<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED NOVEMBER 30, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
KEMPER STRATEGIC
MUNICIPAL INCOME TRUST
"... During the last half of the fiscal year,
we concentrated purchases in the
intermediate maturity range. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
8
PORTFOLIO COMPOSITION
PORTFOLIO STATISTICS
9
PORTFOLIO OF INVESTMENTS
16
FINANCIAL STATEMENTS
19
FINANCIAL HIGHLIGHTS
20
NOTES TO FINANCIAL STATEMENTS
22
REPORT OF INDEPENDENT AUDITORS
23
TAX INFORMATION
24
SHAREHOLDERS' MEETING
25
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN
AT A GLANCE
KEMPER STRATEGIC MUNICIPAL INCOME
TRUST TOTAL RETURNS
FOR THE YEAR ENDED NOVEMBER 30, 1999
[BAR GRAPH]
<TABLE>
<S> <C>
BASED ON NET ASSET VALUE -1.35%
- --------------------------------------------------------
BASED ON MARKET PRICE -14.08%
- --------------------------------------------------------
</TABLE>
NET ASSET VALUE AND MARKET PRICE
<TABLE>
<CAPTION>
AS OF AS OF
11/30/99 11/30/98
- --------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $11.31 $12.24
- --------------------------------------------------------
MARKET PRICE $10.31 $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. (SEE PROSPECTUS
FOR MORE DETAILS.)
INVESTMENTS BY THE FUND IN LOWER- AND NON-RATED SECURITIES PRESENT SPECIAL RISK
CONSIDERATION.
DIVIDEND REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF NOVEMBER 30, 1999.
<TABLE>
<CAPTION>
KEMPER STRATEGIC
MUNICIPAL
INCOME TRUST
- --------------------------------------------------------
<S> <C>
ONE-YEAR INCOME $0.7500
- --------------------------------------------------------
NOVEMBER DIVIDEND $0.0625
- --------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE
(BASED ON NET ASSET VALUE) 6.63%
- --------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE
(BASED ON MARKET PRICE) 7.27%
- --------------------------------------------------------
TAX EQUIVALENT DISTRIBUTION RATE
(BASED ON NET ASSET VALUE AND A
37.1% FEDERAL INCOME TAX RATE) 10.54%
- --------------------------------------------------------
TAX EQUIVALENT DISTRIBUTION RATE
(BASED ON MARKET PRICE AND A
37.1% FEDERAL INCOME TAX RATE) 11.56%
- --------------------------------------------------------
</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. DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
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 & Poor's.
DURATION A measure, in years, of the interest-rate sensitivity of a 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.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price.
<PAGE> 3
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
ECONOMIC OVERVIEW
DEAR KEMPER FUNDS SHAREHOLDER:
The end of the metaphorical millennium, it turns out, was not a disaster.
Instead, it was an excuse to party. And why not? As our technological revolution
gained critical mass, its vast potential came into better focus. Capital
spending on information technology didn't slow down; it accelerated. Inflation
remained dormant. The budget surplus nearly doubled, with the promise of oceans
of black ink yet to come. Even the government delivered good news: Its
statisticians toyed with the national accounts to reveal a more productive
economy. It's no wonder the prevailing sentiment could be summed up with the
quintessentially American yelp of glee: Yahoo!
Now, with the potential Y2K crisis seemingly averted, the question hanging
over the economy is whether the Federal Reserve Board will boost interest rates
to soak up extra liquidity caused by its pre-Y2K infusion of cash into the
economy. And unfortunately, all parties end. This one will, too. The questions
are when and how.
The "when" should be before the second half of the year. The Fed has already
raised interest rates three times, and is likely to raise them again on Feb. 2.
Fed officials said they left the rate at 5.5 percent in December mainly because
of "market uncertainties associated with the century-date change." But the Fed
expressed concern that "increases in demand" will foster "inflationary
imbalances" that could spark rate increases once the Y2K issue has been handled.
Although some investors have expressed fear that the Fed's sucking cash out of
banks will jolt the financial system (causing some stock indexes, as well as the
bond markets, to drop sharply in early January), the "how" is likely to be a
slow winding down, thanks to persistent low inflation.
Yes, some prices are higher: Filling up the SUV's gas tank definitely costs
more. But the rate of inflation for non-energy goods and services has actually
slowed during the past year. Although most analysts are worried that the
reprieve won't last -- assuming that higher commodity prices, a softer dollar
and the scarcity of skilled workers will show up as higher prices at the
checkout counter -- we'd turn that worry on its head. If inflation hasn't
accelerated after three years of over 4-percent gross domestic product (GDP)
growth and an unprecedented credit explosion, prices aren't likely to increase
if growth slows and lenders get stingier.
More good news stems from the technological investment boom. While executives
have pared capital budgets in traditional areas such as industrial machinery and
buildings, they've boosted outlays on computers and software. Thanks to the
sheer force of technology spending, overall business investment has grown two to
four times as fast as GDP in every year since 1993. And that expansion should
continue, with more than 20 percent growth likely in high-tech through 2000 and
even beyond. And technology hurts inflation. It saves on labor and inventory,
increases capacity, creates new competitors, cuts out middlemen, gives shoppers
comparative price information and enables global auctions.
Our outlook is for inflation to stay centered around 2 percent, and we expect
the Fed to raise the federal funds rate and the discount rate by one quarter of
a point (0.25%) each on Feb. 2. (More extreme possibilities bandied about by
bearish investors -- including a half-point rise or an emergency move before the
Fed's February meeting -- are unlikely.) We project that the result will be a
gentle slowing of growth from 4 percent in 1999 to around 3.5 percent in 2000
and just under 2.5 percent in 2001.
Despite this positive outlook, the rowdiness of Y2K preparations and
celebration should be sufficient to show us that risks exist in today's markets
and remind us that we could be in for a serious hangover.
The prospect of sparkling growth with no inflation has excited equity
investors, but there's a catch: declining corporate pricing power. If companies
don't have the ability to increase prices, profit growth will decline -- and
it's already happening. For the five years ending in June 1999, S&P 500
operating earnings averaged 9 percent, two and a half percentage points per year
slower than analysts had predicted. Profits did recover strongly in the second
half of 1999, but we suspect that they will soon sputter again. And the
economy's newfound productivity won't change the rules and allow companies to
make money even if they can't raise prices. Productivity gains do produce a
windfall, but historically customers and employees have grabbed the lion's
share. Web sites and dot.coms haven't changed this
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (12/31/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.00 5.50 4.80 5.90
Prime rate (2) 8.50 7.75 8.00 8.50
Inflation rate (3)* 2.60 2.30 1.50 2.00
The U.S. dollar (4) -0.7 -0.9 1.20 9.40
Capital goods orders (5)* 12.60 2.50 -0.6 6.40
Industrial production (5)* 3.30 2.90 3.50 6.90
Employment growth (6) 2.10 2.10 2.30 2.70
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
*DATA AS OF 11/30/99.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
one iota. As a result, we expect profits to be virtually flat in all of 2000 and
to decline as the economy slows in 2001.
Debt is another drink that could bring on future headaches. America has been
swigging it in prodigious amounts. Companies have borrowed heavily to fund
mergers, share buybacks and new investments. Homeowners have increased their
debt with new home equity loans and bigger mortgages. Financial institutions
have issued record amounts of new paper to fund aggressive growth. There's no
hard and fast rule for determining if the debt America is taking on is too much,
but warning bells should sound when debt grows by orders of magnitude faster
than necessary to fund economic activity. That happened in 1985 and 1986, when
excess credit created a commercial real estate bubble and funded dubious
leveraged buyouts with suspect junk bonds, and it's happening again now. Both
the commercial real estate and the high yield markets took years to recover.
Today, the sheer size of the excesses could make the "morning after" even more
painful.
The end result: Given the continuing thrust of growth from the technological
revolution, an improving world economy and the Fed's experience and skill, 2000
could turn out to be a good year. But it's highly unlikely to be as good a year
as 1999.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF JANUARY 6, 2000, AND MAY NOT ACTUALLY COME TO PASS. THIS
INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS AN
INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
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 MANAGEMENT
TEAM ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
AS THE FISCAL YEAR BEGAN, INVESTOR FOCUS SHIFTED FROM TURBULENCE OVERSEAS
TO STRONG ECONOMIC GROWTH IN THE UNITED STATES. FEARS OF POTENTIALLY HIGHER
INFLATION PUSHED INTEREST RATES UP AND BOND PRICES DOWN THROUGHOUT THE FUND'S
FISCAL YEAR. IN THE FOLLOWING Q&A, THE MANAGEMENT TEAM DISCUSSES THE MARKET'S
PERFORMANCE AND THEIR INVESTMENT STRATEGY.
Q BEFORE WE GET INTO THE PERFORMANCE OF KEMPER STRATEGIC MUNICIPAL INCOME
TRUST, COULD YOU PROVIDE SOME BACKGROUND ON HOW GOVERNMENT BONDS PERFORMED OVER
THE LAST 12 MONTHS?
A The last 12 months were characterized by a nearly continuous rise in
interest rates across all maturities.
At the very start of the fiscal year last fall, yields in the government
bond market were near historic lows. A series of problems in Russia, Latin
America and Asia had created a global "flight to quality" as investors worldwide
clamored for the relative safety of established markets. In addition, much of
Europe was converting to the euro at year-end. So, for nervous global investors
looking for a safe place to park their assets, U.S. Treasury bonds were about
the only option. The resulting demand pushed the 30-year Treasury bond yield
down to near 5 percent in November 1998.
To help combat the uncertainty and ward off a worsening of the situation,
the Federal Reserve cut interest rates three times in the last quarter of 1998.
The Fed's plan, in part, was to inject liquidity into the global financial
system by stimulating the U.S. economy -- and thereby other economies -- and
make the yields on foreign bonds look more attractive in comparison with U.S.
securities.
Q DID THE FED'S PLAN WORK?
A Yes, it did. In fact, it worked almost TOO well. Investors gained
confidence that foreign economies could bring their problems under control, and
assets shifted from the United States to other markets. At the same time, some
investors feared that the Fed's stimulus, which was uncharacteristically applied
during a time of strong U.S. economic growth, would ignite inflation. Both these
factors acted to push interest rates up in the United States throughout the
fiscal year. On November 25, 1998, 30-year Treasuries yielded 5.18 percent. A
year later, they were 6.20 percent. That's a monumental move for such an
established security. As economic growth in the United States continued to be
strong and labor markets remained tight throughout 1999, the Federal Reserve was
compelled to put the brakes on the U.S. economy. The Fed rescinded its prior
three interest-rate cuts by raising rates in June, August and November.
Q WHAT WAS THE EFFECT OF RISING RATES ON THE BOND MARKET?
A Because bond prices fall when interest rates rise, these last 12 months
have been a challenging period for bond investors. It's been tough to try to
create positive returns for shareholders when fighting
5
<PAGE> 6
PERFORMANCE UPDATE
the constant headwind of rising rates. This difficulty is reflected in the
returns of bond indices. For example, the Lehman Brothers Aggregate Bond index*,
which is a broad proxy for the taxable bond market as a whole, experienced a
total return of -0.04 percent for the 12-month period ended November 30, 1999.
Government bonds, which don't provide as much income as corporate bonds and
therefore tend to be more sensitive to interest-rate changes, were hit hardest;
the Lehman Brothers Long-Term Government Bond index* was down 7.52 percent for
the same period.
* THE LEHMAN AGGREGATE BOND INDEX IS A TOTAL RETURN INDEX INCLUDING FIXED-RATE
DEBT ISSUES RATED INVESTMENT-GRADE OR BETTER. IT CONTAINS GOVERNMENT,
CORPORATE AND MORTGAGE SECURITIES AND IS GENERALLY CONSIDERED REPRESENTATIVE
OF THE MARKET FOR INVESTMENT-GRADE BONDS AS A WHOLE. THE LEHMAN BROTHERS
LONG-TERM GOVERNMENT BOND INDEX IS A TOTAL RETURN INDEX GENERALLY CONSIDERED
REPRESENTATIVE OF THE MARKET FOR TREASURIES AND GOVERNMENT AGENCY SECURITIES
WITH MATURITIES GREATER THAN TEN YEARS. INVESTORS CANNOT INVEST IN THE
INDICES.
Q HOW DID MUNICIPAL BONDS FARE IN COMPARISON?
A Despite an environment of rising interest rates, municipal bonds held up
relatively well versus long-term government bonds. The Lehman Brothers Municipal
Bond index* ended the period down 1.07 percent.
* THE LEHMAN BROTHERS MUNICIPAL BOND INDEX INCLUDES APPROXIMATELY 15,000 BONDS.
TO BE INCLUDED IN THE INDEX, A MUNICIPAL BOND MUST MEET THE FOLLOWING
CRITERIA: A MINIMUM CREDIT RATING OF BBB, ISSUED AS A PART OF AN ISSUE OF AT
LEAST $50 MILLION, ISSUED WITHIN THE LAST FIVE YEARS, AND A MATURITY OF AT
LEAST TWO YEARS. BONDS SUBJECT TO ALTERNATIVE MINIMUM TAX, VARIABLE RATE BONDS
AND ZERO COUPON BONDS ARE EXCLUDED FROM THE INDEX. INVESTORS CANNOT INVEST IN
THE INDEX.
Q WHY DID MUNICIPAL BONDS HOLD UP BETTER THAN THE LONG-TERM GOVERNMENT
BOND MARKET?
A The turbulence had less of an impact because several factors were
operating in favor of municipal bonds. The primary one was a positive
supply/demand situation. Municipal bond issuance in 1999 through November was
down more than 20 percent from the same period last year. With demand remaining
strong and fewer bonds from which to choose, prices remained relatively firm.
Second, municipal bond yields were very attractive compared with
government bond yields. Usually, a municipal bond will yield about 10 to 15
percent less than a similar-maturity government bond, because the tax advantage
of a municipal is discounted in its price. But when government bond yields were
so low, A-rated municipal bonds actually OUTYIELDED 30-year Treasuries, which is
very unusual. As a result, a lot of "crossover buyers" -- investors who wouldn't
normally buy municipal bonds -- entered the market and helped boost demand.
According to THE BOND BUYER Revenue Bond index (see Terms To Know on page
2), A-rated municipal bonds at the end of November offered 97 percent of the
yield of a 30-year Treasury bond -- a very attractive value when you consider
the tax advantage that municipal bonds offer.
Finally, a solid credit situation has helped support municipal bond
prices. The economy is growing well, and that translates to solid tax revenues
for municipalities. A good revenue stream means an increase in high-quality
bonds (see Terms To Know on page 2), which tend to have lower yields because
buyers don't need to be compensated to take extra risk.
Q HOW DID THE KEMPER STRATEGIC MUNICIPAL INCOME TRUST PERFORM SPECIFICALLY?
A Versus our peers, the fund performed well. Our total return was -1.35
percent based on net asset value, versus an average return of -2.51 percent for
the Lipper Closed-End High Yield Municipal Debt Funds category.
Q YOU'VE SAID IN THE PAST THAT YOU NORMALLY MANAGE THE FUND BY KEEPING
CLOSE TO A NEUTRAL DURATION AND THEN TRYING TO TAKE ADVANTAGE OF DISLOCATIONS IN
THE MARKET TO INCREMENTALLY BOOST RETURNS. DID YOU DO ANYTHING IN ADDITION TO
THAT DURING THE COURSE OF THE YEAR?
A During the last half of the fiscal year, we concentrated purchases in the
intermediate maturity range. This area of the yield curve appeared to offer the
best trade-off of risk and return. Also, the difference in yield between
lower-quality bonds and high-quality bonds increased to historically wide
levels, which we believed provided adequate compensation for the additional risk
of these instruments. Therefore, we began to selectively add new BBB- and
non-rated securities to the portfolio to provide additional yield.
Q WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET FROM HERE?
A We think municipals should perform relatively well for several reasons.
First, the municipal market should continue to be more stable than the
government and corporate bond markets. As the
6
<PAGE> 7
PERFORMANCE UPDATE
fiscal year drew to a close, it appeared that investors were expecting the
Federal Reserve to continue raising rates into the year 2000. If the Fed does
tighten, Treasuries and corporate bonds would likely remain volatile as most
investors try to interpret the ramifications of higher rates on both the
domestic and global economies. While municipal securities are also influenced by
these factors, supply and demand fundamentals in the municipal market may act to
dampen volatility.
Second, the municipal market continues to offer attractive value, with
long-maturity yields still attractive relative to Treasuries. As we mentioned,
A-rated municipal bonds now yield nearly the same as similar-maturity
Treasuries, even without factoring in the tax advantage. Third, strong municipal
finances should help alleviate credit concerns. And finally, issuance has so far
remained more than 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
fixed-income investors an attractive option.
7
<PAGE> 8
PORTFOLIO COMPOSITION
PORTFOLIO STATISTICS
THE FUND'S SECTORS*
REPRESENTING THE FUND'S TOTAL ASSETS ON NOVEMBER 30, 1999
<TABLE>
<CAPTION>
HOLDINGS PERCENT
<S> <C> <C>
- ----------------------------------------------------------
1. U.S. GOVERNMENT SECURED 18%
- ----------------------------------------------------------
2. GENERAL OBLIGATIONS 14%
- ----------------------------------------------------------
3. REVENUE BONDS 65%
- ----------------------------------------------------------
4. CASH AND EQUIVALENTS 3%
- ----------------------------------------------------------
</TABLE>
SECURITIES RATINGS
<TABLE>
<CAPTION>
[PIE CHART] [PIE CHART]
ON 11/30/99 ON 11/30/98
<S> <C> <C>
- --------------------------------------------------------------------------------
AAA 39% 10%
- --------------------------------------------------------------------------------
AA 16 2
- --------------------------------------------------------------------------------
A 1 1
- --------------------------------------------------------------------------------
BBB 11 19
- --------------------------------------------------------------------------------
BB 3 3
- --------------------------------------------------------------------------------
B -- 4
- --------------------------------------------------------------------------------
NOT RATED+ 30 61
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
+ THESE SECURITIES ARE NOT RATED BY S&P OR MOODY'S; HOWEVER, THEY ARE RATED BY
SCUDDER KEMPER INVESTMENTS, INC. AS FOLLOWS: A .3%, BBB 2.8%, BB 13.9% AND B
13.0% FOR NOVEMBER 30, 1999, AND AAA 15%, A 3%, BBB 8%, BB 31% AND B 4% FOR
NOVEMBER 30, 1998.
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 11/30/99 ON 11/30/98
<S> <C> <C>
- ----------------------------------------------------------------------------------
AVERAGE MATURITY 20.3 years 16.3 years
- ----------------------------------------------------------------------------------
</TABLE>
* PORTFOLIO HOLDINGS AND COMPOSITION ARE SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
Portfolio of Investments at November 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL INVESTMENTS--4.3% PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DISTRICT OF COLUMBIA
District of Columbia, General Obligation, Series
B1, Daily Demand Note, 4.00%, 06/01/2003* $ 1,000 $ 1,000
---------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
ILLINOIS
Chicago, IL, O'Hare International Airport,
Revenue, American Airlines Project, Series 1983
C, Daily Demand Note, 3.80%, 12/01/2017* 1,300 1,300
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TEXAS
Brazos River Authority, Texas Utilities Electric
Company Project Pollution Control Revenue,
Series 1996B, Daily Demand Note, 4.10%,
06/01/2030*(c) 1,000 1,000
Harris County, TX, Health Facilities, Revenue, St
Lukes Episcopal Hospital, Series B, 3.70%,
02/15/2027* 3,000 3,000
North Central, TX, Health Facilities Development
Corp., Presbyterian Medical Center, Daily Demand
Note, Series C, 3.70%, 12/01/2015*(c) 2,000 2,000
--------------------------------------------------------------------------------
6,000
--------------------------------------------------------------------------------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS--4.3%
(Cost $8,300) 8,300
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL INVESTMENTS--95.7%
- -----------------------------------------------------------------------------------------------------------------------
ALABAMA
Alabama State Public School and College Authority,
Revenue, Series C, 5.625%, 07/01/2013 5,000 5,085
- -----------------------------------------------------------------------------------------------------------------------
ARIZONA
Coconino County, AZ, Industrial Development
Authority, Revenue, Guidance Center Income
Project, Prerefunded 06/01/2001, 9.25%,
06/01/2011(b) 1,645 1,778
Flagstaff Industrial Development Authority,
Revenue, 6.30%, 9/1/2038 2,000 1,739
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, 9.50%,
08/01/2010 1,900 2,069
--------------------------------------------------------------------------------
7,754
- -----------------------------------------------------------------------------------------------------------------------
CALIFORNIA
Foothill/Eastern Transportation Corridor Agency,
Toll Road, ETM, zero coupon, 01/01/2026** 11,500 2,420
Sacramento County, Bradshaw Road Project, Revenue,
7.20%, 09/02/2015 1,225 1,264
Sacramento, CA, City Financing Authority, Revenue,
Convention Center Hotel, Series A, 6.25%,
01/01/2030 2,000 1,863
San Diego, CA, Detention Facility, Certificates of
Participation, Revenue, 8.00%, 06/01/2002 275 285
San Joaquin Hills, Transportation Corridor Agency,
Senior Lien Toll Road, ETM, Revenue, zero
coupon, 01/01/2020** 4,300 1,305
--------------------------------------------------------------------------------
7,137
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COLORADO
Arapahoe County, CO, Capital Improvement Trust
Fund, Capital Improvement Trust Fund, Revenue,
Prerefunded 08/31/2005, zero coupon,
08/31/2010(b) $ 5,000 $ 2,692
City and County of Denver, Airport System,
Revenue, Prerefunded 11/15/2001, 8.00%,
11/15/2025(b) 240 256
City and County of Denver, Airport System,
Revenue, Prerefunded 11/15/2001, 8.00%,
11/15/2025(b) 660 694
Denver, CO, City and County Airport, Unrefunded
Balance, Series A, Revenue, 7.50%, 11/15/2023 830 909
Denver, CO, City and County Airport Revenue,
Series A, Prerefunded 11/15/2004, 7.50%,
11/15/2023(b) 170 194
Denver, CO, City and County Airport, Unrefunded
Balance, Series A, Revenue, 8.75%, 11/15/2023 735 796
Denver, CO, City and County Airport Revenue,
Series A, Prerefunded 11/15/2001, 8.75%,
11/15/2023(b) 265 292
--------------------------------------------------------------------------------
5,833
- -----------------------------------------------------------------------------------------------------------------------
CONNECTICUT
Connecticut State Development Authority, Revenue,
Pierce Memorial Baptist Home, Prerefunded
10/01/2000, 9.25%, 10/01/2018(b) 2,000 2,141
Greenwich, CT, Housing Authority Revenue, Series
A, 6.35%, 09/01/2027 2,000 1,883
Mashantucket Western Pequot Tribe, Special
Revenue, zero coupon, 09/01/2017 2,000 617
Mashantucket Western Pequot Tribe, Special
Revenue, zero coupon, 09/01/2018 1,000 286
--------------------------------------------------------------------------------
4,927
- -----------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA
District of Columbia, General Obligation, Series
1999A, 5.50%, 6/1/2010 2,000 2,044
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
FLORIDA
Nassau County, Amelia Island Care Center Project,
Revenue, 9.75%, 01/01/2023 1,960 2,152
Orlando, FL, Special Assessment Revenue, Conroy
Road Interchange, Series A, 5.80%, 05/01/2026 1,000 892
Volusia County, FL, Health Facilities Authority,
Memorial Health Systems Project, Revenue,
Prerefunded 06/01/2000, 8.25%, 06/01/2020(b) 2,390 2,485
--------------------------------------------------------------------------------
5,529
- -----------------------------------------------------------------------------------------------------------------------
GEORGIA
Forsyth County, Georgia School District, General
Obligation, 5.75%, 02/01/2011 4,500 4,705
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
HAWAII
Honolulu, HI, General Obligation, 5.50%,
11/01/2010(c) 5,000 5,134
--------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ILLINOIS
Chicago, IL, O'Hare International Airport,
International Terminal, Special Revenue, 8.20%,
12/01/2024 $ 1,200 $ 1,354
Chicago, IL, Tax Allocation, Central Station
Project, Series A, Prerefunded 01/01/2005,
8.90%, 01/01/2011(b) 1,835 2,028
Harvard, IL, Multifamily Housing, Northfield Court
Project, Revenue, 9.50%, 06/01/2006 1,910 2,002
Illinois Health Facility Authority, Bethany Home
and Hospital Series B, Revenue, Prerefunded
02/15/2000, 8.625%, 02/15/2009(b) 540 556
Illinois Health Facility Authority, Bethany Home
and Hospital Series A, Revenue, Prerefunded
02/15/2000, 8.625%, 02/15/2009(b) 1,600 1,647
Itasca, IL, Central Manufacturing District,
Special Service Area, Revenue, Prerefunded
12/01/2000, 8.375%, 12/01/2009(b) 2,115 2,244
Lombard, IL, Tax Increment, Revenue, Prerefunded
06/01/2000, 8.80%, 12/01/2004(b) 1,140 1,190
St. Charles, IL, Multifamily Housing, Revenue,
Housing-Wessel Court Project, 7.60%, 04/01/2024 1,900 1,923
University Park, IL, Tax Allocation, Governors
Gateway Industrial Park, 8.50%, 12/01/2011 1,775 1,947
---------------------------------------------------------------------------------
14,891
- ------------------------------------------------------------------------------------------------------------------------
INDIANA
Indiana Health Facilities Financing Authority,
Franciscan Eldercare Community Services, 5.875%,
05/15/2029 3,000 2,542
Indiana Health Facilities Financing Authority
Hospital, Revenue, Fayette Memorial Hospital
Project, 7.20%, 10/1/2022 2,800 2,903
Indianapolis Airport Authority, United Airlines,
Inc., Project, Revenue, 6.50%, 11/15/2031 1,900 1,856
---------------------------------------------------------------------------------
7,301
- ------------------------------------------------------------------------------------------------------------------------
IOWA
Finance Authority Healthcare Facilities, On With
Life, Inc. Project, Revenue, 7.25%, 08/01/2015 2,000 2,044
Lake City Iowa Health Care Facility Revenue,
Refinancing-Opportunity Living Project, 6.450%,
05/01/2011 2,100 1,989
---------------------------------------------------------------------------------
4,033
- ------------------------------------------------------------------------------------------------------------------------
KANSAS
Manhattan, KS, Health Care Facilities Revenue
Bond, Meadowlark Hills Retirement, Series A,
6.50%, 05/15/2028 500 461
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MARYLAND
Anne Arundel County Maryland Special Obligation,
Arundel Mills Project, Series 1999, 7.10%,
07/01/2029 $ 1,500 $ 1,499
Maryland Economic Development Corporation,
Chesapeake Bay Conference, Series 1999B, 7.625%,
12/01/2022* 4,000 4,000
Maryland Economic Development, Student Housing,
Revenue, Collegiate Housing, Series A, 5.75%,
06/01/2019 1,000 940
Maryland Economic Development Corporation,
University of Maryland, Series 1999A, 5.75%,
06/01/2031 1,000 912
--------------------------------------------------------------------------------
7,351
- -----------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS
Massachusetts State, General Obligation, Series
1999C, 5.625%, 09/01/2011 3,035 3,130
Massachusetts State, General Obligation, Series
1999C, 5.625%, 09/01/2012 1,000 1,023
Massachusetts State Development Financial Agency,
Revenue, Health Care Facilities, Series A,
7.10%, 07/01/2032 2,000 1,930
Worcester, Briarwood Retirement Community, Salem
Community Corporation, Revenue, 9.25%,
12/01/2022 1,925 2,090
--------------------------------------------------------------------------------
8,173
- -----------------------------------------------------------------------------------------------------------------------
MICHIGAN
Gogebic County, Hospital Finance Authority, Grand
View Hospital Project, Revenue, Prerefunded
10/01/2001, 8.75%, 10/01/2016(b) 2,250 2,458
Hillsdale Hospital Finance Authority, Revenue,
5.25%, 05/15/2026 1,450 1,156
Madison Heights, Tax Increment Finance Authority,
Revenue, 8.50%, 03/15/2001 315 323
Strategic Funding, Ltd., Holland Home Corporation,
Revenue, 5.75%, 11/15/2028 2,000 1,685
Tawas City, Hospital Finance Authority, St. Joseph
Health System, Revenue, 5.75%, 02/15/2023 1,300 1,251
Tawas City, MI, Hospital Financial Authority,
Revenue, Series A, ETM, 5.60%, 2/15/2013** 520 521
Wayne Charter County, MI, Detroit-Metro Wayne
County, Revenue, 5.00%, 12/01/2022(c) 500 426
--------------------------------------------------------------------------------
7,820
- -----------------------------------------------------------------------------------------------------------------------
MISSOURI
St Louis, MO, Tax Increment Revenue, Tax
Allocation, Series A, 10.00%, 08/01/2010 2,015 2,406
West Plains, MO, Industrial Development Authority,
Ozarks Medical Center Project, Revenue,
Prerefunded 09/15/2000, 8.625%, 09/15/2020(b) 1,910 2,015
--------------------------------------------------------------------------------
4,421
- -----------------------------------------------------------------------------------------------------------------------
NEBRASKA
Nebraska Investment Finance Authority Single,
Revenue, Series A, 6.70%, 09/01/2026 500 512
--------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEVADA
Nevada Housing Division, Single Family Mortgage
Program, Revenue, 6.50%, 04/01/2028 $ 1,000 $ 1,019
Nevada Housing Division, Single Family Mortgage
Program, Revenue, Series B2, 7.90%, 10/01/2021 815 833
Nevada, General Obligation, 5.000%, 05/15/2022(c) 2,000 1,736
--------------------------------------------------------------------------------
3,588
- -----------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE
New Hampshire Higher Educational & Health
Facilities, Revenue, Havenwood Heritage Heights,
7.45%, 01/01/2025 2,000 2,064
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
NEW JERSEY
Educational Facilities Authority, Caldwell
College, Revenue, 7.25%, 07/01/2025 1,100 1,135
New Jersey Economic Development Authority Revenue,
Harrogate Incorporation, Series A, 5.875%,
12/01/2026 200 178
--------------------------------------------------------------------------------
1,313
- -----------------------------------------------------------------------------------------------------------------------
NEW YORK
New York State Medical Care Facilities Finance
Agency, Revenue, Prerefunded 8/15/2001, 7.30%,
02/15/2021(b) 40 43
Monroe County, New York, Airport Authority,
Greater Rochester Intl, Revenue, 5.625%,
01/01/2010 3,740 3,835
Nassau Health Care Corporation, New York, Revenue,
6.00%, 08/01/2016 2,825 2,861
New York & New Jersey, Port Authority Special
Obligation, Revenue, Continental/Eastern
Project, Laguardia, 9.125%, 12/01/2015 2,500 2,635
New York City, General Obligation, Series 1997C,
7.00%, 02/01/2010 315 316
New York State Medical Care Facilities Finance
Agency, Revenue, Partially Prerefunded
8/15/2001, 7.30%, 02/15/2021(b) 20 21
New York, NY, General Obligation, Series I, ETM,
7.50%, 08/15/2010** 105 107
Port Authority of New York & New Jersey, Special
Obligation Revenue, JFK International Air
Terminal, MBIA insured, 6.25%, 12/01/2011(c) 2,000 2,164
Triborough Bridge and Tunnel Authority, New York,
Revenue, Series 1992Y, 6.00%, 01/01/2012 9,000 9,561
--------------------------------------------------------------------------------
21,543
- -----------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA
North Carolina Municipal Power Agency, Electric
Revenue, Series B, 6.375%, 01/01/2013 1,300 1,317
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
NORTH DAKOTA
North Dakota Housing Finance Agency, Single Family
Mortgage, Revenue, 8.375%, 07/01/2021 505 517
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
OHIO
Marion County, OH, Health Care Facilities, United
Church Homes, Inc., Revenue, Prerefunded
12/01/1999, 8.875%, 12/01/2012(b) 2,780 2,864
--------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OKLAHOMA
Woodward Municipal Authority, Hospital Revenue,
8.50%, 11/01/2014 $ 1,335 $ 1,439
Woodward Municipal Authority, Hospital Revenue,
Prerefunded 11/01/2000, 9.250%, 11/01/2014(b) 1,750 1,863
--------------------------------------------------------------------------------
3,302
- -----------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
Greene County, PA, Series B, General Obligation,
Prerefunded 12/01/2000, 8.75%, 12/01/2010(b) 1,540 1,612
Higher Educational Facilities Authority,
Philadelphia College of Textiles and Science,
Revenue, 6.70%, 04/01/2014 2,000 2,109
Montgomery County, PA, Higher Education & Health
Authority Revenue Bond, Temple Continuing Care
Center, 6.75%, 07/01/2029 1,500 1,374
Philadelphia, PA, Hospitals and Higher Education
Facilities Authority, Chestnut Hill College,
6.00%, 10/01/2029 710 646
--------------------------------------------------------------------------------
5,741
- -----------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA
Aiken County, Hospital Facilities, Mattie C. Hall
Health Care Center Project, Revenue, 8.625%,
10/01/2010 1,500 1,517
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TEXAS
Abilene Texas Health Facilities, Sears Methodist
Retirement, Series 1998, 5.90%, 11/15/2025 2,500 2,146
Austin, TX, Bergstrom Landhost Enterprises,
Revenue, Series A, 6.75%, 04/01/2027 2,000 1,873
Dallas-Fort Worth, TX, International Airport
Facility, American Airlines, Revenue, Series
1999, 6.375%, 05/01/2035 2,000 1,939
Houston, Airport System Special Facilities,
Continental Airlines, Inc., Improvement
Projects, Revenue, 5.70%, 07/15/2029 2,000 1,727
Houston, Airport System Special Facilities,
Continental Airlines, Inc., Improvement
Projects, Revenue, 6.125%, 07/15/2027 2,000 1,838
Lower Colorado River Authority, Texas, Revenue,
Series 1999E, 5.75%, 05/15/2011 4,000 4,138
Lower Colorado River Authority, Texas, Revenue,
Series 1999B, 6.00%, 05/15/2013 5,000 5,207
Travis County, Texas, Health Facilities
Development, Ascension Health Credit Series A,
6.00%, 11/15/2012(c) 3,860 4,016
--------------------------------------------------------------------------------
22,884
- -----------------------------------------------------------------------------------------------------------------------
UTAH
Utah Housing Finance Agency, Single Family
Mortgage Revenue, Series 1999A, 6.65%,
07/01/2026 805 825
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
VIRGIN ISLANDS
Virgin Islands, Public Finance Authority, Gross
Receipts Taxes Series A, Revenue, 6.375%,
10/01/2019 3,000 2,991
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
VIRGINIA
Fairfax County, VA, Economic Development Authority
Revenue Series 1999A, 7.25%, 10/01/2019 2,000 1,932
--------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WASHINGTON
Washington State, General Obligation, Series 1999
A, 5.50%, 07/01/2011 $ 5,000 $ 5,080
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
WISCONSIN
Wisconsin State Health and Educational Facilities
Authority, Revenue, Prerefunded 07/01/2005,
6.35%, 07/01/2017(b) 600 641
Wisconsin Housing and Economic Development
Authority, Home Ownership, Revenue, 6.20%,
03/01/2027 500 498
Wisconsin State Health And Education Facilities
Authority Revenue, 5.125%, 02/15/2020 1,000 879
--------------------------------------------------------------------------------
2,018
--------------------------------------------------------------------------------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS--95.7%
(Cost $180,539) 182,607
--------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $188,839) $190,907
--------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) The cost for federal income tax purposes was $188,839. At November 30, 1999,
net unrealized appreciation for all securities based on tax cost was $2,068.
This consisted of aggregate gross unrealized appreciation for all securities
in which there was an excess of market value over tax cost of $5,629 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $3,561.
(b) Prerefunded: Bonds which are prerefunded are collateralized by U.S. Treasury
securities which are held in escrow and are used to pay principal and
interest on tax-exempt issues and to retire the bond in full at the earliest
refunding date.
(c) Bond is insured by one of these companies: AMBAC, FGIC, or MBIA/BIG.
* Floating rate and monthly, weekly, or daily demand notes are securities whose
yields vary with a designated market index or market rate, such as the
coupon-equivalent of the U.S. Treasury bill rate. Variable rate demand notes
are securities whose yields are periodically reset at levels that are
generally comparable to tax-exempt commercial paper. These securities are
payable on demand within seven calendar days and normally incorporate an
irrevocable letter of credit from a major bank. These notes are carried, for
purposes of calculating average weighted maturity, at the longer of the
period remaining until the next rate change or to the extent of the demand
period.
** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by a
trustee and used to pay principal and interest on bonds so designated.
The accompanying notes are an integral part of the financial statements.
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
as of November 30, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments in securities, at value (cost $188,839) $190,907
- ------------------------------------------------------------------------
Cash 504
- ------------------------------------------------------------------------
Receivable for investments sold 585
- ------------------------------------------------------------------------
Interest receivable 3,141
- ------------------------------------------------------------------------
TOTAL ASSETS $195,137
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES
- ------------------------------------------------------------------------
Payable for investments purchased 3,438
- ------------------------------------------------------------------------
Dividends payable 57
- ------------------------------------------------------------------------
Accrued management fee 94
- ------------------------------------------------------------------------
Other accrued expenses and payables 48
- ------------------------------------------------------------------------
Total liabilities 3,637
- ------------------------------------------------------------------------
NET ASSETS, AT VALUE $191,500
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------
Net assets consist of:
Accumulated distributions in excess of net investment income $ (10)
- ------------------------------------------------------------------------
Remarketed preferred shares, par value $.01 per share,
unlimited number of shares authorized; 2,800 shares
outstanding at $25 thousand liquidation value per share 70,000
- ------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investment securities 2,068
- ------------------------------------------------------------------------
Accumulated net realized gain (loss) 536
- ------------------------------------------------------------------------
Paid-in capital 118,906
- ------------------------------------------------------------------------
NET ASSETS, AT VALUE $191,500
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET ASSET VALUE
- ------------------------------------------------------------------------
NET ASSET VALUE PER COMMON SHARES
(121,500 / 10,742 outstanding shares of
beneficial interest, $.01 par value,
unlimited number of shares authorized)
(NET ASSETS LESS REMARKETED PREFERRED SHARES AT LIQUIDATION
VALUE DIVIDED BY COMMON SHARES OUTSTANDING) $11.31
- ------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended November 30, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
INVESTMENT INCOME
- -----------------------------------------------------------------------
Interest $ 9,743
- -----------------------------------------------------------------------
Expenses:
Management fee 838
- -----------------------------------------------------------------------
Services to shareholders 60
- -----------------------------------------------------------------------
Custodian fee 14
- -----------------------------------------------------------------------
Auditing 40
- -----------------------------------------------------------------------
Legal 315
- -----------------------------------------------------------------------
Trustees' fees 19
- -----------------------------------------------------------------------
Reports to shareholders 68
- -----------------------------------------------------------------------
Registration and remarketing fee 30
- -----------------------------------------------------------------------
Other 36
- -----------------------------------------------------------------------
Total expenses, before expense reductions 1,420
- -----------------------------------------------------------------------
Expense reductions (13)
- -----------------------------------------------------------------------
Total expenses, after expense reductions 1,407
- -----------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 8,336
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTION
- -----------------------------------------------------------------------
Net realized gain (loss) from investments 800
- -----------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on investments (9,721)
- -----------------------------------------------------------------------
Net gain (loss) on investment transactions (8,921)
- -----------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ (585)
- -----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------
1999 1998
<S> <C> <C>
- -------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- -------------------------------------------------------------------------------------------
Operations:
Net investment income $ 8,336 $ 8,265
- -------------------------------------------------------------------------------------------
Net realized gain (loss) 800 338
- -------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (9,721) (985)
- -------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (585) 7,618
- -------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Common shares (8,046) (8,199)
- -------------------------------------------------------------------------------------------
Remarketed preferred shares (535) --
- -------------------------------------------------------------------------------------------
Net realized gain from investment transactions (common
shares) (107) --
- -------------------------------------------------------------------------------------------
Fund share transactions:
Net proceeds from issuance of remarketed preferred shares 69,300 --
- -------------------------------------------------------------------------------------------
Net proceeds from shares issued to common shareholders in
reinvestment of distributions 467 692
- -------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions 69,767 692
- -------------------------------------------------------------------------------------------
Increase (decrease) in net assets 60,494 111
- -------------------------------------------------------------------------------------------
Net assets at beginning of period 131,006 130,895
- -------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including accumulated
distributions in excess of net investment income of $(10)
and undistributed net investment income (loss) $268,
respectively) $191,500 $131,006
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
OTHER INFORMATION
- -------------------------------------------------------------------------------------------
Shares outstanding at beginning of period 10,704 10,649
- -------------------------------------------------------------------------------------------
Shares issued to common shareholders in reinvestment of
distributions 38 55
- -------------------------------------------------------------------------------------------
Net increase (decrease) in Fund shares 38 55
- -------------------------------------------------------------------------------------------
Shares outstanding at end of period 10,742 10,704
- -------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS AND MARKET PRICE DATA.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
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 .78(a) .77 .80 .82 .83
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.83) (.05) .17 (.05) .64
- -----------------------------------------------------------------------------------------------------
Total from investment operations (.05) .72 .97 .77 1.47
- -----------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income to common shareholders (.75) (.77) (.82) (.82) (.82)
- -----------------------------------------------------------------------------------------------------
Net investment income to preferred shareholders
(common share equivalent) (.05) -- -- -- --
- -----------------------------------------------------------------------------------------------------
Net realized gains on investment transactions
(common shares) (.01) -- -- -- --
- -----------------------------------------------------------------------------------------------------
Total distributions (.81) (.77) (.82) (.82) (.82)
- -----------------------------------------------------------------------------------------------------
Dilution resulting from remarketed preferred
shares (b) (.07) -- -- -- --
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.31 12.24 12.29 12.14 12.19
- -----------------------------------------------------------------------------------------------------
Market value, end of year $10.31 12.81 13.06 12.38 12.13
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN PER COMMON SHARE
- -----------------------------------------------------------------------------------------------------
BASED ON NET ASSET VALUE (%) (1.35) 5.99 8.28 6.58 13.09
- -----------------------------------------------------------------------------------------------------
BASED ON MARKET VALUE (%) (14.08) 4.36 12.87 9.19 11.70
=====================================================================================================
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) net of
remarket preferred shares 121,500 131,006 130,895 128,234 127,844
- -----------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%)
(excluding preferred shares) 1.12 .77 .76 .74 .76
- -----------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%)
(excluding preferred shares) 1.11 .77 .76 .74 .76
- -----------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%)
(including preferred shares) (b) 1.01 -- -- -- --
- -----------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%)
(including preferred shares) (b) 1.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------
Ratio of net investment income (%)
(excluding preferred shares) (b) 6.55 6.29 6.62 6.82 6.97
- -----------------------------------------------------------------------------------------------------
Ratio of net investment income (%)
(including preferred shares) (b) 5.91 -- -- -- --
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 24 22 13 31 8
- -----------------------------------------------------------------------------------------------------
Remarketed preferred shares information
at end of period:
Aggregate amount outstanding ($ thousands) 70,000 -- -- -- --
- -----------------------------------------------------------------------------------------------------
Asset coverage per share $68,000 -- -- -- --
- -----------------------------------------------------------------------------------------------------
Liquidation and market value per share $25,000 -- -- -- --
- -----------------------------------------------------------------------------------------------------
</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.
(a) Based on monthly average shares outstanding during the period.
(b) Effective September 29, 1999, the Fund issued 2,800 remarketed preferred
shares.
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper Strategic Municipal Income Trust (the
"Fund") is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as a
closed-end, diversified management investment
company organized as a Massachusetts business
trust.
The Fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Portfolio debt securities
purchased with an original maturity greater than
sixty days are valued by pricing agents approved by
the officers of the Trust, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the
calculated mean between the most recent bid and
asked quotation supplied by a bona fide market
maker shall be used. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
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.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income to common shareholders, if
any, are made monthly. Net realized gains from
investment transactions, in excess of available
capital loss carryforwards, would be taxable to the
Fund if not distributed, and, therefore, will be
distributed to shareholders at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date. Interest income is recorded on the
accrual basis. Realized gains and losses from
investment transactions are recorded on an
identified cost basis. All discounts are accreted
for both tax and financial reporting purposes.
REMARKETED PREFERRED SHARES. Effective September
29, 1999, the Fund issued 2,800 shares of Series T
Remarketed Preferred Shares at a purchase price of
$25,000 per share plus dividends, if any, that had
accumulated from the date the fund first issued the
shares. The Remarketed Preferred Shares will be
entitled to receive cash dividends at an annual
rate that may vary for the successive dividend
periods for such shares. The auction agent will
determine the dividend rate for a particular period
by an auction conducted on the business day
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
immediately prior to the start of that dividend
period. Investors and potential investors in the
Remarketed Preferred Shares may participate in
auctions for the Municipal Preferred Shares through
their broker-dealer.
- --------------------------------------------------------------------------------
2 PURCHASES AND SALES
OF SECURITIES For the year ended November 30, 1999, investment
transactions (excluding short-term investments) are
as follows (in thousands):
Purchases $96,033
Proceeds from sales 32,426
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the annual rate of .60%
of average weekly net assets. The Fund incurred a
management fee of $838,000 for the year ended
November 30, 1999.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of $24,000
for the year ended November 30, 1999.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the year ended November 30,
1999, the Fund made no direct payments to its
officers and incurred trustees' fees of $19,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian whereby credits realized as a result of
uninvested cash balances were used to reduce a
portion of the fund's expenses. During the period,
the Fund's custodian fees were reduced by $13,000
under these arrangements.
- --------------------------------------------------------------------------------
5 LINE OF CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility for temporary or emergency
purposes. The Participants are charged an annual
commitment fee which is allocated pro rata among
each of the Participants. Interest is calculated
based on the market rates at the time of the
borrowing. The Fund may borrow up to a maximum of
33 percent of its net assets under the agreement.
21
<PAGE> 22
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, 1999, 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 1995. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of November 30, 1999, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Kemper Strategic Municipal Income Trust at November 30, 1999, 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 1995, in conformity with accounting principles generally
accepted in the United States.
/s/ERNST & YOUNG LLP
Chicago, Illinois
January 21, 2000
22
<PAGE> 23
TAX INFORMATION
The Fund paid distributions of $.01 per share from net long-term capital gains
during its year ended November 30, 1999 of which 100% represents 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$735,000, as capital gain dividends for the year ended November 30, 1999, of
which 100% represents 20% rate gains.
Of the dividends paid from net investment income for the taxable year ended
November 30, 1999, 100% are designated as exempt interest dividends for federal
income tax purposes.
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 account, please call 1-800-621-1048.
23
<PAGE> 24
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
An annual shareholders' meeting was held on July 14, 1999, 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. Akins 9,160,387 168,244
James R. Edgar 9,162,286 166,345
Arthur R. Gottschalk 9,165,405 163,226
Frederick T. Kelsey 9,189,993 138,638
Thomas W. Littauer 9,192,927 135,704
Fred B. Renwick 9,198,117 130,514
John G. Weithers 9,199,535 129,096
</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>
9,229,779 30,487 68,364
</TABLE>
24
<PAGE> 25
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 219066
Kansas City, Missouri 64121-6066
1-800-294-4366
25
<PAGE> 26
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.
26
<PAGE> 27
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.
27
<PAGE> 28
TRUSTEES & OFFICERS
<TABLE>
<S> <C> <C>
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 BRENDA LYONS
Trustee and ANN M. MCCREARY Assistant Treasurer
Vice President Vice President
FRED B. RENWICK ROBERT C. PECK, JR.
Trustee Vice President
JOHN G. WEITHERS KATHRYN L. QUIRK
Trustee Vice President
</TABLE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- ---------------------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 219066
Kansas City, MO 64121
- ---------------------------------------------------------------------------------------------
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
- ---------------------------------------------------------------------------------------------
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
- ---------------------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
</TABLE>
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