<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 2000
KEMPER STRATEGIC
MUNICIPAL INCOME TRUST
"... Curve positioning and security structure selection helped Kemper Strategic
Municipal Income Trust preserve capital to a greater extent than its peers in a
climate of rapidly rising interest rates. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
PORTFOLIO STATISTICS
9
PORTFOLIO OF INVESTMENTS
16
FINANCIAL STATEMENTS
19
FINANCIAL HIGHLIGHTS
20
NOTES TO FINANCIAL STATEMENTS
22
SHAREHOLDERS' MEETING
AT A GLANCE
KEMPER STRATEGIC MUNICIPAL INCOME TRUST TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 2000
<TABLE>
<S> <C> <C> <C>
BASED ON NET ASSET VALUE 0.06%
........................................................
BASED ON MARKET PRICE 3.07%
........................................................
</TABLE>
NET ASSET VALUE AND MARKET PRICE
<TABLE>
<CAPTION>
AS OF AS OF
5/31/00 11/30/99
.........................................................
<S> <C> <C> <C> <C>
NET ASSET VALUE $10.85 $11.31
.........................................................
MARKET PRICE $10.19 $10.31
.........................................................
</TABLE>
INCOME MAY BE SUBJECT TO STATE AND LOCAL TAXES, AND A PORTION OF THE INCOME MAY
BE SUBJECT TO THE ALTERNATIVE MINIMUM TAX FOR CERTAIN INVESTORS.
INVESTMENT BY THE TRUST IN LOWER-RATED SECURITIES PRESENTS SPECIAL RISK
CONSIDERATIONS.
DIVIDEND REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE
TRUST AS OF MAY 31, 2000.
<TABLE>
<S> <C> <C> <C>
SIX-MONTHS INCOME $ 0.375
......................................................
MAY DIVIDEND $0.0625
......................................................
ANNUALIZED DISTRIBUTION RATE
(BASED ON NET ASSET VALUE) 6.91%
......................................................
ANNUALIZED DISTRIBUTION RATE
(BASED ON MARKET PRICE) 7.36%
......................................................
TAX-EQUIVALENT DISTRIBUTION RATE
(BASED ON NET ASSET VALUE AND A
37.1% FEDERAL INCOME TAX RATE) 10.99%
......................................................
TAX-EQUIVALENT DISTRIBUTION RATE
(BASED ON MARKET PRICE AND A
37.1% FEDERAL INCOME TAX RATE) 11.70%
......................................................
</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 GUARANTEE FUTURE RESULTS. MARKET PRICE,
DISTRIBUTION RATES, NET ASSET VALUE AND RETURNS ARE HISTORICAL AND WILL
FLUCTUATE. ADDITIONAL INFORMATION CONCERNING PERFORMANCE IS CONTAINED IN THE
FINANCIAL HIGHLIGHTS APPEARING AT THE END OF THIS REPORT.
TERMS TO KNOW
DISCOUNTS AND PREMIUMS Par value is the principal value that an investor may
receive when a bond matures. If a bond's price is lower than par, it is selling
at a discount. If a bond's price is higher than par, it is said to be trading at
a premium.
DURATION A measure 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.
INVERTED YIELD CURVE A market phenomenon in which short-term bonds (securities
with two- to 10-year maturities) have higher income potential and current yields
than long-term bonds (securities with 10- to 30-year maturities). Historically
it has occurred during a period of rising short-term interest rates and been
viewed as an indicator of a future economic slowdown.
REVENUE BOND INDEX (RBI) RBI is the average yield on 25 revenue bonds with
30-year maturities rated A1 and compiled by THE BOND BUYER, a newspaper that
reports on the municipal bond market.
<PAGE> 3
ECONOMIC OVERVIEW
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.
DEAR KEMPER FUNDS SHAREHOLDER,
When an irresistible force such as the ebullient U.S. economy meets an immovable
object, such as a determined Federal Reserve Board, the old song is right:
Something's gotta give. One possibility -- the economy could slow down as the
Fed has ordered. Or, if market volatility becomes true distress, the Fed could
back off, as it has in the past. A third possibility is that neither the Fed nor
the economy will give way until it's too late, which could lead to a recession.
Recent evidence suggests, however, that the economy probably will slow down as
ordered.
Before explaining why, perhaps it's best to start with a review of how
monetary policy works. Central bankers often sound like witch doctors reading
animal entrails, so it's understandable that many people are confused about
monetary policy. But monetary policy still works in the same way it always has.
First, it changes the price and availability of money. More subtly, it alters
people's perceptions about and confidence in the future, thereby adjusting their
willingness to take risks.
It's a bit early to tell how the Fed's monetary policy is working so far. The
policymakers only started raising interest rates about a year ago, and it takes
at least that long for higher rates to impact borrowers. There are two reasons.
First, interest rates on many existing loans are fixed. And, a family who has
just selected a dream house isn't going to walk away if mortgage rates rise a
notch. Similarly, a company that has just approved an expansion program won't
stop cold because the prime rate is higher. So it's foolish to think that
America's economy has become less interest-sensitive because the economy roared
through the first several months of this year. Americans are more in hock than
ever, so higher interest rates will hurt more than ever. The May dip in housing
starts and auto sales -- especially the higher priced, gas guzzling sport
utility vehicles -- is probably the first sign that higher rates are biting.
They will bite harder in coming months. We look for both housing starts and
vehicle sales to drop about 10 percent in 2001.
Confidence is harder to measure, but there are some early flutters of
weakness. It's true that consumers remain cheerily upbeat. But corporate bond
markets, the most sensitive barometer of business confidence and a vital source
of corporate funds, have been nervous. Investors are demanding a big premium
before they'll buy lower quality bonds, which means there's less new money for
companies to spend. Corporate bond issuance through mid-June was 35 percent
below the first five and a half months of 1999.
So far, companies have been able to get around the bond market stinginess by
turning to their bankers. Banks lent businesses 8 percent more from January
through May of this year than they did during the first five months of 1999. But
some banks are beginning to worry, too. Bank examiners have been questioning the
quality of loans and the level of reserves. In response, more bankers are
tightening lending standards and raising rates. This is a textbook case of how
tighter monetary policy eventually slows an economy.
Aren't bond market and banker concerns overdone? As long as the economy keeps
growing at 3 percent or so, won't that guarantee such good profits that paying
the bills will be a cinch? Not necessarily. Profits are far more cyclical than
economic growth. Earnings actually fell during 1998, even though the economy
continued to roll. That was a global crisis, when foreign earnings fell sharply.
But take a look at the last "soft landing" during 1995. Revenue growth dipped
and pricing power fell, squeezing profits. The same thing is likely to happen
again in the coming slowdown -- and this time, tight labor markets could make it
even tougher for companies to control costs quickly. Assuming growth is between
2.5 percent and 3 percent by the end of 2001, we believe year-over-year profit
comparisons will have turned slightly negative.
A profit slowdown when new lines of credit are hard to come by will take its
toll on capital spending. We expect growth in business outlays for buildings and
equipment to slip from over 12 percent this year to around 8 percent in 2001.
That's still quite robust, and the "high-tech imperative" is the reason why.
Executives believe that they have no option but to keep up with the
technological revolution that is transforming the world. The fact that high-tech
gear keeps getting cheaper year after year and also helps save on expensive
labor makes the decision to buy it easy. Indeed, unit sales of computers and
peripherals to businesses have sustained growth rates in excess of 40 percent
since 1995. And the rush is on to lay down the infrastructure for the next
generation of wireless communications. We estimate that the sector will see unit
growth of about 50 percent this year, double the growth in 1999. It's hard even
for superstars to sustain these stratospheric
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 (5/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.40 6.00 5.50 5.60
Prime rate (2) 9.50 8.50 7.75 8.50
Inflation rate (3)* 3.00 2.60 2.30 1.50
The U.S. dollar (4) 4.30 -0.70 -0.90 6.40
Capital goods orders (5)* 17.00 12.30 2.50 14.50
Industrial production (5)* 6.10 3.70 2.90 5.20
Employment growth (6) 2.60 2.20 2.30 2.60
</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 4/30/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
compound growth rates forever, and we do expect some moderation next year.
However, high-tech orders continue to ratchet upwards, and the shortage in
semiconductors and other components has persisted long enough to cause major
players to announce huge capacity additions.
Another battle the Fed must win before it succeeds in slowing the economy is
bringing consumers to heel. Most families still feel better off than they were
last year and much richer than they were five years ago. That's a powerful
incentive to spend and enjoy. Indeed, total real consumption has been galloping
at a 5 percent rate or better since early 1998. But consumers are so important
to the economy that if they don't start spending less freely, there won't be a
slowdown. We expect the Fed to be successful and slow down shoppers in the
months ahead -- but the victory won't be an easy one. We expect at least one
more rate hike and a few more financial fireworks before consumers and the
economy hoist the white flag.
So what will the slowdown look like? During the spring, retail sales, housing
starts and job creation slowed, but strength in high tech orders and capital
equipment production probably will help keep the slowdown from becoming too
abrupt. We expect about 3.5 percent growth in the second half. That would still
produce a hearty 5 percent growth for full year 2000. During 2001, the full
impact of the Fed's recent tightening will probably rein growth in to just 3
percent.
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 JUNE 29, 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
TRUST AND MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC. HE HAS ALSO
SERVED AS DIRECTOR OF THE MUNICIPAL BOND GROUP AND RESEARCH DEPARTMENT.
[WILSON PHOTO]
REBECCA L. WILSON HAS 14 YEARS OF PROFESSIONAL INVESTMENT EXPERIENCE AND HAS
BEEN CO-MANAGER OF THE TRUST SINCE 1998. SHE JOINED SCUDDER KEMPER INVESTMENTS,
INC. IN 1986.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
MUNICIPAL BONDS HAVE FACED A TOUGH ENVIRONMENT SINCE NOVEMBER 1999. THE FEDERAL
RESERVE BOARD OPEN MARKET COMMITTEE RAISED SHORT-TERM INTEREST RATES THREE
TIMES, WHILE THE TREASURY DEPARTMENT ANNOUNCED A DEBT BUYBACK PLAN, PROMPTING AN
INVERSION OF THE U.S. TREASURY YIELD CURVE. BELOW, THE MANAGEMENT TEAM DISCUSSES
THE MARKET'S PERFORMANCE AND HOW THE TRUST IS POSITIONED FOR THE COMING MONTHS.
Q HOW DID THE MUNICIPAL BOND MARKET PERFORM DURING THE FIRST SIX MONTHS OF
FISCAL YEAR 2000?
A It was a challenging period for all fixed-income markets, and particularly
so for tax-exempt debt. Long-term Treasury interest rates fell 28 basis points
(0.28 percent) between November 30, 1999, and May 31, 2000. Two- to 10-year
rates rose between 66 and 9 basis points (0.66 and 0.09 percent respectively).
During the period, the Federal Reserve expressed a resolve to head off
inflationary pressures as commodity prices rebounded, the nation's unemployment
rate reached 30-year lows and consumer spending was brisk. These factors, along
with strong U.S. economic growth, prompted the Federal Reserve Board Open Market
Committee to raise its short-term interest-rate target three times by an
additional 100 basis points (1 percent) to 6.50 percent.
As we entered the new calendar year, tax-related selling pressures abated and
were replaced by increased demand as equity price volatility picked up towards
the latter part of the fiscal period. Additionally, a decline in the supply of
tax-exempt debt helped bring stability to the municipal market. As of the end of
May, new issuance in calendar year 2000 was down 26.8 percent from year-earlier
levels, according to THE BOND BUYER.
During the beginning of the fiscal period, the municipal market came under
intense selling pressure. Many investors sold municipal bond funds in calendar
year 1999 to realize tax losses they could use to offset year-end capital gains
from equity funds. Liquidity in the market was difficult and spreads (the
difference in interest rates between bonds of varying quality) widened. During
the fiscal period municipal yields as measured by the Bond Buyer Revenue Bond
index increased 13 basis points from 6.14 percent to 6.27 percent.
Q HOW DID YOU POSITION KEMPER STRATEGIC MUNICIPAL INCOME TRUST BETWEEN
NOVEMBER 1999 AND MAY 2000?
A The trust's average unleveraged duration target (see Portfolio Statistics
on page 9) ranged from neutral to slightly less than most of the trust's peers
during the period. This, along with curve positioning and security structure
selection, helped the Kemper Strategic Municipal Income Trust preserve capital
to a greater extent than its peers in a climate of rapidly rising interest
rates. (See At a Glance on page 2.) The trust's 3.07 percent total return, based
on market price, outpaced the 1.02 percent return of the Lehman Brothers
Municipal Bond index* for the six months ended May 31, 2000. The average fund in
the Lipper high-yield municipal debt fund category (closed-end leveraged funds)
declined 1.64 percent over the same period.
To increase income and total return potential, we focused on issue selection
and curve placement. We added more lower-quality bonds as the income
differential (spreads) between high-quality and lower-quality securities grew
for most of the period. This strategy helped Kemper Strategic Municipal Income
Trust outperform the average of its peers for the six months ended May 31,
5
<PAGE> 6
PERFORMANCE UPDATE
2000. As of the end of May municipal bonds rated BBB -- the lowest level of
investment-grade bonds -- generally yielded more than 100 basis points more than
comparable-sector AAAs.
The changing shape of the municipal yield curve provided some interesting
opportunities over the fiscal period. As the fiscal year started, the two-year
to 30-year yield curve was historically steep. We used this opportunity to
concentrate new purchases towards the longer end of the maturity spectrum. As
the fiscal year ended, the two-year to 30-year curve was flat, so the investment
focus was shifted towards shorter maturities where the risk-return profile was
more attractive.
* 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 THE TRUST'S MARKET PRICE RISE MORE THAN ITS NET ASSET VALUE
BETWEEN NOVEMBER AND MAY?
A At the start of fiscal year 2000, we believe many municipal bond investors
decided to reduce their exposure to federal capital gains taxes on their equity
portfolios by selling municipal bonds and/or municipal bond funds at a loss.
This tax-loss-related selling persisted through the end of calendar year 1999
and, in our view, artificially depressed the municipal bond market. Early in the
fiscal year, the trust's shares were selling at as much as an 8.8 percent
discount to net asset value. This discount narrowed in the spring as more
investors perceived trust shares to be selling at what they believed were
bargain prices.
Q THIS PAST WINTER, THE TREASURY ANNOUNCED PLANS TO BUY BACK SOME LONG-TERM
DEBT AND HOLD FEWER AUCTIONS. WHAT WERE THE SHORT-TERM CONSEQUENCES OF THIS
ACTION ON MUNICIPAL BONDS, AND WHAT DO YOU BELIEVE MAY BE THE LONG-TERM EFFECT?
A At the start of the fiscal period, the municipal bond yield curve -- the
difference in income potential between short-term and long-term
securities -- was steep compared with Treasuries. We used this development to
reposition the portfolios with more longer-term bonds. We believe this helped
the trust capture additional income and total return potential. In our view,
long-term municipal securities offered compelling value on a tax-adjusted basis.
Long-term municipal bond yields reached a historically attractive
ratio -- providing all of the yield of comparable-maturity Treasuries.
Long-maturity municipal bonds typically yield about 85 to 90 percent of a
similar-maturity Treasury.
As the new calendar year began, the Treasury yield curve inverted, so that by
May 31, 2000, one-year Treasury bills had higher yields than 30-year bonds. This
happened in part because the Treasury began buying back 30-year government bonds
and reducing auctions all along the maturity spectrum. The Treasury buybacks
helped generate a welcome bond market rally in February after five straight
months of depressed prices. While the municipal yield curve flattened during
this past winter, it did not invert, increasing the relative attractiveness of
long-term municipal bonds.
Q IS A STRONG U.S. ECONOMY BAD NEWS FOR MUNICIPAL BONDS?
A Not necessarily. In fact, to the extent that the Fed can contain
inflation, and investors believe that consumer prices will not accelerate,
strong economic growth is positive because it enhances the ability of municipal
debt issuers to meet their obligations. The first calendar quarter of 2000 was
the 18th consecutive quarter in which bond-rating upgrades exceeded downgrades,
according to Standard & Poor's.
The trust's portfolios contained bonds from many states and U.S. territories
as of May 31, providing an element of diversification for the funds. As of May
31, 2000, Texas was the largest state allocation for Kemper Strategic Municipal
Income Trust (12.71 percent of net assets). Texas bond issuers have historically
had to offer higher yields to attract investors, in part because, like Illinois
municipal bonds, the income from tax-exempt bonds is not necessarily exempt from
state income taxes.
Q WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL BOND MARKET FOR THE BALANCE OF
FISCAL YEAR 2000?
A Given recent government statistics that suggest U.S. economic growth has
begun to moderate and the fact that Federal Reserve raised its short-term
interest rate target in May by 50 basis points, we think municipal bonds face a
more stable environment than in the prior six months. We believe the municipal
bond market provides excellent value, with yields of longer-maturity municipals
still near those of Treasuries, and tax-equivalent yields near double-digit
levels for investors in the highest brackets. In January, in fact, municipal
bond yields, as measured by THE BOND BUYER'S Revenue Bond Index, reached 6.35
percent, the highest level since August 1995. In our view, a robust U.S. economy
enhances municipal finances, and that should continue to help bolster municipal
credit ratings. Finally, if the equity and taxable bond markets remain as
volatile as they have been this past winter, we think it could provide a
catalyst for renewed enthusiasm for tax-exempt debt as a way to diversify a
portfolio.
6
<PAGE> 7
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 5/31/00 ON 11/30/99
<S> <C> <C> <C> <C>
REVENUE BONDS 70% 65%
................................................................................
GENERAL OBLIGATION BONDS 10 14
................................................................................
LEASE OBLIGATIONS 2 --
................................................................................
U.S. GOVERNMENT SECURED 16 18
................................................................................
CASH AND EQUIVALENTS 2 3
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
QUALITY
<TABLE>
<CAPTION>
ON 5/31/00 ON 11/30/99
<S> <C> <C> <C> <C>
AAA 40% 27%
................................................................................
AA 7 16
................................................................................
A 3 1
................................................................................
BBB 17 11
................................................................................
BB 3 3
................................................................................
NOT RATED 30 42
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
THE RATINGS OF STANDARD & POOR'S CORPORATION (S&P) AND MOODY'S INVESTORS
SERVICE, INC. (MOODY'S) REPRESENT THEIR OPINIONS AS TO THE QUALITY OF SECURITIES
THAT THEY UNDERTAKE TO RATE. THE PERCENTAGE SHOWN REFLECTS THE HIGHER OF MOODY'S
OR S&P RATINGS. PORTFOLIO COMPOSITION WILL CHANGE OVER TIME. RATINGS ARE
RELATIVE AND SUBJECTIVE AND NOT ABSOLUTE STANDARDS OF QUALITY.
+ THESE SECURITIES ARE NOT RATED BY S&P OR MOODY'S; HOWEVER THEY ARE RATED BY
SCUDDER KEMPER INVESTMENTS, INC. AS FOLLOWS: AAA 9%, BBB 3%, BB 14%, B 14% FOR
MAY 31, 2000, AND AAA 13%, BBB 3%, BB 13% AND B 13% FOR NOVEMBER 30, 1999. NOT
RATED SECURITIES THAT ARE PRE-REFUNDED OR ESCROWED TO MATURITY ARE INCLUDED IN
AAA QUALITY RATING.
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 5/31/00 ON 11/30/99
<S> <C> <C> <C> <C>
AVERAGE MATURITY 14.9 years 20.3 years
--------------------------------------------------------------------------------
</TABLE>
* PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
7
<PAGE> 8
PORTFOLIO STATISTICS
TOP FIVE STATE ALLOCATIONS*
Representing 43.59 percent of the trust's portfolio on May 31, 2000
<TABLE>
<CAPTION>
HOLDINGS PERCENT
<S> <C> <C>
---------------------------------------------------------------------
1. TEXAS 12.71%
---------------------------------------------------------------------
2. ILLINOIS 8.67%
---------------------------------------------------------------------
3. NEW YORK 7.99%
---------------------------------------------------------------------
4. WASHINGTON 7.83%
---------------------------------------------------------------------
5. COLORADO 6.39%
---------------------------------------------------------------------
</TABLE>
*PORTFOLIO HOLDINGS AND COMPOSITION ARE SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
Portfolio of Investments at May 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
SHORT-TERM MUNICIPAL INVESTMENTS--1.4% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
DISTRICT OF COLUMBIA
District of Columbia, General Obligation,
General Fund Recovery, Series 1991 B, Daily
Demand Note, 3.75%, 06/01/2003* $ 1,500,000 $ 1,500,000
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
INDIANA
Jasper County, IN, Pollution Control,
Northern Indiana Public Services, Revenue,
Series C, Daily Demand Bond, 4.00%,
04/01/2019* 1,000,000 1,000,000
----------------------------------------------------------------------------------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS
(COST $2,500,000) 2,500,000
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
<CAPTION>
LONG-TERM MUNICIPAL INVESTMENTS--98.6%
<S> <C> <C> <C> <C>
ALABAMA
Alabama State Public School and College
Authority, Revenue, Series C, 5.625%,
07/01/2013 1,000,000 999,030
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
ARIZONA
Coconino County, AZ, Industrial Development
Authority, Revenue, Guidance Center Income
Project, Prerefunded 06/01/2001, 9.25%,
06/01/2011 (b) 1,575,000 1,660,853
Flagstaff Industrial Development Authority,
Revenue, 6.30%, 09/01/2038 2,000,000 1,635,680
Health Facilities Authority, The New
Foundation Project, Revenue, 8.25%,
03/01/2019 2,280,000 2,121,266
Pima County Industrial Development Authority,
Larson County Project, Industrial
Development Revenue, 9.50%, 08/01/2010 1,900,000 2,051,810
----------------------------------------------------------------------------------
7,469,609
---------------------------------------------------------------------------------------------------------------------
CALIFORNIA
Foothill/Eastern Transportation Corridor
Agency, Toll Road, zero coupon, ETM,
01/01/2026** 11,500,000 2,426,500
Sacramento County, Bradshaw Road Project,
Revenue, 7.20%, 09/02/2015 1,225,000 1,263,796
Sacramento, CA, City Financing Authority,
Revenue Bond, Convention Center Hotel,
Series A, 6.25%, 01/01/2030 2,000,000 1,815,860
San Diego, CA, Detention Facility,
Certificates of Participation, Revenue,
8.0%, 06/01/2002 175,000 179,177
San Joaquin Hills, Transportation Corridor
Agency, Senior Lien Toll Road, Revenue,
ETM, Zero coupon, 01/01/2020** 4,300,000 1,336,999
----------------------------------------------------------------------------------
7,022,332
---------------------------------------------------------------------------------------------------------------------
COLORADO
Arapahoe County, CO, Capital Improvement
Trust Fund, Capital Improvement Trust Fund,
Revenue, Prerefunded 08/31/2005, Zero
coupon, 08/31/2010 (b) 5,000,000 2,699,350
City and County of Denver, Airport System:
Revenue, Prerefunded 11/15/2001, 8.00%,
11/15/2025 (b) 240,000 250,390
Revenue, Prerefunded 11/15/2001, 8.00%,
11/15/2025 (b) 660,000 681,668
Denver, CO, City and County Airport Revenue:
Series A, Prerefunded 11/15/2001, 8.75%,
11/15/2023 (b) 265,000 284,114
</TABLE>
The accompanying notes are an integral part of the financial statements. 9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
Series A, Prerefunded 11/15/2004, 7.50%,
11/15/2023 (b) $ 170,000 $ 188,180
Unrefunded Balance, Revenue, Series A:
8.75%, 11/15/2023 735,000 780,291
7.50%, 11/15/2023 830,000 890,972
Denver, CO, Urban Renewal Authority, Tax
Increment Revenue, 7.75%, 09/01/2016 1,760,000 1,851,590
----------------------------------------------------------------------------------
7,626,555
---------------------------------------------------------------------------------------------------------------------
CONNECTICUT
Connecticut State Development Authority,
Revenue, Pierce Memorial Baptist Home,
Prerefunded 10/01/2000, 9.25%, 10/01/2018
(b) 2,000,000 2,087,360
Greenwich, CT, Housing Authority Revenue,
Series A, 6.35%, 09/01/2027 2,000,000 1,837,960
Mashantucket Western Pequot Tribe, Special
Revenue:
Zero coupon, 09/01/2017 2,000,000 626,860
Zero coupon, 09/01/2018 1,000,000 290,980
----------------------------------------------------------------------------------
4,843,160
---------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA
District of Columbia, General Obligation,
MBIA, Series A, 5.00%, 06/01/2018 (c) 1,000,000 875,360
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
FLORIDA
Volusia County, FL, Health Facilities
Authority, Memorial Health Systems Project,
Revenue, Prerefunded 06/01/2000, 8.25%,
06/01/2020 (b) 2,390,000 2,437,800
Hillsborough County, FL, Industrial
Development Authority Revenue, University
Community Hospital Project, 5.625%,
08/15/2023 2,000,000 1,625,860
Nassau County, Amelia Island Care Center
Project, Revenue, 9.75%, 01/01/2023 1,945,000 2,094,784
Orlando, FL, Special Assessment Revenue,
Conroy Road Interchange, Series A, 5.80%,
05/01/2026 1,000,000 852,590
Palm Beach County, FL, Health Facilities
Authority, Revenue, 5.125%, 11/15/2029 1,000,000 770,950
----------------------------------------------------------------------------------
7,781,984
---------------------------------------------------------------------------------------------------------------------
ILLINOIS
Chicago, IL, O'Hare International Airport:
International Terminal, Special Revenue,
8.20%, 12/01/2024 1,200,000 1,296,012
Special Facilities Revenue, United Airlines
Project, Series A, 5.35%, 09/01/2016 2,000,000 1,672,220
Chicago, IL, Tax Allocation, Central Station
Project, Series A, Prerefunded 01/01/2005,
8.90%, 01/01/2011 (b) 1,835,000 1,977,359
Illinois Health Facilities Authority, 6.75%,
02/15/2016 2,180,000 2,227,197
Illinois State, General Obligation, FGIC,
6.00%, 01/01/2013 (c) 3,315,000 3,408,417
Itasca, IL, Central Manufacturing District,
Special Service Area, Revenue, Prerefunded
12/01/2000, 8.375%, 12/01/09 (b) 2,115,000 2,194,651
Lombard, IL, Tax Increment Revenue,
Prerefunded 06/01/2000, 8.80%, 12/01/2004
(b) 190,000 193,800
</TABLE>
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
St. Charles, IL, Multifamily Housing Revenue,
Housing-Wessel Court Project, 7.60%,
04/01/2024 $ 1,870,000 $ 1,875,217
University Park, IL, Tax Allocation,
Governors Gateway Industrial Park, 8.50%,
12/01/2011 1,775,000 1,918,864
----------------------------------------------------------------------------------
16,763,737
---------------------------------------------------------------------------------------------------------------------
INDIANA
Indiana Health Facilities Financing
Authority:
Franciscan Eldercare Community Services,
5.875%, 05/15/2029 3,000,000 2,387,310
Hospital Revenue, Fayette Memorial Hospital
Project, 7.20%, 10/01/2022 2,800,000 2,728,432
Indianapolis Airport Authority, United
Airlines, Inc., Project, Revenue, 6.50%,
11/15/2031 1,900,000 1,732,971
----------------------------------------------------------------------------------
6,848,713
---------------------------------------------------------------------------------------------------------------------
IOWA
Finance Authority Healthcare Facilities, On
With Life, Inc. Project, Revenue, 7.25%,
08/01/2015 2,000,000 1,950,620
Lake City, IA, Health Care Facility Revenue,
Refinancing Opportunity Living Project,
6.45%, 05/01/2011 1,925,000 1,762,588
----------------------------------------------------------------------------------
3,713,208
---------------------------------------------------------------------------------------------------------------------
KANSAS
Manhattan, KS, Health Care Facilities Revenue
Bond, Meadowlark Hills Retirement, Series
A, 6.50%, 05/15/2028 500,000 438,675
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
MARYLAND
Anne Arundel County Maryland Special
Obligation, Arundel Mills Project, 7.10%,
07/01/2029 1,500,000 1,465,650
Maryland Economic Development, Student
Housing Revenue Bond, Collegiate Housing,
Series A, 5.75%, 06/01/2019 1,000,000 901,220
Maryland Economic Development Corporation:
University of Maryland, Series 1999A,
5.75%, 06/01/2031 1,000,000 864,330
Chesapeake Bay Conference, Series 1999b,
7.625%, 12/01/2022 4,000,000 3,892,480
Maryland Health & Educational Facilities
Authority, 6.75%, 07/01/2030 1,000,000 989,760
----------------------------------------------------------------------------------
8,113,440
---------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS
Massachusetts State Development Financial
Agency, Revenue, Health Care Facilities,
Series A, 7.10%, 07/01/2032 2,000,000 1,822,720
State of Massachusetts, General Obligation,
MBIA, Series B, 5.00%, 04/01/2016 (c) 3,175,000 2,881,789
Worcester, Briarwood Retirement Community,
Salem Community Corporation, Revenue,
9.25%, 12/01/2022 1,925,000 2,054,013
----------------------------------------------------------------------------------
6,758,522
</TABLE>
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
MICHIGAN
Gogebic County, Hospital Finance Authority,
Grand View Hospital Project, Revenue,
Prerefunded 10/01/2001, 8.75%, 10/01/2016
(b) $ 2,250,000 $ 2,398,500
Hillsdale Hospital Finance Authority,
Revenue, 5.25%, 05/15/2026 1,450,000 1,036,620
Kalamazoo, MI, Economic Development Revenue
Bond, Series A, 7.50%, 05/15/2029 2,000,000 1,810,340
Madison Heights, Tax Increment Finance
Authority, Revenue, 8.50%, 03/15/2001 235,000 238,358
Strategic Funding, Ltd., Holland Home
Corporation, Revenue, 5.75%, 11/15/2028 2,000,000 1,493,360
Tawas City, MI: Hospital Finance Authority,
St. Joseph Health System, Revenue, ETM,
5.75%, 02/15/2023** 1,300,000 1,263,769
Hospital Financial Authority, Revenue, Series
A, ETM, 5.60%, 02/15/2013** 495,000 494,733
Wayne Charter County, MI, Detroit-Metro Wayne
County, Revenue, MBIA, 5.00%, 12/01/2022
(c) 500,000 422,645
----------------------------------------------------------------------------------
9,158,325
---------------------------------------------------------------------------------------------------------------------
MISSOURI
St Louis, MO, Tax Increment Revenue, Tax
Allocation, Series A, 10.00%, 08/01/2010 2,015,000 2,360,814
West Plains, MO, Industrial Development
Authority, Ozarks Medical Center Project,
Revenue, Prerefunded 09/15/2000, 8.625%,
09/15/2020 (b) 1,910,000 1,969,286
----------------------------------------------------------------------------------
4,330,100
---------------------------------------------------------------------------------------------------------------------
NEBRASKA
Nebraska Investment Finance Authority, Single
Family Housing Revenue, Series A, 6.70%,
09/01/2026 500,000 505,055
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
NEVADA
Housing Division, Single Family Mortgage
Program, Revenue: Series B2, 7.90%,
10/01/2021 725,000 735,701
6.50%, 04/01/2028 970,000 975,791
Nevada, General Obligation, MBIA, 5.00%,
05/15/2022 (c) 2,000,000 1,717,360
----------------------------------------------------------------------------------
3,428,852
---------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE
New Hampshire Health & Education Facilities
Authority, Revenue: Hampshire College
Issue, 7.40%, 01/01/2023 1,000,000 987,710
Havenwood Heritage Heights, 7.45%, 01/01/2025 2,000,000 2,008,980
----------------------------------------------------------------------------------
2,996,690
---------------------------------------------------------------------------------------------------------------------
NEW JERSEY
Educational Facilities Authority, Caldwell
College, Revenue, 7.250%, 07/01/2025 1,100,000 1,129,227
New Jersey Economic Development Authority
Revenue, Harrogate Inc., Series A, 5.875%,
12/01/2026 200,000 166,494
----------------------------------------------------------------------------------
1,295,721
</TABLE>
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
NEW MEXICO
Farmington, NM, Pollution Control Revenue,
5.80%, 04/01/2022 $ 2,750,000 $ 2,388,733
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
NEW YORK
Monroe County, New York, Airport Authority,
Greater Rochester Intl, Revenue, MBIA,
5.625%, 01/01/2010 (c) 3,740,000 3,767,339
Nassau Health Care Corporation, New York,
Revenue, 6.00%, 08/01/2016 2,825,000 2,874,183
New York & New Jersey Port Authority, Special
Obligation, Revenue, Continental/Eastern
Project, Laguardia, 9.125%, 12/01/2015 2,500,000 2,587,850
New York City, General Obligation, Unrefunded
Balance, Series C, 7.00%, 02/01/2010 315,000 316,074
New York City, NY, Transitional Finance
Authority, Future Tax Secd, Series B,
Revenue, 6.00%, 11/15/2013 2,000,000 2,068,100
New York Metropolitan Transportation
Authority, Revenue, Series A, 5.125%,
04/01/2019 1,450,000 1,302,593
New York State Dormitory Authority, Revenue,
Series A, FGIC, 5.125%, 05/15/2021 (c) 1,880,000 1,657,671
New York State Medical Care Facilities
Finance Agency, Revenue: Partially Refunded
08/15/2001, 7.30%, 02/15/2021 20,000 20,850
Prerefunded 08/15/2001, 7.30%, 02/15/2021 (b) 40,000 41,956
New York, NY, General Obligation, Series I,
ETM, 7.50%, 08/15/2010** 105,000 106,394
Triborough Bridge and Tunnel Authority, New
York, Revenue, Series Y, 6.000%, 01/01/2012 5,000,000 5,214,000
----------------------------------------------------------------------------------
19,957,010
---------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA
North Carolina Municipal Power Agency,
Electric Revenue, Series B, 6.375%,
01/01/2013 1,300,000 1,296,568
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
NORTH DAKOTA
Grand Forks, ND, Health Care Systems,
Revenue, 7.125%, 08/15/2024 1,000,000 977,880
North Dakota Housing Finance Agency, Single
Family Housing, Revenue, 8.375%, 07/01/2021 385,000 391,514
----------------------------------------------------------------------------------
1,369,394
---------------------------------------------------------------------------------------------------------------------
OKLAHOMA
Woodward Municipal Authority, Hospital
Revenue: 8.50%, 11/01/2014, 1,335,000 1,409,733
Prerefunded 11/01/2000, 9.25%, 11/01/2014
(b) 1,750,000 1,815,188
----------------------------------------------------------------------------------
3,224,921
---------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
Greene County, PA, General Obligation, Series
B, Prerefunded 12/01/00, 8.75%, 12/01/2010
(b) 1,540,000 1,571,247
Higher Educational Facilities Authority,
Philadelphia College of Textiles and
Science, Revenue, 6.70%, 04/01/2014 2,000,000 2,022,800
Montgomery County, PA, Health & Educational
Facilities Authority, 7.25%, 12/01/2027 2,000,000 1,847,660
----------------------------------------------------------------------------------
5,441,707
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
SOUTH CAROLINA
Aiken County, Hospital Facilities, Mattie C.
Hall Health Care Center Project, Revenue,
8.625%, 10/01/2010 $ 1,500,000 $ 1,515,000
South Carolina Jobs and Economic Development
Authority, Hospital Facilities Revenue,
7.375%, 12/15/2021 1,000,000 960,970
South Carolina Transportation Infrastructure,
Revenue, Series A, AMBAC, 5.375%,
10/01/2024 (c) 4,150,000 3,797,665
----------------------------------------------------------------------------------
6,273,635
---------------------------------------------------------------------------------------------------------------------
TENNESSEE
Johnson City, TN, Health & Educational
Facilities Board, Hospital Revenue, Series
A, 7.50%, 07/01/2033 2,000,000 1,892,300
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
TEXAS
Abilene, TX, Health Facilities Development,
Corporate Retirement Facilities, Sears
Methodist Retirement, Revenue, Series A,
5.90%, 11/15/2025 2,500,000 2,009,075
Austin, TX, Bergstrom Landhost Enterprises,
Revenue, Series A, 6.75%, 04/01/2027 2,000,000 1,792,900
Crowley, TX, Independent School District,
General Obligation, 5.125%, 08/01/2025 5,000,000 4,379,450
Dallas-Fort Worth, TX, International Airport
Facility, American Airlines, Revenue,
6.375%, 05/01/2035 2,000,000 1,823,000
Houston, TX: General Obligation, Series A,
5.00%, 03/01/2016 3,000,000 2,712,390
Independent School District, General
Obligation, Series A, 5.00%, 02/15/2024 2,000,000 1,713,700
Airport System Special Facilities,
Continental Airlines, Inc., Improvement
Projects, Revenue: 6.125%, 07/15/2027 2,000,000 1,705,260
5.70%, 07/15/2029 2,000,000 1,603,700
Lower Colorado River Authority, Texas,
Electric Revenue, Series B, 6.00%,
05/15/2013 5,000,000 5,125,950
San Antonio, TX, Elec & Gas, Electric
Revenue, Series A, 5.00%, 02/01/2018 1,100,000 973,973
Travis County, TX, Health Facilities
Development, Ascension Health Credit Series
A, MBIA, Revenue, 6.00%, 11/15/2012 (c) 3,860,000 3,942,527
----------------------------------------------------------------------------------
27,781,925
---------------------------------------------------------------------------------------------------------------------
UTAH
Utah Housing Finance Agency, Single Family
Mortgage Revenue, Series 1999A, 6.65%,
07/01/2026 685,000 693,597
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
VIRGIN ISLANDS
Virgin Islands, Gross Receipts Taxes, Public
Financial Authority Revenue, Series A,
6.375%, 10/01/2019 3,000,000 2,970,090
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
VIRGINIA
Fairfax County, VA, Economic Development
Authority Revenue Series 1999A, 7.25%,
10/01/2019 2,000,000 1,929,380
----------------------------------------------------------------------------------
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
WISCONSIN
Wisconsin Housing and Economic Development
Authority, Home Ownership, Revenue, 6.20%,
03/01/2027 $ 500,000 $ 489,715
Wisconsin State Health And Education
Facilities Authority Revenue, 5.125%,
02/15/20 1,000,000 825,020
Wisconsin State Health & Educational
Facilities Authority: Revenue Bond, Aurora
Health Care Inc., Series A, 5.60%,
02/15/2029 1,000,000 782,750
Revenue, Prerefunded 07/01/05, 6.35%,
07/01/2017 (b) 600,000 626,226
----------------------------------------------------------------------------------
2,723,711
----------------------------------------------------------------------------------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS
(Cost: $180,581,300) 178,912,039
----------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $183,081,300) (a) $181,412,039
----------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost for federal income tax purposes was $183,081,300. At May 31, 2000,
net unrealized depreciation for all securities based on tax cost was
$1,669,261. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $4,158,732 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$5,827,993.
(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, MBIA/BIG, or FSA.
* 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 & LIABILITIES
As of May 31, 2000 (Unaudited)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value, (cost $183,081,300) $181,412,039
----------------------------------------------------------------------------
Cash 717,480
----------------------------------------------------------------------------
Receivable for investments sold 1,139,000
----------------------------------------------------------------------------
Interest receivable 3,421,386
----------------------------------------------------------------------------
Other assets 7,000
----------------------------------------------------------------------------
TOTAL ASSETS 186,696,905
----------------------------------------------------------------------------
LIABILITIES
Dividends payable 9,092
----------------------------------------------------------------------------
Accrued management fee 96,228
----------------------------------------------------------------------------
Other accrued expenses 26,346
----------------------------------------------------------------------------
Total liabilities 131,666
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $186,565,239
----------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income (loss) $ (113,902)
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
securities (1,669,261)
----------------------------------------------------------------------------
Accumulated net realized gain (loss) (557,340)
----------------------------------------------------------------------------
Remarketed preferred shares, par value $.01 per share,
unlimited number of shares authorized, 2,800 shares
outstanding at $25 thousand liquidation value per share 70,000,000
----------------------------------------------------------------------------
Paid-in capital 118,905,742
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $186,565,239
----------------------------------------------------------------------------
NET ASSETS VALUE
NET ASSET VALUE PER COMMON SHARES
($116,565,239 / 10,742,480 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) $10.85
----------------------------------------------------------------------------
</TABLE>
16 The accompanying notes are an integral part of the financial statements.
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended May 31, 2000 (Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $ 6,309,679
---------------------------------------------------------------------------
Dividends 11,445
---------------------------------------------------------------------------
Total income 6,321,124
---------------------------------------------------------------------------
Expenses:
Management fee 569,641
---------------------------------------------------------------------------
Services to shareholders 19,961
---------------------------------------------------------------------------
Custodian fees 10,858
---------------------------------------------------------------------------
Auditing 91,200
---------------------------------------------------------------------------
Legal 19,848
---------------------------------------------------------------------------
Trustees' fees and expenses 159
---------------------------------------------------------------------------
Reports to shareholders 109,057
---------------------------------------------------------------------------
Other 16,499
---------------------------------------------------------------------------
Total expenses, before expense reductions 837,223
---------------------------------------------------------------------------
Expense reductions (2,099)
---------------------------------------------------------------------------
Total expenses, after expense reductions 835,124
---------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 5,486,000
---------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from investments (556,342)
---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on investments (3,737,125)
---------------------------------------------------------------------------
Net gain (loss) on investment transactions (4,293,467)
---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 1,192,533
---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MAY 31, YEAR ENDED
2000 NOVEMBER 30,
(UNAUDITED) 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 5,486,000 8,335,524
---------------------------------------------------------------------------------------------------
Net realized gain (loss) (556,342) 799,995
---------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the (3,737,125) (9,721,592)
---------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 1,192,533 (586,073)
---------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (5,589,758) (8,581,062)
---------------------------------------------------------------------------------------------------
From net realized gains (537,124) (107,036)
---------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold -- 140,000,000
---------------------------------------------------------------------------------------------------
Reinvestment of distributions -- 468,256
---------------------------------------------------------------------------------------------------
Cost of shares redeemed -- (70,700,000)
---------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions -- 69,768,256
---------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (4,934,349) 60,494,085
---------------------------------------------------------------------------------------------------
Net assets at beginning of period 191,499,588 131,005,503
---------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income (loss) of ($113,902) and $10,144,
respectively) $186,565,239 191,499,588
---------------------------------------------------------------------------------------------------
OTHER INFORMATION
Shares outstanding at beginning of period 10,742,480 10,703,554
---------------------------------------------------------------------------------------------------
Shares issued to shareholders in reinvestment of
distributions -- 38,926
---------------------------------------------------------------------------------------------------
Net increase in Fund shares -- 38,926
---------------------------------------------------------------------------------------------------
Shares outstanding at end of period 10,742,480 10,742,480
---------------------------------------------------------------------------------------------------
</TABLE>
18 The accompanying notes are an integral part of the financial statements.
<PAGE> 19
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS AND MARKET PRICE DATA.
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED YEARS ENDED NOVEMBER 30,
MAY 31, -----------------------------------------------
2000 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $11.31 12.24 12.29 12.14 12.19 11.54
---------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .51(a) .78(a) .77 .80 .82 .83
---------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment transactions (.40) (.83) (.05) .17 (.05) .64
---------------------------------------------------------------------------------------------------------
Total from investment operations .11 (.05) .72 .97 .77 1.47
---------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income to common
shareholders (.38) (.75) (.77) (.82) (.82) (.82)
---------------------------------------------------------------------------------------------------------
Net investment income to preferred
shareholders (common share equivalent) (.14) (.05) -- -- -- --
---------------------------------------------------------------------------------------------------------
Net realized gains on investment
transactions (common shares) (.05) (.01) -- -- -- --
---------------------------------------------------------------------------------------------------------
Total distributions (.57) (.81) (.77) (.82) (.82) (.82)
---------------------------------------------------------------------------------------------------------
Dilution resulting from remarketed
preferred shares (b) -- (.07) -- -- -- --
---------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.85 11.31 12.24 12.29 12.14 12.19
---------------------------------------------------------------------------------------------------------
Market value, end of period $10.19 10.31 12.81 13.06 12.38 12.13
TOTAL RETURN PER COMMON SHARE
BASED ON NET ASSET VALUE (%) .06** (1.35) 5.99 8.28 6.58 13.09
---------------------------------------------------------------------------------------------------------
BASED ON MARKET VALUE (%) 3.07** (14.08) 4.36 12.87 9.19 11.70
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period net of
remarketed preferred shares ($ thousands) 116,565 121,500 131,006 130,895 128,234 127,844
---------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) (excluding preferred
shares) 1.41* 1.12 .77 .76 .74 .76
---------------------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) (excluding preferred
shares) 1.41* 1.11 .77 .76 .74 .76
---------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) (including preferred
shares) .89* 1.01 -- -- -- --
---------------------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) (including preferred
shares) .89* 1.00 -- -- -- --
---------------------------------------------------------------------------------------------------------
Ratio of net investment income (%)
(excluding preferred shares) 9.27* 6.55 6.29 6.62 6.82 6.97
---------------------------------------------------------------------------------------------------------
Ratio of net investment income (%)
(including preferred shares) 5.81* 5.91 -- -- -- --
---------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 51* 24 22 13 31 8
---------------------------------------------------------------------------------------------------------
Remarketed preferred shares information
at end of period:
Aggregate amount outstanding ($
thousands) 70,000 70,000 -- -- -- --
---------------------------------------------------------------------------------------------------------
Asset coverage per share $67,000 68,000 -- -- -- --
---------------------------------------------------------------------------------------------------------
Liquidation and market value per share $25,000 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.
* Annualized.
** Not annualized.
(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. Investments are stated at
value. 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
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
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 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 six months ended May 31, 2000, investment
transactions (excluding short-term investments) are
as follows:
Purchases $46,411,795
Proceeds from sales 46,009,723
--------------------------------------------------------------------------------
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 $569,641 for the six months ended
May 31, 2000.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of $12,000
for the six months ended May 31, 2000, of which
$451 is unpaid.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the six months ended May 31,
2000, the Fund made no direct payments to its
officers and incurred trustees' fees of $159 to
independent trustees.
--------------------------------------------------------------------------------
4 EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the Fund's
expenses. During the six months ended May 31, 2000,
the Fund's custodian and transfer agent fees were
reduced by $1,441 and $658 respectively 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
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
An annual shareholders' meeting was held on May 25, 2000, 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 9,627,793 226,805
Linda C. Coughlin 9,643,196 211,805
James R. Edgar 9,649,646 204,952
Arthur R. Gottschalk 9,661,882 192,716
Fred B. Renwick 9,633,488 221,110
John G. Weithers 9,688,814 165,784
</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>
9,705,556 28,142 123,387
</TABLE>
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES & OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JAMES E. AKINS MARK S. CASADY LINDA J. WONDRACK
Trustee President Vice President
LINDA C. COUGHLIN PHILIP J. COLLORA MAUREEN E. KANE
Trustee Vice President and Assistant Secretary
Secretary
JAMES R. EDGAR CAROLINE PEARSON
Trustee PHILIP G. CONDON Assistant Secretary
Vice President
ARTHUR R. GOTTSCHALK BRENDA LYONS
Trustee JOHN R. HEBBLE Assistant Treasurer
Treasurer
FREDERICK T. KELSEY
Trustee ANN M. MCCREARY
Vice President
THOMAS W. LITTAUER
Trustee and Vice President KATHRYN L. QUIRK
Vice President
FRED B. RENWICK
Trustee REBECCA L. WILSON
Vice President
JOHN G. WEITHERS
Trustee
</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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