<PAGE> 1
KEMPER
NATIONAL TAX-FREE
INCOME SERIES
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
Offering investors the opportunity for as high a level of current
interest income that is exempt from federal income taxes as is
consistent with preservation of capital
KEMPER MUNICIPAL BOND FUND
KEMPER INTERMEDIATE MUNICIPAL
BOND FUND
" . . . Our primary course of action was to shorten the durations of the
funds as it became apparent that rates were on the rise . . ."
[KEMPER FUNDS LOGO]
<PAGE> 2
Contents
3
Economic Overview
5
Performance Update
8
Portfolio Statistics
9
Terms to Know
13
Portfolio of
Investments
28
Report from
Independent Auditors
29
Financial Statements
32
Notes to
Financial Statements
36
Financial Highlights
At A Glance
- ---------------------------------------------------------------------------
KEMPER NATIONAL TAX-FREE INCOME
FUNDS TOTAL RETURNS*
- ---------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(UNADJUSTED FOR SALES CHARGE)
KEMPER MUNICIPAL BOND FUND
[BAR GRAPH]
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------
CLASS A 6.00%
- ---------------------------------------------------------------------------
CLASS B 4.97%
- ---------------------------------------------------------------------------
CLASS C 4.99%
- ---------------------------------------------------------------------------
LIPPER MUNICIPAL BOND FUNDS CATEGORY AVERAGE* 5.61%
- ---------------------------------------------------------------------------
</TABLE>
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
[BAR GRAPH]
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------
CLASS A 4.15%
- ---------------------------------------------------------------------------
CLASS B 3.34%
- ---------------------------------------------------------------------------
CLASS C 3.26%
- ---------------------------------------------------------------------------
LIPPER MUNICIPAL BOND FUNDS CATEGORY AVERAGE* 4.31%
- ---------------------------------------------------------------------------
</TABLE>
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
*Lipper Analytical Services, Inc. returns and rankings are based upon changes in
net asset value with all dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable. Returns
and rankings are historical and do not reflect future performance. The funds are
compared to their respective Lipper categories as follows: General Municipal
Debt and Intermediate Municipal Debt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
NET ASSET VALUE
- ---------------------------------------------------------------------------
AS OF AS OF
9/30/96 9/30/95
- ---------------------------------------------------------------------------
<S> <C> <C>
KEMPER MUNICIPAL BOND FUND
CLASS A $10.18 $10.15
- ---------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND
CLASS B $10.15 $10.13
- ---------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND
CLASS C $10.18 $10.16
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
NET ASSET VALUE
- ---------------------------------------------------------------------------
AS OF AS OF
9/30/96 9/30/95
- ---------------------------------------------------------------------------
<S> <C> <C>
KEMPER INTERMEDIATE
MUNICIPAL BOND FUND CLASS A $10.06 $10.18
- ---------------------------------------------------------------------------
KEMPER INTERMEDIATE
MUNICIPAL BOND FUND CLASS B $10.06 $10.18
- ---------------------------------------------------------------------------
KEMPER INTERMEDIATE
MUNICIPAL BOND FUND CLASS C $10.06 $10.19
- ---------------------------------------------------------------------------
</TABLE>
KEMPER TAX-FREE INCOME
LIPPER RANKINGS*
COMPARED TO ALL OTHER FUNDS IN THEIR RESPECTIVE LIPPER CATEGORIES
KEMPER MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
1-YEAR #84 OF #166 OF #162 OF
230 FUNDS 230 FUNDS 230 FUNDS
- ---------------------------------------------------------------------------
5-YEAR #19 OF N/A N/A
103 FUNDS
- ---------------------------------------------------------------------------
10-YEAR #9 OF N/A N/A
62 FUNDS
- ---------------------------------------------------------------------------
15-YEAR #6 OF N/A N/A
33 FUNDS
- ---------------------------------------------------------------------------
20-YEAR #1 OF N/A N/A
2 FUNDS
- ---------------------------------------------------------------------------
</TABLE>
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
1-YEAR #79 OF #122 OF #125 OF
139 FUNDS 139 FUNDS 139 FUNDS
- ---------------------------------------------------------------------------
</TABLE>
- ---------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- ----------------------------------------------------------------------------
THE FOLLOWING TABLES SHOW PER SHARE DIVIDEND
AND YIELD INFORMATION FOR THE FUNDS AS OF
SEPTEMBER 30, 1996.
<TABLE>
<CAPTION>
A B C
MUNICIPAL BOND SHARES SHARES SHARES
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
1 YEAR INCOME: $0.5493 $0.4572 $0.4613
- ---------------------------------------------------------------------------
SEPTEMBER
DIVIDEND: $0.0464 $0.0390 $0.0389
- ---------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 5.47% 4.61% 4.58%
- ---------------------------------------------------------------------------
SEC YIELD+: 4.83% 4.19% 4.20%
- ---------------------------------------------------------------------------
TAX EQUIVALENT
YIELD: 7.68% 6.66% 6.68%
BASED ON A MARGINAL FEDERAL INCOME TAX RATE OF
37.1%
- ---------------------------------------------------------------------------
<CAPTION>
INTERMEDIATE A B C
MUNICIPAL BOND SHARES SHARES SHARES
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
1 YEAR INCOME: $0.4557 $0.3753 $0.3788
- ---------------------------------------------------------------------------
SEPTEMBER
DIVIDEND: $0.0394 $0.0330 $0.0325
- ---------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 4.71% 3.94% 3.87%
- ---------------------------------------------------------------------------
SEC YIELD+: 3.98% 3.29% 3.33%
- ---------------------------------------------------------------------------
TAX EQUIVALENT
YIELD: 6.33% 5.23% 5.29%
BASED ON A MARGINAL FEDERAL INCOME TAX RATE OF
37.1%
- ---------------------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as an
annualized percentage of net asset value on September 30, 1996. Distribution
rate simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended September 30, 1996 shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with the
standardized method prescribed by the Securities and Exchange Commission. Tax
equivalent yield is based on the fund's yield and the 37.1% federal tax rate.
Income may be subject to state and local taxes and, for some investors, a
portion may be subject to the alternative minimum tax.
<PAGE> 3
GENERAL ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $76 BILLION IN ASSETS, INCLUDING $42 BILLION IN RETAIL
MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
As we approach the close of 1996, it's remarkable how eventful the year has been
and yet, economically, we are essentially where we were one year ago.
The fundamentals of the economy are remarkably similar today to what they
were in 1995. Long-term interest rates are approximately 6.52% compared to 6.29%
in November 1995. The economy is growing at a rate of approximately 2.2%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and one year ago is that prices of
the stocks are on average up 15% to 20%. While price movements were more
volatile in 1996 than in the past few years, the patient investor was amply
rewarded. The prime element sending the stock market higher was strong positive
cash flows. This liquidity in an environment of modestly increasing corporate
profits and relatively stable interest rates pushed stocks higher for most of
the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- - EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in recent
previous years but positive nonetheless.
- - INTEREST RATES. Rates should remain stable, and short-term interest
rates may even decline.
- - LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, continue to create strong demand for
securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
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 (10/31/96) 6 Months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.53 6.74 6.04 7.74
Prime rate (2) 8.25 8.25 8.75 7.75
Inflation rate (3) 3 2.9 2.6 2.6
The U.S. dollar (4) 4.74 8.94 -1.05 -5.28
Capital goods orders (5)* 2.24 7.42 8.57 15.65
Industrial production (5) 3.5 2.56 1.92 6.77
Employment growth (6) 2.01 2.07 1.93 3.3
</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%. 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 the 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 September 30, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
- ----------------------
Stephen B. Timbers
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
November 15, 1996
*THE STANDARD & POOR'S 500 IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE OF THE
U.S. STOCK MARKET.
4
<PAGE> 5
PERFORMANCE UPDATE
[MIER PHOTO]
PORTFOLIO MANAGER CHRIS MIER SPEAKS AT A CELEBRATION COMMEMORATING KEMPER
MUNICIPAL BOND FUND'S 20TH ANNIVERSARY. THE FUND IS KNOWN AS AMERICA'S FIRST
MUNICIPAL BOND FUND.
MIER JOINED ZURICH KEMPER INVESTMENTS, INC. IN 1986 AND IS NOW SENIOR VICE
PRESIDENT AND PORTFOLIO MANAGER OF KEMPER MUNICIPAL BOND FUND AND KEMPER
INTERMEDIATE MUNICIPAL BOND FUND. MIER RECEIVED A B.A. DEGREE IN ECONOMICS FROM
THE UNIVERSITY OF MICHIGAN AND RECEIVED AN M.M. IN FINANCE FROM KELLOGG GRADUATE
SCHOOL OF MANAGEMENT AT NORTHWESTERN UNIVERSITY. HE IS A CHARTERED FINANCIAL
ANALYST.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
THE YEAR ENDED SEPTEMBER 30, 1996, WAS A PERIOD OF SHIFTING INTEREST RATES AND
POLITICAL RHETORIC, WHICH GREATLY IMPACTED THE MUNICIPAL BOND MARKET. KEMPER
MUNICIPAL BOND FUND AND KEMPER INTERMEDIATE MUNICIPAL BOND FUND PORTFOLIO
MANAGER CHRIS MIER EXPLAINS HOW HE ALTERED THE STRUCTURE OF THE PORTFOLIOS TO
HELP ENHANCE PERFORMANCE.
Q. DURING THE LAST YEAR, MUNICIPAL BOND YIELDS HAVE FLUCTUATED QUITE A BIT.
WHAT WAS BEHIND THE STEADY DECLINE IN YIELDS AND THEN THEIR SHARP RISE?
A. During the first quarter of the period, there was optimism that a federal
budget resolution would occur. In addition, economic indicators suggested that
the economy, while growing, was slowing down somewhat. This created a favorable
climate for the municipal market, and bond yields fell (prices appreciated). THE
BOND BUYER 25-Bond Index (RBI) -- a gauge of municipal bond interest rates --
began the fiscal year at 6.27 percent on September 28, 1995, and then fell to a
low of 5.63 percent on January 4, 1996.
Later in January, however, data was released that indicated the economic
slowdown may have been related mostly to the impact of severe weather as opposed
to any fundamental weakness. Moreover, with the start of the Republican party
presidential primaries, focus moved away from the federal budget and deficit
reduction proposals toward other issues. As optimism about deficit reduction
began to fade, yields began to rise.
This rise in yields was propelled in early March, when the U.S. Department
of Labor announced an unanticipated and dramatic increase in employment growth.
Many bond investors saw this data as evidence that the economy was
re-establishing a very firm footing. The news caused a sell-off in the market
because more rapid growth is often associated with higher inflation, which
erodes the value of fixed-income investments. Yields jumped from 5.88 percent on
March 7, to 6.13 percent on March 14 as measured by the RBI.
The municipal market traded in an irregular pattern during the remainder of
the period as economic indicators gave mixed signals about the pace of economic
growth. The RBI yield was 6.01 percent at the close of the fiscal year.
Q. HOW WAS PERFORMANCE IMPACTED BY THE CHANGES IN INTEREST RATES?
A. The municipal market, along with the overall bond market, was adversely
affected by the upward movement in interest rates that began occurring in
January 1996. When interest rates rise, the prices of bonds fall. However, the
good news for Kemper Municipal Bond Fund shareholders is that Class A shares of
the fund still outperformed the average return of the Lipper General Municipal
Debt Category for the fiscal year period (unadjusted for sales charge). Returns
for Class A shares of Kemper Intermediate Municipal Bond Fund fell just short of
the Lipper Intermediate Municipal Debt category for the twelve-month period
(unadjusted for sales charge).
5
<PAGE> 6
PERFORMANCE UPDATE
Q. HOW DID YOU ALTER YOUR MANAGEMENT OF THE FUNDS AS RATES SHIFTED DIRECTION
IN EARLY 1996?
A. Our primary course of action was to shorten the durations of the funds as
it became apparent that rates were on the rise. Remember, the shorter a fund's
duration, the less sensitive it is to interest rate changes. We shortened
durations by reducing the average maturities of the portfolios, using futures
and increasing cash reserves.
Q. WHAT TYPES OF PORTFOLIO ADJUSTMENTS DID YOU MAKE DURING THE PERIOD?
A. In addition to our adjustment of the funds' durations, we focused on three
areas. First, we looked for opportunities to selectively add A and BBB rated
bonds throughout the period. We also focused on maintaining or improving the
call protection of the portfolios and in some cases we favored the acquisition
of non-callable issues. That's because better call protection generally builds
in better price performance capabilities. Finally, we increased the level of
issue diversification within the funds. We did this by adding a variety of
issues that mature at different points in time and have a somewhat wider range
of coupon rates. We also looked for bonds with shorter maturities that offered
attractive yields relative to those of longer maturity issues.
Q. WERE THERE ANY SIGNIFICANT TRENDS WITHIN INDIVIDUAL STATES THAT AFFECTED
THE FUNDS' PERFORMANCE?
A. Like the nation, many states experienced an ongoing economic expansion and
higher rates of employment, which is generally positive for municipal markets.
In some states, such as California and Ohio, general obligation bond ratings
were upgraded. During the period, we reduced our exposure to New York City
issues. This was in response to New York City's ongoing struggle with balancing
its budget.
Q. YOU MENTIONED THAT THE FUNDS' EXPOSURE TO NEW YORK CITY ISSUES HAD BEEN
REDUCED. HOW DO YOU DETERMINE WHEN TO ADD OR DECREASE PORTFOLIO EXPOSURE OR
DECIDE WHICH ISSUES TO PURCHASE?
A. We are fortunate to have a staff of five research analysts dedicated to
following the municipal market. This group of seasoned professionals has more
than 50 years of combined industry experience, which makes them invaluable to
the portfolio selection process.
Each analyst covers a specific geographic area as well as industry
specialization. They have access, via computer subscription services, to all
relevant regional and national news and financial publications. In many cases,
they receive the information as the publications are being printed. The analysts
also have access to sophisticated investment databases. The information
available through the services, in many cases, is customized to meet Zurich
Kemper's specific needs. In addition, the research analysts regularly meet with
issuers and often travel with the issuers to conduct site-visits. Such
one-on-one meetings grant us a greater understanding about potential investments
than we could grasp from pouring through published data alone.
This multi-faceted approach to research enables us to make informed decisions
quickly as new issues are offered. Or as the case was with New York City, to
better understand potential drawbacks.
Q. WHAT CAN YOU TELL US ABOUT THE LEVEL OF MUNICIPAL SUPPLY?
A. Supply picked up during the last few months of 1995 but remained lower than
1994 levels for the year as a whole. Early in 1996, supply was relatively high
but by the close of the year it was moving closer to 1995 levels.
Q. ARE MUNICIPAL BOND FUNDS A GOOD INVESTMENT IN THE CURRENT ECONOMIC
ENVIRONMENT?
A. Municipal bonds can play an important role in rounding out a
well-diversified portfolio of investments. The tax-exempt income that municipal
bond funds provide may be especially helpful now as many investors may be under
invested in tax-exempt assets. Municipal bonds and equities can both be
important components of a balanced portfolio. If your exposure to municipals has
declined on a relative basis, now may be the right time to review your long-term
goals and rebalance your portfolio of investments in favor of municipal bonds.
Q. WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET?
A. We expect moderate economic growth to continue, with possibly only a slight
increase in inflation. Rates should remain within the prevailing range that has
been in effect since March, but there is the possibility that rates may trend
lower. We look for levels of municipal supply to remain relatively moderate,
which would be positive for municipal bonds.
6
<PAGE> 7
PERFORMANCE UPDATE
KEMPER MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Average Annual Total Returns*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED SEPTEMBER 30, 1996 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEAR CLASS
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
- - KEMPER MUNICIPAL BOND FUND CLASS A 1.22% 6.50% 7.50% 7.68% (SINCE 4/20/76)
- --------------------------------------------------------------------------------------------------------
- - KEMPER MUNICIPAL BOND FUND CLASS B 1.97 N/A N/A 4.65 (SINCE 5/31/94)
- --------------------------------------------------------------------------------------------------------
- - KEMPER MUNICIPAL BOND FUND CLASS C 4.99 N/A N/A 6.01 (SINCE 5/31/94)
- --------------------------------------------------------------------------------------------------------
</TABLE>
Growth of an assumed $10,000 investment in Kemper Municipal Bond Fund Class A
from 1/1/80 through 9/30/96
[LINE GRAPH]
<TABLE>
<CAPTION>
1/01/80 12/31/85 12/31/90 12/31/95 09/30/96
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- - KEMPER 10000 16183 25,622 37758 39989
MUNICPAL BOND FUND CLASS A (1)
- ----------------------------------------------------------------------------------------------------------
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10000 16515 26,190 39970 40703
- ----------------------------------------------------------------------------------------------------------
- - CONSUMER PRICE INDEX ++ 10000 14250 17,445 20013 20574
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Growth of an assumed $10,000 investment in Kemper Municipal Bond Fund Class B
from 5/31/94 through 9/30/96
[LINE GRAPH]
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 09/30/96
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- - KEMPER 10000 9744 11444 11122
MUNICPAL BOND FUND CLASS B (1)
- ----------------------------------------------------------------------------------------------------------
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10000 9864 11586 11798
- ----------------------------------------------------------------------------------------------------------
- - CONSUMER PRICE INDEX ++ 10000 10149 10407 10698
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Growth of an assumed $10,000 investment in Kemper Municipal Bond Fund Class C
from 5/31/94 through 9/30/96
[LINE GRAPH]
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 09/30/96
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- - KEMPER 10000 9776 11484 11464
MUNICPAL BOND FUND CLASS C (1)
- ---------------------------------------------------------------------------------------------------------
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10000 9864 11586 11798
- ---------------------------------------------------------------------------------------------------------
- - CONSUMER PRICE INDEX ++ 10000 10149 10407 10698
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
*Average annual total return measures net investment income and capital gain or
loss from portfolio investments, assuming reinvestment of all dividends and for
A shares adjustment for the maximum sales charge of 4.5%, for B shares
adjustment for the applicable contingent deferred sales charge (CDSC) of 3% and
for C shares no adjustment for sales charge. The maximum B share CDSC is 4%.
For C shares purchased after 4/1/96 there is a 1% CDSC on certain redemptions
within the first year of purchase. Average annual return reflects annualized
change. During the periods noted, securities prices fluctuated. For additional
information, see the Prospectus and Statement of Additional Information and the
Financial Highlights at the end of this report.
(1)Performance includes reinvestment of dividends and adjustment for the maximum
sales charge for A shares and the contingent deferred sales charge in effect
at the end of the period for B shares. When reviewing the performance chart,
please note that the inception date for the Lehman Brothers Municipal Bond Index
is 1/1/80. As a result, we are not able to illustrate the life of fund
performance (since 4/20/76) for Kemper Municipal Bond Fund. In comparing Kemper
Municipal Bond Fund to the Lehman Brothers Municipal Bond Index, you should note
that the fund's performance reflects the maximum sales charge, while no such
charges are reflected in the performance of the index.
+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, have been issued as a part of an issue of at least
$50 million, have been issued within the last five years, and have 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. Source is Towers Data
Systems.
++The Consumer Price Index is a statisRtical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source is
Towers Data Systems.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
[PIE CHART]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
ON 9/30/96 ON 9/30/95
- ---------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 74% 80%
- ---------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 15 9
- ---------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 9 5
- ---------------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 6
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
QUALITY
[PIE CHART]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
ON 9/30/96 ON 9/30/95
- ---------------------------------------------------------------------------------
<S> <C> <C>
AAA 58% 48%
- ---------------------------------------------------------------------------------
AA 9 13
- ---------------------------------------------------------------------------------
A 11 15
- ---------------------------------------------------------------------------------
BBB 18 20
- ---------------------------------------------------------------------------------
BB 0 1
- ---------------------------------------------------------------------------------
NOT RATED 4 3
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
* Portfolio composition and holdings are subject to change.
8
<PAGE> 9
PORTFOLIO STATISTICS
YEARS TO MATURITY
[PIE CHART]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
ON 9/30/96 ON 9/30/95
- ---------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 11% 9%
- ---------------------------------------------------------------------------------
10-20 YEARS 53 46
- ---------------------------------------------------------------------------------
20+ YEARS 36 45
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
AVERAGE MATURITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
ON 9/30/96 ON 9/30/95
- ---------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 17.6 YEARS 18.7 YEARS
- ---------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TERMS TO KNOW
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income investment or portfolio. The longer the duration, the greater the
interest rate risk.
REVENUE BOND INDEX (RBI) The average yield on 25 revenue bonds with 30-year
maturities compiled by THE BOND BUYER, a newspaper that covers the municipal
bond market.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period. Total return assumes the
reinvestment of all dividends and it represents the aggregate percentage or
dollar value change over the period.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
9
<PAGE> 10
PORTFOLIO STATISTICS
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- -AVERAGE ANNUAL TOTAL RETURNS*
- ------------------------------------------------------------------------------------------------------------------
FOR PERIOD ENDED SEPTEMBER 30, 1996 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
LIFE OF
1-YEAR CLASS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
CLASS A 1.26% 6.82% (SINCE 11/1/94)
- ------------------------------------------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
CLASS B 0.37 6.00 (SINCE 11/1/94)
- ------------------------------------------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
CLASS C 3.26 7.58 (SINCE 11/1/94)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Intermediate Municipal Bond Fund Class A
from 11/1/94 through 9/30/96
- --------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
11/1/94 12/31/94 12/31/95 9/30/96
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -KEMPER INTERMEDIATE MUNICIPAL BOND FUND
CLASS A(1) 10,000 9,853 11,241 11,350
- -LEHMAN BROTHERS MUNICIPAL
BOND INDEX+ 10,000 10,035 11,787 12,003
- -CONSUMER PRICE INDEX++ 10,000 10,013 10,268 10,555
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Kemper Intermediate Municipal
Bond Fund Class B
from 11/1/94 through 9/30/96
- --------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
11/1/94 12/31/94 12/31/95 9/30/96
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -KEMPER INTERMEDIATE MUNICIPAL BOND FUND
CLASS B(1) 10,000 10,117 11,431 11,184
- -LEHMAN BROTHERS MUNICIPAL
BOND INDEX+ 10,000 10,035 11,787 12,003
- -CONSUMER PRICE INDEX++ 10,000 10,013 10,268 10,555
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Kemper Intermediate Municipal
Bond Fund Class C
from 11/1/94 through 9/30/96
- --------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
11/1/94 12/31/94 12/31/95 9/30/96
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -KEMPER INTERMEDIATE MUNICIPAL BOND FUND
CLASS C(1) 10,000 10,133 11,463 11,507
- -LEHMAN BROTHERS MUNICIPAL
BOND INDEX+ 10,000 10,035 11,787 12,003
- -CONSUMER PRICE INDEX++ 10,000 10,013 10,268 10,555
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
* Average annual total return measures net investment income and capital gain
or loss from portfolio investments, assuming reinvestment of all dividends and
for A shares adjustment for the maximum sales charge of 2.75%, for B shares
adjustment for the applicable contingent deferred sales charge (CDSC) of 3% and
for C shares no adjustment for sales charge. The maximum B share CDSC is 4%.
For C shares purchased after 4/1/96 there is a 1% CDSC on certain redemptions
within the first year of purchase. Average annual return reflects annualized
change. During the periods noted, securities prices fluctuated. For additional
information, see the Prospectus and Statement of Additional Information and the
Financial Highlights at the end of this report.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for A shares and the contingent deferred sales charge in
effect at the end of the period for B shares. In comparing the Kemper Municipal
Bond Fund to the Lehman Brothers Municipal Bond Index, you should note that the
fund's performance reflects the maximum sales charge, while no such charges are
reflected in the performance of the index.
+ 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, have been issued as a part of an
issue of at least $50 million, have been issued within the last five years, and
have 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.
Source is Towers Data Systems.
++ The Consumer Price Index is a statistical measure of change, over time,
in the prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source is
Towers Data Systems.
10
<PAGE> 11
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
ON 9/30/96 ON 9/30/95
- --------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 70% 69%
- --------------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 25 20
- --------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 3 7
- --------------------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 4
- --------------------------------------------------------------------------------------
100% 100%
[PIE CHART]
QUALITY
<CAPTION>
- --------------------------------------------------------------------------------------
ON 9/30/96 ON 9/30/95
<S> <C> <C>
- --------------------------------------------------------------------------------------
AAA 62% 76%
- --------------------------------------------------------------------------------------
AA 16 9
- --------------------------------------------------------------------------------------
A 4 2
- --------------------------------------------------------------------------------------
BBB 16 13
- --------------------------------------------------------------------------------------
NOT RATED 2 --
- --------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
* Portfolio composition and holdings are subject to change.
11
<PAGE> 12
PORTFOLIO STATISTICS
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
ON 9/30/96 ON 9/30/95
- --------------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 78% 73%
- --------------------------------------------------------------------------------------
11-20 YEARS 22 27
- --------------------------------------------------------------------------------------
100% 100%
[PIE CHART]
AVERAGE MATURITY
<CAPTION>
- --------------------------------------------------------------------------------------
ON 9/30/96 ON 9/30/95
- --------------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 9.1 YEARS 8.6 YEARS
- --------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
KEMPER MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL AND
INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gen. Oblg., NY:
7.75% to be called 08-15-01 @ 102 $ 3,285 $ 3,772
8.40% to be called 11-15-01 @ 102 27,540 32,574
---------------------------------------------------------------------------------------
Local Government Assistance Corp., NY, Rev., 7.375% and
7.50%, to be called 04-01-01 @ 102 9,675 10,959
---------------------------------------------------------------------------------------
Power Auth., NY, Electrical Rev., 8.00%, to be called
01-01-98 @ 102 10,000 10,681
---------------------------------------------------------------------------------------
Dormitory Auth., NY, State University Educational
Facilities, Rev., 7.25%, to be called 05-15-02 @ 102 3,810 4,353
---------------------------------------------------------------------------------------
Municipal Water Finance Auth., NY, Water and Sewer
System, Rev., 7.00%, to be called 06-15-01 @ 101 970 1,067
---------------------------------------------------------------------------------------
Public Power Supply System, WA, Nuclear Proj. #2, Rev.,
7.00%, to be called 07-01-00 @ 102 57,355 63,168
---------------------------------------------------------------------------------------
Philadelphia, PA:
Gas Works Rev., 7.70%, to be called 06-15-01 @ 102 14,850 16,990
Municipal Auth., Criminal Justice Center, Rev., 7.80%,
to be called 04-01-98 @ 102 4,000 4,410
---------------------------------------------------------------------------------------
Industrial Dev. Auth., PA, Economic Dev. Rev., 7.00%,
to be called 07-01-01 @ 102 5,000 5,561
---------------------------------------------------------------------------------------
City and County of Denver, CO, Airport System Rev.,
7.25% and 7.50%, to be called 11-15-02 @ 102 8,690 10,040
---------------------------------------------------------------------------------------
Health Facilities Auth., CO, Vail Valley Medical Center,
Rev., 8.125%, to be called 06-01-99 @ 102 7,000 7,726
---------------------------------------------------------------------------------------
Metropolitan Denver Sewerage Disposition District No. 1,
CO., Rev., 6.75%, to be called 10-01-96 @ 102 5,540 5,596
---------------------------------------------------------------------------------------
Colorado Springs, CO, County Utility Rev., 6.75%,
to be called 11-15-01 @ 102 2,890 3,210
---------------------------------------------------------------------------------------
Clermont County Hospital Facilities, OH, Mercy Health
Systems, Rev., 7.50%:
to be called 09-01-99 @ 102 7,720 8,506
to be called 09-01-01 @ 100 2,280 2,559
---------------------------------------------------------------------------------------
Muskingum County, OH, Franciscan Health Advisory
Services, Inc., Rev., 7.50%, to be called 03-01-97 @
102 7,470 7,731
---------------------------------------------------------------------------------------
Franklin County, OH, Mount Carmel Health Hospital, Rev.,
7.25%, to be called 06-01-00 @ 102 5,495 6,081
---------------------------------------------------------------------------------------
Hospital Finance Auth., MI:
Henry Ford Health Systems, Rev., 7.00%, to be called
07-01-00 @ 102 11,000 12,099
Sisters of Mercy Health Corp., Rev., 7.50%, to be
called 08-15-97 @ 103 9,000 9,521
---------------------------------------------------------------------------------------
Hospital Auth. of Marion County, IN, University Heights
Hospital, Rev., 8.625%, to be called 10-01-99 @ 102 7,195 8,158
---------------------------------------------------------------------------------------
Trustees of Purdue University, IN, Student Fees, Rev.,
6.75%, to be called 07-01-01 @ 102 6,300 6,960
---------------------------------------------------------------------------------------
State Toll Road Financing Auth., IN, Rev., 6.875%,
to be called 01-01-97 @ 102 4,000 4,111
---------------------------------------------------------------------------------------
Health and Educational Facilities Auth., MO, Christian
Health Services Dev. Corp., Rev., 6.875%, to be called
02-15-01 @ 102 7,000 7,720
---------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
St. Louis County, MO, Regional Convention & Sports
Complex Auth., Rev., 7.00%, to be called 08-15-03 @ 100 $ 4,380 $ 4,930
---------------------------------------------------------------------------------------
Charleston County, SC, Charleston Public Facilities
Corp., Certificates of Participation, Rev., 6.875% and 7.00%,
to be called 06-01-04 @ 102 7,260 8,303
---------------------------------------------------------------------------------------
Lancaster County Water and Sewer District, SC, Waterworks
and Sewer System Improvement, Rev., 6.75%,
to be called 05-01-01 @ 102 3,000 3,311
---------------------------------------------------------------------------------------
Matagorda County, TX, Navigation District Number 1, Central
Power and Light Company, Pollution Control, Rev.,
7.875%, to be called 12-01-96 @ 102 10,890 11,178
---------------------------------------------------------------------------------------
Austin TX, Water, Sewer and Electric Rev.:
11.00% to be called 05-15-99 @ 100 80 81
14.00% to be called 05-01-01 @ 100 55 69
---------------------------------------------------------------------------------------
Albuquerque Southwest Community Health Services, NM,
Rev., 10.125%, to be called 08-01-08 @ 100 4,000 5,147
---------------------------------------------------------------------------------------
Resource Recovery Auth., CT, Mid-Connecticut Systems,
Rev., 7.30%, to be called 11-15-96 @ 103 4,790 4,954
---------------------------------------------------------------------------------------
Gaithersburg, MD, First Mortgage Economic Dev., Asbury
Methodist Home Incorporated, Rev., 7.85%, to be called
01-01-00 @ 102 4,000 4,477
---------------------------------------------------------------------------------------
Riverside County, CA, Riverside Juvenile Facilities
Corp., Certificates of Participation, Rev., 8.00%, to
be called 10-01-98 @ 102 4,000 4,373
---------------------------------------------------------------------------------------
Essex County Improvement Auth., NJ, County Jail and Youth
Housing Proj., Lease Rev., 6.90%, to be called 12-01-04
@ 102 2,645 3,036
---------------------------------------------------------------------------------------
South Essex Sewerage District, MA, Gen. Oblg., 6.75%,
to be called 06-01-04 @ 102 2,000 2,265
---------------------------------------------------------------------------------------
Chicago, IL, Tax Increment Allocation Bonds, Central
Station, Rev., 8.90%, to be called 01-01-05 @ 100 1,805 2,165
---------------------------------------------------------------------------------------
Kenton County Airport Board, KY, Greater Cincinnati
International Airport, Rev., 8.25%, to be called
03-01-96 @ 102 1,620 1,742
---------------------------------------------------------------------------------------
Jacksonville Health Facilities Auth., FL, Baptist Medical
Center, Rev., 11.50%:
to be called 10-01-03 @ 100 10 14
to be called 10-01-04 @ 100 35 50
to be called 10-01-05 @ 100 55 81
---------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--9.3% 309,729
- -----------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------
ILLINOIS--8.9% Chicago:
Board of Education, Gen. Oblg., 6.00% and 6.25%,
2009 and 2020 26,235 27,734
Gas Supply, Peoples Gas, Light and Coke Company, Rev.,
8.10%, 2020 8,250 9,135
---------------------------------------------------------------------------------------
City of East St. Louis, Illinois Dev. Finance Auth., Debt
Restructuring Rev., 7.50%, 2013 3,750 4,104
---------------------------------------------------------------------------------------
County of Cook, Gen. Oblg., 6.50% to 9.50%, 1996
through 2022 71,095 77,686
---------------------------------------------------------------------------------------
Dev. Finance Auth., Pollution Control, Commonwealth
Edison Company Proj., Rev., 6.75%, 2015 16,780 18,242
---------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Freeport, Single Family Mortgage Rev., 7.40%, 2010 $ 1,400 $ 1,404
---------------------------------------------------------------------------------------
Gen. Oblg., 5.25% and 5.75%, 2020 through 2017 11,260 10,893
---------------------------------------------------------------------------------------
Harvard, Multifamily Housing, Northfield Court, Rev.,
8.80%, 2008 3,855 4,105
---------------------------------------------------------------------------------------
Health Facilities Auth.:
Northwestern Medical Faculty Foundation, Inc.,
Healthcare Facilities Rev., 6.50%, 2015 3,900 4,220
South Suburban Hospital, Rev., 7.00%, 2009 7,750 8,390
---------------------------------------------------------------------------------------
Madison County, Gen. Oblg., 5.85%, 2013 3,500 3,613
---------------------------------------------------------------------------------------
O'Hare International Airport:
General Rev., 6.00% and 6.375%, 2012 38,580 39,594
International Terminal, Special Rev., 6.75%, 2018 23,350 24,822
---------------------------------------------------------------------------------------
Regional Transportation Auth., Gen. Oblg., 6.70%, 2021 25,800 29,389
---------------------------------------------------------------------------------------
Skyway Toll Bridge Rev., 6.75%, 2014 15,400 15,917
---------------------------------------------------------------------------------------
Sports Facilities Auth., Rev., 7.875%, 2010 2,990 3,278
---------------------------------------------------------------------------------------
St. Charles, Wessel Court Proj., Multifamily Housing
Rev., 7.60%, 2024 3,895 3,984
---------------------------------------------------------------------------------------
University Park, Governors Gateway Industrial Park, Tax
Increment Rev., 8.50%, 2011 2,965 3,209
---------------------------------------------------------------------------------------
Wastewater Transmission, Rev., 5.375%, 2013 4,770 4,677
--------------------------------------------------------------------------------------
294,396
- -----------------------------------------------------------------------------------------------------------------
TEXAS--7.1% Austin:
Independent School District, Gen. Oblg. 5.75%,
2013 through 2016 28,875 29,062
Combined Utility Systems Rev. 5.50% and 6.00%,
2020 and 2013 19,300 19,505
Water, Sewer and Electric Rev., 11.00% and 14.00%,
1996 and 2001 3,475 4,338
---------------------------------------------------------------------------------------
Brazos River Auth., Texas Utilities Electric Company
Proj., Rev., 8.125%, 2020 4,495 4,934
---------------------------------------------------------------------------------------
Ector County, Hospital District, Rev., 7.30%, 2012 550 598
---------------------------------------------------------------------------------------
Georgetown Higher Education Finance Corp., Southwestern
University Proj., Rev., 6.25%, 2009 840 867
---------------------------------------------------------------------------------------
Grand Prairie Independent School District, Gen. Oblg.,
5.20%, 2024 8,000 7,475
---------------------------------------------------------------------------------------
Harris County:
Hospital District, Mortgage Rev., 7.40%, 2010 6,940 8,205
Toll Road Unlimited Tax and Subordinate Lien,
Rev., 6.75%, 2014 15,000 16,300
---------------------------------------------------------------------------------------
Housing Agcy., Single Family Mortgage Rev., 7.15%, 2012 985 1,023
---------------------------------------------------------------------------------------
Houston:
Higher Education Finance Corp., University of St.
Thomas, Rev., 7.25%, 2007 1,445 1,552
Water and Sewer Junior Lien, Rev., 6.20%, 2020 10,000 10,407
---------------------------------------------------------------------------------------
Independent School District, Rev., 5.60% and 5.75%,
2011 and 2013 34,440 34,683
---------------------------------------------------------------------------------------
Matagorda County, Navigation District Number 1, Houston
Lighting and Power Company, Pollution Control, Rev.,
7.875%, 2016 13,735 14,041
---------------------------------------------------------------------------------------
Mc Allen, Health Facilities Dev. Corp., Rev., 5.00%, 2015 5,800 5,315
---------------------------------------------------------------------------------------
Northcentral Texas Presbyterian Healthcare Rev., 5.75%,
2026 7,000 6,671
---------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rio Grande Valley, Health Facilities Dev. Corp., Golden
Palms Retirement and Health Center, Rev., 6.40%, 2012 $ 3,700 $ 3,915
---------------------------------------------------------------------------------------
Sabine River Auth., Texas Utilities Electric Company,
Rev., 6.10% and 8.125%, 2018 and 2020 13,920 14,379
---------------------------------------------------------------------------------------
State Gen. Oblg., 7.00%, 2012 10,739 10,868
---------------------------------------------------------------------------------------
Titus County Hospital District Improvement, Rev., 6.125%,
2013 6,700 6,506
---------------------------------------------------------------------------------------
Travis County Housing Finance Corp., Residential
Mortgage, Senior Rev., 7.00%, 2011 415 438
---------------------------------------------------------------------------------------
Turnpike Auth., Dallas North Tollway System, Rev., 5.00%
and 5.25%, 2025, and 2023 38,195 35,068
--------------------------------------------------------------------------------------
236,150
- -----------------------------------------------------------------------------------------------------------------
NEW JERSEY--6.4% Bayshore Regional Sewerage Auth. Rev., 5.50%, 2012 7,170 7,173
---------------------------------------------------------------------------------------
Camden County Municipal Utilities Auth., Rev., 8.25%,
2017 15,600 16,665
---------------------------------------------------------------------------------------
Essex County, Property and Equipment Improvement Leasing
Program, Rev., 6.50%, 2012 4,050 4,389
---------------------------------------------------------------------------------------
Health Care Facilities Financing Auth.:
Atlantic City Medical Center, Rev., 6.80%, 2011 6,840 7,332
Southern Ocean County Hospital, Rev., 6.125%, 2013 3,735 3,665
West Jersey Health System, Rev., 6.125%, 2012 11,000 11,410
---------------------------------------------------------------------------------------
Jersey City Sewer Auth., Rev., 4.50%, 2019 13,000 10,909
---------------------------------------------------------------------------------------
Transportation System Bonds, Rev., 5.125% to 5.50%, 2011
through 2014 30,020 29,377
---------------------------------------------------------------------------------------
Turnpike Auth., Rev., 6.20% and 10.375%, 2016 and 2003 104,245 115,583
---------------------------------------------------------------------------------------
Wastewater Treatment Trust, Rev., 6.625%, 2007 4,340 4,857
--------------------------------------------------------------------------------------
211,360
- -----------------------------------------------------------------------------------------------------------------
CALIFORNIA--6.3% Central Valley Financing Auth., Cogeneration Proj.,
Carson Ice, Rev., 6.00%, 2009 6,000 5,981
---------------------------------------------------------------------------------------
City of Los Angeles, Department of Water & Power,
Electric Plant, Rev., 4.75%, 2012 through 2019 12,725 11,239
---------------------------------------------------------------------------------------
City of Santa Clara, Sports and Open Space Auth.,
Certificates of Participation, Rev., 4.75%, 2014 5,000 4,478
---------------------------------------------------------------------------------------
Department of Corrections, Rev., 5.40% to 5.80%, 2009
through 2017 32,665 32,683
---------------------------------------------------------------------------------------
Duarte, City of Hope National Medical Center,
Certificates of Participation, Rev., 6.00%, 2008 9,930 9,952
---------------------------------------------------------------------------------------
Foothill/Eastern Transit Corridor Agcy., Tollroad Rev.,
zero-coupon to 6.50%, 2016 through 2032 125,520 52,118
---------------------------------------------------------------------------------------
Gen. Oblg., 5.25%, 2020 10,200 9,547
---------------------------------------------------------------------------------------
Health Facilities, Childrens Hospital Rev., 5.375%, 2020 10,475 9,988
---------------------------------------------------------------------------------------
Imperial Irrigation District, Certificates of
Participation, Electric System Proj., Rev., 6.75%, 2011 3,500 3,862
---------------------------------------------------------------------------------------
Los Angeles County:
Metropolitan Sales Tax Rev., 6.00%, 2020 18,865 19,173
Public Works Financing Auth., Rev., 4.75%, 2010 5,000 4,590
---------------------------------------------------------------------------------------
Orange County, Recovery Certificates of Participation,
Rev., 5.60% to 5.875%, 2009 through 2019 21,370 21,547
---------------------------------------------------------------------------------------
Regents of University of California, Multiple Purpose
Proj., Rev., 4.875% and 5.70%, 2011 and 2019 17,295 16,628
---------------------------------------------------------------------------------------
Southern California Rapid Transit District, Rev., 5.90%,
2007 6,800 7,243
--------------------------------------------------------------------------------------
209,029
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COLORADO--6.3% Adams County, Gen. Oblg., 6.125%, 2007 $ 4,280 $ 4,527
---------------------------------------------------------------------------------------
Arapahoe County, Public Highway Auth., Rev., 6.95% and
7.00%, 2020 and 2026 80,700 85,747
---------------------------------------------------------------------------------------
City and County of Denver:
Airport System Rev., 5.75% to 8.75%, 2002 through 2023 69,065 74,752
Gen. Oblg., 6.50%, 2010 6,225 6,853
---------------------------------------------------------------------------------------
Douglas County School District No. 1, Douglas and Elbert
Counties, Gen. Oblg., 6.50%, 2016 16,665 17,945
---------------------------------------------------------------------------------------
Health Facilities Auth., Covenant Retirement Communities,
Inc., Rev., 6.75%, 2015 and 2025 5,900 6,007
---------------------------------------------------------------------------------------
Housing Finance Auth., Single Family Mortgage Rev.,
7.65%, 2022 705 737
---------------------------------------------------------------------------------------
Metropolitan Wastewater Reclamation District, Gen. Oblg.,
6.00%, 2010 11,505 11,832
--------------------------------------------------------------------------------------
208,400
- -----------------------------------------------------------------------------------------------------------------
NEW YORK--5.9% Dormitory Auth.:
State University Educational Facility, Rev.,
5.50% to 5.75%, 2013 25,500 25,072
City University System, Special Oblg., Rev., 6.00%,
2014 7,000 7,110
---------------------------------------------------------------------------------------
Environmental Quality, Gen. Oblg., 6.50%, 2011 4,260 4,623
---------------------------------------------------------------------------------------
Environmental Facilities Corp., State Water Pollution
Control, Revolving Fund Rev., 6.875% to 7.25%, 2010
through 2014 18,875 20,983
---------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy.:
Hospital, Mortgage Rev., 6.75%, 2014 8,000 8,762
Hospital and Nursing Home, Rev., 6.45%, 2009 8,905 9,567
Mental Health Services Facilities Improvement, Rev.,
7.75%, 2010 3,935 4,358
---------------------------------------------------------------------------------------
Metropolitan Transit Auth., Transit Facilities, Rev.,
6.25%, 2014 6,000 6,319
---------------------------------------------------------------------------------------
New York City:
Gen. Oblg., 5.875% to 8.40%, 2000 through 2019 30,150 30,809
Industrial Dev. Auth., USTA National Tennis Center Inc.
Proj., Civil Facility Rev., 6.50% and 6.60%, 2010 and
2011 6,485 7,048
Municipal Water Finance Auth., Rev., 7.00%, 2015 530 588
---------------------------------------------------------------------------------------
Port Auth. of New York and New Jersey:
LaGuardia Airport Passenger Terminal, Special
Obligation, Rev., 9.125%, 2015 3,225 3,567
Rev., 6.00% to 9.125%, 2008 through 2015 14,445 15,019
---------------------------------------------------------------------------------------
Triborough Bridge and Tunnel Auth., Rev., 8.125%, 2012 14,000 14,940
---------------------------------------------------------------------------------------
Urban Dev. Corp., Correctional Facilities, Rev., 5.25% to
5.70%, 2014 through 2025 39,425 36,431
--------------------------------------------------------------------------------------
195,196
- -----------------------------------------------------------------------------------------------------------------
PENNSYLVANIA--4.1% Armstrong County Hospital Auth., St. Francis Medical
Center Proj., Rev., 6.25%, 2013 11,350 11,829
---------------------------------------------------------------------------------------
Bethlehem Area School District, Gen. Oblg., 6.00%, 2016 9,500 9,702
---------------------------------------------------------------------------------------
City of Pittsburgh, Public Finance Auth., Wastewater
Rev., 4.75%, 2016 8,335 7,367
---------------------------------------------------------------------------------------
Columbia County, Industrial Dev. Auth., First Mortgage
Rev., 9.00%, 2014 1,600 1,699
---------------------------------------------------------------------------------------
Convention Center Auth., Rev., 6.70% and 6.75%, 2014 and
2019 12,525 13,392
---------------------------------------------------------------------------------------
Intergovernmental Cooperation Auth., Rev., 5.50% and
5.60%, 2016 and 2012 9,785 9,693
---------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lehigh County, General Purpose Auth., Lehigh Valley
Hospital Inc., Rev., 6.50%, 2010 $ 6,000 $ 6,455
---------------------------------------------------------------------------------------
McKean County Hospital Auth., Bradford Hospital Proj.,
Rev., 5.95% to 6.10%, 2008 through 2020 8,300 7,940
---------------------------------------------------------------------------------------
Monroeville, Hospital Auth., Forbes Health System, Rev.,
6.25%, 2015 6,375 6,423
---------------------------------------------------------------------------------------
Philadelphia:
Gas Works Rev., 5.25% and 6.375%, 2014 and 2015 35,180 35,437
Municipal Auth., Lease Rev., 6.125% to 6.30%, 2013
through 2017 8,800 8,856
Water & Wastewater, Rev., 5.00% and 5.60%, 2016 and
2018 18,260 17,633
--------------------------------------------------------------------------------------
136,426
- -----------------------------------------------------------------------------------------------------------------
FLORIDA--3.9% Alachua County Public Improvement Rev., 5.125%, 2021 5,000 4,623
---------------------------------------------------------------------------------------
Board of Education, Capital Outlay, Public Education,
Gen. Oblg., 5.30% and 6.40%, 2009 and 2019 25,640 26,903
---------------------------------------------------------------------------------------
Broward County:
Airport System Rev., 7.625%, 2013 2,620 2,825
Waste Energy Company, Rev., 7.95%, 2008 13,305 14,664
---------------------------------------------------------------------------------------
City of Gainsville, Utility System, Rev. 5.20%, 2022 and
2026 15,150 14,101
---------------------------------------------------------------------------------------
City of South Miami Health Facilities Auth., Baptist
Health Systems Obligated Group, Rev., 5.37%, 2016 3,000 2,897
---------------------------------------------------------------------------------------
Dade County Aviation, Rev., 5.75%, 2011 7,500 7,558
---------------------------------------------------------------------------------------
Department of Environmental Protection, Rev., 5.25%, 2008 6,000 5,997
---------------------------------------------------------------------------------------
Greater Orlando Aviation Auth., Rev., 8.375%, 2016 3,065 3,319
---------------------------------------------------------------------------------------
Hillsborough County Industrial Dev. Auth., Tampa
Electric, Rev., 8.00%, 2022 10,000 11,623
---------------------------------------------------------------------------------------
Jacksonville Health Facilities Auth., Baptist Medical
Center, Rev., 11.50%, 2012 85 138
---------------------------------------------------------------------------------------
Manatee County, Public Utilities, Rev., 4.75%, 2013 5,340 4,763
---------------------------------------------------------------------------------------
Palm Beach County, Solid Waste Auth., Rev., 8.75%, 2010 13,755 14,540
---------------------------------------------------------------------------------------
Pasco County, Solid Waste Disposal and Resource Recovery,
Rev., 7.80%, 2011 13,730 14,687
--------------------------------------------------------------------------------------
128,638
- -----------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--3.7% Bay Transit Auth., General Transportation System, Rev.,
5.50% to 6.20%, 2012 through 2016 37,015 38,292
---------------------------------------------------------------------------------------
Consolidated Loan Series B, Gen. Oblg., 5.375% to 5.50%,
2009 through 2012 20,220 20,153
---------------------------------------------------------------------------------------
Municipal Wholesale Electric Company, Power Supply
System, Rev., 6.625% to 6.75%, 2011 through 2018 31,445 32,914
---------------------------------------------------------------------------------------
Port Auth., Rev., 13.00%, 2013 1,500 2,506
---------------------------------------------------------------------------------------
State, Gen. Oblg., 6.50%, 2011 17,300 18,339
---------------------------------------------------------------------------------------
Water Restoration Auth., Rev., 4.75% to 5.25%, 2015
through 2023 10,700 9,583
--------------------------------------------------------------------------------------
121,787
- -----------------------------------------------------------------------------------------------------------------
OHIO--3.5% Building Auth., Workers Compensation Facility, William
Green Building, Rev., 4.75%, 2014 13,230 11,775
---------------------------------------------------------------------------------------
City of Springdale, Hospital Facilities First Mortgage,
Southwestern Ohio Seniors Services, Rev., 6.00%, 2018 1,250 1,190
---------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cleveland, Public Power System Improvement, First
Mortgage Rev., 7.00%, 2017 $ 850 $ 902
---------------------------------------------------------------------------------------
Cuyahoga County, Merida Health System, Hospital Rev.,
6.25%, 2014 7,050 7,203
---------------------------------------------------------------------------------------
Higher Education Facility Commission, Rev., 6.70%, 2003 6,725 7,283
---------------------------------------------------------------------------------------
Marion County Health Care Facilities and Improvement,
United Church Homes Proj., Rev., 6.30% and 6.375%,
2015 and 2010 5,350 5,248
---------------------------------------------------------------------------------------
Scioto County USHCSO-Portsmouth Proj., Hospital
Facilities, Rev., 7.625%, 2015 2,000 2,141
---------------------------------------------------------------------------------------
Turnpike Rev., 5.50% to 5.80%, 2010 through 2015 27,730 27,932
---------------------------------------------------------------------------------------
Village of Green Springs, St. Francis Health Care Center
Proj., Rev., 7.00% and 7.125%, 2014 and 2025 8,640 8,839
---------------------------------------------------------------------------------------
Water Dev. Auth., Pollution Control, Rev., 5.50%, 2014 3,500 3,474
---------------------------------------------------------------------------------------
Waterworks, First Mortgage Rev., 5.625% and 6.50%, 2011
and 2021 32,565 32,846
---------------------------------------------------------------------------------------
Worthington City School District, Gen. Oblg., 6.375%,
2012 6,210 6,564
--------------------------------------------------------------------------------------
115,397
- -----------------------------------------------------------------------------------------------------------------
MISSOURI--2.9% Clarence Cannon Wholesale Water Commission, Water Rev.,
6.00%, 2020 10,000 9,247
---------------------------------------------------------------------------------------
Health and Educational Facilities Auth., Rev., 5.125%,
2016 5,000 4,725
---------------------------------------------------------------------------------------
Kansas City Municipal Assistance, Leasehold -H- Roe
Bartle, Rev., 5.00%, 2020 22,235 20,406
---------------------------------------------------------------------------------------
Lake of the Ozarks Community Bridge Corp., Bridge System,
Rev., 6.25% and 6.40%, 2016 and 2025 7,800 7,576
---------------------------------------------------------------------------------------
Sikeston, Electric System, Rev., 5.00% to 6.20%, 2010
through 2022 11,070 11,334
---------------------------------------------------------------------------------------
St. Louis:
Gen. Oblg., 7.90%, 2021 5,000 5,490
Scullin Redev. Proj., Tax Increment Rev., 10.00%, 2010 8,705 10,459
---------------------------------------------------------------------------------------
Water Pollution Control, Rev., 5.50% to 5.75%,
2014 through 2018 25,850 26,215
--------------------------------------------------------------------------------------
95,452
- -----------------------------------------------------------------------------------------------------------------
GEORGIA--2.7% Chatham County School District, Gen. Oblg., 6.15%, 2010 7,300 7,607
---------------------------------------------------------------------------------------
City of Atlanta, Water and Sewerage, Rev., 4.50%, 2018 16,000 13,485
---------------------------------------------------------------------------------------
Fulton -- DeKalb Hospital Auth., Rev., 6.55% and 6.60%,
2018 and 2028 24,600 25,153
---------------------------------------------------------------------------------------
Metropolitan Atlanta Rapid Transit Auth., Sales Tax,
Rev., 6.70%, 2012 4,600 5,027
---------------------------------------------------------------------------------------
Municipal Electric Auth.:
Power Rev., 4.75% to 8.125%, 2012 through 2019 33,955 33,515
Special Obligation, 6.60%, 2018 3,500 3,948
--------------------------------------------------------------------------------------
88,735
- -----------------------------------------------------------------------------------------------------------------
MICHIGAN--2.6% Building Auth., Rev., 6.75%, 2011 9,750 10,420
---------------------------------------------------------------------------------------
City of Battle Creek and Calhoun County, Downtown Dev.
Auth., Tax Increment Rev., 7.60% 2016 3,800 4,235
---------------------------------------------------------------------------------------
Detroit, Gen. Oblg., 5.00% to 6.80%, 2010 through 2015 20,910 20,499
---------------------------------------------------------------------------------------
Hospital Finance Auth.:
Gratiot Community Hospital, Rev., 6.10%, 2007 2,250 2,240
McLaren Oblg. Group, Rev., 4.50% and 5.38%. 2013 and
2021 28,185 22,782
---------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kalamazoo Hospital Finance Auth., Rev., 5.75%, 2016 $ 7,915 $ 7,891
---------------------------------------------------------------------------------------
Municipal Bond Auth., State Revolving Fund, Rev., 5.625%,
2019 5,000 4,911
---------------------------------------------------------------------------------------
Underground Storage Tank Financial Assurance Auth., Rev.,
5.50%, 2009 14,840 14,869
--------------------------------------------------------------------------------------
87,847
- -----------------------------------------------------------------------------------------------------------------
MARYLAND--2.4% City of Gaithersburg, Economic Dev., Auth., Asbury
Methodist Home Incorporated, First Mortgage Rev.,
5.50%, 2015 and 2020 15,500 14,566
---------------------------------------------------------------------------------------
Community Dev. Administration, Department of Housing and
Community Dev., Rev., 7.85%, 2029 4,555 4,648
---------------------------------------------------------------------------------------
Energy Financing Administration, AES Warrior Run Proj.,
Rev., 7.40%, 2019 24,100 25,260
---------------------------------------------------------------------------------------
Health & Higher Educational Facilities Auth., Doctors'
Community Hospital Proj., Rev., 5.50% and 5.75%, 2024
and 2013 17,885 16,090
---------------------------------------------------------------------------------------
Northeast Maryland Waste Disposal Auth., Southwest
Resource Recovery Facility, Rev., 7.20%, 2006 1,500 1,723
---------------------------------------------------------------------------------------
Stadium Auth., Sports Facilities Lease Rev., 7.60%, 2019 17,200 18,896
--------------------------------------------------------------------------------------
81,183
- -----------------------------------------------------------------------------------------------------------------
NEVADA--2.3% City of Reno, Redev. Agcy., Tax Allocation Rev., 5.65%
and 5.75%, 2013 and 2017 7,165 6,631
---------------------------------------------------------------------------------------
Clark County School District, Gen. Oblg., 5.90% to 6.00%,
2012 through 2015 44,885 45,852
---------------------------------------------------------------------------------------
Colorado River Commission, Gen. Oblg., 5.30%, 2024 5,000 4,706
---------------------------------------------------------------------------------------
Henderson, Healthcare Facilities Rev., 5.00%, 2020 6,915 6,276
---------------------------------------------------------------------------------------
Humboldt County, Pollution Control, Idaho Power Company,
Rev., 8.30%, 2014 9,650 11,297
--------------------------------------------------------------------------------------
74,762
- -----------------------------------------------------------------------------------------------------------------
INDIANA--2.2% Health Facility Financing Auth., Fayette Memorial
Hospital, Rev., 7.20%, 2022 1,800 1,822
---------------------------------------------------------------------------------------
Indianapolis Airport Auth.:
Local Public Improvement Bond, Transportation Rev.,
6.60% and 6.75%, 2007 and 2014 14,000 15,599
Maintenance Center Proj., Rev., 6.50%, 2031 21,100 21,040
---------------------------------------------------------------------------------------
Office Building Correctional Facilities, Rev. 5.50%, 2020 10,500 10,102
---------------------------------------------------------------------------------------
Transportation Financing Auth., Highway Rev., 5.75% and
7.25%, 2012 and 2015 7,000 7,792
---------------------------------------------------------------------------------------
Trustees of Purdue University, Student Fees, Rev., 6.75%
and 6.70%, 2009 and 2015 14,500 15,826
--------------------------------------------------------------------------------------
72,181
- -----------------------------------------------------------------------------------------------------------------
MINNESOTA--1.5% City of Minneapolis, Housing Redev. Auth. Health Care
System, Rev., 4.75%, 2018 36,200 31,596
---------------------------------------------------------------------------------------
City of St. Louis Park, Methodist Hospital Proj., Rev.,
7.25%, 2015 6,650 7,369
---------------------------------------------------------------------------------------
Housing Finance Agcy., Single Family Mortgage Bonds,
Rev., 7.90%, 2019 5,710 5,970
---------------------------------------------------------------------------------------
Western Minnesota Municipal Power Agency, Rev., 5.50%,
2011 and 2012 6,285 6,255
--------------------------------------------------------------------------------------
51,190
</TABLE>
20
<PAGE> 21
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALABAMA--1.4% Birmingham-Jefferson Civic Center Auth., Capital Outlay,
Special Tax Rev., 7.40%, 2008 $ 12,000 $ 12,893
---------------------------------------------------------------------------------------
City of Mobile, Mobile Energy Services, Industrial Dev.
Board, Rev., 6.95%, 2020 22,000 23,235
---------------------------------------------------------------------------------------
Hoover, Gen. Oblg., 4.50%, 2013 8,545 7,432
---------------------------------------------------------------------------------------
University of South Alabama, Hospital and Auxiliary Rev.,
4.75%, 2010 4,000 3,663
---------------------------------------------------------------------------------------
47,223
- -----------------------------------------------------------------------------------------------------------------
WASHINGTON--1.2% Public Power Supply System:
Nuclear Proj. #1, Rev., 5.75%, 2010 and 2011 15,000 15,030
Nuclear Proj. #3, Rev., 5.375%, 2015 21,410 20,388
---------------------------------------------------------------------------------------
Snohomish County, Gen. Oblg., 5.70%, 2012 5,140 5,241
---------------------------------------------------------------------------------------
40,659
- -----------------------------------------------------------------------------------------------------------------
ARKANSAS--1.2% Jonesboro Residential Housing & Health Care Facilities
Board, Rev., 5.80%, 2012 4,025 4,093
---------------------------------------------------------------------------------------
North Little Rock, Electric System, Rev., 6.50%, 2010 and
2015 31,830 35,301
---------------------------------------------------------------------------------------
39,394
- -----------------------------------------------------------------------------------------------------------------
NEBRASKA--1.0% Investment Finance Auth., Rev., 6.70%, 2026 3,520 3,640
---------------------------------------------------------------------------------------
Omaha, Public Power District Electric System, Rev., 5.50%
and 6.20%, 2014 and 2017 12,850 13,320
---------------------------------------------------------------------------------------
Public Power District, Rev., 5.50%, 2013 11,455 11,375
---------------------------------------------------------------------------------------
Scotts Bluff County, Hospital Auth., West Medical Proj.
Center, Rev., 6.45%, 2004 4,535 4,855
---------------------------------------------------------------------------------------
33,190
- -----------------------------------------------------------------------------------------------------------------
TENNESSEE--1.0% Housing Dev. Agcy., Mortgage Finance Program, Rev., 7.05%
and 7.125%, 2020 and 2026 25,980 26,935
---------------------------------------------------------------------------------------
Metropolitan Nashville Airport Auth., Airport
Improvement, Rev., 6.60%, 2015 5,250 5,657
---------------------------------------------------------------------------------------
32,592
- -----------------------------------------------------------------------------------------------------------------
STATES LESS THAN D.C., Gen. Oblg., 6.30%, 2010 4,500 4,660
ONE PERCENT--10.4%
---------------------------------------------------------------------------------------
D.C., Georgetown University, Rev., 8.25%, 2018 11,410 12,258
---------------------------------------------------------------------------------------
D.C., Metropolitan Washington Airports Auth., Airport
System Rev., 7.60%, 2014 3,000 3,277
---------------------------------------------------------------------------------------
D.C., Redevelopment Land Agcy., Sports Arena Special Tax,
Rev., 5.625%, 2010 9,850 9,528
---------------------------------------------------------------------------------------
KY, Dev. Finance Auth., Baptist Hospital Inc., Rev.,
7.625%, 2011 2,000 2,156
---------------------------------------------------------------------------------------
KY, Hopkins County, The Trover Clinic Foundation, Rev.,
6.625%, 2011 4,000 4,316
---------------------------------------------------------------------------------------
KY, Kenton County Airport Board, Greater Cincinnati
International Airport, Rev., 7.125% and 8.25%, 2015 and
2021 19,585 20,625
---------------------------------------------------------------------------------------
KY, Trimble County, Louisville Gas & Electric Company,
Rev., 7.75%, 2019 1,840 1,941
---------------------------------------------------------------------------------------
KY, Turnpike Auth., Toll Road, Rev., 8.50%, 2004 780 799
---------------------------------------------------------------------------------------
AZ, City of Phoenix:
Gen. Oblg., 6.375%, 2013 7,400 7,873
Streets and Highway User, Rev., 6.25%, 2011 10,000 10,561
---------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AZ, Cocinino County, Industrial Dev. Auth., Health Care
Institution, The Guidance Center, Inc. Proj., Rev.,
9.25%, 2011 $ 905 $ 999
---------------------------------------------------------------------------------------
AZ, Health Facilities Auth., Hospital System, Phoenix
Baptist Hospital and Medical Center, Inc. and Medical
Environments, Inc., Rev., 6.25%, 2011 1,400 1,470
---------------------------------------------------------------------------------------
AZ, Salt River Proj., Rev., 6.25%, 2019 8,000 8,317
---------------------------------------------------------------------------------------
VA, Louden County Sanitation Auth., Water & Sewer Rev.,
5.25%, 2026 3,000 2,815
---------------------------------------------------------------------------------------
VA, Chesapeake Public School, Rev., 5.40%, 2009 5,750 5,767
---------------------------------------------------------------------------------------
VA, Richmond, Gen. Oblg., 5.00%, 2021 12,325 11,219
---------------------------------------------------------------------------------------
VA, Riverside Regional Jail Facility, Rev., 5.875%, 2014 6,985 7,129
---------------------------------------------------------------------------------------
NM, Albuquerque:
Health Care, Ltd. Proj., Rev., 9.75%, 2014 1,405 1,510
Southwest Community Health Services, Rev., 10.00%, 2003 900 1,145
---------------------------------------------------------------------------------------
NM, Los Alamos County, Utility System, Rev., 6.10%, 2010 4,400 4,578
---------------------------------------------------------------------------------------
NM, Rio Rancho Water & Wastewater System, Rev., 6.00%,
2022 12,475 12,661
---------------------------------------------------------------------------------------
NM, Socorro Hospital System, Southwest Community Health
Services, Rev., 10.00%, 2003 1,370 1,756
---------------------------------------------------------------------------------------
NM, Truth or Consequences, Nursing Home Improvement,
Sierra Health Care, Inc., Rev., 9.75%, 2014 940 1,010
---------------------------------------------------------------------------------------
OR, Portland International Airport, Rev., 5.625%, 2015
through 2026 18,965 18,477
---------------------------------------------------------------------------------------
SC, Charleston County, Public Facilities Corp.,
Certificates of Participation, Rev., 6.875% and 7.00%,
2014 and 2019 355 394
---------------------------------------------------------------------------------------
SC, Darlington County, Carolina Power & Light Company
Proj., Pollution Control, Rev., 6.60%, 2010 7,500 8,138
---------------------------------------------------------------------------------------
SC, Grand Strand, Water and Sewer, Rev., 6.375%, 2012 5,000 5,491
---------------------------------------------------------------------------------------
SC, Santee Cooper, Public Service Auth., Rev., 6.25%,
2022 7,000 7,360
---------------------------------------------------------------------------------------
UT, Davis County Solid Waste Management & Energy
Recovery, Special Service District, Rev., 6.125%, 2009 6,200 6,034
---------------------------------------------------------------------------------------
UT, Housing Finance Agcy., Single Family Mortgage Rev.,
8.625%, 2019 755 784
---------------------------------------------------------------------------------------
UT, Intermountain Power Agcy., Power Supply System, Rev.,
5.00% and 7.50%, 2021 14,770 14,070
---------------------------------------------------------------------------------------
UT, West Valley City, Salt Lake County Excise Tax, Rev.,
10.625%, 2004 925 1,146
---------------------------------------------------------------------------------------
LA, East Baton Rouge Parish, Sales & Use Tax Rev., 5.50%,
2021 4,820 4,684
---------------------------------------------------------------------------------------
LA, Parish School Board of the Parish of Jefferson, Sales
Tax, Gen. Oblg., 6.25%, 2008 11,000 11,712
---------------------------------------------------------------------------------------
AK, Energy Auth., Bradley Lake Hydroelectric Power, Rev.,
7.25%, 2016 4,675 5,095
---------------------------------------------------------------------------------------
AK, Municipality of Anchorage, Municipal Light and Power,
Electric Rev., 5.50% and 6.50%, 2015 9,000 9,413
---------------------------------------------------------------------------------------
AK, North Slope Borough, Gen. Oblg., 13.00%, 1998 635 709
---------------------------------------------------------------------------------------
IA, Finance Auth.:
GNMA Mortgage-Backed Securities Program, Single Family
Mortgage Rev., 7.90%, 2022 2,435 2,558
Trinity Regional Hospital Proj., Rev., 7.00%, 2022 12,000 12,594
---------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NC, Durham County, 1991 Jail Facilities and Computer
Equipment Financing Proj., Rev., 6.625%, 2014 $ 5,500 $ 5,786
---------------------------------------------------------------------------------------
NC, Eastern Municipal Power Agcy, Power System, Rev.,
5.125%, 2012 9,380 8,895
---------------------------------------------------------------------------------------
HI, Department of Budget and Finance, Special Purpose
Rev., 6.25%, 2021 6,000 6,163
---------------------------------------------------------------------------------------
HI, Gen. Oblg., 5.75%, 2010 5,000 5,133
---------------------------------------------------------------------------------------
OK, Valley View Hospital Auth., Rev., 5.75% and 6.00%,
2006 and 2014 7,040 6,778
---------------------------------------------------------------------------------------
OK, Woodward Municipal Auth., Hospital Rev., 6.45%, 2014 2,070 2,065
---------------------------------------------------------------------------------------
MT, Montana State University Higher Education Facilities
Auth., Rev., 5.375%, 2021 7,875 7,550
---------------------------------------------------------------------------------------
CT, Dev. Auth., Pierce Memorial Baptist Home, Rev.,
9.25%, 2018 1,140 1,256
---------------------------------------------------------------------------------------
CT, Transportation Infrastructure Purposes, Special Tax
Obligation, Rev., 6.10%, 2012 5,450 5,704
---------------------------------------------------------------------------------------
NH, Higher Education and Health Facilities Auth.,
Havenwood-Heritage Heights Issue, Rev., 7.35% and
7.45%, 2018 and 2025 6,500 6,522
---------------------------------------------------------------------------------------
DE, Delaware River & Bay Auth., Rev., 5.25%, 2026 5,200 4,914
---------------------------------------------------------------------------------------
WI, Health and Education Facilities Auth., Wausau
Hospitals, Inc., Proj., Rev., 6.625%, 2011 3,000 3,215
---------------------------------------------------------------------------------------
ME, Health and Higher Education Facilities Auth., Rev.,
7.10%, 2014 2,750 3,127
---------------------------------------------------------------------------------------
WY, Community Dev. Auth., Single Family Mortgage Rev.,
7.875% and 8.125%, 2017 and 2021 1,925 1,997
---------------------------------------------------------------------------------------
ND, Housing Finance Agcy., Single Family Mortgage
Program, Rev., 8.05%, 2024 1,065 1,103
---------------------------------------------------------------------------------------
P.R., Commonwealth Highway and Transportation Auth.,
Rev., 6.25%, 2016 11,400 12,414
---------------------------------------------------------------------------------------
P.R., Electrical Power Auth. Rev., 6.50%, 2006 2,300 2,572
---------------------------------------------------------------------------------------
P.R., Industrial, Tourist Educational, Medical, and
Environmental, Rev., 6.50%, 2026 9,190 9,153
---------------------------------------------------------------------------------------
V.I., Public Finance Auth., Rev., 7.25%, 2018 3,000 3,209
---------------------------------------------------------------------------------------
344,585
---------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--88.7% 2,945,772
---------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--98.0%
(Cost: $3,095,345) 3,255,501
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--3.9% to 4.1%
INSTRUMENTS--2.1%
Due--November 1996
(Cost: $69,100) 69,100 69,100
---------------------------------------------------------------------------------------
TOTAL INVESTMENTS--100.1%
(Cost: $3,164,445) 3,324,601
---------------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(.1%) (3,055)
---------------------------------------------------------------------------------------
NET ASSETS--100% $3,321,546
---------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $3,164,445,000 for federal income tax
purposes at September 30, 1996, the gross unrealized appreciation was
$166,598,000, the gross unrealized depreciation was $6,442,000 and the net
unrealized appreciation on investments was $160,156,000.
See accompanying Notes to Financial Statements.
23
<PAGE> 24
PORTFOLIO OF INVESTMENTS
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
Portfolio of Investments at September 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL AND
INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dormitory Auth., NY, State University Educational Facilities,
Rev., 7.25%, to be called 05-15-00 @ 102 $145 $ 161
---------------------------------------------------------------------------------------
Local Government Assistance Corp., NY, Rev., 7.00%,
to be called 04-01-01 @ 102 100 111
---------------------------------------------------------------------------------------
Richmond, VA, Gen. Oblg., 6.875%, to be called 01-15-00 @ 102 100 109
---------------------------------------------------------------------------------------
Arlington County, VA, Industrial Dev. Auth., Arlington Hospital,
Rev., 7.125%, to be called 09-01-01 @ 102 90 101
---------------------------------------------------------------------------------------
Philadelphia, PA, Gas Works Rev., 7.70%, to be called 06-15-01 @
102 120 137
---------------------------------------------------------------------------------------
Bay Transportation Auth., MA, Rev., 7.625%, to be called
03-01-00 @ 102 115 128
--------------------------------------------------------------------------------------
TOTAL ADVANCED REFUNDED OBLIGATIONS--3.4% 747
- ----------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL
OBLIGATIONS
- ----------------------------------------------------------------------------------------------------------------
FLORIDA--7.9% Broward County School District, Gen. Oblg., 6.00%, 2004 70 75
---------------------------------------------------------------------------------------
Department of Natural Resources, Preservation 2000,
Rev., 6.20%, 1999 80 84
---------------------------------------------------------------------------------------
Hillsborough County Aviation Auth., Tampa International Airport,
Rev., 6.90%, 2011 5 5
---------------------------------------------------------------------------------------
Lakeland Electric & Water, Rev., 6.50%, 2007 500 557
---------------------------------------------------------------------------------------
Miami Beach, Redev. Agcy. Tax, Incremental Rev.,
5.625%, 2009 250 242
---------------------------------------------------------------------------------------
North Broward Hospital District, Rev., 6.125%, 2003 285 304
---------------------------------------------------------------------------------------
State Board of Education, Gen. Oblg., 7.00%, 2005 400 456
--------------------------------------------------------------------------------------
1,723
- ----------------------------------------------------------------------------------------------------------------
OHIO--7.2% Cleveland Water Works Systems, Rev., 6.125%, 2003 450 481
---------------------------------------------------------------------------------------
Lake County Detention Center, Gen. Oblg., 6.75%, 2005 500 564
---------------------------------------------------------------------------------------
State Turnpike, Rev., 6.00%, 2005 500 533
---------------------------------------------------------------------------------------
Water Dev. Auth., Pure Water Improvement Proj., Rev., 5.75%,
2003 5 5
--------------------------------------------------------------------------------------
1,583
- ----------------------------------------------------------------------------------------------------------------
CALIFORNIA--6.9% Duarte, City of Hope National Medical Center, Certificates of
Participation, Rev., 6.00%, 2008 325 326
---------------------------------------------------------------------------------------
Foothill/Eastern Transit Corridor Agcy., Tollroad Rev., 6.00%,
2016 350 346
---------------------------------------------------------------------------------------
Fresno, Water System, Water Remediation Proj., Rev., 7.50%, 2004 160 187
---------------------------------------------------------------------------------------
Los Angeles, Dept. of Airports, Rev., 6.50%, 2004 400 441
---------------------------------------------------------------------------------------
Sacramento Congeneration Auth., Procter & Gamble Proj.,
Rev., 7.00%, 2004 200 216
--------------------------------------------------------------------------------------
1,516
</TABLE>
24
<PAGE> 25
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PENNSYLVANIA--6.6% Allegheny County Hospital Dev. Auth., Magee Women's Hospital,
Rev., 6.25%, 2008 $300 $ 316
---------------------------------------------------------------------------------------
Columbia County Industrial Dev. Auth., First Mortgage,
Rev., 9.00%, 2014 300 319
---------------------------------------------------------------------------------------
Intergovernmental Cooperation Auth., City of Philadelphia
Funding Program, Rev., 6.00%, 2002 285 303
---------------------------------------------------------------------------------------
McKean County Hospital Auth., Bradford Hospital Proj., Rev.,
5.375%, 2003 350 343
---------------------------------------------------------------------------------------
Philadelphia, Gas Works Rev., 6.25%, 2008 150 154
--------------------------------------------------------------------------------------
1,435
- ----------------------------------------------------------------------------------------------------------------
MICHIGAN--6.4% Detroit, Gen. Oblg., 6.70%, 2010 300 309
---------------------------------------------------------------------------------------
Grand Rapids, Downtown Dev. Auth., Rev., 6.20%, 2004 175 189
---------------------------------------------------------------------------------------
Macomb County, Chippewa Valley Schools, Gen. Oblg., 7.00%, 2001 350 384
---------------------------------------------------------------------------------------
State Building Auth., Rev., 6.25% and 6.50%, 2000 and 2004 165 181
---------------------------------------------------------------------------------------
State Hospital Finance Auth., Gratiot Community Hospital,
Rev., 6.10%, 2007 350 348
--------------------------------------------------------------------------------------
1,411
- ----------------------------------------------------------------------------------------------------------------
ARIZONA--5.6%
Phoenix Civic Improvement Corp., Water System Rev., 6.375%, 2005 495 544
---------------------------------------------------------------------------------------
Salt River Proj., Rev., 6.25%, 2019 500 520
---------------------------------------------------------------------------------------
State University Board of Regents, Rev., 6.50%, 2001 85 92
---------------------------------------------------------------------------------------
Transportation Board, Highway Rev., 6.10%, 2002 70 75
--------------------------------------------------------------------------------------
1,231
- ----------------------------------------------------------------------------------------------------------------
NEW JERSEY--5.4% Middlesex County Utility Auth., Solid Waste System,
Rev., 6.10%, 2001 300 321
---------------------------------------------------------------------------------------
Passaic Valley Sewer System, Rev., 5.70%, 2002 500 526
---------------------------------------------------------------------------------------
Wastewater Treatment Trust, Rev., 6.50%, 2003 300 330
--------------------------------------------------------------------------------------
1,177
- ----------------------------------------------------------------------------------------------------------------
WASHINGTON--5.3% King County School District, Mercer Island, Gen. Oblg.,
6.50%, 2006 500 554
---------------------------------------------------------------------------------------
State Public Power Supply System, Nuclear Project #1,
Rev., 6.00%, 2006 500 525
---------------------------------------------------------------------------------------
Tacoma, Electric System, Rev., 5.80%, 2004 70 73
--------------------------------------------------------------------------------------
1,152
- ----------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA--4.9% Horry County School District, Gen. Oblg., 7.00%, 2002 500 554
---------------------------------------------------------------------------------------
York County School District, Gen. Oblg., 7.00%, 2004 460 513
--------------------------------------------------------------------------------------
1,067
- ----------------------------------------------------------------------------------------------------------------
NEW YORK--4.1% Dormitory Auth:
City University Construction, Rev., 5.40%, 2002 100 103
College and University Education Loan, Rev., 5.70%, 2007 250 255
---------------------------------------------------------------------------------------
New York City:
Gen. Oblg., 5.75% and 6.50%, 2003 and 2002 200 206
Industrial Dev. Auth., USTA National Tennis Center Inc. Proj.,
Rev., 6.10%, 2004 200 216
---------------------------------------------------------------------------------------
Niagara Falls, Water Treatment Plant, Rev., 6.40%, 2004 100 109
--------------------------------------------------------------------------------------
889
</TABLE>
25
<PAGE> 26
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TEXAS--4.1% Austin Airport System, Prior Lien, Rev., 6.10%, 2011 $400 $ 413
---------------------------------------------------------------------------------------
Fort Worth, Water and Sewer Rev., 5.90%, 2001 80 84
---------------------------------------------------------------------------------------
Houston Higher Education Finance Corp., University of St.
Thomas, Rev., 7.25%, 2007 100 107
---------------------------------------------------------------------------------------
Public Finance Auth., Building Rev., 5.875%, 2002 210 222
---------------------------------------------------------------------------------------
Trinity River Auth., Ten Mile Creek System, Rev., 5.50%, 2002 70 73
--------------------------------------------------------------------------------------
899
- ----------------------------------------------------------------------------------------------------------------
NEVADA--3.3% Clark County:
Motor Vehicle Fuel Tax Rev., 5.625%, 2002 70 73
School District, Gen. Oblg., 6.00%, 2003 365 388
---------------------------------------------------------------------------------------
State, Gen. Oblg., 5.90%, 2001 250 263
--------------------------------------------------------------------------------------
724
- ----------------------------------------------------------------------------------------------------------------
HAWAII--3.0% Dept. of Budget and Finance, Special Purpose Rev., 5.50%, 2005 500 502
---------------------------------------------------------------------------------------
State, Gen. Oblg., 7.25%, 2000 145 160
--------------------------------------------------------------------------------------
662
- ----------------------------------------------------------------------------------------------------------------
OKLAHOMA--2.8% Muskogee County, Gen. Oblg., 6.00%, 2001 10 11
---------------------------------------------------------------------------------------
Valley View Hospital Auth., Rev., 5.75%, 2006 350 340
---------------------------------------------------------------------------------------
Woodward Municipal Auth. Hospital Rev., 5.60%, 2004 270 264
--------------------------------------------------------------------------------------
615
- ----------------------------------------------------------------------------------------------------------------
PUERTO RICO--2.7% Bank and Finance Agcy., Affordable Housing, Single Family
Mortgage Rev., 5.90%, 2010 250 255
---------------------------------------------------------------------------------------
Electric Power Auth., Rev., 6.50%, 2006 300 335
--------------------------------------------------------------------------------------
590
- ----------------------------------------------------------------------------------------------------------------
INDIANA--2.5% Educational Facilities Auth., University of Evansville Proj.,
Rev., 5.65%, 2011 225 216
---------------------------------------------------------------------------------------
Johnson County Hospital Association, Rev., 6.50%, 2002 300 325
--------------------------------------------------------------------------------------
541
- ----------------------------------------------------------------------------------------------------------------
ILLINOIS--2.1% Health Facilities Auth., Franciscan Sisters Health Care Corp.
Proj., Rev., 6.25%, 2002 350 374
---------------------------------------------------------------------------------------
McHenry and Lake County School District Number 15, Certificates
of Participation, Rev., 6.125%, 2003 85 92
--------------------------------------------------------------------------------------
466
- ----------------------------------------------------------------------------------------------------------------
KENTUCKY--1.8% Lexington-Fayette Urban County, University of Kentucky Alumni
Association, Commonwealth Library Proj., Rev., 6.50%, 2009 300 325
---------------------------------------------------------------------------------------
University of Kentucky, Consolidated Educational Building, Rev.,
6.00%, 1999 70 73
--------------------------------------------------------------------------------------
398
- ----------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--1.6% Bay Transit Auth., Rev., 6.50%, 2004 5 5
---------------------------------------------------------------------------------------
Commonwealth, Gen. Oblg., 7.00%, 2007 275 302
---------------------------------------------------------------------------------------
Water Pollution Abatement Trust, SESD Loan Program, Rev., 6.20%,
2010 45 47
--------------------------------------------------------------------------------------
354
</TABLE>
26
<PAGE> 27
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COLORADO--1.5% Arapahoe County, Capital Improvement, Highway Rev., 6.90%, 2015 $300 $ 319
- ----------------------------------------------------------------------------------------------------------------
LOUISIANA--1.5% State, Gen. Oblg., 7.00%, 2001 300 329
- ----------------------------------------------------------------------------------------------------------------
ARKANSAS--1.5% North Little Rock, Electric System, Rev., 6.00% and 6.15%,
2001 and 2003 295 318
- ----------------------------------------------------------------------------------------------------------------
MISSOURI--1.4% State Health & Education Facilities Auth., Lake of the Ozarks,
General Hospital Rev., 6.00%, 2006 300 302
- ----------------------------------------------------------------------------------------------------------------
DISTRICT OF Redev. Land Agency, Sports Arena Special Tax, Rev., 5.625%, 2010 300 290
COLUMBIA--1.3%
- ----------------------------------------------------------------------------------------------------------------
MAINE--1.3% Health and Higher Education Facilities Auth., Rev., 6.30% and
6.50%, 2004 and 2006 260 282
- ----------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE--1.0% Higher Education and Health Facilities Auth., Havenwood-Heritage
Heights Issue, Rev., 7.10%, 2006 250 251
- ----------------------------------------------------------------------------------------------------------------
STATES LESS THAN GA, Atlanta International Airport, Rev., 6.50%, 2013 70 74
ONE PERCENT--1.3%
---------------------------------------------------------------------------------------
GA, Municipal Electric Power Auth., Rev., 6.00%, 2000 70 73
---------------------------------------------------------------------------------------
MD, Howard County, Consolidated Public Improvement,
Gen. Oblg., 6.90%, 1999 70 75
---------------------------------------------------------------------------------------
NE, Public Power District, Nuclear Facility, Rev., 5.70%, 2004 50 52
---------------------------------------------------------------------------------------
CT, State, Gen. Oblg., 5.95%, 2000 5 5
---------------------------------------------------------------------------------------
279
---------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--95.0% 20,803
---------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--98.4%
(Cost: $20,921) 21,550
---------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--4.05%
INSTRUMENT--2.3% Due--November 1996
(Cost: $500) 500 500
---------------------------------------------------------------------------------------
TOTAL INVESTMENTS--100.7%
(Cost: $21,421) 22,050
---------------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(.7%) (149)
---------------------------------------------------------------------------------------
NET ASSETS--100% $21,901
---------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $21,421,000 for federal income tax purposes
at September 30, 1996, the gross unrealized appreciation was $646,000, the gross
unrealized depreciation was $17,000, and the net unrealized appreciation on
investments was $629,000.
See accompanying Notes to Financial statements.
27
<PAGE> 28
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER NATIONAL TAX-FREE INCOME SERIES
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of the Kemper Municipal Bond Fund and
Kemper Intermediate Municipal Bond Fund, comprising the Kemper National Tax-Free
Income Series (the Trust) as of September 30, 1996, and the related statements
of operations for the year then ended and changes in net assets for each of the
two years in the period ended September 30, 1996 for the Kemper Municipal Bond
Fund and for the year ended September 30, 1996 and for the period November 1,
1994 (commencements of operations) to September 30, 1995 for the Kemper
Intermediate Municipal Bond Fund, and the financial highlights for the fiscal
periods since 1992. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
September 30, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the above mentioned Funds of Kemper National Tax-Free Income Series at
September 30, 1996, the results of their operations, the changes in their net
assets and the financial highlights for each of the fiscal periods referred to
above, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 18, 1996
28
<PAGE> 29
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTERMEDIATE
MUNICIPAL MUNICIPAL
FUND FUND
- ---------------------------------------------------------------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments, at value
(Cost: $3,164,445 and $21,421) $3,324,601 22,050
- ---------------------------------------------------------------------------------------------------------------
Cash 457 13
- ---------------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 977 50
- ---------------------------------------------------------------------------------------------------------------
Investments sold 37,129 1,502
- ---------------------------------------------------------------------------------------------------------------
Interest 55,636 378
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 3,418,800 23,993
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Payable for:
Dividends 3,468 30
- ---------------------------------------------------------------------------------------------------------------
Fund shares redeemed 7,511 200
- ---------------------------------------------------------------------------------------------------------------
Investments purchased 84,232 1,839
- ---------------------------------------------------------------------------------------------------------------
Management fee 1,145 9
- ---------------------------------------------------------------------------------------------------------------
Administrative services fee 403 4
- ---------------------------------------------------------------------------------------------------------------
Distribution services fee 29 3
- ---------------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 245 1
- ---------------------------------------------------------------------------------------------------------------
Trustees' fees and other 221 6
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 97,254 2,092
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS $3,321,546 21,901
- ---------------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Paid-in capital $3,163,558 21,322
- ---------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (2,168) (50)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 160,156 629
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $3,321,546 21,901
- ---------------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- ---------------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $3,274,349 16,869
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding 321,713 1,677
- ---------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets divided by shares outstanding) $10.18 10.06
- ---------------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71%/2.83% of net asset
value or 4.50%/2.75% of offering price) $10.66 10.34
- ---------------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $43,313 4,333
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding 4,266 431
- ---------------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets divided by shares outstanding) $10.15 10.06
- ---------------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $3,583 699
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding 352 69
- ---------------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets divided by shares outstanding) $10.18 10.06
- ---------------------------------------------------------------------------------------------------------------
CLASS I SHARES
Net assets applicable to shares outstanding $301 --
- ---------------------------------------------------------------------------------------------------------------
Shares outstanding 30 --
- ---------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets divided by shares outstanding) $10.18 --
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended September 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTERMEDIATE
MUNICIPAL MUNICIPAL
FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
- ----------------------------------------------------------------------------------------------------------
Interest income $207,191 1,024
- ----------------------------------------------------------------------------------------------------------
Expenses:
Management fee 14,261 104
- ----------------------------------------------------------------------------------------------------------
Administrative services fee 5,279 41
- ----------------------------------------------------------------------------------------------------------
Distribution services fee 305 33
- ----------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 2,602 15
- ----------------------------------------------------------------------------------------------------------
Professional fees 109 2
- ----------------------------------------------------------------------------------------------------------
Reports to shareholders 446 3
- ----------------------------------------------------------------------------------------------------------
Trustees' fees and other 138 33
- ----------------------------------------------------------------------------------------------------------
Total expenses before expense waiver 23,140 231
- ----------------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment manager -- 22
- ----------------------------------------------------------------------------------------------------------
Total expenses after expense waiver 23,140 209
- ----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 184,051 815
- ----------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ----------------------------------------------------------------------------------------------------------
Net realized gain (loss) on sales of investments (including options
purchased) 24,750 (25)
- ----------------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (2,763) (1)
- ----------------------------------------------------------------------------------------------------------
Net realized gain (loss) 21,987 (26)
- ----------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (2,598) (82)
- ----------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 19,389 (108)
- ----------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $203,440 707
- ----------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 31
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MUNICIPAL FUND INTERMEDIATE MUNICIPAL FUND
----------------------------- ----------------------------------
YEAR ENDED NOVEMBER 1,
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 1994 TO SEPTEMBER
1996 1995 1996 30, 1995
- -------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $ 184,051 199,128 815 509
- -------------------------------------------------------------------------------------------------------------
Net realized gain (loss) 21,987 (5,853) (26) 110
- -------------------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation/depreciation (2,598) 178,553 (82) 711
- -------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 203,440 371,828 707 1,330
- -------------------------------------------------------------------------------------------------------------
Distribution from net investment income (184,051) (199,128) (815) (509)
- -------------------------------------------------------------------------------------------------------------
Distribution from net realized gain (8,498) (12,759) (134) --
- -------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (192,549) (211,887) (949) (509)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (199,993) (366,290) 5,974 15,248
- -------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (189,102) (206,349) 5,732 16,069
- -------------------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------------------
Beginning of period 3,510,648 3,716,997 16,169 100
- -------------------------------------------------------------------------------------------------------------
END OF PERIOD $ 3,321,546 3,510,648 21,901 16,169
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUNDS The Kemper National Tax-Free Income Series (the
Trust) is an open-end, management investment
company comprised of Kemper Municipal Bond Fund
(Municipal Fund) and Kemper Intermediate Municipal
Bond Fund (Intermediate Municipal Fund). The
Intermediate Municipal Fund began offering shares
on November 1, 1994. The Trust is organized as a
business trust under the laws of Massachusetts.
The Funds offer four classes of shares. Class A
shares are sold to investors subject to an initial
sales charge. Class B shares are sold without an
initial sales charge but are subject to higher
ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and, for shares sold on or
after April 1, 1996, a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Exchange traded options are valued
at the last sale price unless there is no sale
price, in which event prices provided by market
makers are used. Over-the-counter traded options
are valued based upon prices provided by market
makers. Financial futures and options thereon are
valued at the settlement price established each day
by the board of trade or exchange on which they are
traded. Other securities and assets are valued at
fair value as determined in good faith by the Board
of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes premium and original
discount amortization on fixed income securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated between the Funds in
proportion to their relative net assets.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A Shares). Proceeds payable on redemption of
Class B and Class C
32
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
shares will be reduced by the amount of any
applicable contingent deferred sales charge. On
each day the New York Stock Exchange is open for
trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. Each Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies and therefore no
federal income tax provision is required.
DIVIDENDS TO SHAREHOLDERS. Each Fund declares and
records a daily dividend equal to its net
investment income for that day, to holders of
shares for which payment has been received. Income
dividends are distributed monthly. Net realized
capital gains, if any, will be distributed at least
annually. Dividends are determined in accordance
with income tax principles which may treat certain
transactions differently than generally accepted
accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Trust has a management
agreement with ZKI. The Municipal Fund pays a fee
at an annual rate of .45% of the first $250 million
of average daily net assets declining to .32% of
average daily net assets in excess of $12.5
billion. The Municipal Fund paid a management fee
of $14,261,000 for the year ended September 30,
1996.
The Intermediate Municipal Fund pays a management
fee at an annual rate of .55% of the first $250
million of average daily net assets declining to
.40% of average daily net assets in excess of $12.5
billion. The management fee for the Intermediate
Municipal Fund was waived and absorbed by ZKI from
inception, November 1, 1994, until April 30, 1995.
Thereafter the management fee was gradually
reinstated through April 30, 1996. For the year
ended September 30, 1996, the Intermediate
Municipal Fund paid a management fee of $82,000
after the waiver.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Trust has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of the Trust's Class A shares
are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS -----------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Year ended September 30, 1996 $ 360,000 2,003,000 144,000
</TABLE>
For services under the distribution services
agreement, the Trust pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares of each Fund. In addition, KDI receives any
contingent deferred sales charges (CDSC) from
redemptions of Class B and Class C shares.
Distribution fees and commissions paid in
connection with the
33
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
sale of such shares and the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION DISTRIBUTION FEES
FEES PAID BY KDI
AND CDSC ------------------------------
RECEIVED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Year ended September 30, 1996 $ 435,000 843,000 36,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, each Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on assets of Fund accounts that the firms service.
Administrative services fees (ASF) paid are as
follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY THE -----------------------------
TRUST TO KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- -------------
<S> <C> <C> <C>
Year ended September 30, 1996 $ 5,320,000 5,350,000 199,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Trust's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Trust. Under the agreement,
KSvC received shareholder services fees of
$1,768,000 for the year ended September 30, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of ZKI.
During the year ended September 30, 1996, the Trust
made no direct payments to its officers and
incurred trustees' fees of $65,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended September 30, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
<TABLE>
<CAPTION>
INTERMEDIATE
MUNICIPAL FUND MUNICIPAL FUND
-------------- --------------
<S> <C> <C>
Purchases $3,247,600 20,788
Proceeds from sales 3,314,802 14,639
</TABLE>
34
<PAGE> 35
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity
in capital shares of the Funds
(in thousands):
--------------
MUNICIPAL FUND
--------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------
SHARES SOLD
------------------------------------------------------------------------------
Class A 18,784 $ 193,179 22,333 $ 219,677
------------------------------------------------------------------------------
Class B 2,551 26,035 3,144 30,627
------------------------------------------------------------------------------
Class C 313 3,200 122 1,214
------------------------------------------------------------------------------
Class I 30 300 -- --
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
------------------------------------------------------------------------------
Class A 11,427 117,176 13,788 134,811
------------------------------------------------------------------------------
Class B 120 1,229 89 878
------------------------------------------------------------------------------
Class C 10 104 4 39
------------------------------------------------------------------------------
Class I -- -- -- --
------------------------------------------------------------------------------
SHARES REDEEMED
------------------------------------------------------------------------------
Class A (50,863) (521,777) (76,431) (744,574)
------------------------------------------------------------------------------
Class B (1,767) (18,134) (861) (8,415)
------------------------------------------------------------------------------
Class C (128) (1,305) (56) (547)
------------------------------------------------------------------------------
Class I -- -- -- --
------------------------------------------------------------------------------
CONVERSION OF SHARES
------------------------------------------------------------------------------
Class A 67 687 68 666
------------------------------------------------------------------------------
Class B (67) (687) (68) (666)
------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(199,993) $(366,290)
------------------------------------------------------------------------------
---------------------------
INTERMEDIATE MUNICIPAL FUND
---------------------------
<CAPTION>
YEAR ENDED NOVEMBER 1, 1994 TO
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
SHARES SOLD
-----------------------------------------------------------------------------
Class A 782 $ 7,959 1,703 $ 16,599
------------------------------------------------------------------------------
Class B 239 2,415 313 3,046
------------------------------------------------------------------------------
Class C 59 593 66 673
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-----------------------------------------------------------------------------
Class A 49 458 32 320
------------------------------------------------------------------------------
Class B 8 86 5 51
------------------------------------------------------------------------------
Class C 2 21 2 16
------------------------------------------------------------------------------
SHARES REDEEMED
-----------------------------------------------------------------------------
Class A (413) (4,178) (481) (4,817)
------------------------------------------------------------------------------
Class B (76) (774) (61) (610)
------------------------------------------------------------------------------
Class C (61) (606) (3) (30)
------------------------------------------------------------------------------
CONVERSION OF SHARES
-----------------------------------------------------------------------------
Class A 1 3 -- --
------------------------------------------------------------------------------
Class B (1) (3) -- --
------------------------------------------------------------------------------
Net increase from
capital share
transactions $ 5,974 $ 15,248
------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------
CLASS A
---------------------------------------------
- -------------- YEAR ENDED SEPTEMBER 30,
MUNICIPAL FUND 1996 1995 1994 1993 1992
- --------------
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.15 9.69 10.95 10.29 10.05
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .55 .55 .55 .61 .65
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .06 .50 (.92) .82 .35
- --------------------------------------------------------------------------------------------
Total from investment operations .61 1.05 (.37) 1.43 1.00
- --------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .55 .55 .56 .62 .63
- --------------------------------------------------------------------------------------------
Distribution from net realized gain .03 .04 .33 .15 .13
- --------------------------------------------------------------------------------------------
Total dividends .58 .59 .89 .77 .76
- --------------------------------------------------------------------------------------------
Net asset value, end of year $10.18 10.15 9.69 10.95 10.29
- --------------------------------------------------------------------------------------------
TOTAL RETURN 6.00% 11.15 (3.67) 14.50 10.36
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------
Expenses .66% .66 .60 .47 .48
- --------------------------------------------------------------------------------------------
Net investment income 5.35 5.63 5.42 5.78 6.44
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------
CLASS B
---------------------------------------------
YEAR ENDED MAY 31 TO
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1994
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.13 9.67 9.95
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .46 .14
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .05 .50 (.26)
- --------------------------------------------------------------------------------------------
Total from investment operations .51 .96 (.12)
- --------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .46 .46 .16
- --------------------------------------------------------------------------------------------
Distribution from net realized gain .03 .04 --
- --------------------------------------------------------------------------------------------
Total dividends .49 .50 .16
- --------------------------------------------------------------------------------------------
Net asset value, end of period $10.15 10.13 9.67
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.97% 10.17 (1.24)
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------
Expenses 1.54% 1.55 1.56
- --------------------------------------------------------------------------------------------
Net investment income 4.47 4.74 4.55
- --------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 37
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------ ------------------
CLASS C CLASS I
------------------------------------- -------------------
YEAR ENDED MAY 31 TO APRIL 19 TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1994 1996
- --------------------------------------------------------------------------------- ------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------- ------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.16 9.69 9.95 10.11
- --------------------------------------------------------------------------------- ------------------
Income from investment operations:
Net investment income .46 .47 .16 .24
- --------------------------------------------------------------------------------- ------------------
Net realized and unrealized gain (loss) .05 .51 (.26) .07
- --------------------------------------------------------------------------------- ------------------
Total from investment operations .51 .98 (.10) .31
- --------------------------------------------------------------------------------- ------------------
Less dividends:
Distribution from net investment income .46 .47 .16 .24
- --------------------------------------------------------------------------------- ------------------
Distribution from net realized gain .03 .04 -- --
- --------------------------------------------------------------------------------- ------------------
Total dividends .49 .51 .16 .24
- --------------------------------------------------------------------------------- ------------------
Net asset value, end of period $10.18 10.16 9.69 10.18
- --------------------------------------------------------------------------------- ------------------
TOTAL RETURN (NOT ANNUALIZED) 4.99% 10.32 (1.03) 3.10
- --------------------------------------------------------------------------------- ------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------- ------------------
Expenses 1.51% 1.51 1.53 .56
- --------------------------------------------------------------------------------- ------------------
Net investment income 4.50 4.78 4.56 5.60
- --------------------------------------------------------------------------------- ------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $3,321,546 3,510,648 3,716,997 4,072,626 3,154,972
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 97% 86 50 52 32
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
FINANCIAL HIGHLIGHTS
[CAPTION]
<TABLE>
<CAPTION>
---------------------------- ---------------------------- ----------------------------------
CLASS A CLASS B CLASS C
---------------------------- ---------------------------- ----------------------------------
NOVEMBER 1, NOVEMBER 1, NOVEMBER 1,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO YEAR ENDED 1994 TO
- -------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
INTERMEDIATE MUNICIPAL FUND 1996 1995 1996 1995 1996 1995
- --------------------------------
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.18 9.50 10.18 9.50 10.19 9.50
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
Income from investment operations:
Net investment income .46 .45 .38 .36 .38 .38
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
Net realized and unrealized gain
(loss) (.04) .68 (.04) .68 (.05) .69
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
Total from investment operations .42 1.13 .34 1.04 .33 1.07
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
Less dividends:
Distribution from net investment
income .46 .45 .38 .36 .38 .38
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
Distribution from net realized gain .08 -- .08 -- .08 --
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
Total dividends .54 .45 .46 .36 .46 .38
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
Net asset value, end of period $10.06 10.18 10.06 10.18 10.06 10.19
- ----------------------------------------------------------------- ------------------------ -------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.15% 12.08 3.34 11.13 3.26 11.43
- ----------------------------------------------------------------- ------------------------ -------------------------
RATIOS TO AVERAGE NET ASSETS (A) (ANNUALIZED)
- ----------------------------------------------------------------- ------------------------ -------------------------
Expenses absorbed by the Fund .92% .55 1.71 1.42 1.65 1.28
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
Net investment income 4.45 5.00 3.66 4.13 3.72 4.27
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (A) (ANNUALIZED)
- ----------------------------------------------------------------- ------------------------ -------------------------
Expenses 1.04% 1.05 1.83 1.92 1.77 1.78
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
Net investment income 4.33 4.50 3.54 3.63 3.60 3.77
- ----------------------------------------------------------------- ---------------------------- ---------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------------------------------
YEAR NOVEMBER 1,
ENDED 1994 TO
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $21,901 16,169
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 80% 60
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES: (a) ZKI agreed to waive the management fee of the Intermediate Municipal
Fund from its inception, November 1, 1994, through April 30, 1995. Thereafter,
the management fee was gradually reinstated through April 30, 1996. "Other
ratios to average net assets" are computed without the undertaking to waive the
management fee.
Total return does not reflect the effect of any sales charges.
FEDERAL TAX STATUS OF 1996 DIVIDENDS
All of the dividends paid from net investment income by the Funds constitute
tax-exempt interest that is not taxable for federal income tax purpose however,
a portion of the dividends paid may be includable in the alternative minimum tax
calculation. A short-term capital gain dividend is taxable as ordinary income,
and a long-term capital gain dividend is taxable as a long-term capital gain
regardless of how long you have owned your shares.
38
<PAGE> 39
NOTES
39
<PAGE> 40
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
DAVID W. BELIN CHARLES R. MANZONI, JR.
Trustee Vice President
LEWIS A. BURNHAM CHRISTOPHER J. MIER
Trustee Vice President
DONALD L. DUNAWAY JOHN E. NEAL
Trustee Vice President
ROBERT B. HOFFMAN PHILIP J. COLLORA
Trustee Vice President and
Secretary
DONALD R. JONES
Trustee JEROME L. DUFFY
Treasurer
DOMINIQUE P. MORAX
Trustee ELIZABETH C. WERTH
Assistant Secretary
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT
KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
1-800-621-1048
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT
INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER
ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER
KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
(RECYCLE LOGO)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Tax-Free Income Funds prospectus.
KNTIS - 2 (11/96) [KEMPER FUNDS LOGO]
1024050
Printed in the U.S.A.
