<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED SEPTEMBER 30, 1997
KEMPER MUNICIPAL BOND FUND
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
OFFERING INVESTORS THE OPPORTUNITY FOR AS HIGH A LEVEL OF CURRENT INTEREST
INCOME THAT IS EXEMPT FROM FEDERAL INCOME TAXES IS CONSISTENT WITH PRESERVATION
OF CAPITAL
KEMPER NATIONAL TAX-FREE INCOME SERIES
"... We looked for ways to increase income
without significantly increasing the
funds risk exposure. ..."
[KEMPER FUND LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
6
TERMS TO KNOW
8
PORTFOLIO STATISTICS
11
PORTFOLIO OF INVESTMENTS
26
REPORT OF INDEPENDENT AUDITORS
27
FINANCIAL STATEMENTS
29
NOTES TO FINANCIAL STATEMENTS
33
FINANCIAL HIGHLIGHTS
AT A GLANCE
- ------------------------------------------------------------------------------
KEMPER NATIONAL TAX-FREE
INCOME FUNDS TOTAL RETURNS*
- ------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(UNADJUSTED FOR SALES CHARGE)
KEMPER MUNICIPAL BOND FUND
[BAR GRAPH]
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 9.15%
CLASS B 8.32%
CLASS C 8.34%
LIPPER MUNICIPAL
BOND FUNDS
CATEGORY AVERAGE* 8.59%
</TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
[BAR GRAPH]
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 7.62%
CLASS B 6.78%
CLASS C 6.77%
LIPPER INTERMEDIATE
MUNICIPAL BOND FUNDS
CATEGORY AVERAGE* 7.22%
</TABLE>
- ------------------------------------------------------------------------------
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT REPRESENT FUTURE PERFORMANCE.
RETURNS AND RANKINGS 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. 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
9/30/97 9/30/96
- ------------------------------------------------------------------------------
<S> <C> <C>
KEMPER MUNICIPAL BOND
FUND CLASS A $10.46 $10.18
- ------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND
FUND CLASS B $10.44 $10.15
- ------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND
FUND CLASS C $10.47 $10.18
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
NET ASSET VALUE
- ------------------------------------------------------------------------------
AS OF AS OF
9/30/97 9/30/96
- ------------------------------------------------------------------------------
<S> <C> <C>
KEMPER INTERMEDIATE MUNICIPAL
BOND FUND CLASS A $10.31 $10.06
- ------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL
BOND FUND CLASS B $10.31 $10.06
- ------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL
BOND FUND CLASS C $10.31 $10.06
- ------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
KEMPER TAX-FREE INCOME LIPPER RANKINGS*
- ------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THEIR RESPECTIVE LIPPER CATEGORIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND
- ------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #57 of #149 of #148 of
233 funds 233 funds 233 funds
- ------------------------------------------------------------------------------
5-YEAR #16 of N/A N/A
110 funds
- ------------------------------------------------------------------------------
10-YEAR #22 of N/A N/A
68 funds
- ------------------------------------------------------------------------------
15-YEAR #5 of N/A N/A
35 funds
- ------------------------------------------------------------------------------
20-YEAR #5 of N/A N/A
20 funds
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
- ------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #42 of #95 of #95 of
133 funds 133 funds 133 funds
- ------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- ------------------------------------------------------------------------------
THE FOLLOWING TABLES SHOW PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE
FUNDS AS OF SEPTEMBER 30, 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND
- ------------------------------------------------------------------------------
A SHARES B SHARES C SHARES
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.5433 $0.4520 $0.4564
- ------------------------------------------------------------------------------
SEPTEMBER DIVIDEND: $0.0458 $0.0381 $0.0385
- ------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 5.25% 4.38% 4.41%
- ------------------------------------------------------------------------------
SEC YIELD+: 4.29% 3.62% 3.63%
- ------------------------------------------------------------------------------
TAX EQUIVALENT
YIELD+: 6.82% 5.76% 5.77%
- ------------------------------------------------------------------------------
</TABLE>
BASED ON A MARGINAL FEDERAL INCOME TAX RATE OF 37.1%.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
- ------------------------------------------------------------------------------
A SHARES B SHARES C SHARES
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4636 $0.3841 $0.3834
- ------------------------------------------------------------------------------
SEPTEMBER DIVIDEND: $0.0392 $0.0310 $0.0323
- ------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.56% 3.61% 3.76%
- ------------------------------------------------------------------------------
SEC YIELD+: 3.84% 3.14% 3.17%
- ------------------------------------------------------------------------------
TAX EQUIVALENT
YIELD+: 6.10% 4.99% 5.04%
- ------------------------------------------------------------------------------
</TABLE>
BASED ON A MARGINAL FEDERAL INCOME TAX RATE OF 37.1%.
+ CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS
AN ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON SEPTEMBER 30, 1997. 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, 1997 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 PERCENT 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
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 $86 BILLION IN ASSETS, INCLUDING $49 BILLION IN RETAIL MUTUAL
FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
Once again, investors experienced extreme market volatility in the month of
October. Unlike the October corrections of 1987 and 1989, this year's market
drop occurred at a time when the United States economy is remarkably healthy and
resilient. As we have noted, the U.S. economy has been moving forward for
several years with an alternating fast/slow pace that has proven successful in
removing whatever excesses build from quarter to quarter. As a consequence,
interest rates and the rate of inflation are both low and stable. Moreover, the
federal budget deficit has been reduced to such an extent that discussion has
now turned to what the government should do with a projected surplus in 1998.
Fortunately, no part of our strong economic foundation was shaken by the
market correction. If anything, the correction provided a short-lived and
relatively painless lesson about the vulnerability of a highly valued market.
When markets are high, everything -- economic news, corporate earnings and
liquidity -- must go right. When markets are high - as our equity market has
been for most of this year - they are vulnerable to relatively minor
disappointments.
As you have read, of course, the direct source of the October correction
was Southeast Asia, where the world's highest growth economies had been
stumbling since the summer. These economies had become overextended, banks ran
into trouble with bad loans and the local governments failed to take prompt
action. The result was a domino effect of competitive devaluations of
currencies, crashing markets and political chaos.
But while Southeast Asia produced the event that led to the mini-panic in
the U.S. equity market - resulting in a 7 percent loss on October 27 -- the
world quickly looked to the U.S. for solutions. When the U.S. market quickly
rebounded, other markets became less volatile. Considering U.S. economic
fundamentals and the relatively small effect that Southeast Asian problems have
on U.S. companies as a whole, rational investors had to expect our market to
bounce back. In fact, if the U.S. equity market had not been so highly valued,
we would have expected the market's reaction to the Asian problems to be quite
muted. For instance, if the Dow Jones Industrial Average had been closer to
7000 than to 8000, we would have expected that the market would have dropped
only slightly.
But as we have said before, today's markets move very fast. We experienced
in one day the kind of correction that we used to experience over a six-month
period. At this writing, the U.S. equity market remains very volatile. We expect
that condition to continue, as volatility is a factor of higher valued markets.
Despite what the last few years may have suggested, markets do not go in just
one direction.
Our recent experience supported many of the basic tenets of investing:
- Invest for the long term and don't react to the short-term noise.
Investors who got hurt in the October correction were those who had
borrowed the money they invested and were forced to sell at low prices.
Investors who were able to remain invested and did, lost only some of
their above-average gain for the year.
- Diversification helps reduce overall portfolio risk. Government
securities investors, for example, found the bond market to be a safe
haven as the bond market rallied during the stock market correction.
- Investing abroad is complex and requires expert advice. Currency
valuations, in particular, can have a significant effect on investment
returns.
Our forecast for the next several months calls for moderate economic
growth, stable interest rates and controlled inflation. While we cannot rule
out the possibility of another market event that would add to the excitement of
equity investing, we would expect the U.S. market to again demonstrate its
resiliency.
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 (10/31/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.03 6.71 6.2 5.93
PRIME RATE(2) 8.5 8.5 8.25 8.75
INFLATION RATE(3)* 2.15 2.5 2.99 2.74
THE U.S. DOLLAR(4) 7.62 6.55 3.46 -1.57
CAPITAL GOODS ORDERS(5)* 14.97 8.17 7.71 5.13
INDUSTRIAL PRODUCTION(5)* 5.52 4.39 3.27 2.35
EMPLOYMENT GROWTH(6)* 2.23 2.27 2.1 2.19
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commerical lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6 percent. The low, moderate inflation of
the last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of September 30, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this commentary 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 AND CHIEF INVESTMENT OFFICER
Zurich Kemper Investments, Inc.
November 13, 1997
4
<PAGE> 5
PERFORMANCE UPDATE
[MIER PHOTO]
CHRIS MIER JOINED ZURICH KEMPER INVESTMENTS, INC. IN 1986 AND IS NOW SENIOR VICE
PRESIDENT AND PORTFOLIO MANAGER OF KEMPER NATIONAL TAX-FREE INCOME SERIES. MIER
RECEIVED A BACHELOR'S DEGREE IN ECONOMICS FROM THE UNIVERSITY OF MICHIGAN AND
WENT ON TO RECEIVE A MASTER'S OF MANAGEMENT DEGREE 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.
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997, A YEAR WITH UNCHARACTERISTICALLY
LOW INFLATION DESPITE MODERATE ECONOMIC GROWTH, KEMPER MUNICIPAL BOND FUND AND
KEMPER INTERMEDIATE MUNICIPAL BOND FUND BENEFITED FROM A RELATIVELY RANGE-BOUND
INTEREST RATE ENVIRONMENT. PORTFOLIO MANAGER CHRIS MIER EXPLAINS HOW THE
PORTFOLIOS WERE ADJUSTED TO TAKE ADVANTAGE OF THIS CLIMATE.
Q DURING THE FUNDS' FISCAL YEAR, THE FEDERAL RESERVE BOARD (THE FED) RAISED
SHORT-TERM INTEREST RATES. HOW DID THAT AND OTHER ECONOMIC EVENTS IMPACT THE
PERFORMANCE OF MUNICIPAL BONDS DURING THE PERIOD?
A Municipal bonds performed relatively well during the 12-month period. The
Fed did raise interest rates but the impact of the tightening on the municipal
market was brief and minimal. Here's a look at that and other major events which
shaped the market's performance.
At the start of the fiscal year, October 1, 1996, there was some political
uncertainty about the potential outcome of the presidential and congressional
elections. Investors feared the Republican party might lose control of Congress
and reduce the likelihood of a balanced budget agreement in 1997. Investment
markets rallied, however, with news that Republicans maintained control of
Congress. Some market participants intimated that the election outcome was
evidence of the public's desire for a true "checks and balances" government.
The bullish environment began to change in December, when Federal Reserve
Board Chairman Alan Greenspan implied in passing that financial assets might be
overvalued. This shook the market and caused yields to rise and securities
prices to fall. Early in 1997, strong economic reports surfaced and Greenspan
reiterated his concern about the values of securities and about the potential
for a rise in wage inflation. In what was considered to be a preemptive move at
keeping inflation in check, the Fed tightened short-term rates by 0.25 percent
in late March.
While economic growth remained somewhat strong even after the Fed
tightening, inflation remained uncharacteristically low. The municipal market
along with the broader fixed-income market began recouping losses experienced
with the Fed's interest rate increase as inflation fears continued to be
unconfirmed. For the remainder of the fiscal period, market yields fluctuated
with the release of varying economic data but remained relatively range-bound.
Inflation never became problematic and bonds performed positively.
Q DID THIS FLUCTUATION IN MARKET YIELDS AFFECT THE PERFORMANCE OF THE FUNDS?
A Yields fluctuated with the markets' changing views on the direction of
economic growth and inflation. However, the fluctuations were not dramatic by
historical standards. In fact, the Bond Buyer 25-Bond Revenue Index-- a gauge of
municipal bond interest rates--fluctuated by less than one percent (65 basis
points) during the period. The index was at its period high for the weeks April
3 and April 10, 1997, at 6.14 percent and dropped to its lowest (5.49 percent)
5
<PAGE> 6
PERFORMANCE UPDATE
on July 31, 1997. The tightness of the yield range provided for relatively
stable bond prices throughout the fiscal year compared with previous fiscal
years.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUNDS IN THIS RANGE-BOUND
RATE ENVIRONMENT?
A We looked for ways to increase income without significantly increasing the
funds' risk exposure. One way we did this was by selectively choosing A and BBB
rated bonds, which offer higher coupon rates than some of the funds' higher
quality and insured issues.
Q WERE THERE ANY OTHER SIGNIFICANT ADJUSTMENTS MADE TO THE FUNDS?
A We maintained duration in a much tighter band, which was more compatible
with the tighter prevailing rate range. Remember, 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.
Q WHAT CAN YOU TELL US ABOUT THE LEVEL OF SUPPLY AND DEMAND IN THE MARKET?
A Year-to-date new issuance has been slightly higher in 1997 than in 1996.
New issuance volume through September 1997 was $153.5 billion compared with
$130.6 billion for the same period in 1996, according to THE BOND BUYER. Demand
for municipal issues came mainly from property and casualty companies and
individuals buying direct.
Q WERE THERE ANY SECTORS THAT PERFORMED ABOVE YOUR EXPECTATIONS?
A The transportation sector performed well during the period. The stronger
economy encouraged increased travel by the public, helping toll road issues.
Toll road bonds are held by the funds.
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 are both 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.
Q WHAT IS YOUR OUTLOOK FOR THE MUNICIPAL MARKET?
A Municipals are attractively valued in this market environment. Demand is
likely to continue to come mainly from the property and casualty industry as
well as individuals. Mutual fund demand for municipal bonds should pick up as
individuals who have accumulated wealth in the equity market attempt to maintain
or protect that wealth in a less risky type of investment.
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.
BOND REVENUE INDEX This index is the average yield on 25 revenue bonds with
30-year maturities compiled by THE BOND BUYER, a newspaper that reports on the
municipal bond market.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for 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.
6
<PAGE> 7
PERFORMANCE UPDATE
- -------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- -------------------------------------------------------------------------------
FOR PERIODS ENDED SEPTEMBER 30, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER MUNICIPAL BOND FUND CLASS A 4.26% 6.27% 8.25% 7.75% (since 4/20/76)
- --------------------------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND CLASS B 5.34 N/A N/A 6.07 (since 5/31/94)
- --------------------------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND CLASS C 8.34 N/A N/A 6.71 (since 5/31/94)
- --------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND CLASS A
- -------------------------------------------------------------------------------
Growth Of an assumed $10,000 investment in Class A shares
from 1/1/80 to 9/30/97
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1/1/80 12/31/85 12/31/90 9/30/97
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Municipal Bond Fund Class A(1) 10000 16183 25622 43657
Lehman Brothers Municipal Bond Index+ 10000 16515 26190 44373
Consumer Price Index++ 10000 14250 17445 20965
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND CLASS B
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B
shares from 5/31/94 to 9/30/97
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 9/30/97
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Municipal Bond Fund Class B(1) 10000 9744 11444 12174
Lehman Brothers Municipal Bond Index+ 10000 9864 11586 12862
Consumer Price Index++ 10000 10149 10407 10902
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND CLASS C
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C
shares from 5/31/94 to 9/30/97
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 9/30/97
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Municipal Bond Fund Class C(1) 10000 9779 11484 12422
Lehman Brothers Municipal bond Index+ 10000 9864 11586 12862
Consumer Price Index++ 10000 10149 10407 10902
</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 CLASS A SHARES ADJUSTMENT FOR THE MAXIMUM SALES CHARGE OF 4.5
PERCENT, FOR CLASS B SHARES ADJUSTMENT FOR THE APPLICABLE CONTINGENT
DEFERRED SALES CHARGE (CDSC) OF 3 PERCENT AND FOR CLASS C SHARES NO
ADJUSTMENT FOR SALES CHARGE. THE MAXIMUM CDSC FOR CLASS B SHARES IS 4
PERCENT. FOR CLASS C SHARES, THERE IS A 1 PERCENT 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 CLASS A SHARES AND THE CONTINGENT DEFERRED
SALES CHARGE IN EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES. WHEN
REVIEWING THE PERFORMANCE CHART, PLEASE NOTE THAT THE INCEPTION DATE
FOR THE LEHMAN BROTHERS MUNICIPAL BOND INDEX IS JANUARY 1, 1980. AS A
RESULT, WE ARE NOT ABLE TO ILLUSTRATE THE LIFE OF CLASS PERFORMANCE (SINCE
APRIL 20, 1976) FOR KEMPER MUNICIPAL BOND FUND. IN COMPARING KEMPER
MUNICIPAL BOND FUND CLASS A SHARES 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.
7
<PAGE> 8
PORTFOLIO STATISTICS
KEMPER MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 9/30/97 ON 9/30/96
- --------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 72% 74%
- --------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 10 15
- --------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 13 9
- --------------------------------------------------------------------------
CASH AND EQUIVALENTS 5 2
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/97 ON 9/30/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
QUALITY ON 9/30/97 ON 9/30/96
- --------------------------------------------------------------------------
<S> <C> <C>
AAA 47% 58%
- ----------------------------------------------------------------------
AA 14 9
- ----------------------------------------------------------------------
A 10 11
- ----------------------------------------------------------------------
BBB 21 18
- ----------------------------------------------------------------------
BB 3 --
- ----------------------------------------------------------------------
B 1 --
- ----------------------------------------------------------------------
NOT RATED 4 4
- ----------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/97 ON 9/30/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
YEARS TO MATURITY ON 9/30/97 ON 9/30/96
- --------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 15% 11%
- ----------------------------------------------------------------------
11-20 YEARS 49 53
- ----------------------------------------------------------------------
+21 YEARS 36 36
- ----------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/97 ON 9/30/96
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
AVERAGE MATURITY ON 9/30/97 ON 9/30/96
- ------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 16.6 years 17.6 years
- ------------------------------------------------------------------------
</TABLE>
* PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
8
<PAGE> 9
PERFORMANCE UPDATE
- -------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- -------------------------------------------------------------------------------
FOR PERIODS ENDED SEPTEMBER 30, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER INTERMEDIATE MUNICIPAL BOND FUND CLASS A 4.71% 7.10% (since 11/1/94)
- ---------------------------------------------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND CLASS B 3.79 6.34 (since 11/1/94)
- ---------------------------------------------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND CLASS C 6.77 7.31 (since 11/1/94)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPHS]
- -------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND CLASS A
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from 11/1/94 to
9/30/97
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
11/1/94 12/31/94 12/31/95 9/30/97
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Intermediate Municipal Bond Fund Class A(1) 10000 9853 11241 12216
Lehman Brothers Municipal Bond Index+ 10000 10035 11787 13085
Consumer Price Index++ 10000 10013 10268 10756
</TABLE>
[LINE GRAPHS]
- -------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND CLASS B
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 11/1/94 to
9/30/97
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
11/1/94 12/31/94 12/31/95 9/30/97
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Intermediate Municipal Bond Fund Class B(1) 10000 10117 11431 11965
Lehman Brothers Municipal Bond Index+ 10000 10035 11787 13085
Consumer Price Index++ 10000 10013 10268 10756
</TABLE>
[LINE GRAPHS]
- -------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND CLASS C
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 11/1/94 to
9/30/97
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
11/1/94 12/31/94 12/31/95 9/30/97
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Intermediate Municipal Bond Fund Class C(1) 10000 10133 11463 12287
Lehman Brothers Municipal Bond Index+ 10000 10035 11787 13085
Consumer Price Index++ 10000 10013 10268 10756
</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 CLASS A SHARES ADJUSTMENT FOR THE MAXIMUM SALES CHARGE OF 2.75
PERCENT, FOR B SHARES ADJUSTMENT FOR THE APPLICABLE CONTINGENT DEFERRED
SALES CHARGE (CDSC) OF 3 PERCENT AND FOR CLASS C SHARES NO ADJUSTMENT FOR
SALES CHARGE. THE MAXIMUM CLASS B SHARE CDSC IS 4 PERCENT. FOR CLASS C
SHARES, THERE IS A 1 PERCENT 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 CLASS A SHARES AND THE CONTINGENT DEFERRED SALES
CHARGE IN EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES. IN COMPARING
THE KEMPER INTERMEDIATE 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.
9
<PAGE> 10
PORTFOLIO STATISTICS
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 9/30/97 ON 9/30/96
<S> <C> <C>
REVENUE BONDS 70% 70%
- --------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 17 25
- --------------------------------------------------------------------------
US GOVERNMENT SECURED 8 3
- --------------------------------------------------------------------------
CASH AND EQUIVALENTS 5 2
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/97 ON 9/30/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
QUALITY ON 9/30/97 ON 9/30/96
- --------------------------------------------------------------------------
<S> <C> <C>
AAA 48% 62%
- --------------------------------------------------------------------------
AA 14 16
- --------------------------------------------------------------------------
A 5 4
- --------------------------------------------------------------------------
BBB 23 16
- --------------------------------------------------------------------------
NOT RATED 10 2
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/97 ON 9/30/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
YEARS TO MATURITY ON 9/30/97 ON 9/30/96
- --------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 73% 78%
- --------------------------------------------------------------------------
11-20 YEARS 27 22
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/97 ON 9/30/96
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
AVERAGE MATURITY ON 9/30/97 ON 9/30/96
- ------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 7.7 years 9.1 years
- ------------------------------------------------------------------------
</TABLE>
* PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1997
(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>
Camden County, NJ, Municipal Utility Auth., Rev.,
8.25%, to be called 12-01-97 @ 102 $ 9,485 $ 9,745
Power Auth., NY, Electrical Rev., 8.00%, to be called
01-01-98 @ 102 10,000 10,305
Kenton County Airport Board, KY, Greater Cincinnati
Int'l. Airport, Rev., 8.25%, to be called 03-01-98
@ 102 1,620 1,682
Philadelphia, PA, Municipal Auth., Criminal Justice
Center, Rev., 7.80%, to be called 04-01-98 @ 102 365 380
Scioto County, OH, USHCSO-Portsmouth Proj., Hospital
Facilities, Rev., 7.625%, to be called 05-15-98 @
102 2,000 2,087
Riverside County, CA, Riverside Juvenile Facilities
Corp., Certificates of Participation, Rev., 8.00%,
to be called 10-01-98 @ 102 4,000 4,239
Health Facilities Auth., CO, Vail Valley Medical
Center, Rev., 8.125%, to be called 06-01-99 @ 102 7,000 7,588
Clermont County Hospital Facilities, OH, Mercy Health
Systems, Rev., 7.50%, to be called 09-01-99 @ 102 7,720 8,363
Hospital Auth. of Marion County, IN, University
Heights Hospital, Rev., 8.625%, to be called
10-01-99 @ 102 7,195 7,962
Gaithersburg, MD, First Mortgage Economic Dev.,
Asbury Methodist Home Incorporated, Rev., 7.85%, to
be called 01-01-00 @ 102 4,000 4,382
Mental Health Services, NY, Facilities Improvement,
Rev., 7.75%, to be called 02-15-00 @ 102 1,965 2,165
Philadelphia, PA, Municipal Auth., Criminal Justice
Center, Rev., 7.80%, to be called 04-01-00 @ 100 3,635 3,959
Franklin County, OH, Mount Carmel Health Hospital,
Rev., 7.25%, to be called 06-01-00 @ 102 5,495 6,024
Hospital Finance Auth., MI, Henry Ford Health System,
Rev., 7.00%, to be called 07-01-00 @ 102 11,000 12,014
Health and Educational Facilities Auth., MO,
Christian Health Services Dev. Corp., Rev., 6.875%,
to be called 02-15-01 @ 102 7,000 7,708
Local Government Assistance Corp., NY, Rev., 7.375%
and 7.50%, to be called 04-01-01 @ 102 9,675 10,885
Lancaster County Water and Sewer District, SC,
Waterworks and Sewer System Improvement, Rev.,
6.75%, to be called 05-01-01 @ 102 3,000 3,305
Municipal Water Finance Auth., NY, Water and Sewer
System, Rev., 7.00%, to be called 06-15-01 @ 101 760 841
Philadelphia, PA, Gas Works Rev., 7.70%, to be called
06-15-01 @ 102 14,850 16,870
Industrial Dev. Auth., PA, Economic Dev., Rev.,
7.00%, to be called 07-01-01 @ 102 5,000 5,551
Gen. Oblg., NY, 7.75%, to be called 08-15-01 @ 102 3,285 3,748
Clermont County Hospital Facilities, OH, Mercy Health
Systems, Rev., 7.50%, to be called 09-01-01 @ 100 2,280 2,549
Gen. Oblg., NY, 8.40%, to be called 11-15-01 @ 102 27,540 32,286
Austin, TX, Water, Sewer and Electric Rev., 14.00%,
to be called 11-15-01 @ 100 105 123
Chicago, IL, Tax Increment Allocation Bonds, Central
Station, Rev., 8.90%, to be called 01-01-02 @ 102 1,745 2,100
Gen. Oblg., NY, 7.00%, to be called 02-01-02 @ 102 1,095 1,226
Health Facilities Auth., IL, South Suburban Hospital,
Rev., 7.00%, to be called 02-15-02 @ 102 3,055 3,423
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ector County, TX, Hospital District, Rev., 7.30%, to
be called 04-15-02 @ 102 $ 550 $ 627
Dormitory Auth., NY, State University Educational
Facilities, Rev., 7.25%, to be called 05-15-02 @
102 3,810 4,354
Finance Auth., IA, Trinity Regional Hospital Proj.,
Rev., 7.00%, to be called 07-01-02 @ 102 12,000 13,516
City and County of Denver, CO, Airport System Rev.,
7.25% and 7.50%, to be called 11-15-02 @ 102 15,690 18,161
County of Cook, IL, Gen. Oblg., 6.50% and 6.60%, to
be called 11-15-02 @ 102 29,815 33,401
St. Louis County, MO, Regional Convention & Sports
Complex Auth., Rev., 7.00% and 7.90%, to be called
08-15-03 @ 100 9,140 10,621
Jacksonville Health Facilities Auth., FL, Baptist
Medical Center, Rev., 11.50%, to be called 10-01-03
@ 100 10 14
Skyway Toll Bridge, IL, Rev., 6.75%, to be called
01-01-04 @ 102 15,400 17,507
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 8,413
Jacksonville Health Facilities Auth., FL, Baptist
Medical Center, Rev., 11.50%, to be called 10-01-04
@ 100 35 50
Essex County Improvement Auth., NJ, County Jail and
Youth Housing Proj., Lease Rev., 6.90%, to be
called 12-01-04 @ 102 2,645 3,086
Detroit, MI, Gen. Oblg., 6.80%, to be called 04-01-05
@ 101 3,000 3,462
Arapahoe County, CO, Public Highway Auth., Rev.,
6.95% and 7.00%, to be called 08-31-05 @ 103 105,525 125,154
Jacksonville Health Facilities Auth., FL, Baptist
Medical Center, Rev., 11.50%, to be called 10-01-05
@ 100 40 58
Houston, TX, Water and Sewer Junior Lien, Rev.,
6.20%, to be called 12-01-05 @ 100 10,000 11,176
Jacksonville Health Facilities Auth., FL, Baptist
Medical Center, Rev., 11.50%, to be called 10-01-06
@ 100 15 23
Albuquerque Southwest Community Health Services, NM,
Rev., 10.125%, to be called 08-01-08 @ 100 4,000 5,466
---------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--13.2% 426,599
- ------------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------
NEW JERSEY--7.4% Camden County, Municipal Utilities Auth., Rev.,
8.25%, 2017 6,115 6,281
Essex County, Property and Equipment Improvement
Leasing Program, Rev., 6.50%, 2012 4,050 4,486
Health Care Facilities Financing Auth.:
Atlantic City Medical Center, Rev., 6.80%, 2011 6,840 7,499
Southern Ocean County Hospital, Rev., 6.125%, 2013 3,735 3,872
West Jersey Health System, Rev., 6.125%, 2012 11,000 11,746
Jersey City Sewer Auth., Rev., 4.50%, 2019 13,000 11,485
Building Auth., Rev., 5.00%, 2011 through 2013 44,760 44,714
Economic Development Auth., Rev., 5.875%, 2026 1,000 1,015
Salem Pollution Control Financing Auth., Rev., 6.20%,
2030 20,000 21,599
Transportation Trust Fund Auth., Gen. Oblg., 5.50%,
2015 4,420 4,520
Turnpike Auth., Rev., 6.20% to 10.375%, 2003 through
2016 103,950 119,776
---------------------------------------------------------------------------------------
236,993
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ILLINOIS--6.6% Chicago:
Board of Education, Gen. Oblg., 6.00% and 6.25%,
2009 through 2020 $ 27,235 $ 30,237
Gas Supply, Peoples Gas, Light and Coke Company,
Rev., 8.10%, 2020 8,250 9,070
County of Cook, Gen. Oblg., 6.50%, 2013 and 2014 39,780 46,505
Dev. Finance Auth.:
Pollution Control, Commonwealth Edison Company
Proj., Rev., 6.75%, 2015 16,780 18,824
McGaw YMCA- Evanston Proj., 7.50%, 2013 3,750 4,219
Freeport, Single Family Mortgage Rev., 7.40%, 2010 1,165 1,169
Harvard, Multifamily Housing, Northfield Court, Rev.,
8.80%, 2008 3,830 4,101
Health Facilities Auth.:
Northwestern Medical Faculty Foundation, Inc.,
Healthcare Facilities Rev., 6.50%, 2015 3,900 4,317
South Suburban Hospital, Rev., 7.00%, 2009 4,695 5,320
O'Hare International Airport:
General Rev., 6.00% and 6.375%, 2012 20,000 21,670
International Terminal, Special Rev., 6.75%, 2018 23,350 25,396
Regional Transportation Auth., Gen. Oblg., 6.70%,
2021 25,800 30,641
Sports Facilities Auth., Rev., 7.875%, 2010 2,990 3,210
St. Charles, Wessel Court Proj., Multifamily Housing
Rev., 7.60%, 2024 3,845 3,978
University Park, Governors Gateway Industrial Park,
Tax Increment Rev., 8.50%, 2011 2,865 3,241
---------------------------------------------------------------------------------------
211,898
- ------------------------------------------------------------------------------------------------------------------
NEW YORK--6.2% Dormitory Auth., State University Educational
Facility, Rev., 5.75% and 6.00%, 2013 and 2014 12,500 13,698
Environmental Quality, Gen. Oblg., 6.50%, 2011 4,260 4,772
Environmental Facilities Corp., State Water Pollution
Control, Revolving Fund Rev., 6.875% to 7.25%, 2010
through 2014 18,875 21,285
Medical Care Facilities Finance Agcy.:
Hospital, Mortgage Rev., 6.75%, 2014 8,000 8,997
Hospital and Nursing Home, Rev., 6.45%, 2009 8,640 9,476
Mental Health Services Facilities Improvement,
Rev., 7.75%, 2010 1,970 2,155
Metropolitan Transit Auth.:
Commuter Facilities, Rev., 5.00%, 2013 through 2015 46,215 45,479
Transit Facilities, Rev., 6.00% and 6.25%, 2020 and
2014 11,000 12,052
New York City:
Gen. Oblg., 5.875% to 8.40%, 2000 through 2019 28,505 30,303
Industrial Dev. Auth., USTA National Tennis Center
Inc. Proj., Civil Facility Rev., 6.50% and 6.60%,
2010 and 2011 6,485 7,300
Municipal Water Finance Auth., Rev., 7.00%, 2015 740 812
Port Auth. of New York and New Jersey, Rev., 6.00% to
9.125%, 2008 through 2015 17,595 19,092
Triborough Bridge and Tunnel Auth., Rev., 8.125%,
2012 14,000 14,436
Urban Dev. Corp., Correctional Facilities, Rev.,
5.60% and 5.70%, 2015 and 2020 8,255 8,532
---------------------------------------------------------------------------------------
198,389
- ------------------------------------------------------------------------------------------------------------------
COLORADO--5.2% Adams County, Gen. Oblg., 6.125%, 2007 4,280 4,636
Arapahoe County, Public Highway Auth., Rev., zero
coupon to 5.75%, 2014 through 2023 184,840 65,152
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
City and County of Denver:
Airport System Rev., 6.55% to 8.75%, 2002 through
2023 $ 52,065 $ 58,200
Gen. Oblg., 6.50%, 2010 6,225 7,227
Douglas County School District No. 1, Douglas and
Elbert Counties, Gen. Oblg., 7.00% and 6.50%, 2013
and 2016 10,715 13,032
Health Facilities Auth., Covenant Retirement
Communities, Inc., Rev., 6.75%, 2015 and 2025 5,900 6,325
Housing Finance Auth., Single Family Mortgage Rev.,
7.65%, 2022 600 630
Metropolitan Wastewater Reclamation District, Gen.
Oblg., 6.00%, 2010 11,505 12,129
---------------------------------------------------------------------------------------
167,331
- ------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--5.1% Turnpike Auth., Rev., zero coupon, 2017 through 2022 74,000 22,006
Bay Transit Auth., General Transportation System,
Rev., 5.00% to 6.20%, 2011 through 2016 45,505 47,482
Consolidated Loan Series B, Gen. Oblg., 5.00% to
6.50%, 2011 through 2014 22,040 22,320
Municipal Wholesale Electric Company, Power Supply
System, Rev., 6.00% to 6.75%, 2011 through 2018 37,055 39,638
Port Auth., Rev., 13.00%, 2013 1,500 2,558
Water Restoration Auth., Rev., 6.00%, 2011 and 2020 29,905 31,842
---------------------------------------------------------------------------------------
165,846
- ------------------------------------------------------------------------------------------------------------------
TEXAS--4.7% Austin:
Combined Utility Systems Rev., 6.00%, 2013 9,500 10,582
Water, Sewer and Electric Rev., 14.00%, 2001 2,895 3,545
Brazos River Auth., Texas Utilities Electric Company
Proj., Rev., 8.125%, 2020 4,495 4,896
Denison Hospital Auth. Rev., 6.125%, 2012 and 2027 7,790 7,993
Department of Housing and Community Affairs, Rev.,
6.40%, 2027 3,350 3,559
Georgetown Higher Education Finance Corp.,
Southwestern University Proj., Rev., 6.25%, 2009 840 896
Gulf Coast Waste Disposal Auth., Rev., 6.875%, 2028 12,750 13,919
Harris County:
Hospital District, Mortgage Rev., 7.40%, 2010 6,940 8,276
Toll Road Unlimited Tax and Subordinate Lien, Rev.,
6.75%, 2014 15,000 16,417
Housing Agcy., Single Family Mortgage Rev., 7.15%,
2012 855 901
Houston, Higher Education Finance Corp., University
of St. Thomas, Rev., 7.25%, 2007 1,445 1,561
Lower Colorado River Authority, Rev., 6.375%, 2027 3,800 4,022
Port Arthur Airport and Marina Improvement, Gen.
Oblg., 6.125%, 2019 9,000 9,454
Rio Grande Valley, Health Facilities Dev. Corp.,
Golden Palms Retirement and Health Center, Rev.,
6.40%, 2012 3,700 4,028
Sabine River Auth., Texas Utilities Electric Company,
Rev., 6.10% and 8.125%, 2018 and 2020 31,670 33,828
State of Texas - Public Finance Auth., Gen. Oblg.,
7.00%, 2012 10,739 11,231
State Veteran's Land Bonds, Gen. Oblg., 6.40%, 2024 8,550 9,151
Titus County Hospital District Improvement, Rev.,
6.125%, 2013 6,700 6,853
Travis County Housing Finance Corp., Residential
Mortgage, Senior Rev., 7.00%, 2011 360 384
---------------------------------------------------------------------------------------
151,496
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA--4.6% Dept. of Water Resources, Rev., 5.00%, 2014 and 2015 $ 13,100 $ 12,901
City of Santa Clara, Sports and Open Space Auth.,
Certificates of Participation, Rev., 4.75%, 2014 5,000 4,696
Foothill/Eastern Transit Corridor Agcy., Tollroad
Rev., 5.00% to 6.50%, 2016 through 2035 61,575 63,894
Imperial Irrigation District, Certificates of
Participation, Electric System Proj., Rev., 6.75%,
2011 3,500 3,947
San Diego Industrial Dev. Auth., Rev., 6.10%, 2019 14,600 15,442
San Joaquin Hills, Rev., zero coupon, 2013 through
2026 155,700 47,897
---------------------------------------------------------------------------------------
148,777
- ------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA--4.1% Allegheny County:
Environmental Improvement Rev., 6.10%, 2018 and
2020 11,640 12,129
Airport, 5.75%, 2011 through 2014 14,605 15,553
Armstrong County Hospital Auth., St. Francis Medical
Center Proj., Rev., 6.25%, 2013 11,350 12,074
Columbia County, Industrial Dev. Auth., First
Mortgage Rev., 9.00%, 2014 1,555 1,732
Convention Center Auth., Rev., 6.70% and 6.75%, 2014
and 2019 12,525 13,728
Hazelton-Saint Joseph Medical Center, Rev., 6.125%
and 6.20%, 2016 and 2026 6,705 6,962
Higher Educational Facilities Auth., College Rev.,
5.85% and 5.90%, 2017 and 2027 4,875 4,978
Jenrette City Health Services Auth., Rev., 6.00%,
2018 945 971
Lehigh County, General Purpose Auth., Lehigh Valley
Hospital Inc., Rev., 6.50%, 2010 6,000 6,556
McKean County Hospital Auth., Bradford Hospital
Proj., Rev., 5.95% and 6.10%, 2008 and 2020 8,300 8,454
Monroeville, Hospital Auth., Forbes Health System,
Rev., 6.25%, 2015 6,375 6,677
New Castle Area Hospital Auth., Rev., 6.00%, 2010 845 933
Philadelphia:
Gas Works Rev., 6.375%, 2014 31,080 33,207
Municipal Auth., Lease Rev., 6.25% and 6.30%, 2013
and 2017 4,800 5,010
Wilkes Barre Area School District, Rev., 5.25%, 2014 3,830 3,836
---------------------------------------------------------------------------------------
132,800
- ------------------------------------------------------------------------------------------------------------------
WASHINGTON--3.1% Gen. Oblg. Refunding Bonds, 5.00%, 2011 17,870 17,833
King County, Gen. Oblg., 6.625% and 6.25%, 2015 and
2032 33,840 37,174
Public Power Supply System, Nuclear Proj. #1, Rev.,
5.125%, 2013 34,600 33,596
Public Power Supply System, Nuclear Proj. #3, Rev.,
5.20% and 5.375%, 2012 and 2015 12,675 12,634
---------------------------------------------------------------------------------------
101,237
- ------------------------------------------------------------------------------------------------------------------
NEW MEXICO--2.7% Albuquerque:
Health Care, Ltd. Proj., Rev., 9.75%, 2014 1,375 1,439
Southwest Community Health Services, Rev., 10.00%,
2003 810 986
Farmington, Pollution Control Rev., 6.30% to 6.95%,
2016 through 2023 72,795 76,915
Los Alamos County, Utility System, Rev., 6.10%, 2010 4,400 4,766
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Socorro Hospital System, Southwest Community Health
Services, Rev., 10.00%, 2003 $ 1,240 $ 1,509
Truth or Consequences, Nursing Home Improvement,
Sierra Health Care, Inc., Rev., 9.75%, 2014 920 962
---------------------------------------------------------------------------------------
86,577
- ------------------------------------------------------------------------------------------------------------------
MARYLAND--2.7% City of Gaithersburg, Economic Dev., Asbury Methodist
Home Incorporated, First Mortgage Rev., 5.50%, 2015
and 2020 15,500 15,413
Community Dev. Administration, Department of Housing
and Community Dev., Rev., 7.85%, 2029 4,040 4,178
Energy Financing Administration, AES Warrior Run
Proj., Rev., 7.40%, 2019 24,100 26,390
Health & Higher Educational Facilities Auth.,
Doctors' Community Hospital Proj., Rev., 5.75% and
5.50%, 2013 and 2024 19,885 19,394
Northeast Maryland Waste Disposal Auth., Southwest
Resource Recovery Facility, Rev., 7.20%, 2006 1,500 1,739
Stadium Auth., Sports Facilities Lease Rev., 7.60%,
2019 17,200 18,733
---------------------------------------------------------------------------------------
85,847
- ------------------------------------------------------------------------------------------------------------------
OHIO--2.6% Air Quality, Rev., 6.10%, 2020 5,000 5,084
Building Authority:
Highway Safety Building Fund Proj., Rev., 5.50% and
5.60%, 2014 and 2015 6,840 7,062
Worker's Compensation Facility, William Green
Building, Rev., 4.75%, 2014 10,230 9,605
City of Springdale, Hospital Facilities First
Mortgage, Southwestern Ohio Seniors Services, Rev.,
6.00%, 2018 1,250 1,280
Cleveland, Public Power System Improvement, First
Mortgage Rev., 7.00%, 2017 850 910
Cuyahoga County:
Meridia Health System, Hospital Rev., 6.25%, 2014 7,050 7,548
Port Auth., Rev., 6.00%, 2007 1,250 1,262
Higher Education Facility Commission, Rev., 6.70%,
2003 6,725 7,264
Lucas County Health Facilities, Rev., 6.625% and
6.75%, 2014 and 2020 4,000 4,190
Marion County Health Care Facilities and Improvement,
United Church Homes Proj., Rev., 6.375% and 6.30%,
2010 and 2015 6,900 7,210
North Olmstead City, Gen. Oblg., 6.20%, 2011 300 340
Village of Green Springs, St. Francis Health Care
Center Proj., Rev., 7.00% and 7.125%, 2014 and 2025 8,640 9,200
Water Development Auth., Pollution Control Rev.,
6.10%, 2020 8,000 8,134
Waterworks Improvement First Mortgage Rev., 6.50%,
2011 4,580 5,008
Willoughby Industrial Dev. Auth., Rev., 6.875%, 2016 2,250 2,387
Worthington City School District, Gen. Oblg., 6.375%,
2012 6,210 6,771
---------------------------------------------------------------------------------------
83,255
- ------------------------------------------------------------------------------------------------------------------
FLORIDA--2.0% Broward County:
Airport System Rev., 7.625%, 2013 2,620 2,756
Waste Energy Company, Rev., 7.95%, 2008 12,815 13,969
Citrus County, Pollution Control Rev., 6.35%, 2022 7,000 7,461
Greater Orlando Aviation Auth., Rev., 8.375%, 2016 3,065 3,244
Hillsborough County Industrial Dev. Auth., Tampa
Electric, Rev., 8.00%, 2022 10,000 11,589
Jacksonville Health Facilities Auth., Baptist Medical
Center, Rev., 11.50%, 2012 85 142
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Orange County Health Facilities Auth., Rev., 6.25%,
2016 and 2021 $ 7,000 $ 7,948
Orlando Utilities Commission, Water and Electrical
Rev., 6.75%, 2017 3,500 4,194
Pasco County, Solid Waste Disposal and Resource
Recovery, Rev., 7.80%, 2011 13,730 14,310
---------------------------------------------------------------------------------------
65,613
- ------------------------------------------------------------------------------------------------------------------
MICHIGAN--1.9% Building Auth., Rev., 6.75%, 2011 9,750 10,656
City of Battle Creek and Calhoun County, Downtown
Dev. Auth., Tax Increment Rev., 7.60%, 2016 3,800 4,408
Detroit:
Gen. Oblg., 6.25% and 6.70%, 2010 5,910 6,370
Sewage Disposal System, Rev., 5.70%, 2023 12,400 12,577
Hospital Finance Auth.:
Gratiot Community Hospital, Rev., 6.10%, 2007 2,250 2,361
McLaren Oblg. Group, Rev., 5.375% and 4.50%, 2013
and 2021 27,935 24,863
---------------------------------------------------------------------------------------
61,235
- ------------------------------------------------------------------------------------------------------------------
KENTUCKY--1.8% Dev. Finance Auth., Baptist Hospital Inc., Rev.,
7.625%, 2011 2,000 2,102
Hopkins County, The Trover Clinic Foundation, Rev.,
6.625%, 2011 4,000 4,372
Kenton County Airport Board, Greater Cincinnati
International Airport, Rev., 6.30% to 8.25%, 2015
through 2021 44,300 47,919
Trimble County, Louisville Gas & Electric Company,
Rev., 7.75%, 2019 1,840 1,896
Turnpike Auth., Toll Road, Rev., 8.50%, 2004 780 791
---------------------------------------------------------------------------------------
57,080
- ------------------------------------------------------------------------------------------------------------------
INDIANA--1.7% Health Facility Financing Auth., Fayette Memorial
Hospital, Rev., 7.20%, 2022 1,800 1,928
Indianapolis Airport Auth., Maintenance Center Proj.,
Rev., 6.50%, 2031 21,100 22,382
Industrial Dev. Finance Auth., Environmental
Improvement, Rev., 6.25%, 2030 7,920 8,278
Transportation Financing Auth., Highway Rev., 7.25%,
2015 4,000 4,908
Trustees of Purdue University, Student Fees, Rev.,
6.75% and 6.70%, 2009 and 2015 14,250 15,931
---------------------------------------------------------------------------------------
53,427
- ------------------------------------------------------------------------------------------------------------------
ARIZONA--1.6% City of Phoenix:
Gen. Oblg., 6.375%, 2011 7,400 8,084
Streets and Highway User, Rev., 6.25%, 2011 10,000 10,831
Cocinino County, Industrial Dev. Auth., Health Care
Institution, The Guidance Center, Inc. Proj., Rev.,
9.25%, 2011 585 655
Pima County, Industrial Dev. Auth., Rev., 6.00%, 2029 23,000 23,180
Salt River Proj., Rev., 6.25%, 2019 8,000 8,568
---------------------------------------------------------------------------------------
51,318
- ------------------------------------------------------------------------------------------------------------------
MISSOURI--1.5% Health and Educational Facilities Auth., Rev., 5.75%,
2017 3,250 3,258
Clarence Cannon Wholesale Water Commission, Water
Rev., 6.00%, 2020 10,000 10,145
</TABLE>
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lake of the Ozarks Community Bridge Corp., Bridge
System, Rev., 6.25% and 6.40%, 2016 and 2025 $ 15,550 $ 15,759
Sikeston, Electric System, Rev., 6.20%, 2010 6,870 7,768
St. Louis:
Regional Convention & Sports Complex Auth., Gen.
Oblg., 7.90%, 2021 240 268
Scullin Redev. Proj., Tax Increment Rev., 10.00%,
2010 8,395 10,371
-------------------------------------------------------------------------------------------
47,569
- ----------------------------------------------------------------------------------------------------------------------
ALABAMA--1.4% Birmingham-Jefferson Civic Center Auth., Capital
Outlay, Special Tax Rev., 7.40%, 2008 12,000 12,694
City of Mobile, Mobile Energy Services, Industrial
Dev. Board, Rev., 6.95%, 2020 22,000 24,077
Hoover, Gen. Oblg., 4.50%, 2013 8,545 7,864
-------------------------------------------------------------------------------------------
44,635
- ----------------------------------------------------------------------------------------------------------------------
GEORGIA--1.4% Chatham County School District, Gen. Oblg., 6.15%,
2010 7,300 7,781
Fulton-DeKalb Hospital Auth., Rev., 6.55% and 6.60%,
2018 and 2028 4,430 4,648
Housing and Finance Auth., Rev., 6.25%, 2028 14,510 15,207
Municipal Electric Auth.:
Power Rev., 8.125% and 6.60%, 2017 and 2018 11,000 12,042
Special Oblg., 6.60%, 2018 3,500 4,104
-------------------------------------------------------------------------------------------
43,782
- ----------------------------------------------------------------------------------------------------------------------
UTAH--1.3% Housing Finance Agcy., Single Family Mortgage Rev.,
8.625%, 2019 495 522
Intermountain Power Agcy., Power Supply System, Rev.,
5.75 and 7.50%, 2019 and 2021 38,305 39,668
West Valley City, Salt Lake County Excise Tax, Rev.,
10.625%, 2004 845 1,046
-------------------------------------------------------------------------------------------
41,236
- ----------------------------------------------------------------------------------------------------------------------
ARKANSAS--1.3% Jonesboro Residential Housing & Health Care
Facilities Board, Rev., 5.80%, 2012 4,025 4,289
North Little Rock, Electric System, Rev., 6.50%, 2010
and 2015 31,830 36,851
-------------------------------------------------------------------------------------------
41,140
- ----------------------------------------------------------------------------------------------------------------------
TENNESSEE--1.2% Housing Dev. Agcy., Mortgage Finance Program, Rev.,
7.05% and 7.125%, 2020 and 2026 25,470 27,147
Metropolitan Nashville Airport Auth., Airport
Improvement, Rev., 6.60%, 2015 5,250 5,727
Metropolitan Government, Nashville and Davidson
County, Gen. Oblg., 5.10%, 2014 5,805 5,810
-------------------------------------------------------------------------------------------
38,684
</TABLE>
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONNECTICUT--1.2% Dev. Auth.:
Pierce Memorial Baptist Home, Rev., 9.25%, 2018 $ 1,140 $ 1,257
Water Facilities Rev., 6.15% and 6.00%, 2035 and
2036 18,200 18,863
Greenwich Housing Auth., Rev., 6.35%, 2027 2,640 2,648
Mashantucket Western Pequot Tribe, Rev., 5.75%, 2027 9,000 8,974
Transportation Infrastructure Purposes, Special Tax
Oblg., Rev., 6.10%, 2012 5,450 5,883
-------------------------------------------------------------------------------------------
37,625
- ----------------------------------------------------------------------------------------------------------------------
MINNESOTA--1.0% City of Minneapolis, Housing Redev. Auth., Health
Care System, Rev., 4.75%, 2018 22,200 20,367
City of St. Louis Park, Methodist Hospital Proj.,
Rev., 7.25%, 2015 6,650 7,297
Housing Finance Agcy., Single Family Mortgage Bonds,
Rev., 7.90%, 2019 5,630 5,851
-------------------------------------------------------------------------------------------
33,515
- ----------------------------------------------------------------------------------------------------------------------
STATES LESS THAN AK, Energy Auth., Bradley Lake Hydroelectric Power,
ONE PERCENT--7.3% Rev., 7.25%, 2016 4,675 5,002
AK, Municipality of Anchorage, Municipal Light and
Power, Electric Rev., 6.50%, 2015 5,000 5,819
AK, North Slope Borough, Gen. Oblg., zero coupon and
13.00%, 1998 and 2008 11,635 7,145
D.C., Gen. Oblg., 6.30%, 2010 4,500 4,889
D.C., Georgetown University, Rev., 8.25%, 2018 11,410 11,873
D.C., Metropolitan Washington Airports Auth., Airport
System Rev., 7.60%, 2014 3,000 3,298
D.C., Redevelopment Land Agcy., Sports Arena Special
Tax, Rev., 5.625%, 2010 9,305 9,343
HI, Gen. Oblg., Rev., 5.50%, 2014 and 2016 17,920 18,294
IA, Finance Auth., GNMA Mortgage-Backed Securities
Program, Single Family Mortgage Rev., 7.90%, 2022 2,100 2,200
LA, Centenary College of Louisiana Project, Rev.,
5.75% and 5.90%, 2012 and 2017 2,000 2,025
LA, Parish School Board of the Parish of Jefferson,
Sales Tax, Gen. Oblg., 6.25%, 2008 11,000 11,936
ME, Health and Higher Education Facilities Auth.,
Rev., 7.10%, 2014 2,750 3,161
MT, Board of Housing, Rev., 6.15%, 2030 10,420 10,743
NC, Durham County, 1991 Jail Facilities and Computer
Equipment Financing Proj., Rev., 6.625%, 2014 5,500 5,856
NC, Eastern Municipal Power Agcy., Power System,
Rev., 6.00%, 2022 18,775 20,610
ND, Housing Finance Agcy., Single Family Mortgage
Program, Rev., 8.05%, 2024 955 1,001
NE, Investment Finance Auth., Rev., 6.70% and 6.30%,
2026 and 2028 6,520 6,856
NE, Omaha Public Power District Electric System,
Rev., 6.20%, 2017 4,700 5,200
NE, Scotts Bluff County, Hospital Auth., West Medical
Proj. Center, Rev., 6.45%, 2004 4,535 4,937
NH, Higher Education and Health Facilities Auth.,
Havenwood - Heritage Heights Issue, Rev., 7.35% and
7.45%, 2018 and 2025 6,500 6,869
NV, City of Reno, Redev. Agcy., Tax Allocation Rev.,
5.65% and 5.75%, 2013 and 2017 7,165 7,109
NV, Humboldt County, Pollution Control, Idaho Power
Company, Rev., 8.30%, 2014 9,650 11,518
OK, Valley View Hospital Auth., Rev., 5.75% and
6.00%, 2006 and 2014 7,040 7,247
</TABLE>
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OK, Woodward Municipal Auth., Hospital Rev., 6.45%,
2014 $ 2,070 $ 2,172
SC, Charleston County, Public Facilities Corp.,
Certificates of Participation, Rev., 6.875% and
7.00%, 2014 and 2019 355 401
SC, Darlington County, Carolina Power & Light Company
Proj., Pollution Control Rev., 6.60%, 2010 7,500 8,373
SC, Grand Strand, Water and Sewer, Rev., 6.375%, 2012 5,000 5,751
SC, Santee Cooper, Public Service Auth., Rev., 6.25%,
2022 7,000 7,566
VA, Richmond, Gen. Oblg., 6.25%, 2018 2,665 2,817
WI, Health and Education Facilities Auth., Wausau
Hospitals, Inc., Proj., Rev., 6.625%, 2011 3,000 3,238
WY, Community Dev. Auth., Rev., 6.35%, 2029 5,000 5,243
WY, Community Dev. Auth., Single Family Mortgage
Rev., 7.875% and 8.125%, 2017 and 2021 1,575 1,650
P.R., Commonwealth Highway and Transportation Auth.,
Rev., 6.25%, 2016 11,400 13,022
P.R., Industrial, Tourist Educational, Medical and
Environmental, Rev., 6.50%, 2026 9,190 9,759
V.I., Public Finance Auth., Rev., 7.25%, 2018 3,000 3,351
-----------------------------------------------------------------------------------------
236,274
-----------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--81.6% 2,623,579
-----------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--94.8%
(Cost: $2,842,063) 3,050,178
-----------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield-2.85% to 4.20%
INSTRUMENTS--8.4% Due-October 1997
-----------------------------------------------------------------------------------------
CA, L.A. Airport, Rev. 20,500 20,500
-----------------------------------------------------------------------------------------
CA, Pollution Control Financing Auth., Rev. 15,000 15,000
-----------------------------------------------------------------------------------------
D.C., Washington, Gen. Oblg. 14,100 14,100
-----------------------------------------------------------------------------------------
NY, New York City, Municipal Water Finance Auth.,
Rev. 28,800 28,800
-----------------------------------------------------------------------------------------
TX, Brazos Utilities, Rev. 35,200 35,200
-----------------------------------------------------------------------------------------
Others 155,365 155,365
-----------------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--8.4%
(Cost: $268,965) 268,965
-----------------------------------------------------------------------------------------
TOTAL INVESTMENTS--103.2%
(Cost: $3,111,028) 3,319,143
-----------------------------------------------------------------------------------------
LIABILITIES, LESS OTHER ASSETS--(3.2)% (102,922)
-----------------------------------------------------------------------------------------
NET ASSETS--100% $3,216,221
-----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $3,111,028,000 for federal income tax
purposes at September 30, 1997, the gross unrealized appreciation was
$208,414,000, the gross unrealized depreciation was $299,000 and the net
unrealized appreciation on investments was $208,115,000.
See accompanying Notes to Financial Statements.
20
<PAGE> 21
PORTFOLIO OF INVESTMENTS
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1997
(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>
Richmond, VA, Gen. Oblg., 6.875%, to be called
01-15-00 @ 102 $100 $ 108
Bay Transportation Auth., MA, Rev., 7.625%, to
be called 03-01-00 @ 102 115 126
Dormitory Auth., NY, State University
Educational Facilities, Rev., 7.25%, to be
called
05-15-00 @ 102 145 159
Local Government Assistance Corp., NY, Rev.,
7.00%, to be called 04-01-01 @ 102 100 111
Philadelphia, PA, Gas Works Rev., 7.70%, to be
called 06-15-01 @ 102 120 136
Gen. Oblg., MA, 7.00%, to be called
07-01-01 @ 102 275 306
Arlington County, VA, Industrial Dev. Auth.,
Arlington Hospital, Rev., 7.125%, to be
called 09-01-01 @ 102 90 101
North Broward, FL, Hospital District, Rev.,
6.125%, to be called 01-01-02 @ 102 285 310
Arapahoe County, CO, Capital Improvement,
Highway, Rev., 6.90%, to be called 08-31-05 @
103 300 354
------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--7.8% 1,711
- -----------------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA--9.7% Allegheny County Hospital Dev. Auth., Magee
Women's Hospital, Rev., 6.25%, 2008 300 328
Columbia County Industrial Dev. Auth., First
Mortgage Rev., 9.00%, 2014 290 323
Health Services Auth. of Hazleton,
Hazleton-Saint Joseph Medical Center, Rev.,
5.85%, 2006 220 227
Higher Educational Facilities Auth., Rev.,
5.50%, 2007 265 273
Intergovernmental Cooperation Auth., City of
Philadelphia Funding Program, Rev., 6.00%,
2002 285 306
McKean County Hospital Auth., Bradford
Hospital, Proj., Rev., 5.375%, 2003 350 359
Monroeville Hospital Auth., Forbes Health
System, Rev., 5.75%, 2005 300 313
-----------------------------------------------------------------------------
2,129
</TABLE>
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OHIO--9.7% Building Auth., Adult Correctional Building
Fund Proj., Gen. Oblg., 6.125%, 2010 $400 $ 434
Cleveland Water Works Systems, Rev., 6.125%,
2003 450 487
County of Athens, Inn-Ohio of Athens, Inc.
Proj., Economic Dev. Rev., 6.25%, 2011 220 230
Higher Education Facility Commission, The
University Of Findlay 1996 Proj., Rev.,
5.75%, 2007 375 391
Lucas County Health Facilities, Rev., 6.10%,
2006 300 315
Marion County, Health Care Facilities Refunding
and Improvement, United Church Homes, Inc.
Proj., Rev., 6.30%, 2015 250 260
Water Dev. Auth., Pure Water Improvement Proj.,
Rev., 5.75%, 2003 5 5
------------------------------------------------------------------------------
2,122
- -----------------------------------------------------------------------------------------------------------------------
TEXAS--9.0% Amarillo County, Rev., zero coupon, 2004 650 486
Denison Hospital Auth., Texoma Medical Center
Inc. Proj., Rev., 5.90%, 2007 300 316
Fort Worth, Water and Sewer Rev., 5.90%, 2001 80 84
Harris County, Criminal Justice Center, Gen.
Oblg., 7.50%, 2004 and 2005 400 477
Houston Higher Education Finance Corp.,
University of St. Thomas, Rev., 7.25%, 2007 100 108
North Richland Hills, Gen. Oblg., 6.00%, 2002 195 208
Public Finance Auth., Building Rev., 5.875%,
2002 210 223
Trinity River Auth., Ten Mile Creek System,
Rev., 5.50%, 2002 70 74
------------------------------------------------------------------------------
1,976
- -----------------------------------------------------------------------------------------------------------------------
MICHIGAN--9.0% Detroit, Gen. Oblg., 6.70%, 2010 300 328
Grand Rapids, Downtown Dev. Auth., Rev., 6.20%,
2004 175 192
Macomb County, Chippewa Valley Schools, Gen.
Oblg., 7.00%, 2001 350 383
Higher Educational Facilities Auth., Rev.,
5.40% and 5.75%, 2006 and 2013 500 519
State Building Auth., Rev., 6.25% and 6.50%,
2000 and 2004 165 184
State Hospital Finance Auth., Gratiot Community
Hospital, Rev., 6.10%, 2007 350 367
------------------------------------------------------------------------------
1,973
- -----------------------------------------------------------------------------------------------------------------------
NEW YORK--6.3% New York City:
Gen. Oblg., 6.50% and 5.75%, 2002 and 2003 200 214
Industrial Dev. Auth., USTA National
Tennis Center Inc. Proj., Rev., 6.10%, 2004 200 219
Niagara Falls, Water Treatment Plant, Rev.,
6.40%, 2004 100 111
Port Auth., of New York and New Jersey, JFK
International Air Terminal LLC Proj., Rev.,
6.25%, 2008 500 563
Thruway Auth., Local Highway and Bridge Service
Contract, Gen. Oblg., 6.00%, 2002 265 281
------------------------------------------------------------------------------
1,388
</TABLE>
22
<PAGE> 23
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA--4.9% Central Valley Financing Auth., Carson
Ice-Gen Proj., Cogeneration Proj. Rev.,
6.00%, 2009 $250 $ 261
Fresno, Water System, Water Remediation Proj.,
Rev., 7.50%, 2004 160 190
Sacramento Cogeneration Auth., Procter & Gamble
Proj., Rev., 7.00%, 2004 200 227
San Joaquin Hills Transportation Corridor
Agcy., Toll Road, Rev., zero coupon, 2012 825 393
------------------------------------------------------------------------------
1,071
- -----------------------------------------------------------------------------------------------------------------------
ARIZONA--4.8% Cocinino County, Industrial Dev. Auth., Health
Care Institution, The Guidance Center, Inc.
Proj., Rev., 9.25%, 2011 295 330
Phoenix Civic Improvement Corp., Water System
Rev., 6.375%, 2005 495 556
State University Board of Regents, Rev., 6.50%,
2001 85 92
Transportation Board, Highway Rev., 6.10%, 2002 70 76
------------------------------------------------------------------------------
1,054
- -----------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA--3.7% Horry County School District, Gen. Oblg.,
7.00%, 2002 250 276
York County School District, Gen. Oblg., 7.00%,
2004 460 526
------------------------------------------------------------------------------
802
- -----------------------------------------------------------------------------------------------------------------------
OKLAHOMA--3.0% Muskogee County, Gen. Oblg., 6.00%, 2001 10 11
Valley View Hospital Auth., Rev., 5.75%, 2006 350 360
Woodard Municipal Auth., Hospital Rev., 5.60%,
2004 270 282
------------------------------------------------------------------------------
653
- -----------------------------------------------------------------------------------------------------------------------
INDIANA--2.8% Johnson County Hospital Association, Rev.,
6.50%, 2002 300 327
Trustees of Purdue University, Student Fees,
Rev., 6.70%, 2015 250 279
------------------------------------------------------------------------------
606
- -----------------------------------------------------------------------------------------------------------------------
NEW JERSEY--2.7% Middlesex County Utility Auth., Solid Waste
System, Rev., 6.10%, 2001 300 322
Transportation Auth., Rev., 6.50%, 2011 225 262
------------------------------------------------------------------------------
584
- -----------------------------------------------------------------------------------------------------------------------
MISSOURI--2.4% State Health & Education Facilities Auth., Lake
of the Ozarks, General Hospital Rev., 5.50%
and 6.00%, 2001 and 2006 500 519
- -----------------------------------------------------------------------------------------------------------------------
ILLINOIS--2.1% Health Facilities Auth., Franciscan Sisters
Health Care Corp. Proj., Rev., 6.25%, 2002 350 379
McHenry and Lake County School District Number
15, Certificates of Participation, Rev.,
6.125%, 2003 85 93
------------------------------------------------------------------------------
472
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KENTUCKY--1.9% Lexington-Fayette Urban County, University of
Kentucky Alumni Association, Commonwealth
Library Proj., Rev., 6.50%, 2009 $300 $ 337
University of Kentucky, Consolidated
Educational Building, Rev., 6.00%, 1999 70 72
------------------------------------------------------------------------------
409
- -----------------------------------------------------------------------------------------------------------------------
NEVADA--1.5% Clark County, Motor Vehicle Fuel Tax Rev.,
5.625%, 2002 70 74
State, Gen. Oblg., 5.90%, 2001 250 264
------------------------------------------------------------------------------
338
- -----------------------------------------------------------------------------------------------------------------------
LOUISIANA--1.5% State, Gen. Oblg., 7.00%, 2001 300 328
- -----------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--1.5% Bay Transportation Auth., Rev., 6.50%, 2004 5 6
Commonwealth of MA, Gen. Oblg., 6.25%, 2003 250 273
Water Pollution Abatement Trust, SESD Loan
Program, Rev., 6.20%, 2010 45 49
------------------------------------------------------------------------------
328
- -----------------------------------------------------------------------------------------------------------------------
ARKANSAS--1.5% North Little Rock, Electric System, Rev., 6.00%
and 6.15%, 2001 and 2003 295 322
- -----------------------------------------------------------------------------------------------------------------------
MAINE--1.3% Health and Higher Education Facilities Auth.,
Rev., 6.30% and 6.50%, 2004 and 2006 260 288
- -----------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA--1.3% Redev. Land Agency, Sports Arena Special Tax,
Rev., 5.625%, 2010 285 286
- -----------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE--1.2% Higher Education and Health Facilities Auth.,
Havenwood-Heritage Heights Issue, Rev.,
7.10%, 2006 250 259
- -----------------------------------------------------------------------------------------------------------------------
PUERTO RICO--1.2% Bank and Finance Agcy., Affordable Housing,
Single Family Mortgage Rev., 5.90%, 2010 250 257
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STATES LESS THAN AK, Student Loan, Gen. Oblg., 5.55%, 2010 $200 $ 204
ONE PERCENT--3.7%
CT, State, Gen. Oblg., 5.95%, 2000 5 5
FL, Broward County School District, Gen. Oblg.,
6.00%, 2004 70 76
FL, Department of Natural Resources,
Preservation 2000, Rev., 6.20%, 1999 80 83
FL, Hillsborough County Aviation Auth., Tampa
International Airport, Rev., 6.90%, 2011 5 5
GA, Atlanta International Airport, Rev., 6.50%,
2013 70 75
HI, State, Gen. Oblg., 7.25%, 2000 145 158
MD, Howard County, Consolidated Public
Improvement, Gen. Oblg., 6.90%, 1999 70 73
NE, Public Power District, Nuclear Facility,
Rev., 5.70%, 2004 50 53
WA, Tacoma, Electric System, Rev., 5.80%, 2004 70 75
------------------------------------------------------------------------------
807
------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--86.7% 18,971
------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--94.5%
(Cost: $19,574) 20,682
------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--2.80% to 3.75%
INSTRUMENTS--3.6%
Due--October 1997
(Cost: $800) 800 800
------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.1%
(Cost: $20,374) 21,482
------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES--1.9% 407
------------------------------------------------------------------------------
NET ASSETS--100% $21,889
------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $20,374,000 for federal income tax purposes
at September 30, 1997, the gross unrealized appreciation was $1,110,000, the
gross unrealized depreciation was $2,000 and the net unrealized appreciation on
investments was $1,108,000.
See accompanying Notes to Financial Statements.
25
<PAGE> 26
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 portfolios 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, 1997, the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
fiscal periods since 1993. 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, 1997, 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, 1997, 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, 1997
26
<PAGE> 27
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTERMEDIATE
MUNICIPAL MUNICIPAL
FUND FUND
- ----------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Investments, at value
(Cost: $3,111,028 and $20,374) $3,319,143 21,482
- ----------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 369 38
- ----------------------------------------------------------------------------------------
Investments sold 71,496 1,053
- ----------------------------------------------------------------------------------------
Interest 47,791 366
- ----------------------------------------------------------------------------------------
TOTAL ASSETS 3,438,799 22,939
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ----------------------------------------------------------------------------------------
Cash Overdraft 375 130
- ----------------------------------------------------------------------------------------
Payable for:
Dividends 3,132 15
- ----------------------------------------------------------------------------------------
Fund shares redeemed 14,567 --
- ----------------------------------------------------------------------------------------
Investments purchased 202,392 880
- ----------------------------------------------------------------------------------------
Management fee 1,115 10
- ----------------------------------------------------------------------------------------
Administrative services fee 457 4
- ----------------------------------------------------------------------------------------
Distribution services fee 41 2
- ----------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 234 --
- ----------------------------------------------------------------------------------------
Trustees' fees and other 265 9
- ----------------------------------------------------------------------------------------
Total liabilities 222,578 1,050
- ----------------------------------------------------------------------------------------
NET ASSETS $3,216,221 21,889
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ----------------------------------------------------------------------------------------
Paid-in capital $2,969,293 20,765
- ----------------------------------------------------------------------------------------
Accumulated net realized gain on investments 38,813 16
- ----------------------------------------------------------------------------------------
Net unrealized appreciation on investments 208,115 1,108
- ----------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $3,216,221 21,889
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
THE PRICING OF SHARES
- ----------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $3,149,137 16,591
- ----------------------------------------------------------------------------------------
Shares outstanding 301,050 1,609
- ----------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $10.46 10.31
- ----------------------------------------------------------------------------------------
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) $10.95 10.60
- ----------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $61,336 4,571
- ----------------------------------------------------------------------------------------
Shares outstanding 5,878 443
- ----------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $10.44 10.31
- ----------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $5,438 727
- ----------------------------------------------------------------------------------------
Shares outstanding 519 70
- ----------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $10.47 10.31
- ----------------------------------------------------------------------------------------
CLASS I SHARES
Net assets applicable to shares outstanding $310 --
- ----------------------------------------------------------------------------------------
Shares outstanding 30 --
- ----------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $10.46 --
- ----------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 28
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTERMEDIATE
MUNICIPAL MUNICIPAL
FUND FUND
<S> <C> <C>
- ------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------------------------
Interest income $194,097 1,171
- ------------------------------------------------------------------------------------------
Expenses:
Management fee 13,507 117
- ------------------------------------------------------------------------------------------
Administrative services fee 5,379 49
- ------------------------------------------------------------------------------------------
Distribution services fee 426 38
- ------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 2,478 14
- ------------------------------------------------------------------------------------------
Professional fees 122 --
- ------------------------------------------------------------------------------------------
Reports to shareholders 384 12
- ------------------------------------------------------------------------------------------
Trustees' fees and other 209 14
- ------------------------------------------------------------------------------------------
Total expenses 22,505 244
- ------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 171,592 927
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------------------
Net realized gain on sales of investments (including
options purchased) 71,844 154
- ------------------------------------------------------------------------------------------
Net realized loss from futures transactions (5,209) (15)
- ------------------------------------------------------------------------------------------
Net realized gain 66,635 139
- ------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 47,959 479
- ------------------------------------------------------------------------------------------
Net gain on investments 114,594 618
- ------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $286,186 1,545
- ------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED SEPTEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTERMEDIATE
MUNICIPAL FUND MUNICIPAL FUND
---------------------------- ---------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------
Net investment income $ 171,592 184,051 927 815
- ---------------------------------------------------------------------------------------------------------
Net realized gain (loss) 66,635 21,987 139 (26)
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 47,959 (2,598) 479 (82)
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 286,186 203,440 1,545 707
- ---------------------------------------------------------------------------------------------------------
Distribution from net investment income (171,592) (184,051) (927) (815)
- ---------------------------------------------------------------------------------------------------------
Distribution from net realized gain (25,654) (8,498) (73) (134)
- ---------------------------------------------------------------------------------------------------------
Total dividends to shareholders (197,246) (192,549) (1,000) (949)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (194,265) (199,993) (557) 5,974
- ---------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (105,325) (189,102) (12) 5,732
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of year 3,321,546 3,510,648 21,901 16,169
- ---------------------------------------------------------------------------------------------------------
END OF YEAR $3,216,221 3,321,546 21,889 21,901
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE The Kemper National Tax-Free Income Series (the
FUND 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 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 a contingent deferred sales
charge payable on 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 each Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT INVESTMENT VALUATION. Investments are stated at
ACCOUNTING POLICIES value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Financial futures and options are
valued at the settlement price established each day
by the board of trade or exchange on which they are
traded. Over-the-counter traded options are valued
based upon prices provided by market makers. Other
securities and assets are valued at fair value as
determined in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (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 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.
29
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
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 from generally accepted
accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH MANAGEMENT AGREEMENT. The Trust has a management
AFFILIATES 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 $13,507,000 for the year ended September 30,
1997.
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 Intermediate Municipal Fund paid a
management fee of $117,000 for the year ended
September 30, 1997.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Trust has an underwriting and distribution
services agreement with Zurich Kemper Distributors,
Inc. (ZKDI). Underwriting commissions paid in
connection with the distribution of the Trust's
Class A shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY ZKDI
COMMISSIONS ----------------------------
RETAINED BY ZKDI TO ALL FIRMS TO AFFILIATES
----------------- ------------ -------------
<S> <C> <C> <C>
Year ended September 30, 1997 $299,000 1,627,000 8,000
</TABLE>
For services under the distribution services
agreement, the Trust pays ZKDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, ZKDI 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, ZKDI 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 sale of each Fund's Class B and
Class C shares and the CDSC received in connection
with the redemption of such shares are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES
AND CDSC COMMISSIONS AND
RECEIVED BY DISTRIBUTION FEES
ZKDI PAID BY ZKDI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Year ended September 30, 1997 573,000 703,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agreement with ZKDI. For
providing information and administrative services
to shareholders, each Fund pays ZKDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. ZKDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on
30
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
assets of Fund accounts the firms service.
Administrative services fees (ASF) paid are as
follows:
<TABLE>
<CAPTION>
ASF PAID BY ZKDI
ASF PAID BY THE -----------------------------
TRUST TO ZKDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- -------------
<S> <C> <C> <C>
Year ended September 30, 1997 $5,428,000 5,450,000 18,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Trust's transfer agent,
Zurich Kemper Service Company (ZKSvC) is the
shareholder service agent of the Trust. Under the
agreement, ZKSvC received shareholder services fees
of $1,595,000 for the year ended September 30,
1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of ZKI.
For the year ended September 30, 1997, the Trust
made no direct payments to its officers and
incurred trustees' fees of $55,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended September 30, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
<TABLE>
<CAPTION>
INTERMEDIATE
MUNICIPAL FUND MUNICIPAL FUND
-------------- --------------
<S> <C> <C>
Purchases $2,422,364 16,096
Proceeds from sales 2,747,490 17,597
</TABLE>
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the Funds (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996
MUNICIPAL ----------------------- -----------------------
FUND SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 36,543 $ 376,175 18,784 $ 193,179
--------------------------------------------------------------------------------
Class B 2,441 24,932 2,551 26,035
--------------------------------------------------------------------------------
Class C 412 4,246 313 3,200
--------------------------------------------------------------------------------
Class I -- -- 30 300
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 13,029 133,574 11,427 117,176
--------------------------------------------------------------------------------
Class B 176 1,799 120 1,229
--------------------------------------------------------------------------------
Class C 18 182 10 104
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (70,404) (723,896) (50,863) (521,777)
--------------------------------------------------------------------------------
Class B (836) (8,563) (1,767) (18,134)
--------------------------------------------------------------------------------
Class C (263) (2,714) (128) (1,305)
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 169 1,742 67 687
--------------------------------------------------------------------------------
Class B (169) (1,742) (67) (687)
--------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE
TRANSACTIONS $(194,265) $(199,993)
--------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996
INTERMEDIATE -------------------- --------------------
MUNICIPAL FUND SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 503 $5,105 782 $ 7,959
---------------------------------------------------------------------------
Class B 104 1,058 239 2,415
---------------------------------------------------------------------------
Class C 35 355 59 593
---------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 51 512 49 458
---------------------------------------------------------------------------
Class B 10 109 8 86
---------------------------------------------------------------------------
Class C 2 24 2 21
---------------------------------------------------------------------------
SHARES REDEEMED
Class A (623) (6,324) (413) (4,178)
---------------------------------------------------------------------------
Class B (101) (1,028) (76) (774)
---------------------------------------------------------------------------
Class C (36) (368) (61) (606)
---------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 1 10 1 3
---------------------------------------------------------------------------
Class B (1) (10) (1) (3)
---------------------------------------------------------------------------
NET INCREASE
(DECREASE) FROM
CAPITAL SHARE
TRANSACTIONS $ (557) $ 5,974
---------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Municipal Fund has entered into exchange traded
financial futures contracts on U.S. Treasury
securities in order to help protect itself from
anticipated market conditions and, as such, bears
the risk that arises from entering into these
contracts.
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and its broker as the market value
of the futures contract fluctuates. At September
30, 1997, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $12,106,000. The fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures position open
at September 30, 1997:
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN AT
TYPE AMOUNT MONTH 9/30/97
--------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Note $26,468,000 Dec. '97 $37,500
--------------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------
CLASS A
YEAR ENDED SEPTEMBER 30,
--------------------------------------
MUNICIPAL FUND 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------
Net asset value, beginning of year $10.18 10.15 9.69 10.95 10.29
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .54 .55 .55 .55 .61
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .36 .06 .50 (.92) .82
- --------------------------------------------------------------------------------
Total from investment operations .90 .61 1.05 (.37) 1.43
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .54 .55 .55 .56 .62
- --------------------------------------------------------------------------------
Distribution from net realized gain .08 .03 .04 .33 .15
- --------------------------------------------------------------------------------
Total dividends .62 .58 .59 .89 .77
- --------------------------------------------------------------------------------
Net asset value, end of year $10.46 10.18 10.15 9.69 10.95
- --------------------------------------------------------------------------------
TOTAL RETURN 9.15% 6.00 11.15 (3.67) 14.50
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Expenses .68% .66 .66 .60 .47
- --------------------------------------------------------------------------------
Net investment income 5.29% 5.35 5.63 5.42 5.78
- --------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 34
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------
Class B Shares
--------------------------------------
YEAR ENDED SEPTEMBER MAY 31
30, TO
---------------------- SEPTEMBER 30,
MUNICIPAL FUND 1997 1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------
Net asset value, beginning of period $10.15 10.13 9.67 9.95
- ---------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45 .46 .46 .14
- ---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .37 .05 .50 (.26)
- ---------------------------------------------------------------------------------
Total from investment operations .82 .51 .96 (.12)
- ---------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .45 .46 .46 .16
- ---------------------------------------------------------------------------------
Distribution from net realized gain .08 .03 .04 --
- ---------------------------------------------------------------------------------
Total dividends .53 .49 .50 .16
- ---------------------------------------------------------------------------------
Net asset value, end of period $10.44 10.15 10.13 9.67
- ---------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.32% 4.97 10.17 (1.24)
- ---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------
Expenses 1.55% 1.54 1.55 1.56
- ---------------------------------------------------------------------------------
Net investment income 4.42% 4.47 4.74 4.55
- ---------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 35
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C CLASS I
YEAR ENDED SEPTEMBER
30, MAY 31 TO YEAR ENDED APRIL 19 TO
---------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
MUNICIPAL FUND 1997 1996 1995 1994 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------- ---------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------- ---------------------------------
Net asset value, beginning of period $10.18 10.16 9.69 9.95 10.18 10.11
- --------------------------------------------------------------------------------- ---------------------------------
Income from investment operations:
Net investment income .46 .46 .47 .16 .55 .24
- --------------------------------------------------------------------------------- ---------------------------------
Net realized and unrealized gain (loss) .37 .05 .51 (.26) .36 .07
- --------------------------------------------------------------------------------- ---------------------------------
Total from investment operations .83 .51 .98 (.10) .91 .31
- --------------------------------------------------------------------------------- ---------------------------------
Less dividends:
Distribution from net investment income .46 .46 .47 .16 .55 .24
- --------------------------------------------------------------------------------- ---------------------------------
Distribution from net realized gain .08 .03 .04 -- .08 --
- --------------------------------------------------------------------------------- ---------------------------------
Total dividends .54 .49 .51 .16 .63 .24
- --------------------------------------------------------------------------------- ---------------------------------
Net asset value, end of period $10.47 10.18 10.16 9.69 10.46 10.18
- --------------------------------------------------------------------------------- ------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.34% 4.99 10.32 (1.03) 9.27 3.10
- --------------------------------------------------------------------------------- ---------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------- ---------------------------------
Expenses 1.53% 1.51 1.51 1.53 .58 .56
- --------------------------------------------------------------------------------- ---------------------------------
Net investment income 4.44% 4.50 4.78 4.56 5.39 5.60
- --------------------------------------------------------------------------------- ---------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $3,216,221 3,321,546 3,510,648 3,716,997 4,072,626
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 77% 97 86 50 52
- ------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR MUNICIPAL FUND:
Total return does not reflect the effect of any sales charges.
35
<PAGE> 36
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------
CLASS A
-----------------------------------
YEAR ENDED NOVEMBER 1,
SEPTEMBER 30, 1994 TO
-------------- SEPTEMBER 30,
INTERMEDIATE MUNICIPAL FUND 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------
Net asset value, beginning of period $10.06 10.18 9.50
- -------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .46 .45
- -------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .29 (.04) .68
- -------------------------------------------------------------------------------
Total from investment operations .75 .42 1.13
- -------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .46 .46 .45
- -------------------------------------------------------------------------------
Distribution from net realized gain .04 .08 --
- -------------------------------------------------------------------------------
Total dividends .50 .54 .45
- -------------------------------------------------------------------------------
Net asset value, end of period $10.31 10.06 10.18
- -------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.62% 4.15 12.08
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------
Expenses absorbed by the Fund .96% .92 .55
- -------------------------------------------------------------------------------
Net investment income 4.55% 4.45 5.00
- -------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------
Expenses .96% 1.04 1.05
- -------------------------------------------------------------------------------
Net investment income 4.55% 4.33 4.50
- -------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 37
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------
Class B
---------------------------------
YEAR ENDED NOVEMBER 1,
SEPTEMBER 30, 1994 TO
-------------- SEPTEMBER 30,
INTERMEDIATE MUNICIPAL FUND 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $10.06 10.18 9.50
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .38 .38 .36
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .29 (.04) .68
- ---------------------------------------------------------------------------------------
Total from investment operations .67 .34 1.04
- ---------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .38 .38 .36
- ---------------------------------------------------------------------------------------
Distribution from net realized gain .04 .08 --
- ---------------------------------------------------------------------------------------
Total dividends .42 .46 .36
- ---------------------------------------------------------------------------------------
Net asset value, end of period $10.31 10.06 10.18
- ---------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.78% 3.34 11.13
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.76% 1.71 1.42
- ---------------------------------------------------------------------------------------
Net investment income 3.75% 3.66 4.13
- ---------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses 1.76% 1.83 1.92
- ---------------------------------------------------------------------------------------
Net investment income 3.75% 3.54 3.63
- ---------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------
Class C Shares
------------------------------------------
YEAR ENDED SEPTEMBER 30, NOVEMBER 1
------------------------ 1994 TO
SEPTEMBER 30,
INTERMEDIATE MUNICIPAL FUND 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.06 10.19 9.50
- ------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .39 .38 .38
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .29 (.05) .69
- ------------------------------------------------------------------------------------------------------
Total from investment operations .68 .33 1.07
- ------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .39 .38 .38
- ------------------------------------------------------------------------------------------------------
Distribution from net realized gain .04 .08 --
- ------------------------------------------------------------------------------------------------------
Total dividends .43 .46 .38
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.31 10.06 10.19
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.77% 3.26 11.43
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.73% 1.65 1.28
- ------------------------------------------------------------------------------------------------------
Net investment income 3.78% 3.72 4.27
- ------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------
Expenses 1.73% 1.77 1.78
- ------------------------------------------------------------------------------------------------------
Net investment income 3.78% 3.60 3.77
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------------
<CAPTION>
NOVEMBER 1
YEAR ENDED SEPTEMBER 30, 1994 TO
------------------------ SEPTEMBER 30,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets at end of period (in
thousands) $21,889 21,901 16,169
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 80% 80 60
- ------------------------------------------------------------------------------------------------------
</TABLE>
NOTES FOR INTERMEDIATE MUNICIPAL FUND:
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 1997 DIVIDENDS FOR BOTH FUNDS
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 CHARLES R. MANZONI, JR
President and Trustee Vice President
DAVID W. BELIN CHRISTOPHER J. MIER
Trustee Vice President
LEWIS A. BURNHAM JOHN E. NEAL
Trustee Vice President
DONALD L. DUNAWAY ROBERT C. PECK, JR.
Trustee Vice President
ROBERT B. HOFFMAN PHILIP J. COLLORA
Trustee Vice President and
Secretary
DONALD R. JONES JEROME L. DUFFY
Trustee Treasurer
SHIRLEY D. PETERSON ELIZABETH C. WERTH
Trustee Assistant Secretary
WILLIAM P. SOMMERS
Trustee
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LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT ZURICH KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUND LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
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 (11/97) 1039840
