal Authority, Hospital Revenue,
Prerefunded 11/1/00 @ 102, 9.25%, 11/01/2014 1,750 1,919
---------------------------------------------------------------------------------
3,415
- --------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA--5.3%
Greene County, PA, General Obligation, Prerefunded
12/01/00 @ 100, 8.75%, 12/01/2010 1,625 1,749
Higher Educational Facilities Authority, Philadelphia
College of Textiles and Science, Revenue, 6.7%,
04/01/2014 2,000 2,180
Lehigh County, PA, General Purpose Authority, Wiley
House, Revenue, Prerefunded 8/15/99 @ 102, 8.65%,
11/01/2004 2,085 2,173
Philadelphia, PA, Hospitals and Higher Education
Facilities Authority, Chestnut Hill College, 6.0%,
10/01/2029 710 700
---------------------------------------------------------------------------------
6,802
- --------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA--1.2%
Aiken County, Hospital Facilities, Mattie C. Hall Health
Care Center Project Revenue, 8.625%, 2010 1,500 1,533
---------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
TEXAS--6.6%
Abilene Texas Health Facilities, Sears Methodist
Retirement 2,500 2,444
Austin, TX, Bergstrom Landhost Enterprises Inc., Airport
Hotel, Series A, 6.75%, 04/01/2027 2,000 2,013
Houston, Airport System Special Facilities, Continental
Airlines, Inc., Improvement Projects, Revenue, 6.125%,
7/15/2027 2,000 2,042
Houston, Airport System Special Facilities, Continental
Airlines, Inc., Improvement Projects, Revenue, 5.7%,
7/15/2029 2,000 1,977
---------------------------------------------------------------------------------
8,476
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UTAH--.8% Utah Housing Finance Agency, Single Family Mortgage
Revenue, 6.65%, 07/01/2026 $ 980 $ 1,023
--------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
WISCONSIN--1.7% Health and Educational Facilities Authority, Revenue,
6.35%, 07/01/2017 600 662
Wisconsin Housing and Economic Development Authority,
Home Ownership, Revenue, 6.2%, 03/01/2027 500 526
Wisconsin State' Health And Education Facilities
Authority Revenue, 5.125%, 02/15/2020 1,000 983
--------------------------------------------------------------------------------------
2,171
--------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL INVESTMENTS--98.4%
(Cost: $116,746) 125,602
--------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
MONEY MARKET
INSTRUMENTS--1.6% Yield--3.3%
Due--June 1999
(Cost: $2,000) 2,000 2,000
--------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $118,746) $127,602
--------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $118,746,000 for federal income tax purposes
at May 31, 1999, the gross unrealized appreciation on investments was
$9,279,000, the gross unrealized depreciation was $423,000 and the net
unrealized appreciation on investments was $8,856,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1999 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investments, at value
(Cost: $118,746) $127,602
- --------------------------------------------------------------------------------
Receivable for:
Investments sold 110
- --------------------------------------------------------------------------------
Interest 2,447
- --------------------------------------------------------------------------------
TOTAL ASSETS 130,159
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------------
Cash overdraft 163
- --------------------------------------------------------------------------------
Payable for:
Investments purchased 991
- --------------------------------------------------------------------------------
Management fee 59
- --------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 15
- --------------------------------------------------------------------------------
Trustees' fees and other 13
- --------------------------------------------------------------------------------
Total liabilities 1,241
- --------------------------------------------------------------------------------
NET ASSETS $128,918
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------------
Paid-in capital $119,456
- --------------------------------------------------------------------------------
Undistributed net realized gain on investments 174
- --------------------------------------------------------------------------------
Net unrealized appreciation on investments 8,856
- --------------------------------------------------------------------------------
Undistributed net investment income 432
- --------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $128,918
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE, $.01 PAR VALUE
($128,918 / 10,730 shares outstanding) $12.01
- --------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
May 31, 1999 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------
Interest income $ 4,717
- --------------------------------------------------------------------------------
Expenses:
Management fee 387
- --------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 33
- --------------------------------------------------------------------------------
Professional fees 37
- --------------------------------------------------------------------------------
Reports to shareholders 44
- --------------------------------------------------------------------------------
Registration fee 20
- --------------------------------------------------------------------------------
Trustees' fees and other 13
- --------------------------------------------------------------------------------
Total expenses 534
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,183
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------------------------------------
Net realized gain on sales of investments 469
- --------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (2,933)
- --------------------------------------------------------------------------------
Net loss on investments (2,464)
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,719
- --------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
For the six months ended May 31, 1999 (unaudited) and for the year ended
November 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 4,183 8,265
- ----------------------------------------------------------------------------------------
Net realized gain 469 338
- ----------------------------------------------------------------------------------------
Change in net unrealized appreciation (2,933) (985)
- ----------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,719 7,618
- ----------------------------------------------------------------------------------------
Distribution from net investment income (4,019) (8,199)
- ----------------------------------------------------------------------------------------
Distribution from net realized gain (107) --
- ----------------------------------------------------------------------------------------
Total dividends to shareholders (4,126) (8,199)
- ----------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
(26 shares and 55 shares, respectively) 319 692
- ----------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (2,088) 111
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------
Beginning of period 131,006 130,895
- ----------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment income
of $432 and $268, respectively) $128,918 131,006
- ----------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES DESCRIPTION OF FUND. Kemper Strategic Municipal
Income Trust, a Massachusetts business trust, is
registered under the Investment Company Act of 1940
as a non-diversified, closed-end management
investment company.
SECURITY 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. Money market instruments purchased
with an original maturity of sixty days or less are
valued at amortized cost. 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. 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's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies, and to distribute
all of its taxable and tax-exempt income to its
shareholders. Accordingly, the fund paid no federal
income taxes and no federal income tax provision
was required.
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 Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the annual rate of .60%
of average weekly net assets. The fund incurred a
management fee of $387,000 for the six months ended
May 31, 1999.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the fund. Under the agreement,
KSvC received shareholder services fees of $12,000
for the six months ended May 31, 1999.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the six months ended May 31,
1999, the fund made no direct payments to its
officers and incurred trustees' fees of $7,000 to
independent trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS For the six months ended May 31, 1999, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $ 18,887
Proceeds from sales 18,232
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED MAY 31,
MAY 31, -----------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.24 12.29 12.14 12.19 11.54
- -------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .39 .77 .80 .82 .83
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.23) (.05) .17 (.05) .64
- -------------------------------------------------------------------------------------------------
Total from investment operations .16 .72 .97 .77 1.47
- -------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .38 .77 .82 .82 .82
- -------------------------------------------------------------------------------------------------
Distribution from net realized gain .01 -- -- -- --
- -------------------------------------------------------------------------------------------------
Total dividends .39 .77 .82 .82 .82
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $12.01 12.24 12.29 12.14 12.19
- -------------------------------------------------------------------------------------------------
Market value, end of period $11.88 12.81 13.06 12.38 12.13
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Based on net asset value 1.28% 5.99 8.28 6.58 13.09
- -------------------------------------------------------------------------------------------------
Based on market value (4.34)% 4.36 12.87 9.19 11.70
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses .81% .77 .76 .74 .76
- -------------------------------------------------------------------------------------------------
Net investment income 6.44% 6.29 6.62 6.82 6.97
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------
Net assets at end of period (in
thousands) $128,918 131,006 130,895 128,234 127,844
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 29% 22 13 31 8
- -------------------------------------------------------------------------------------------------
</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. Data for the
period ended May 31, 1999 is unaudited.
16
<PAGE> 17
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 17, 1998, a special shareholders' meeting was held. Kemper Strategic
Municipal Income Trust shareholders were asked to vote on a new investment
management agreement with Scudder Kemper Investments, Inc. This item was
approved. Below are the results:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
8,585,327 106,893 175,608
</TABLE>
17
<PAGE> 18
NOTES
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES&OFFICERS
TRUSTEES OFFICERS
JAMES E. AKINS MARK S. CASADY REBECCA L. WILSON
Trustee President Vice President
JAMES R. EDGAR PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President and Vice President
Secretary
ARTHUR R. GOTTSCHALK MAUREEN E. KANE
Trustee PHILIP G. CONDON Assistant Secretary
Vice President
FREDERICK T. KELSEY CAROLINE PEARSON
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
THOMAS W. LITTAUER ELIZABETH C. WERTH
Trustee and ANN M. MCCREARY Assistant Secretary
Vice President Vice President
BRENDA LYONS
FRED B. RENWICK ROBERT C. PECK, JR. Assistant Treasurer
Trustee Vice President
JOHN G. WEITHERS KATHRYN L. QUIRK
Trustee Vice President
- -------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- -------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419066
Kansas City, MO 64141
- -------------------------------------------------------------------------
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
- -------------------------------------------------------------------------
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
KSMIT - 3 (7/23/99) 1080050
