<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED NOVEMBER 30, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
KEMPER STRATEGIC
MUNICIPAL INCOME TRUST
"... We're very optimistic about the prospects
for municipal bonds. They represent an
extremely attractive investment. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
6
Year 2000
7
Portfolio Composition
Portfolio Statistics
8
Portfolio Of
Investments
12
Report Of
Independent Auditors
13
Financial Statements
15
Notes To
Financial Statements
17
Financial Highlights
18
Description Of
Dividend Reinvestment Plan
21
Shareholders' Meeting
AT A GLANCE
- --------------------------------------------------------------------------------
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED NOVEMBER 30, 1998
<TABLE>
<CAPTION>
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER STRATEGIC MUNICIPAL
INCOME TRUST 5.99% 4.36%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE AND MARKET PRICE
- --------------------------------------------------------------------------------
AS OF AS OF
11/30/98 11/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $12.24 $12.29
- --------------------------------------------------------------------------------
MARKET PRICE $12.81 $13.06
- --------------------------------------------------------------------------------
</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. (See prospectus
for more details)
The fund may invest up to 50 percent in lower rated securities, which represent
greater risk of default and price volatility than other high quality bonds.
As a non-diversified investment company the fund may invest more than 5 percent
of its assets in the security of a particular issuer. These special risk
considerations are discussed in the prospectus.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF NOVEMBER 30, 1998
<TABLE>
<CAPTION>
KEMPER STRATEGIC
MUNICIPAL
INCOME TRUST
- --------------------------------------------------------------------------------
<S> <C>
ONE-YEAR INCOME: $ 0.7700
- --------------------------------------------------------------------------------
NOVEMBER DIVIDEND: $ 0.0625
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON NET ASSET VALUE) 6.13%
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON MARKET PRICE) 5.85%
- --------------------------------------------------------------------------------
TAX EQUIVALENT DISTRIBUTION
RATE:
(BASED ON NET ASSET VALUE AND
A 37.1% FEDERAL INCOME TAX
RATE) 9.75%
- --------------------------------------------------------------------------------
TAX EQUIVALENT DISTRIBUTION
RATE:
(BASED ON MARKET PRICE AND A
37.1% FEDERAL INCOME TAX RATE) 9.30%
- --------------------------------------------------------------------------------
</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, distribution
rates, net asset value and returns fluctuate. Additional information concerning
performance is contained in the Financial Highlights appearing at the end of
this report.
TERMS TO KNOW
DURATION Duration is a measure of the interest rate sensitivity of a fixed-
income investment or portfolio. The longer the duration, the greater the
interest rate risk.
REVENUE BOND INDEX (RBI) The average yield on 25 revenue bonds with 30-year
maturities compiled by THE BOND BUYER, a newspaper that reports on 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 time 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.
<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 BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND A MASTER'S DEGREE IN ECONOMICS FROM BROWN UNIVERSITY IN
PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS WITH THE HARRIS
BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $245 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES, AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
If you're like most investors, you may be wondering if you should allow yourself
to breathe a sigh of relief as 1999 begins. After several months of generally
declining stock prices and extreme volatility, the U.S. stock market seems to
have rediscovered its resiliency. In the fourth quarter, the Standard & Poor's
500, an unmanaged index generally representative of the U.S. stock market,
bounced back into the 1200-point range, up approximately 20 percent from its
third-quarter low of 957. The blue chip Dow Jones Industrial Average enjoyed a
comparable rise. Investor confidence suddenly overtook the investor uncertainty
that had plagued the markets at summer's end. While financial volatility appears
to be continuing, the mood for investors definitely has improved.
To what can we attribute the change? Simply this -- the cumulative effect of
some good news, not the least of which was a long-awaited series of interest
rate reductions by the Federal Reserve Board. In September, the Fed reduced the
federal funds rate a modest quarter of a percentage point, however, this first
cut disappointed some investors who were expecting a more dramatic gesture. Two
weeks later, the Fed came back with an additional quarter of a percentage point
reduction. This was an unexpected cut that seemed to have a positive effect on
Wall Street. In November, a third rate cut of a quarter of a percentage point
also boosted investor confidence. Investors were further surprised by
better-than-expected corporate earnings reports early in the fourth quarter.
Finally, economic data regarding retail sales, employment and home sales
suggested continued economic growth and very little prospect of recession.
In many ways, 1998's market activity provides a study in how investor
perceptions can upstage economic realities. Certainly, the tumultuous lessons of
Russia and Southeast Asia renewed investors' awareness of risk in 1998, which
was an important wake-up call. At all times, investors must understand and
consider risk. But over the course of 1998, U.S. economic fundamentals have
essentially remained strong. In fact, inflation has remained low for the entire
year. Economic growth has been solid. Our consumer confidence remained fairly
high, although not quite as high as in 1997. The nation's budget surplus for
1998 came in at $60 billion, with another budget surplus expected for fiscal
1999.
Growth in the nation's gross domestic product (GDP), which represents the
total value of all goods and services produced within the U.S. economy, has
remained remarkably steady. GDP is expected to have grown at an annualized rate
of 3 percent for the second half of 1998 and is anticipated to hover around 2
percent to 2.5 percent for the first half of 1999. The consumer price index
(CPI) remains in a range of 1.5 percent to 2 percent.
While employment growth has slowed a bit, the slowdown in wage gains may
provide the Fed with an incentive to reduce interest rates even further. U.S.
corporate profits have generally been flat, so we may see a decrease in capital
spending. Banks appear to be only a little less willing to lend, so the threat
of a general credit crunch is minimal.
Investors may take comfort in the fact that the U.S. markets and economy have
withstood the test of 1998's tumultuous third quarter. Similarly, while certain
countries, such as Malaysia, Indonesia, Brazil and Russia, are still suffering
from economic crises, others, including the Philippines, South Korea, Thailand
and China, appear to have survived. As long as the Fed and the Group of Seven
leading industrial nations (G7) are committed to avoiding recession on national
and global levels respectively, investors have a good chance of experiencing a
more stable economic environment.
At home, there has been somewhat of a slowdown in manufacturing, as reduced
U.S. exports reflect foreign economic turmoil. But the global impact of the
Asian crisis still has not hit the U.S. as hard as was expected. Indeed, Asian
turmoil has not affected U.S. trade as much as it has lowered import prices and
helped reduce global interest rates.
In Europe, the much anticipated Economic and Monetary Union (EMU) is on the
move, with a focus on more flexibility and growth potential for the region.
European equities may be the beneficiaries of increased spending, as governments
seek to foster growth and reduce unemployment.
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 (12/31/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 4.65 5.50 5.81 6.30
Prime rate(2) 7.75 8.50 8.50 8.25
Inflation rate(3)* 1.55 1.75 1.89 3.18
The U.S. dollar(4) -2.45 9.54 10.26 4.36
Capital goods orders(5)* 7.82 9.52 8.53 4.82
Industrial production(5)* 1.47 5.10 6.56 5.32
Employment growth(6)* 2.28 2.65 2.70 2.33
</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 November 30, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
If you're a long-term investor in today's short-term world, go ahead and
breathe that sigh of relief -- but be on your toes in 1999. It's going to be an
interesting year as the EMU emerges, the race for the next presidency heats up
and the year 2000 approaches. And, remember: Investors don't like uncertainty,
be it economic or political. More trauma in the White House, continuing disputes
with Iraq or any other hints of crisis could prompt a downward spike in our
markets in the short run. In the long run, the keys to investment performance
remain moderate growth, low inflation and limited taxation and regulation.
Thank you for choosing to invest with Kemper Funds. 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 E. Silvia as of January 4, 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.
4
<PAGE> 5
PERFORMANCE UPDATE
[MIER PHOTO]
CHRISTOPHER MIER JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1986 AND IS A
MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS 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.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
IN A VOLATILE YEAR WHEN U.S. GOVERNMENT BOND PRICES WERE DRIVEN BY EVENTS
ABROAD, MUNICIPAL BONDS PERFORMED REASONABLY WELL. BELOW, LEAD PORTFOLIO MANAGER
CHRIS MIER DISCUSSES THE FORCES THAT AFFECTED THE MUNICIPAL BOND MARKET, AND HOW
THE FUND WAS POSITIONED IN RESPONSE.
Q CHRIS, WHAT WERE THE CENTRAL FORCES THAT AFFECTED THE MARKET FOR MUNICIPAL
BONDS IN 1998?
A The last year was somewhat unusual because factors outside the U.S. played
a significant role in the performance of municipal bonds. The market was
impacted first by developments in Asia, then in Russia and Latin America.
Indications of potential economic and currency problems in Asian countries
had been circulating throughout the summer of 1997. Investors began to realize
that the outsized growth experienced by these countries -- particularly Hong
Kong, Thailand, Malaysia and Indonesia -- was fueled largely by intense investor
speculation worldwide. Increasingly, investors began to doubt the ability of
these countries to make the tough fiscal and monetary decisions to justify the
value of their currencies. Just after the fiscal year began, this uncertainty
came to a head, culminating in November as the Hong Kong stock market imploded,
and a number of Asian countries devalued their currencies.
In 1998, Russia effectively devalued the ruble, and Latin American
countries, specifically Brazil, also started to experience problems.
Ironically, the problems abroad led to strong performance by government
bonds here in the U.S. Investors opted for the relatively safe haven of
Treasuries, and demand drove Treasury bond prices sharply higher. At the same
time, investors expected cheaper imports of foreign goods to put a damper on
U.S. inflation, and lower exports to impede U.S. economic growth.
This suggested lower interest rates in the future, a positive for bonds, and
continuing turmoil further increased demand for U.S. government bonds. The
result was that Treasuries staged a powerful rally in August and September.
As the gloom regarding foreign markets deepened, however, it became clear
that the Federal Reserve (the Fed) was becoming increasingly concerned with the
specter of a serious decline in the liquidity of capital markets. To help head
off such a debacle, the Fed reduced short-term interest rates three times: on
September 29, October 16 and on November 17. The cuts re-energized world stock
markets and sparked a pullback in the U.S. bond market as the fiscal year drew
to a close.
Overall, it was a volatile year for bonds, but performance was good.
According to the Lehman Long Government Bond Index, long-term government bonds
provided a total return of 15.51 percent, far in excess of the 3 percent annual
inflation rate.
Q DID MUNICIPAL BONDS ENJOY THE SAME KIND OF RALLY?
A Municipal bonds managed a reasonably good year, with the Lehman Municipal
Bond Index rising 7.76 percent. But the municipal market's progress was impeded
by very heavy issuance. The declining rate environment that characterized the
majority of the year increased the supply of municipal bonds in two ways:
1) New issues -- new bond offerings flooded the market as local
governments tried to capitalize on low interest rates to beef up
5
<PAGE> 6
PERFORMANCE UPDATE
infra structure such as highways and water/sewer projects.
2) Refinancing bonds -- when rates decline, municipal issuers look to
refinance their debt, just like private homeowners refinance their mortgages
when rates fall. So municipal governments issued new lower-yielding bonds to
replace the higher-yielding ones.
As the year began, it looked as if we might experience a record year for
issuance. But as volatility increased during the fall of 1998, issuance slacked
off. Nevertheless, volume this year has been extraordinarily heavy by historical
standards.
Much of this supply has been sopped up by hedge funds and "crossover" buyers,
primarily investors who usually buy taxable bonds, but who have recognized the
outstanding value in municipals. Such "non-traditional" buyers have helped
offset the glut of issuance.
Q WHAT DID YOU DO TO HELP THE FUND RESPOND TO THE MARKET'S CONDITIONS?
A This is what we did:
1. We strove to improve average call protection whenever possible.
2. We worked to increase the fund's stake in higher-yielding municipal
securities when they met our stringent credit tests.
3. We kept the fund fully invested.
Q YOU MENTIONED THAT CROSSOVER BUYERS HAVE BEGUN TO "RECOGNIZE THE
OUTSTANDING VALUE IN MUNICIPALS." WHAT OUTSTANDING VALUE DO YOU MEAN?
A Municipal bonds offer attractive value right now for several reasons.
First, the heavy supply of municipal bonds has kept yields from declining as
fast as Treasuries. Thus, at the end of the fiscal year, municipal bonds
actually offered a higher yield than Treasuries -- an unusual state of affairs.
Second, that relatively high yield doesn't even take into account the tax
advantage, which further enhances the attractiveness of municipal bonds versus
Treasuries. Therefore, municipal bonds give you a better real return, that is,
what you have left after taking into account the effects of taxes and inflation.
Finally, municipal bonds are not currently experiencing some of the credit
problems other markets -- such as those for corporate bonds or emerging foreign
bonds -- are facing.
Q SO YOUR OUTLOOK FOR THE MUNICIPAL MARKET IS PRETTY BRIGHT AT THIS POINT.
A We're very optimistic about the prospects for municipal bonds. They
represent an extremely attractive investment. Their value versus other fixed
income securities is only one reason. There are others. For example, the strong
economy and low interest rates have increased tax revenues and allowed municipal
governments to strengthen their balance sheets. So in our experience credit
quality has never been better for many states.
The Federal Reserve has demonstrated its commitment to stimulating
domestic economic growth and encouraging liquid capital markets. As investors
look for value in bond markets, the municipal market seems an obvious choice.
And finally, the volatility in other markets over the last 12 months has
shown the importance of diversification. Because the stock market has advanced
strongly over the last three years, many investors' portfolios may have become a
little stock-heavy. They may want to take some money out of stocks and put it in
bonds to rebalance and help stabilize their portfolios, and municipal bonds
right now may be a smart way to do that.
YEAR 2000
Year 2000 Issue
Like other registered investment companies and financial and business
organizations worldwide, the fund could be adversely affected if computer
systems on which the fund relies, which primarily include those used by the
investment manager, its affiliates or other service providers, are unable to
correctly process date-related information on and after January 1, 2000. This
risk is commonly called the Year 2000 Issue. Failure to successfully address the
Year 2000 Issue could result in interruptions to and other material adverse
effects on the fund's business and operations, such as problems with calculating
net asset value. The investment manager has commenced a review of the Year 2000
Issue as it may affect the fund and is taking steps it believes are reasonably
designed to address the Year 2000 Issue, although there can be no assurances
that these steps will be sufficient. In addition, there can be no assurances
that the Year 2000 Issue will not have an adverse effect on the municipalities
whose securities are held by the fund or on global markets or economies
generally.
6
<PAGE> 7
PORTFOLIO COMPOSITION
PORTFOLIO COMPOSITION*
REPRESENTING THE FUND'S COMPOSITION AS OF NOVEMBER
30, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------
HOLDINGS PERCENT
- ------------------------------------------------------
<S> <C> <C>
1. REVENUE BONDS 73%
- ------------------------------------------------------
2. U.S. GOVERNMENT SECURED 23%
- ------------------------------------------------------
3. GENERAL OBLIGATIONS 1%
- ------------------------------------------------------
4. CASH AND EQUIVALENTS 3%
- ------------------------------------------------------
</TABLE>
PORTFOLIO STATISTICS
SECURITIES RATINGS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 11/30/98 ON 11/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 10% 5%
- --------------------------------------------------------------------------------
AA 2 6
- --------------------------------------------------------------------------------
A 1 1
- --------------------------------------------------------------------------------
BBB 19 24
- --------------------------------------------------------------------------------
BB 3 3
- --------------------------------------------------------------------------------
B 4 4
- --------------------------------------------------------------------------------
Not rated+ 61 57
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 11/30/98 ON 11/30/97
+ These securities are not rated by S&P or Moody's,
however they are rated by Scudder Kemper
Investments, Inc. as follows: AAA 15%, A 3%, BBB
8%, BB 31% and B 4% for November 30, 1998, and
AAA 19%, A 2%, BBB 7%, BB 23% and B 6% for
November 30, 1997.
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. Ratings are relative and subjective
and not absolute standards of quality.
AVERAGE MATURITY*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 11/30/98 ON 11/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
Average Maturity 16.3 years 16.1 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 November 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
ADVANCED REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York City, NY, Gen. Oblg., 7.50%, to be called
8-15-99 @ 101.50 $ 1,935 $ 2,024
Lehigh County, PA, General Purpose Auth., Wiley
House, Rev., 8.65%, to be called 11-1-99 @ 102 2,085 2,227
Cuyahoga County, OH, Health Care Facilities, Judson
Retirement Community Center, Rev., 8.875%, to be
called 11-15-99 @ 103 2,500 2,704
Marion County, OH, Health Care Facilities, United
Church Homes, Inc., Rev., 8.875%, to be called
12-1-99 @ 103 2,780 3,014
Lombard, IL, Tax Increment Rev., 8.80%, to be called
6-1-00 @ 102 1,315 1,442
Volusia County, FL, Health Facilities Auth.,
Memorial Health Systems Proj., Rev., 8.25%, to be
called 6-1-00 @ 102 2,390 2,599
West Plains, MO, Industrial Dev. Auth., Ozarks
Medical Center Proj. Rev., 8.625%, to be called
9-15-00 @ 102 1,940 2,148
Woodward Municipal Auth., OK, Hospital Rev., 9.25%,
to be called 11-1-00 @ 102 1,750 1,965
Itasca, IL, Central Manufacturing District, Special
Service Area, Rev., 8.375%, to be called 12-1-00 @
102 2,245 2,494
Greene County, PA, Gen. Oblg., 8.75%, to be called
12-1-00 @ 100 1,625 1,790
Coconino County, AZ, Industrial Dev. Auth., The
Guidance Center, Inc. Proj., Rev., 9.25%, to be
called 6-1-01 @ 102 1,710 1,947
Medical Care Facilities Finance Agcy., NY, Rev.,
7.30%, to be called 8-15-01 @ 102 40 45
City and County of Denver, CO, Airport System Rev.,
8.75%, to be called 11-15-01 @ 102 265 307
8.00%, to be called 11-15-01 @ 100 660 723
7.50%, to be called 11-15-04 @ 102 170 204
Chicago, IL, Tax Increment Allocation, Central
Station Proj., Rev., 8.90%, to be called 1-1-05 @
100 1,930 2,325
Arapahoe County, CO, Capital Improvement Trust Fund,
Rev., zero coupon, to be called 8-31-05 @ 71.45 5,000 2,716
-----------------------------------------------------------------------------
TOTAL ADVANCED REFUNDED OBLIGATIONS--23.4% 30,674
-----------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER MUNICIPAL OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------
ILLINOIS--7.7% Chicago, O'Hare International Airport, International
Terminal, Special Rev., 8.20%, 2024 $ 1,200 $ 1,422
Harvard, Multifamily Housing, Northfield Court
Proj., Rev., 9.50%, 2006 1,955 2,102
Health Facility Auth., Rev., 8.625%, 2009 2,275 2,458
St. Charles, Multifamily Housing, Wessel Court
Proj., Rev., 7.60%, 2024 1,925 2,011
Village of University Park, Tax Increment, Governors
Gateway Industrial Park, Rev., 8.50%, 2011 1,855 2,127
----------------------------------------------------------------------------
10,120
- ---------------------------------------------------------------------------------------------------------------------
INDIANA--7.0% Health Facilities Finance Auth., Fayette Memorial
Hospital Proj., Rev., 7.20%, 2022 2,800 3,039
Health Facilities Finance Auth., Rev., 5.875%, 2029 3,000 2,973
Housing Finance Auth., Residential Mortgage, Rev.,
8.375%, 2020 1,105 1,134
Indianapolis Airport Auth., United Air Lines, Inc.
Proj., Rev., 6.50%, 2031 1,900 2,043
----------------------------------------------------------------------------
9,189
- ---------------------------------------------------------------------------------------------------------------------
MICHIGAN--6.3% Gogebic County, Hospital Finance Auth., Grand View
Hospital Proj., Rev., 8.75%, 2016 2,250 2,445
Hillsdale Hospital Finance Auth., Rev., 5.25%, 2026 1,450 1,407
Madison Heights, Tax Increment Finance Auth., Rev.,
8.50%, 2001 520 552
Strategic Funding, Ltd., Holland Home Corp., Rev.,
5.75%, 2028 2,000 1,997
Tawas City, Hospital Finance Auth., St. Joseph
Health System, Rev., 5.60% and 5.75%, 2013 and
2023 1,840 1,862
----------------------------------------------------------------------------
8,263
- ---------------------------------------------------------------------------------------------------------------------
FLORIDA--5.2% Manatee County, First Mortgage, Meditrust Proj.,
Rev., 7.35%, 2015 1,635 1,852
Martin County Industrial Dev. Auth., Indiantown
Congeneration, L.P. Proj., Rev., 7.875%, 2025 1,500 1,732
Nassau County, Amelia Island Care Center Proj.,
Rev., 9.75%, 2023 1,960 2,265
Orlando Florida Special Assessment, Rev., 5.80%,
2026 1,000 991
----------------------------------------------------------------------------
6,840
- ---------------------------------------------------------------------------------------------------------------------
TEXAS--5.0% Abilene County Health Facility Dev., Rev., 5.90%,
2025 2,500 2,475
Brazos River Auth., Collateralized Pollution
Control, Utilities Electric Co. Proj., Rev.,
8.25%, 2019 2,000 2,046
Houston, Airport System Special Facilities,
Continental Airlines, Inc., Improvement Projs.,
Rev., 6.125%, 2027 2,000 2,059
----------------------------------------------------------------------------
6,580
- ---------------------------------------------------------------------------------------------------------------------
ARIZONA--5.0% Flagstaff Industrial Dev. Auth., Rev., 6.30%, 2038 2,000 1,987
Health Facilities Auth., The New Foundation Proj.,
Rev., 8.25%, 2019 2,375 2,210
Pima County Industrial Dev. Auth., Larson Co. Proj.,
Rev., 9.50%, 2010 2,000 2,344
----------------------------------------------------------------------------
6,541
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEW MEXICO--4.7% Albuquerque Nursing Home, West Mesa Center Proj.,
Rev., 9.75%, 2014 $ 1,305 $ 1,372
Farmington, Pollution Control, San Juan Proj., Rev.,
6.30% and 6.95%, 2016 and 2020 3,500 3,822
Truth or Consequences Nursing Home, Sierra Health
Care, Inc., Rev., 9.75%, 2014 875 904
----------------------------------------------------------------------------
6,098
- ---------------------------------------------------------------------------------------------------------------------
CALIFORNIA--4.4% Foothill/Eastern Transportation Corridor Agcy., Toll
Road Rev., zero coupon, 2026 11,500 2,759
Sacramento County, Bradshaw Road Proj., Rev., 7.20%,
2015 1,225 1,266
San Diego, Detention Facility, Certificates of
Participation, 8.00%, 2002 275 295
San Joaquin Hills Transportation Corridor Agcy.,
Senior Lien Toll Road Rev., zero coupon, 2020 4,300 1,508
----------------------------------------------------------------------------
5,828
- ---------------------------------------------------------------------------------------------------------------------
CONNECTICUT--3.3% Dev. Auth., Pierce Memorial Baptist Home, Inc.
Proj., Rev., 9.25%, 2018 2,000 2,174
Greenwich Housing Auth., Multifamily Housing Rev.,
6.35%, 2027 2,000 2,078
----------------------------------------------------------------------------
4,252
- ---------------------------------------------------------------------------------------------------------------------
IOWA--3.2% Finance Auth., Healthcare Facilities, On With Life,
Inc. Proj., Rev., 7.25%, 2015 2,000 2,168
Lake City, Health Care Facility, Opportunity Living
Proj., Rev., 10.00%, 2015 2,000 2,074
----------------------------------------------------------------------------
4,242
- ---------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA--3.1% Columbia County, Industrial Dev. Auth., First
Mortgage, First Street Association Proj., Rev.,
9.00%, 2014 1,790 1,864
Higher Educational Facilities Auth., Philadelphia
College of Textiles & Science, Rev., 6.70%, 2014 2,000 2,206
----------------------------------------------------------------------------
4,070
- ---------------------------------------------------------------------------------------------------------------------
NEW YORK--2.5% Medical Care Facilities Finance Agcy., Rev., 7.30%,
2021 20 22
New York City, Gen. Oblg., 7.00% and 7.50%, 2010 530 543
Port Auth. of New York and New Jersey, LaGuardia
Airport Passenger Terminal, Rev., 9.125%, 2015 2,500 2,756
----------------------------------------------------------------------------
3,321
- ---------------------------------------------------------------------------------------------------------------------
MISSOURI--2.1% St. Louis, Tax Increment, Scullin Redev. Proj.,
Rev., 10.00%, 2010 2,115 2,695
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
NEVADA--1.8% Housing Division, Single Family Mortgage Program,
Rev., 7.90% and 6.50%, 2021 and 2028 2,280 2,412
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--1.7% Worcester, Briarwood Retirement Community, Salem
Community Corp., Rev., 9.25%, 2022 1,945 2,216
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE--1.7% Higher Educational and Health Facilities Auth.,
United Church of Christ-Havenwood, Rev., 7.45%,
2025 2,000 2,206
----------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COLORADO--1.6% City and County of Denver, Airport System Rev., 7.50%
to 8.75%, 2023 through 2025 $ 1,805 $ 2,063
-----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
MINNESOTA--1.4% Sauk Rapids, Industrial Dev., Gold N Plump Poultry
Proj., Rev., 9.50%, 2005 1,705 1,799
-----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA--1.2% Aiken County, Hospital Facilities, Mattie C. Hall
Health Care Center Proj., Rev., 8.625%, 2010 1,500 1,533
-----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
OKLAHOMA--1.2% Woodward Municipal Auth., Hospital Rev., 8.50%, 2014 1,335 1,524
-----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
NEW JERSEY--1.1% Economic Dev. Auth., Rev., 5.875%, 2026 200 208
Educational Facilities Auth., Caldwell College, Rev.,
7.25%, 2025 1,100 1,199
-----------------------------------------------------------------------------
1,407
- ----------------------------------------------------------------------------------------------------------------------
STATES LESS THAN NE, Investment Finance Auth., Single Family Housing
ONE PERCENT--2.7% Rev., 6.70%, 2026 500 536
ND, Housing Finance Agcy., Single Family Mortgage
Rev., 8.375%, 2021 610 634
UT, Housing Finance Agcy., Single Family Mortgage
Rev., 6.65%, 2026 1,135 1,221
WI, Health & Educational Facilities Auth., Rev.,
6.35%, 2017 600 614
WI, Housing & Economic Dev. Auth., Home Ownership,
Rev., 6.20%, 2027 500 533
-----------------------------------------------------------------------------
3,538
-----------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--73.9% 96,737
-----------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--97.3%
(Cost: $115,622) 127,411
-----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--3.25% to 3.50%
INSTRUMENTS--2.1% Due--December 1998
(Cost: $2,800) 2,800 2,800
-----------------------------------------------------------------------------
TOTAL INVESTMENTS--99.4%
(Cost: $118,422) 130,211
-----------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.6% 795
-----------------------------------------------------------------------------
NET ASSETS--100% $131,006
-----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $118,422,000 for federal income tax purposes
at November 30, 1998, the gross unrealized appreciation on investments was
$11,897,000, the gross unrealized depreciation was $108,000 and the net
unrealized appreciation on investments was $11,789,000.
See accompanying Notes to Financial Statements.
11
<PAGE> 12
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, 1998, and 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 1994. 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, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Strategic Municipal Income Trust at November 30, 1998, 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 years since 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 19, 1999
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $118,422) $130,211
- ------------------------------------------------------------------------
Cash 336
- ------------------------------------------------------------------------
Receivable for:
Investments sold 1,881
- ------------------------------------------------------------------------
Interest 2,688
- ------------------------------------------------------------------------
TOTAL ASSETS 135,116
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Investments purchased 3,963
- ------------------------------------------------------------------------
Management fee 119
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 18
- ------------------------------------------------------------------------
Trustees' fees and others 10
- ------------------------------------------------------------------------
Total liabilities 4,110
- ------------------------------------------------------------------------
NET ASSETS $131,006
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $119,137
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (188)
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 11,789
- ------------------------------------------------------------------------
Undistributed net investment income 268
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $131,006
- ------------------------------------------------------------------------
NET ASSET VALUE PER SHARE, $.01 PAR VALUE
($131,006 / 10,704 shares outstanding) $12.24
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED November 30, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------
Interest income $9,279
- ----------------------------------------------------------------------
Expenses:
Management fee 789
- ----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 64
- ----------------------------------------------------------------------
Professional fees 50
- ----------------------------------------------------------------------
Reports to shareholders 45
- ----------------------------------------------------------------------
Trustees' fees and other 66
- ----------------------------------------------------------------------
Total expenses 1,014
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 8,265
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ----------------------------------------------------------------------
Net realized gain on sales of investments 338
- ----------------------------------------------------------------------
Change in net unrealized appreciation on investments (985)
- ----------------------------------------------------------------------
Net loss on investments (647)
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,618
- ----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1998 1997
- ------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 8,265 8,512
- ------------------------------------------------------------------------------------------------
Net realized gain 338 59
- ------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (985) 1,650
- ------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 7,618 10,221
- ------------------------------------------------------------------------------------------------
Distribution from net investment income (8,199) (8,695)
- ------------------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
(55 shares and 90 shares, respectively) 692 1,135
- ------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 111 2,661
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------------
Beginning of year 130,895 128,234
- ------------------------------------------------------------------------------------------------
END OF YEAR (including undistributed
net investment income of
$268 and $202, respectively) $131,006 130,895
- ------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES DESCRIPTION OF FUND. Kemper Strategic Municipal
Income 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. 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 $789,000 for the year ended
November 30, 1998.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's business to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, the fund's
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Trustees of the fund has
approved a new investment management agreement with
Scudder Kemper, which is substantially identical to
the former investment management agreement, except
for the dates of execution and termination.
Shareholders approved the new investment management
agreement through a proxy solicitation that
concluded in mid-December.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
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, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the year ended November 30,
1998, the fund made no direct payments to its
officers and incurred trustees' fees of $14,000 to
independent trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS For the year ended November 30, 1998, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $34,359
Proceeds from sales 33,842
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $12.29 12.14 12.19 11.54 12.36
- --------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .77 .80 .82 .83 .83
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.05) .17 (.05) .64 (.80)
- --------------------------------------------------------------------------------------------------------
Total from investment operations .72 .97 .77 1.47 .03
- --------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .77 .82 .82 .82 .82
- --------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- .03
- --------------------------------------------------------------------------------------------------------
Total dividends .77 .82 .82 .82 .85
- --------------------------------------------------------------------------------------------------------
Net asset value, end of year $12.24 12.29 12.14 12.19 11.54
- --------------------------------------------------------------------------------------------------------
Market value, end of year $12.81 13.06 12.38 12.13 11.63
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN
- --------------------------------------------------------------------------------------------------------
Based on net asset value 5.99% 8.28 6.58 13.09 .12
- --------------------------------------------------------------------------------------------------------
Based on market value 4.36% 12.87 9.19 11.70 .74
- --------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------------
Expenses .77% .76 .74 .76 .75
- --------------------------------------------------------------------------------------------------------
Net investment income 6.29% 6.62 6.82 6.97 6.92
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $131,006 130,895 128,234 127,844 120,689
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate 22% 13 31 8 11
- --------------------------------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
Pursuant to Section 852 of the Internal Revenue Code, the fund designates
$75,000, as capital gain dividends for the year ended November 30, 1998, of
which 100% represents 20% rate gains.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
17
<PAGE> 18
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
18
<PAGE> 19
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.
19
<PAGE> 20
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.
20
<PAGE> 21
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
An annual shareholders' meeting was held on October 22, 1998 for Kemper
Strategic Municipal Income Trust. Shareholders were asked to vote on two
separate issues: election of members to the Board of Trustees and ratification
of Ernst & Young LLP as independent auditors. The following are the results for
each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
James E. Atkins 9,522,605 141,461
Arthur R. Gottschalk 9,541,897 122,169
Frederick T. Kelsey 9,535,763 128,502
Thomas W. Littauer 9,538,313 125,753
Daniel Pierce 9,527,060 137,005
Fred B. Renwick 9,534,790 129,276
John B. Tingleff 9,565,501 98,565
John G. Weithers 9,556,732 107,333
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund. This item was approved.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
9,543,100 25,517 95,448
</TABLE>
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY KATHRYN L. QUIRK
Chairman and Trustee President Vice President
JAMES E. AKINS PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President and Vice President
Secretary
ARTHUR R. GOTTSCHALK MAUREEN E. KANE
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
FREDERICK T. KELSEY CAROLINE PEARSON
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
THOMAS W. LITTAUER ELIZABETH C. WERTH
Trustee & Vice President CHRISTOPHER J. MIER Assistant Secretary
Vice President
FRED B. RENWICK BRENDA LYONS
Trustee ROBERT C. PECK, JR. Assistant Treasurer
Vice President
JOHN B. TINGLEFF
Trustee
JOHN G. WEITHERS
Trustee
- --------------------------------------------------------------------------------
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 AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania Avenue
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
KSMIT - 2 (1/26/99) 1064370
