1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 2001
SCUDDER STRATEGIC
MUNICIPAL INCOME TRUST
"In the last six months, municipal bond prices have climbed steadily upward,
while interest rates have declined."
[SCUDDER INVESTMENTS LOGO]
2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
PORTFOLIO STATISTICS
8
PORTFOLIO OF INVESTMENTS
15
FINANCIAL STATEMENTS
18
FINANCIAL HIGHLIGHTS
19
NOTES TO FINANCIAL STATEMENTS
21
SHAREHOLDERS' MEETING
AT A GLANCE
SCUDDER STRATEGIC MUNICIPAL
INCOME TRUST TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 2001
.
BASED ON NET ASSET VALUE 6.73%
.......................................................
BASED ON MARKET PRICE 14.58%
.......................................................
NET ASSET VALUE AND MARKET PRICE
AS OF AS OF
5/31/01 11/30/00
.........................................................
NET ASSET VALUE $11.75 $11.37
.........................................................
MARKET PRICE $11.66 $10.51
.........................................................
DIVIDEND REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE
TRUST AS OF MAY 31, 2001.
......................................................
SIX-MONTHS INCOME $ 0.375
......................................................
MAY DIVIDEND $0.0625
......................................................
ANNUALIZED DISTRIBUTION RATE
(BASED ON NET ASSET VALUE) 6.38%
......................................................
ANNUALIZED DISTRIBUTION RATE
(BASED ON MARKET PRICE) 6.43%
......................................................
TAX-EQUIVALENT DISTRIBUTION RATE
(BASED ON NET ASSET VALUE AND A 37.1%
FEDERAL INCOME TAX RATE) 2.37%
......................................................
TAX-EQUIVALENT DISTRIBUTION RATE
(BASED ON MARKET PRICE AND A 37.1%
FEDERAL INCOME TAX RATE) 2.39%
......................................................
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.
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.
TERMS TO KNOW
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5 percent to 6 percent is 100
basis points.
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 intermediate-term bonds
(securities with one- 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.
YIELD A measure of net investment income per share earned over a specific one-
month or 30-day period expressed as an annualized percentage of the maximum
offering price of the fund's shares at the end of the period.
3
ZURICH SCUDDER INVESTMENTS, INC., A LEADING GLOBAL INVESTMENT MANAGEMENT FIRM,
IS A MEMBER OF THE ZURICH FINANCIAL SERVICES GROUP. ZURICH SCUDDER INVESTMENTS
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
IN THE WORLD, MANAGING MORE THAN $360 BILLION IN ASSETS FOR CORPORATE CLIENTS,
RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND INVESTORS AND
INDIVIDUALS WORLDWIDE. HEADQUARTERED IN NEW YORK, ZURICH SCUDDER 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. HEADQUARTERED IN ZURICH, SWITZERLAND, ZURICH FINANCIAL
SERVICES GROUP IS ONE OF THE GLOBAL LEADERS IN THE FINANCIAL SERVICES INDUSTRY,
PROVIDING ITS CUSTOMERS WITH PRODUCTS AND SOLUTIONS IN THE AREA OF FINANCIAL
PROTECTION AND ASSET ACCUMULATION.
ECONOMIC OVERVIEW
DEAR SHAREHOLDER:
The plot thickens. Can the Economy in Distress hold out until our hero, Monetary
and Fiscal Policy, rides to the rescue?
Actually, we think this story can have a happy ending, although maintaining
that optimism requires a leap of faith. There's no economic evidence that a
bottom is near. But all of the monetary indicators -- such as a steep yield
curve, exploding money supply growth and record bond issuance -- give us hope.
And now we have a tax cut. This suggests that the economy will escape
recession -- but just barely. We expect economic growth to average just under 2
percent for the next 18 months -- and this slow advance will curtail inflation,
which we expect to rise just 2.5 percent in 2002.
Why is aggressive monetary and fiscal policy likely to produce such anemic
growth? The answer is that even Federal Reserve Board Chairman Alan Greenspan
can't fix everything, especially when a certain global villain is at work. Who
is this malefactor? Oil. It's likely that purchasing power in the developed
world was drained by the recent jump in oil prices.
But oil's not the only culprit. When the United States ran into trouble, so
did other countries. For example, European politicians continue to focus on
politics, not economics. And the Japanese government has let structural problems
fester during the last 10 years. We now see near-recession conditions almost
everywhere.
You might expect the dollar to decline as other countries become more
dependent on the United States and increase the number of goods they sell
here -- but astonishingly, it hasn't. That's not necessarily good news, however.
More than 30 percent of U.S. corporate profits are earned abroad, and when the
dollar rises, those earnings are worth less. Non-American companies also take
advantage of their weaker currencies to aggressively price exports to the United
States. That undercuts American companies' pricing power and ravages revenue
growth. The result is a humdinger of a profits recession. We expect S&P 500
operating profits to be down 15 percent this year as a whole.
One result of the profit recession is that executives are trying to restore
profitability by cutting costs. This hurts the economy. They first go after
travel and entertainment, affecting hotels, airlines and restaurants. Next in
line are capital spending and payroll, so we expect the unemployment rate to
rise from 4.5 percent to 5.5 percent by the end of next year.
When unemployment rises, consumers feel the heat. Consumer spending won't
decrease drastically, because Uncle Sam is putting almost $40 billion in the
mail this summer. Still, they won't spend too much. We expect consumption growth
through the end of next year to hover around 2 percent.
3
4
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]
NOW (6/30/01) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
10-year Treasury rate1 5.3 5.2 6.1 5.9
Prime rate2 6.75 9.5 9.5 7.75
Inflation rate3* 3.6 3.4 3.2 2
The U.S. dollar4 9.6 8.6 0.6 -1.8
Capital goods orders5* -9.2 14.3 14.1 -0.2
Industrial production 5* -2.8 4.4 6.4 3.6
Employment growth6 0.3 1.5 2.5 2.4
(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.
(7) THE TWO INTEREST RATES, EMPLOYMENT PLUS THE US DOLLAR HAVE DATA THROUGH
JUNE, ALL THE OTHERS ONLY GO THROUGH MAY. THEREFORE "6 MONTHS AGO" FOR THE
TWO INTEREST RATES, THE DOLLAR AND EMPLOYMENT IS DECEMBER; FOR THE OTHERS
(EXCEPT CAPITAL GOODS), IT'S NOVEMBER.
*DATA AS OF 5/31/01.
SOURCE: ECONOMICS DEPARTMENT, ZURICH SCUDDER INVESTMENTS, INC.
ECONOMIC OVERVIEW
Because consumption is two-thirds of the economy, it sets the pace for gross
domestic product (GDP). And 2 percent GDP growth will not foster inflation.
While many myths about the new economy were exaggerated, its disinflationary
tendencies were not. We know that inflation is a complex phenomenon, but we
don't believe it can survive under conditions of slow growth.
Moderate growth with low inflation is not a bad end to our story. We doubt
that it will feel very satisfying, however. Monetary and Fiscal Policy may well
rescue the Economy in Distress, but he can't undo the shock. The convalescence
is likely to be prolonged.
Scudder Distributors, Inc.
THE OPINIONS AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF
ZURICH SCUDDER INVESTMENTS, INC. AS OF JULY 1, 2001, AND MAY NOT ACTUALLY COME
TO PASS.
4
5
PERFORMANCE UPDATE
[LASTNAME PHOTO]
PHILIP G. CONDON JOINED THE FIRM IN 1983 AND IS LEAD PORTFOLIO MANAGER OF THE
TRUST AND MANAGING DIRECTOR OF ZURICH SCUDDER INVESTMENTS' MUNICIPAL BOND GROUP.
HE HAS ALSO SERVED AS DIRECTOR OF THE MUNICIPAL BOND 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 ZURICH SCUDDER INVESTMENTS,
INC. IN 1986. SHE IS ALSO CO-LEAD PORTFOLIO MANAGER OF SCUDDER HIGH-YIELD
TAX-FREE FUND.
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.
AMID A VOLATILE STOCK MARKET AND SLOWING U.S.
ECONOMY, THE BOND MARKET CONTINUED TO CLIMB
STEADILY OVER THE LAST SIX MONTHS. ISSUANCE OF
MUNICIPAL BONDS INCREASED SIGNIFICANTLY AS THE COST
OF BORROWING MONEY DECLINED FOLLOWING A STRING OF
SHORT-TERM INTEREST RATES CUTS BY THE FEDERAL
RESERVE BOARD. BELOW, THE MANAGEMENT TEAM DISCUSSES
THE MARKET'S PERFORMANCE AS WELL AS HOW THE TRUST
FARED DURING THE PERIOD.
Q HOW HAS THE U.S. BOND MARKET PERFORMED OVER THE SIX-MONTH PERIOD ENDED MAY
31, 2001?
A The bond market staged a significant rally in early 2001, as the U.S.
economy cooled, interest rates declined, and investor interest in bonds grew. In
the last six months, the Federal Reserve Board has cut interest rates on five
separate occasions for a total reduction of 250 basis points, placing the
federal funds lending rate at 4 percent. Those falling rates coupled with a
slowing U.S. economy and a volatile stock market helped to rekindle investor
interest in bonds.
While rates for Treasury bonds with maturities of two years or less fell
sharply, those with maturities of five years or more saw only minor declines.
Longer-maturity Treasury bonds typically were not as severely affected by
interest rate cuts. In this case, longer maturity bonds might have been even
less affected, since the bond market was worried that inflation could rear its
ugly head. By May 31, 2001, the 10-year Treasury bond's yield had slipped to
5.38 percent, just nine basis points less than six months earlier. However, a
two-year Treasury bond saw its yield decline by 142 basis points. As a result,
the Treasury yield curve regained a positive slope in early 2001, with long-term
Treasuries yielding more than short-term Treasuries. It had been inverted in
2000. The municipal yield curve did not invert in 2000 and remained positively
sloped through the first five months of 2001.
Q HOW DID THE FED'S RATE CUTS AFFECT THE MUNICIPAL BOND MARKET?
A In the last six months, municipal bond prices have climbed steadily
upward, while interest rates have declined. The Fed's interest rate cuts also
led to a significant rise in municipal bond sales in the first half of 2001.
Issuers have raced to market to take advantage of low borrowing costs and to get
deals done before an expected large California issuance later this summer.
Specifically, the California Department of Water Resources is expected to issue
about $13 billion in bonds in August or September. The sale is designed to help
pay back the state coffers drained by the energy crisis that has plagued most of
the state. The sale will likely be the largest ever in the tax-exempt market.
The municipal bond yield curve has also steepened during the period with
30-year bonds yielding about 203 basis points more than a bond with a maturity
of two years as of May 31, 2001. Previously, the municipal curve had been fairly
flat with 30-year bonds yielding about 109 basis points more than two-year bonds
as of November 30, 2000.
5
6
PERFORMANCE UPDATE
Q HOW DID YOU REPOSITION SCUDDER STRATEGIC MUNICIPAL TRUST AS A RESULT OF
THESE MOVES IN INTEREST RATES?
A We continue to manage the trust with a focus on structure and maturity,
while carefully monitoring the credit quality of individual issues. Although we
do keep in mind the interest rate environment, we typically try to keep duration
neutral to our peers. That said, as the municipal bond yield curve has generally
steepened over the period, partially because of these rate cuts, we have found
15-year municipal bonds to be particularly attractive and have added selectively
in that area.
Q HOW DID SCUDDER STRATEGIC MUNICIPAL INCOME TRUST PERFORM DURING THE
PERIOD?
A The trust posted strong results on a net asset value as well as on a
market value basis during the period. Thanks to the high-yield bond market's
strength, the trust posted a 14.58 percent return on a market value basis for
the six-month period ended May 31. The trust also posted a strong 6.73 percent
return on a net asset value basis. Those results dramatically outpaced the
fund's typical peer in the Lipper High-Yield Municipal Debt Funds category,
which gained 4.54 percent. The trust also handily beat its benchmark, the
unmanaged Lehman Brothers Municipal Bond Index*, which posted a 4.73 percent
return during the same period.
* THE LEHMAN BROTHERS MUNICIPAL BOND INDEX CONTAINS APPROXIMATELY 15,000 BONDS.
TO BE IN THE INDEX, A MUNICIPAL BOND MUST MEET THE FOLLOWING CRITERIA: A
MINIMUM CREDIT RATING OF BBB, ISSUED AS 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 WHAT IS YOUR OUTLOOK FOR THE MUNICIPAL BOND MARKET AND FOR THE TRUST GOING
FORWARD?
A We see growing interest in municipal bonds as more investors embrace the
need for portfolio diversification and look to increase their exposure to bonds,
particularly after the stock market volatility we've seen over the last year.
And while the U.S. economic slowdown has caused stocks to struggle, most
municipalities are still in solid shape. We believe municipal bond yields are
now even more attractive than usual relative to Treasury bonds.
6
7
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION
ON 5/31/01 ON 11/30/00
-------------------------------------------------------------------------------
REVENUE BONDS 79% 45%
...............................................................................
GENERAL OBLIGATION BONDS 12 13
...............................................................................
LEASE OBLIGATIONS 1 --
...............................................................................
U.S. GOVERNMENT SECURED 8 42
-------------------------------------------------------------------------------
100% 100%
[PIE CHART] [PIE CHART]
QUALITY
ON 5/31/01 ON 11/30/00
--------------------------------------------------------------------------------
AAA 33% 34%
................................................................................
AA 8 7
................................................................................
A 4 5
................................................................................
BBB 19 19
................................................................................
BB 4 3
................................................................................
NOT RATED 32 32
--------------------------------------------------------------------------------
100% 100%
[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 INVESTMENTS, INC. AS FOLLOWS: AAA 4%, A 3%, BBB 8%, BB 9%, B 8% FOR MAY
31, 2001, AND AAA 3%, A 4%, BBB 9%, BB 8% AND B 8% FOR NOVEMBER 30, 2000.
INTEREST RATE SENSITIVITY
ON 5/31/01 ON 11/30/00
--------------------------------------------------------------------------------
AVERAGE MATURITY 13.8 years 15.0 years
--------------------------------------------------------------------------------
7
8
PORTFOLIO OF INVESTMENTS
SCUDDER STRATEGIC MUNICIPAL INCOME TRUST
Portfolio of Investments at May 31, 2001 (unaudited)
PRINCIPAL
SHORT-TERM MUNICIPAL INVESTMENTS--0.4% AMOUNT VALUE
---------------------------------------------------------------------------------------------------------------------
NEW YORK
New York, NY, 3.05%, 08/15/2021
(Cost $800,000) $ 800,000 $ 800,000
LONG-TERM MUNICIPAL INVESTMENTS--99.6%
---------------------------------------------------------------------------------------------------------------------
ALABAMA
Alabama State Public School and College Authority,
Revenue, Series C, 5.625%, 07/01/2013 1,000,000 1,072,220
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
ARIZONA
Arizona Health Facilities Authority Revenue, New
Foundation Project, 8.25%, 03/01/2019 2,230,000 2,074,257
Coconino County, AZ, Industrial Development
Authority, Health Care Institution Revenue,
Guidance Center Income Project, Prerefunded
06/01/2001, 9.25%, 06/01/2011 (b) 1,575,000 1,606,500
Flagstaff, AZ, Industrial Development Authority
Revenue, Living Community Northern Community
Project, 6.30%, 09/01/2038 2,000,000 1,669,360
Pima County, AZ, Industrial Development Authority,
Private Activity Revenue, Larson County Project,
9.50%, 08/01/2010 1,800,000 1,830,762
----------------------------------------------------------------------------------
7,180,879
---------------------------------------------------------------------------------------------------------------------
CALIFORNIA
Foothill/Eastern Corridor Agency, California Toll
Road Revenue, Senior Lien, Series A, Zero
coupon, ETM, 01/01/2026** 11,500,000 3,004,605
Sacramento County, Bradshaw Road Project, Revenue,
7.20%, 09/02/2015 1,225,000 1,266,356
Sacramento, CA, City Financing Authority,
Convention Center Hotel, Series 1999 A, 6.25%,
01/01/2030 2,000,000 1,987,740
San Diego, CA, Detention Facility, Certificates of
Participation, Revenue, 8.00%, 06/01/2002 75,000 76,599
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Revenue, Senior Lien, ETM,
Zero coupon, 01/01/2020** 4,300,000 1,596,031
----------------------------------------------------------------------------------
7,931,331
---------------------------------------------------------------------------------------------------------------------
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 3,025,350
Colorado, Health Facilities Revenue, 6.50%,
11/15/2031 1,000,000 990,790
Denver, CO, City and County Airport Revenue:
Series A, 6.00%, 11/15/2012 2,000,000 2,183,040
Unrefunded Balance, Series A, 7.50%, 11/15/2023 830,000 925,201
Series A, Prerefunded 11/15/2004, (b) 7.50%,
11/15/2023 170,000 194,574
Unrefunded Balance, Series A, 8.00%, 11/15/2025 660,000 671,603
Unrefunded Balance, Series A, 8.75%, 11/15/2023 735,000 764,819
Denver, CO, Urban Renewal Authority, Tax Increment
Revenue, AMT, Series 1989, 7.75%, 09/01/2016 1,760,000 1,870,422
Lower Colorado River Authority, Texas, Revenue,
Series B, 6.00%, 05/15/2013 5,000,000 5,466,950
----------------------------------------------------------------------------------
16,092,749
8 The accompanying notes are an integral part of the financial statements.
9
PORTFOLIO OF INVESTMENTS
PRINCIPAL
AMOUNT VALUE
---------------------------------------------------------------------------------------------------------------------
CONNECTICUT
Greenwich, CT, Housing Authority Revenue, Series
A, 6.35%, 09/01/2027 $ 2,000,000 $ 1,890,260
Mashantucket Western Pequot Tribe, Special
Revenue:
Zero coupon, 09/01/2017 2,000,000 724,200
Zero coupon, 09/01/2018 1,000,000 337,330
----------------------------------------------------------------------------------
2,951,790
---------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLOMBIA
District of Columbia, General Obligation, Series
A, 5.00%, 06/01/2018 1,000,000 977,060
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
FLORIDA
Hillsborough County, FL, Industrial Development
Authority Revenue, University Community Hospital
Project, 5.625%, 08/15/2023 2,000,000 1,732,480
Nassau County, Amelia Island Care Center Project,
Revenue, 9.75%, 01/01/2023 1,930,000 2,051,571
Orlando, FL, Special Assessment Revenue, Conroy
Road Interchange, Series A, 5.80%, 05/01/2026 1,000,000 915,840
Palm Beach County, FL, Health Facilities
Authority, Retirement Community Revenue, Series
1998, 5.125%, 11/15/2029 1,000,000 855,320
----------------------------------------------------------------------------------
5,555,211
---------------------------------------------------------------------------------------------------------------------
HAWAII
Hawaii State, General Obligation, MBIA, 5.75%,
10/01/2011 1,250,000 1,366,438
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
ILLINOIS
Chicago, IL, Board of Education, 5.75%, 12/01/2017 1,380,000 1,451,663
Chicago, IL, O'Hare International Airport, Special
Facilities Revenue:
American Airlines Income Project,
8.20%, 12/01/2024 1,200,000 1,335,336
United Airlines Project, Series 1999 A,
5.35%, 09/01/2016 500,000 437,375
Chicago, IL, Tax Increment Allocation, Central
Station Project, Series A, Prerefunded
01/01/2005, 8.90%, 01/01/2011 (b) 1,730,000 1,823,783
Illinois Health Facilities Authority Revenue,
6.75%, 02/15/2016 2,180,000 2,352,394
Illinois State General Obligation, 6.00%,
01/01/2013 3,315,000 3,622,466
St. Charles, IL, Multifamily Housing Revenue,
Housing-Wessel Court Project, 7.60%, 04/01/2024 1,835,000 1,854,176
University Park, IL, Tax Allocation, Governors
Gateway Industrial Park, 8.50%, 12/01/2011 1,685,000 1,814,037
----------------------------------------------------------------------------------
14,691,230
---------------------------------------------------------------------------------------------------------------------
INDIANA
Indiana Health Facilities Financing Authority:
Revenue, Franciscan Eldercare Community
Services, Series 1998, 5.875%, 05/15/2029 3,000,000 2,487,030
Hospital Revenue, Fayette Memorial Hospital
Project, 7.20%, 10/01/2022 2,800,000 2,796,584
Indianapolis, IN, Airport Authority Revenue,
Special Facilities, United Airlines Project,
Series A, 6.50%, 11/15/2031 1,900,000 1,776,386
----------------------------------------------------------------------------------
7,060,000
The accompanying notes are an integral part of the financial statements. 9
10
PORTFOLIO OF INVESTMENTS
PRINCIPAL
AMOUNT VALUE
---------------------------------------------------------------------------------------------------------------------
IOWA
Iowa Finance Authority, Health Care Facilities
Revenue, On With Life, Inc. Project, 7.25%,
08/01/2015 $ 2,000,000 $ 1,987,660
Lake City, IA, Health Care Facility Revenue,
Refinancing Opportunity Living Project, 6.45%,
05/01/2011 1,750,000 1,635,655
----------------------------------------------------------------------------------
3,623,315
---------------------------------------------------------------------------------------------------------------------
KANSAS
Manhattan, KS, Health Care Facilities, Revenue
Bond, Meadowlark Hills Retirement, Series 1999
A, 6.50%, 05/15/2028 500,000 479,770
Overland Park Development Corp., 7.375%,
01/01/2032 2,000,000 2,088,060
----------------------------------------------------------------------------------
2,567,830
---------------------------------------------------------------------------------------------------------------------
KENTUCKY
Kentucky Economic Development Finance Authority,
Health Systems Revenue, Norton Healthcare Inc.,
Series 2000 A, 5.625%, 10/01/2028 1,000,000 1,015,040
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
MARYLAND
Anne Arundel County, MD, Special Obligation:
Arundel Mills Project, Revenue,
7.10%, 07/01/2029 1,500,000 1,584,435
National Business Park Project,
7.375%, 07/01/2028 1,000,000 1,068,690
Maryland Economic Development, Student Housing
Revenue Bond, Collegiate Housing, Series A,
5.75%, 06/01/2019 1,000,000 960,500
Maryland Economic Development Corporation:
University of Maryland, Series 1999 A, 5.75%,
06/01/2031 1,000,000 930,710
Chesapeake Bay Conference, Series 1999 B,
7.625%, 12/01/2022 4,000,000 4,016,600
Maryland State Health and Higher Educational
Facilities Authority, University of Maryland
Medical System Revenue, Series 2000, 6.75%,
07/01/2030 1,000,000 1,061,110
----------------------------------------------------------------------------------
9,622,045
---------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS
Massachusetts State Health & Education Facilities
Revenue Healthcare System, Series C, 5.75%,
07/01/2032 1,000,000 992,780
Massachusetts State Development Financial Agency,
Revenue, Health Care Facilities, Series 1999 A,
7.10%, 07/01/2022 2,000,000 1,868,840
Massachusetts State General Obligation, Series
1998B, 5.000%, 04/01/2016 (c) 3,175,000 3,180,398
Worcester, MA, Mortgage Revenue, Briarwood Issue,
9.25%, 12/01/2022 1,900,000 2,118,481
----------------------------------------------------------------------------------
8,160,499
10 The accompanying notes are an integral part of the financial statements.
11
PORTFOLIO OF INVESTMENTS
PRINCIPAL
AMOUNT VALUE
---------------------------------------------------------------------------------------------------------------------
MICHIGAN
Gogebic County, MI, Hospital Finance Authority,
Hospital Revenue, Grand View Hospital Project,
Prerefunded 10/01/2001, 8.75%, 10/01/2016 (b) $ 2,250,000 $ 2,336,648
Hillsdale, MI, Hospital Finance Authority,
Hospital Revenue, Hillsdale Community Health
Center, 5.25%, 05/15/2026 1,450,000 1,098,709
Kalamazoo, MI, Economic Development Revenue Bond,
Series 1999 A, 7.500%, 05/15/2029 2,000,000 1,927,620
Michigan State Strategic Funding Limited,
Obligation Revenue, 5.75%, 11/15/2028 2,000,000 1,714,220
Saginaw, MI, Hospital Finance Authority Revenue,
Covenant Medical Center, Series F, 6.50%,
07/01/2030 1,000,000 1,040,400
Tawas City, MI, Hospital Finance Authority, St.
Joseph Health System, Series A, Revenue, ETM:
5.60%, 02/15/2012** 470,000 489,167
5.75%, 02/15/2023** 1,300,000 1,349,023
----------------------------------------------------------------------------------
9,955,787
---------------------------------------------------------------------------------------------------------------------
MISSOURI
St. Louis, MO, Tax Increment Revenue, Tax
Allocation, Series A, 10.00%, 08/01/2010 1,905,000 2,324,233
St. Louis, MO, Industrial Development Authority
Revenue, Senior Lien, St. Louis Convention,
Series A, 7.20%, 12/15/2028 2,000,000 2,100,740
----------------------------------------------------------------------------------
4,424,973
---------------------------------------------------------------------------------------------------------------------
NEBRASKA
Nebraska Investment Finance Authority, Single
Family Housing Revenue, Series A, 6.70%,
09/01/2026 500,000 515,770
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
NEVADA
Nevada State Department Business and Industry, Las
Vegas Monorail Project, Revenue, 7.375%,
01/01/2030 2,000,000 1,999,580
Nevada Housing Division, Single Family Mortgage:
Revenue, Series C, 6.50%, 04/01/2028 940,000 980,354
Program, Revenue, Series B2, 7.90%, 10/01/2021 625,000 631,600
----------------------------------------------------------------------------------
3,611,534
---------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE
New Hampshire Health and Educational Facilities
Authority Revenue, New Hampshire College Issue,
Series 2000, 7.40%, 01/01/2023 1,000,000 1,044,560
New Hampshire Higher Education and Health
Facilities Authority:
5.75%, 07/01/2028 1,500,000 1,187,460
Revenue, Havenwood Heritage Heights, 7.45%,
01/01/2025 2,000,000 2,002,900
----------------------------------------------------------------------------------
4,234,920
---------------------------------------------------------------------------------------------------------------------
NEW JERSEY
Educational Facilities Authority, Caldwell
College, Revenue, 7.25%, 07/01/2025 1,075,000 1,136,436
New Jersey Economic Development Authority Revenue,
Harrogate Inc., Series A, 5.875%, 12/01/2026 200,000 174,056
----------------------------------------------------------------------------------
1,310,492
The accompanying notes are an integral part of the financial statements. 11
12
PORTFOLIO OF INVESTMENTS
PRINCIPAL
AMOUNT VALUE
---------------------------------------------------------------------------------------------------------------------
NEW MEXICO
Farmington, NM, Pollution Control Revenue, 5.80%,
04/01/2022 $ 2,750,000 $ 2,599,025
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
NEW YORK
Monroe County, NY, Airport Authority Revenue,
Greater Rochester International, 5.625%,
01/01/2010 (c) 1,740,000 1,869,700
Nassau Health Care Corporation, New York Health
Systems Revenue, 6.00%, 08/01/2016 2,825,000 3,086,934
New York & New Jersey Port Authority, Special
Obligation Revenue, Continental/Eastern Project,
Laguardia, 9.125%, 12/01/2015 2,500,000 2,593,250
New York City, General Obligation, Series C,
7.00%, 02/01/2010 315,000 317,032
New York Metropolitan Transportation Authority,
Revenue, Series A, 5.125%, 04/01/2019 1,450,000 1,459,918
New York State Dormitory Authority, Revenue,
Series A, 5.125%, 05/15/2021 (c) 1,880,000 1,859,113
New York State Medical Care Facilities Finance
Agency Revenue, Partially Refunded to
08/15/2001, 7.30%, 02/15/2021 20,000 20,572
City Transitional Financing Authority Revenue,
Series B, 6.000%, 11/15/2013 2,000,000 2,228,580
Triborough Bridge and Tunnel Authority, New York,
Revenue, Series Y, 6.000%, 01/01/2012 5,000,000 5,637,000
----------------------------------------------------------------------------------
19,072,099
---------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA
Charlotte, NC, Special Facilities Revenue, Douglas
International Airport-US Airways, 7.75%,
02/01/2028 1,000,000 970,300
North Carolina Municipal Power Agency, Electric
Revenue, Series 1999 B, 6.375%, 01/01/2013 1,300,000 1,381,783
----------------------------------------------------------------------------------
2,352,083
---------------------------------------------------------------------------------------------------------------------
NORTH DAKOTA
Grand Forks, ND, Health Care Systems Revenue,
Series 2000, 7.125%, 08/15/2024 1,000,000 1,030,690
North Dakota State Housing Finance Agency, Single
Family Mortgage Revenue, Series A, 8.375%,
07/01/2021 289,000 292,997
----------------------------------------------------------------------------------
1,323,687
---------------------------------------------------------------------------------------------------------------------
OKLAHOMA
Woodward Municipal Authority, Hospital Revenue,
8.50%, 11/01/2014 1,335,000 1,409,440
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
Montgomery County, PA, Health and Educational
Facilities Authority, Philadelphia Geriatric
Center Revenue, Series 1999 A, 7.25%, 12/01/2027 2,000,000 1,940,580
Pennsylvania Higher Education Facilities Authority
UPMC Health System Series A, 6.00%, 01/15/2031 750,000 750,810
Pennsylvania State Higher Educational Facilities
Authority, College & University Revenues,
Philadelphia College Text & Science, 6.70%,
04/01/2014 2,000,000 2,117,140
Westmoreland County, PA, Industrial Development
Authority Revenue, Health Care
Facilities-Redstone, Series 2000 B, 8.125%,
11/15/2030 1,000,000 1,006,970
----------------------------------------------------------------------------------
5,815,500
12 The accompanying notes are an integral part of the financial statements.
13
PORTFOLIO OF INVESTMENTS
PRINCIPAL
AMOUNT VALUE
---------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA
South Carolina Jobs Economic Development
Authority, Hospital Facilities Revenue, Series
2000 A, 7.375%, 12/15/2021 $ 1,000,000 $ 1,025,330
South Carolina Transportation Infrastructure,
Revenue, Series A, 5.375%, 10/01/2024 (c) 4,150,000 4,170,833
----------------------------------------------------------------------------------
5,196,163
---------------------------------------------------------------------------------------------------------------------
TENNESSEE
Johnson City, TN, Health and Educational
Facilities Board Hospital Revenue, 7.50%,
07/01/2033 2,000,000 2,001,520
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
TEXAS
Abilene, TX, Health Facilities Development,
Corporate Retirement Facilities Revenue, Sears
Methodist Retirement, Series A, 5.90%,
11/15/2025 2,500,000 2,049,875
Austin, TX, Bergstrom Landhost Enterprises,
Airport Hotel, Series 1999 A, 6.75%, 04/01/2027 2,000,000 1,906,740
Crowley, TX, Independent School District, General
Obligation, 5.125%, 08/01/2025 5,000,000 4,786,000
Dallas-Fort Worth, TX, International Airport
Facility:
American Airlines, Series C, 6.15%, 05/01/2029 2,000,000 2,068,280
American Airlines, Revenue, 6.375%, 05/01/2035 2,000,000 2,004,380
Houston, TX:
General Obligation, Series A, 5.00%, 03/01/2016 3,000,000 2,958,240
Independent School District, Series A, General
Obligation, 5.00%, 01/15/2024 2,000,000 1,899,640
Airport System Special Facilities,
Continental Airlines, Inc., Improvement
Projects,
Revenue, 5.70%, 07/15/2029 2,000,000 1,685,240
Airport System Special Facilities,
Continental Airlines, Inc., Improvement
Projects,
Revenue, 6.125%, 07/15/2027 2,000,000 1,803,360
San Antonio, TX, Electric & Gas, Revenue, Series
A, 5.00%, 02/01/2018 1,100,000 1,064,162
Tarrant County, TX, Health Facilities Development
Corp., Hospital Revenue, 6.70%, 11/15/2030 1,000,000 1,021,690
Travis County, Texas, Health Facilities
Development Corporation Revenue, Series A,
6.00%, 11/15/2012 (c) 3,860,000 4,166,870
----------------------------------------------------------------------------------
27,414,477
---------------------------------------------------------------------------------------------------------------------
UTAH
Utah Housing Finance Agency, Single Family
Mortgage Revenue, 6.65%, 07/01/2026 560,000 577,713
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
VIRGIN ISLANDS
Virgin Islands, Gross Receipts Taxes, Public
Financial Authority Revenue, Series A, 6.375%,
10/01/2019 3,000,000 3,213,090
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
VIRGINIA
Fairfax County, VA, Economic Development Authority
Revenue, Series 1999 A, 7.250%, 10/01/2019 2,000,000 2,070,260
Virginia Beach, VA, Development Authority Revenue,
7.00%, 04/01/2010 1,410,000 1,411,254
----------------------------------------------------------------------------------
3,481,514
---------------------------------------------------------------------------------------------------------------------
WASHINGTON
Port Seattle WA, Special Facilities, Northwest
Airlines Project, 7.25%, 04/01/2030 1,000,000 986,530
----------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 13
14
PORTFOLIO OF INVESTMENTS
PRINCIPAL
AMOUNT VALUE
---------------------------------------------------------------------------------------------------------------------
WEST VIRGINIA
West Virginia State Hospital Finance Authority,
Hospital Revenue, Charleston Area Medical
Center, Series A, 6.75%, 09/01/2022 $ 2,000,000 $ 2,125,180
----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
WISCONSIN
Wisconsin Housing and Economic Development
Authority, Home Ownership Revenue, Series F,
6.20%, 03/01/2027 500,000 516,540
Wisconsin State Health And Education Facilities
Authority Revenue:
5.125%, 02/15/2020 1,000,000 898,290
Aurora Health Care Inc., Series 1999 A, 5.60%,
02/15/2029 1,000,000 866,640
Memorial Hospital Oconomowoc Project,
Prerefunded 07/01/2005, 6.35%, 07/01/2017 (b) 600,000 656,033
----------------------------------------------------------------------------------
2,937,503
----------------------------------------------------------------------------------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS
(Cost $186,829,090) 194,426,637
----------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $187,629,090) $195,226,637
----------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost for federal income tax purposes was $187,629,090. At May 31, 2001,
net unrealized appreciation for all securities based on tax cost was
$7,597,547. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $10,741,261 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$3,143,714.
(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.
14 The accompanying notes are an integral part of the financial statements.
15
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
As of May 31, 2001 (unaudited)
ASSETS
----------------------------------------------------------------------------
Investments in securities, at value (cost $187,629,090) $195,226,637
----------------------------------------------------------------------------
Cash 187,524
----------------------------------------------------------------------------
Receivable for investments sold 100,000
----------------------------------------------------------------------------
Interest receivable 3,339,038
----------------------------------------------------------------------------
TOTAL ASSETS 198,853,199
----------------------------------------------------------------------------
LIABILITIES
----------------------------------------------------------------------------
Payable for investments purchased 1,707,493
----------------------------------------------------------------------------
Dividends payable 12,272
----------------------------------------------------------------------------
Accrued management fee 99,004
----------------------------------------------------------------------------
Accrued Trustees' fees and expenses 30,102
----------------------------------------------------------------------------
Other accrued expenses and payables 731,316
----------------------------------------------------------------------------
Total liabilities 2,580,187
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $196,273,012
----------------------------------------------------------------------------
NET ASSETS
----------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income $ 144,582
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
securities 7,597,547
----------------------------------------------------------------------------
Accumulated net realized gain (loss) (282,517)
----------------------------------------------------------------------------
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 118,813,400
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $196,273,012
----------------------------------------------------------------------------
NET ASSET VALUE
----------------------------------------------------------------------------
NET ASSET VALUE PER COMMON SHARES
($126,273,012/10,747,327 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) $11.75
----------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 15
16
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended May 31, 2001 (unaudited)
INVESTMENT INCOME
--------------------------------------------------------------------------
Interest $6,280,635
--------------------------------------------------------------------------
Expenses:
Management fee 586,006
--------------------------------------------------------------------------
Services to shareholders 17,596
--------------------------------------------------------------------------
Custodian fees 4,212
--------------------------------------------------------------------------
Auditing 38,194
--------------------------------------------------------------------------
Legal 805
--------------------------------------------------------------------------
Trustees' fees and expenses 6,876
--------------------------------------------------------------------------
Reports to shareholders 4,990
--------------------------------------------------------------------------
Remarketing fee 87,360
--------------------------------------------------------------------------
Other 48,326
--------------------------------------------------------------------------
Total expenses, before expense reductions 794,365
--------------------------------------------------------------------------
Expense reductions (3,683)
--------------------------------------------------------------------------
Total expenses, after expense reductions 790,682
--------------------------------------------------------------------------
NET INVESTMENT INCOME 5,489,953
--------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
--------------------------------------------------------------------------
Net realized gain (loss) from investments 192,228
--------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on investments 3,729,729
--------------------------------------------------------------------------
Net gain (loss) on investment transactions 3,921,957
--------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $9,411,910
--------------------------------------------------------------------------
16 The accompanying notes are an integral part of the financial statements.
17
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
MAY 31, YEAR ENDED
2001 NOVEMBER 30,
(UNAUDITED) 2000
INCREASE (DECREASE) IN NET ASSETS
-------------------------------------------------------------------------------------------------
Operations:
Net investment income $ 5,489,953 $ 10,872,519
-------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions 192,228 (374,722)
-------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period 3,729,729 1,799,954
-------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 9,411,910 12,297,751
-------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Common shares (4,030,248) (8,056,860)
-------------------------------------------------------------------------------------------------
Remarketed preferred shares (1,315,123) (2,946,311)
-------------------------------------------------------------------------------------------------
From net realized gains
Common shares -- (644,549)
-------------------------------------------------------------------------------------------------
Fund share transactions:
Net proceeds from shares issued to common shareholders in
reinvestment of distributions 56,854 --
-------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions 56,854 --
-------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 4,123,393 650,031
-------------------------------------------------------------------------------------------------
Net assets at beginning of period 192,149,619 191,499,588
-------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $144,582 as of May 31, 2001) $196,273,012 $192,149,619
-------------------------------------------------------------------------------------------------
OTHER INFORMATION
-------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period 10,742,480 10,742,480
-------------------------------------------------------------------------------------------------
Shares issued to shareholders in reinvestment of
distributions 4,847 --
-------------------------------------------------------------------------------------------------
Net increase in Fund shares 4,847 --
-------------------------------------------------------------------------------------------------
Shares outstanding at end of period 10,747,327 10,742,480
-------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 17
18
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.
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 2001 -------------------------------------------------------
(UNAUDITED) 2000 1999 1998 1997 1996
PER SHARE OPERATING PERFORMANCE
----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $11.37 11.31 12.24 12.29 12.14 12.19
----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .51(a) 1.01(a) .78(a) .77 .80 .82
----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions .37 .13 (.83) (.05) .17 (.05)
----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .88 1.14 (.05) .72 .97 .77
----------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income to common shareholders (.38) (.75) (.75) (.77) (.82) (.82)
----------------------------------------------------------------------------------------------------------------------------
Net investment income to preferred shareholders
(common share equivalent) (.12) (.27) (.05) -- -- --
----------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions
(common shares) -- (.06) (.01) -- -- --
----------------------------------------------------------------------------------------------------------------------------
Total distributions (.50) (1.08) (.81) (.77) (.82) (.82)
----------------------------------------------------------------------------------------------------------------------------
Dilution resulting from remarketed preferred shares
(b) -- -- (.07) -- -- --
----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.75 11.37 11.31 12.24 12.29 12.14
----------------------------------------------------------------------------------------------------------------------------
Market value, end of period $11.66 10.51 10.31 12.81 13.06 12.38
TOTAL RETURN PER COMMON SHARE
----------------------------------------------------------------------------------------------------------------------------
BASED ON NET ASSET VALUE (%) 6.73** 8.63 (1.35) 5.99 8.28 6.58
----------------------------------------------------------------------------------------------------------------------------
BASED ON MARKET VALUE (%) 14.58** 10.13 (14.08) 4.36 12.87 9.19
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) net of
remarketed preferred shares 126 122 122 131 131 128
----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%)
(excluding preferred shares) 1.26%* 1.50 1.12 .77 .76 .74
----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%)
(excluding preferred shares) 1.26%* 1.49 1.11 .77 .76 .74
----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%)
(including preferred shares) (b) .81%* .95 1.01 -- -- --
----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%)
(including preferred shares) (b) .81%* .94 1.00 -- -- --
----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) (excluding
preferred shares) (b) 8.74%* 9.07 6.55 6.29 6.62 6.82
----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) (including
preferred shares) (b) 5.62%* 5.73 5.91 -- -- --
----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 7* 33 24 22 13 31
----------------------------------------------------------------------------------------------------------------------------
Remarketed preferred shares information at end of
period:
Aggregate amount outstanding ($ thousands) 70,000 70,000 70,000 -- -- --
----------------------------------------------------------------------------------------------------------------------------
Asset coverage per share ($) 70,000 69,000 68,000 -- -- --
----------------------------------------------------------------------------------------------------------------------------
Liquidation and market value per share ($) 25,000 25,000 25,000 -- -- --
----------------------------------------------------------------------------------------------------------------------------
NOTE: Total return based on net asset value reflects changes in the Fund's net
asset value during the period. 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 period.
(a) Based on monthly average shares outstanding during the period.
(b) Effective September 29, 1999, the Fund issued 2,800 remarketed preferred
shares.
* Annualized.
** Not annualized.
18
19
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Scudder Strategic Municipal Income Trust (the
"Fund"), formerly Kemper Strategic Municipal Income
Trust, 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 accounting principles generally
accepted in the United States which require the use
of management estimates. Actual results could
differ from those 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.
At November 30, 2000, the Fund had a net tax basis
capital loss carryforward of approximately $380,000
which may be applied against any realized net
taxable capital gains of each succeeding year until
fully utilized or until November 30, 2008, the
expiration date.
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.
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
19
20
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.
OTHER. 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 and premiums
are accreted/amortized for both tax and financial
reporting purposes.
--------------------------------------------------------------------------------
2 PURCHASES AND SALES
OF SECURITIES For the six months ended May 31, 2001, investment
transactions (excluding short-term investments) are
as follows:
Purchases $9,368,088
Proceeds from sales 6,886,228
--------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Scudder Investments, Inc.,
formerly Scudder Kemper Investments Inc., ("ZSI" or
the "Advisor") 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 $586,006 for the six months ended
May 31, 2001.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Scudder Investments Service Company, ("SISC"),
formerly Kemper Service Company, is the shareholder
service agent of the Fund. Under the agreement,
SISC received shareholder services fees of $12,000
for the six months ended May 31, 2001, of which
$5,601 is unpaid at May 31, 2001.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers of the Advisor. For
the six months ended May 31, 2001, the Fund made no
direct payments to its officers and incurred
trustees' fees of $6,876 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, 2001,
the Fund's custodian and transfer agent fees were
reduced by $2,647 and $1,036 respectively, under
these arrangements.
--------------------------------------------------------------------------------
5 LINE OF CREDIT The Fund and several affiliated funds (the
"Participants") share in a $750 million revolving
credit facility with J.P. Morgan Chase & Co. for
temporary or emergency purposes. The Participants
are charged an annual commitment fee which is
allocated, pro rata based upon net assets, among
each of the Participants. Interest is calculated at
the Federal Funds Rate plus .5%. The Fund may
borrow up to a maximum of 33 percent of its net
assets under the agreement.
20
21
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
An annual shareholders' meeting was held on May 24, 2001, for Scudder 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 (effective July 1, 2001)
For Withheld
John W. Ballantine 9,267,621 1,700
Lewis A Burnham 9,250,668 1,700
Mark Casady 9,267,621 1,700
Linda C. Coughlin 9,268,068 1,700
Donald L. Dunaway 9,267,621 1,700
James R. Edgar 9,260,336 1,700
William F. Glavin 9,271,084 1,700
Robert B. Hoffman 9,267,974 1,700
Shirley D. Peterson 9,264,958 1,700
Fred B. Renwick 9,250,834 1,700
William P. Sommers 9,243,168 1,700
John G. Weithers 9,271,084 1,700
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund. This item was approved.
For Against
9,273,109 33,603
21
22
NOTES
22
23
NOTES
23
24
TRUSTEES&OFFICERS
TRUSTEES OFFICERS
JAMES E. AKINS MAUREEN E. KANE
Trustee MARK S. CASADY Secretary
President
LINDA C. COUGHLIN CAROLINE PEARSON
Trustee and Vice President PHILIP J. COLLORA Assistant Secretary
Vice President and
JAMES R. EDGAR Assistant Secretary BRENDA LYONS
Trustee Assistant Treasurer
JOHN R. HEBBLE
ARTHUR R. GOTTSCHALK Treasurer
Trustee
PHILLIP G. CONDON
FREDERICK T. KELSEY Vice President
Trustee
KATHRYN L. QUIRK
FRED B. RENWICK Vice President
Trustee
LINDA J. WONDRACK
JOHN G. WEITHERS Vice President
Trustee
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LEGAL COUNSEL VEDDER, PRICE, KAUFMAN AND KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
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SERVICE AGENT SCUDDER INVESTMENTS SERVICE COMPANY
P.O. Box 219066
Kansas City, MO 64121
(800) 294-4366
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SHAREHOLDER ZURICH SCUDDER INVESTMENTS, INC.
INFORMATION LINE Web information available at
cef.scudder.com
(800) 349-4281
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CUSTODIAN AND STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT 225 Franklin Street
Boston, MA 02110
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INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
SCUDDER INVESTMENTS LOGO
Printed on recycled paper in the U.S.A.
SSMIT - 3 (7/25/01) 13544