<PAGE> 1
KEMPER TAX-FREE INCOME FUNDS
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 20, 1996
CLASS I SHARES
KEMPER MUNICIPAL BOND FUND
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
Kemper National Tax-Free Income Series offers two investment portfolios,
Kemper Municipal Bond Fund ("Municipal Fund") and Kemper Intermediate Municipal
Bond Fund ("Intermediate Municipal Fund"), which currently offer four classes of
shares to provide investors with different purchasing options. These are Class
A, Class B and Class C shares, which are described in the prospectus, and Class
I shares, which are described in the prospectus as supplemented hereby. (Kemper
State Tax-Free Income Series, which is also included in the Kemper Tax-Free
Income Funds combined prospectus, does not offer Class I shares.)
Class I shares of the Funds are available for purchase exclusively by the
following investors: (a) tax-exempt retirement plans of Zurich Kemper
Investments, Inc. ("ZKI") and its affiliates; and (b) the following investment
advisory clients of ZKI and its investment advisory affiliates that invest at
least $1 million in the Fund: (1) unaffiliated benefit plans, such as qualified
retirement plans (other than individual retirement accounts and self-directed
retirement plans); (2) unaffiliated banks and insurance companies purchasing for
their own accounts; and (3) endowment funds of unaffiliated non-profit
organizations. Class I shares currently are available for purchase only from
Kemper Distributors, Inc., principal underwriter for the Funds. Share
certificates are not available for Class I shares.
The primary distinctions among the classes of shares lie in their initial
and contingent deferred sales charge schedules and in their ongoing expenses,
including asset-based sales charges in the form of Rule 12b-1 distribution fees.
Class I shares are offered at net asset value without an initial sales charge
and are not subject to a contingent deferred sales charge or a Rule 12b-1
distribution fee. Also, there is no administrative services fee charged to Class
I shares. As a result of the relatively lower expenses for Class I shares, the
level of income dividends per share (as a percentage of net asset value) and,
therefore, the overall investment return, will be higher for Class I shares than
for Class A, Class B and Class C shares.
The following information for the Class I shares supplements the referenced
sections of the prospectus.
SUMMARY OF EXPENSES
SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO BOTH FUNDS)
<TABLE>
<CAPTION>
CLASS I
-------
<S> <C>
Maximum Sales Charge on Purchases (as a percentage of offering price).................... None
Maximum Sales Charge on Reinvested Dividends............................................. None
Redemption Fees.......................................................................... None
Exchange Fee............................................................................. None
Deferred Sales Charge (as percentage of redemption proceeds)............................. None
</TABLE>
<PAGE> 2
ANNUAL FUND OPERATION EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
MUNI. FUND INTER. MUNI. FUND
---------- -----------------
<S> <C> <C>
Management Fees...................................................... .42% .55%
12b-1 Fees........................................................... None None
Other Expenses (estimated for Inter. Muni. Fund)..................... .14% .14%
---- ----
Total Operating Expenses............................................. .56% .69%
==== ====
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
You would pay the following expenses on a Muni. Fund $6 $18 $31 $ 70
$1,000 investment, assuming Inter. Muni. Fund $7 $22 $38 $ 86
(1) 5% annual return and
(2) redemption at the end of each time
period:
</TABLE>
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in Class I shares of the Fund will
bear directly or indirectly.
The Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of the Fund. The
Example should not be considered to be a representation of past or future
expenses. Actual expenses may be greater or lesser than those shown.
FINANCIAL HIGHLIGHTS
No financial information is presented for Class I shares of the Intermediate
Municipal Fund since no Class I shares had been issued as of September 30, 1996,
the fiscal year end of the Fund.
MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
APRIL 19 TO
SEPTEMBER 30, 1996
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.11
- -----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .24
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain .07
- -----------------------------------------------------------------------------------------------------
Total from investment operations .31
- -----------------------------------------------------------------------------------------------------
Less distribution from net investment income .24
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $10.18
- -----------------------------------------------------------------------------------------------------
Total return (not annualized) 3.10%
- -----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses .56%
- -----------------------------------------------------------------------------------------------------
Net investment income 5.60
- -----------------------------------------------------------------------------------------------------
</TABLE>
SPECIAL FEATURES
Shareholders of a Fund's Class I shares may exchange their shares for (i) shares
of Kemper Money Funds--Kemper Money Market Fund if the shareholders of Class I
shares have purchased shares because they are participants in tax-exempt
retirement plans of ZKI and its affiliates and (ii) Class I shares of any other
"Kemper Mutual Fund" listed under "Special Features--Class A Shares--Combined
Purchases" in the prospectus. Conversely, shareholders of Kemper Money
Funds--Kemper Money Market Fund who have purchased shares because they are
participants in tax-exempt retirement plans of ZKI and its affiliates may
exchange their shares for Class I shares of "Kemper Mutual Funds" to the extent
that they are available through their plan. Exchanges will be made at the
relative net asset values of the shares. Exchanges are subject to the
limitations set forth in the prospectus under "Special Features--Exchange
Privilege--General."
December 20, 1996
KTFIF-1I (12/96) (LOGO)printed on recycled paper
2
<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- -------------------------------------------------
<S> <C>
Summary 1
- -------------------------------------------------
Summary of Expenses 3
- -------------------------------------------------
Financial Highlights 5
- -------------------------------------------------
Investment Objectives, Policies and Risk 17
Factors
- -------------------------------------------------
Investment Manager and Underwriter 26
- -------------------------------------------------
Dividends and Taxes 29
- -------------------------------------------------
Net Asset Value 33
- -------------------------------------------------
Purchase of Shares 33
- -------------------------------------------------
Redemption or Repurchase of Shares 39
- -------------------------------------------------
Special Features 43
- -------------------------------------------------
Performance 46
- -------------------------------------------------
Capital Structure 48
- -------------------------------------------------
</TABLE>
This combined prospectus of the Kemper Tax-Free Income Funds contains
information about each of the Funds that you should know before investing and
should be retained for future reference. A Statement of Additional Information
dated December 20, 1996, has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. It is available upon request
without charge from the Trusts at the address or telephone number on this cover
or the firm from which this prospectus was obtained.
THE FUNDS' SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT IN A
FUND'S SHARES INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
KEMPER LOGO
KEMPER
TAX-FREE INCOME
FUNDS
PROSPECTUS DECEMBER 20, 1996
KEMPER TAX-FREE INCOME FUNDS
222 South Riverside Plaza, Chicago, Illinois 60606 1-800-621-1048
Kemper Tax-Free Income Funds are two open-end management investment companies
("Trusts"), Kemper National Tax-Free Income Series and Kemper State Tax-Free
Income Series, that together offer a choice of ten investment portfolios
("Funds") to investors seeking a high level of income exempt from federal income
tax and, in the case of certain Funds, from the income taxes of a particular
state:
KEMPER MUNICIPAL BOND FUND
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
KEMPER CALIFORNIA TAX-FREE INCOME FUND
KEMPER FLORIDA TAX-FREE INCOME FUND
KEMPER MICHIGAN TAX-FREE INCOME FUND
KEMPER NEW JERSEY TAX-FREE INCOME FUND
KEMPER NEW YORK TAX-FREE INCOME FUND
KEMPER OHIO TAX-FREE INCOME FUND
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND
KEMPER TEXAS TAX-FREE INCOME FUND
<PAGE> 4
KEMPER TAX-FREE INCOME FUNDS
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606, TELEPHONE 1-800-621-1048
SUMMARY
INVESTMENT OBJECTIVES; PERMITTED INVESTMENTS. Kemper Tax-Free Income Funds are
two open-end management investment companies ("Trusts"), Kemper National
Tax-Free Income Series (the "National Trust") and Kemper State Tax-Free Income
Series (the "State Trust"), that together offer a choice of ten investment
portfolios ("Funds"). The National Trust consists of two "National Funds" that
invest primarily in Municipal Securities and have different portfolio maturity
policies and the State Trust consists of eight "State Funds" that invest
primarily in the Municipal Securities of a particular state.
Each National Fund seeks to provide as high a level of current interest income
that is exempt from federal income taxes as is consistent with preservation of
capital, through investment in a professionally managed, diversified portfolio
of Municipal Securities.
KEMPER MUNICIPAL BOND FUND ("Municipal Fund"). The dollar-weighted average
portfolio maturity of the Municipal Fund is expected normally to be longer than
10 years, although it is not limited as to portfolio maturity.
KEMPER INTERMEDIATE MUNICIPAL BOND FUND ("Intermediate Municipal Fund"). As a
non-fundamental policy, the dollar-weighted average portfolio maturity of the
Intermediate Municipal Fund, under normal market conditions, will be between 3
and 10 years.
Each State Fund seeks to provide a high level of current income that is exempt
from federal income taxes and, in the case of certain Funds, the income taxes of
a particular state, through a professionally managed, non-diversified portfolio
of Municipal Securities.
KEMPER CALIFORNIA TAX-FREE INCOME FUND ("California Fund") seeks income exempt
from federal and California income taxes.
KEMPER FLORIDA TAX-FREE INCOME FUND ("Florida Fund") seeks income exempt from
federal income taxes.
KEMPER MICHIGAN TAX-FREE INCOME FUND ("Michigan Fund") seeks income exempt from
federal and Michigan income taxes.
KEMPER NEW JERSEY TAX-FREE INCOME FUND ("New Jersey Fund") seeks income exempt
from federal and New Jersey income taxes.
KEMPER NEW YORK TAX-FREE INCOME FUND ("New York Fund") seeks income exempt from
federal, New York State and New York City income taxes.
KEMPER OHIO TAX-FREE INCOME FUND ("Ohio Fund") seeks income exempt from federal
and Ohio income taxes.
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND ("Pennsylvania Fund") seeks income
exempt from federal and Pennsylvania income taxes.
KEMPER TEXAS TAX-FREE INCOME FUND ("Texas Fund") seeks income exempt from
federal income taxes.
For the Municipal Fund, all Municipal Securities will be rated at the time of
purchase within the four highest grades assigned by Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Fitch Investors
Service, Inc. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff") or any other
Nationally Recognized Statistical Rating Organization (as designated by the
Securities and Exchange Commission), provided that up to 10% of the Municipal
Fund's net assets may be invested in Municipal Securities that are lower rated
or unrated. For the Intermediate Municipal Fund and the State Funds, all
Municipal Securities will, at the time of purchase, be within the four highest
ratings of Moody's, S&P, Fitch or Duff or any other Nationally Recognized
Statistical Rating Organization or will be of comparable quality as determined
by the Funds' investment manager, provided that up to 10% of a Fund's net assets
may be invested without regard to this limitation. Each Fund may also purchase
and sell put and call options and financial futures contracts and options
thereon. See "Investment Objectives, Policies and Risk Factors" and "Dividends
and Taxes."
1
<PAGE> 5
RISK FACTORS. There is no assurance that the investment objective of any Fund
will be achieved. There are market and investment risks with any security and
the value of an investment in a Fund will fluctuate over time. Normally the
value of a Fund's investments varies inversely with changes in interest rates.
The returns and net asset value of each Fund will fluctuate. As
"non-diversified" funds, each State Fund may invest a relatively high percentage
of its assets in a limited number of issuers, making those Funds more
susceptible to economic, political or regulatory occurrences than a diversified
fund. There are special risks associated with options and financial futures
transactions and there is no assurance that their use will be successful. See
"Investment Objectives, Policies and Risk Factors."
PURCHASES AND REDEMPTIONS. Each Fund provides investors with the option of
purchasing shares in the following ways:
<TABLE>
<S> <C>
Class A Shares..................... Offered at net asset value plus a maximum sales charge of 4.5%
(2.75% for the Intermediate Municipal Fund) of the offering
price. Reduced sales charges apply to purchases of $100,000 or
more. Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a 1%
contingent deferred sales charge if redeemed within one year
of purchase and a .50% contingent deferred sales charge if
redeemed during the second year of purchase.
Class B Shares..................... Offered at net asset value, subject to a Rule 12b-1
distribution fee and a contingent deferred sales charge that
declines from 4% to zero on certain redemptions made within
six years of purchase. Class B shares automatically convert
into Class A shares (which have lower ongoing expenses) six
years after purchase.
Class C Shares..................... Offered at net asset value without an initial sales charge,
but subject to a Rule 12b-1 distribution fee and a 1%
contingent deferred sales charge on redemptions made within
one year of purchase. Class C shares do not convert into
another class.
</TABLE>
Each class of shares represents interests in the same portfolio of investments
of a Fund. The minimum initial investment is $1,000 and investments thereafter
must be at least $100. Shares are redeemable at net asset value, which may be
more or less than original cost, subject to any applicable contingent deferred
sales charge. See "Purchase of Shares" and "Redemption or Repurchase of Shares."
INVESTMENT MANAGER AND UNDERWRITER. Zurich Kemper Investments, Inc. ("ZKI") is
the investment manager for each Fund. ZKI was the first to offer a managed
municipal bond fund (the Municipal Fund) and currently manages approximately
$62.3 billion of tax-exempt investments. ZKI is paid an investment management
fee at an annual rate that differs among the Funds. Kemper Distributors, Inc.
("KDI"), an affiliate of ZKI, is principal underwriter and administrator for
each Fund. For Class B shares and Class C shares, KDI receives a Rule 12b-1
distribution fee of .75% of average daily net assets. KDI also receives the
amount of any contingent deferred sales charges paid on the redemption of
shares. Administrative services are provided to shareholders under
administrative services agreements with KDI. Each Fund pays an administrative
services fee at the annual rate of up to .25 of 1% of average daily net assets
of each class of the Fund, which KDI pays to financial services firms. See
"Investment Manager and Underwriter."
INVESTORS IN A FUND. Each Fund is designed for persons who are seeking a high
level of income exempt from federal income taxes and, in the case of certain
State Funds, from income taxes of a particular state. Through a single
investment in shares of a Fund, investors receive the benefits of professional
management and liquidity. Additionally, each Fund offers the economic advantages
of block purchases of securities and relief from administrative details such as
accounting for distributions and the safekeeping of securities. The tax
exemption of Fund dividends for federal income tax and, if applicable,
particular state or local tax purposes does not necessarily result in exemption
under the income or other tax laws of any other state or local taxing authority.
The laws of the several states and local taxing authorities vary with respect to
the taxation of interest income and investments, and shareholders are advised to
consult their own tax advisers as to the status of their accounts under state
and local tax laws. The Funds may not be appropriate investments for qualified
retirement plans and Individual Retirement Accounts.
2
<PAGE> 6
DIVIDENDS. Each Fund declares daily dividends of its net investment income on
shares for which it has received payment. Each Fund normally distributes monthly
dividends of net investment income and distributes any net realized capital
gains at least annually. Income and capital gain dividends of a Fund are
automatically reinvested in additional shares of that Fund, without a sales
charge, unless the shareholder makes a different election. See "Dividends and
Taxes."
GENERAL. In the opinion of the staff of the Securities and Exchange Commission,
the use of this combined prospectus may make each Trust liable for any
misstatement or omission in this prospectus regardless of the particular Trust
to which it pertains.
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
(APPLICABLE TO ALL FUNDS)(1) CLASS A(2) CLASS B CLASS C
---------- -------------------- ---------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases
(as a percentage of offering price)............ 4.5% None None
2.75% Inter.
Mun.
Fund Only
Maximum Sales Charge on Reinvested Dividends..... None None None
Redemption Fees.................................. None None None
Exchange Fee..................................... None None None
Deferred Sales Charge (as a percentage of
redemption proceeds)........................... None(3) 4% during the first 1% during
year, 3% during the the first
second and third year
years, 2% during the
fourth and fifth
years and 1% in the
sixth year
</TABLE>
- ---------------
(1) Investment dealers and other firms may independently charge additional fees
for shareholder transactions or for advisory services; please see their
materials for details.
(2) Reduced sales charges apply to purchases of $100,000 or more. See "Purchase
of Shares--Initial Sales Charge Alternative--Class A Shares."
(3) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% the first year and .50% the second year. See "Purchase of
Shares--Initial Sales Charge Alternative--Class A Shares."
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
MUNICIPAL INTER. MUN. CALIFORNIA FLORIDA MICHIGAN NEW JERSEY NEW YORK OHIO PENNSYLVANIA TEXAS
CLASS A SHARES FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
--------- ----------- ---------- ------- -------- ---------- -------- ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees.... .42% .55% .53% .55% .55% .55% .54% .55% .55% .55%
12b-1 Fees......... None None None None None None None None None None
Other Expenses..... .24% .41% .25% .29% .41% .41% .29% .36% .46% .37%
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Operating
Expenses......... .66% .96% .78% .84% .96% .96% .83% .91% 1.01% .92%
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
MUNICIPAL INTER. MUN. CALIFORNIA FLORIDA MICHIGAN NEW JERSEY NEW YORK OHIO PENNSYLVANIA TEXAS
CLASS B SHARES FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
--------- ----------- ---------- ------- -------- ---------- -------- ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees.... .42% .55% .53% .55% .55% .55% .54% .55% .55% .55%
12b-1 Fees(4)...... .75% .75% .75% .75% .75% .75% .75% .75% .75% .75%
Other Expenses..... .37% .53% .35% .38% .46% .45% .40% .43% .49% .49%
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Operating
Expenses......... 1.54% 1.83% 1.63% 1.68% 1.76% 1.75% 1.69% 1.73% 1.79% 1.79%
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(4) Long-term shareholders may pay more than the economic equivalent of the
maximum initial sales charges permitted by the National Association of
Securities Dealers, although KDI believes that it is unlikely because of the
automatic conversion feature described under "Purchase of Shares--Deferred
Sales Charge Alternative--Class B Shares."
3
<PAGE> 7
<TABLE>
<CAPTION>
MUNICIPAL INTER. MUN. CALIFORNIA FLORIDA MICHIGAN NEW JERSEY NEW YORK OHIO PENNSYLVANIA TEXAS
CLASS C SHARES FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
--------- ----------- ---------- ------- -------- ---------- -------- ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............ .42% .55% .53% .55% .55% .55% .54% .55% .55% .55%
12b-1 Fees(5).............. .75% .75% .75% .75% .75% .75% .75% .75% .75% .75%
Other Expenses............. .34% .42% .36% .34% .43% .42% .38% .44% .46% .46%
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Operating
Expenses................. 1.51% 1.72% 1.64% 1.64% 1.73% 1.72% 1.67% 1.74% 1.76% 1.76%
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(5) As a result of the accrual of 12b-1 fees, long-term shareholders may pay
more than the economic equivalent of the maximum initial sales charges
permitted by the National Association of Securities Dealers.
EXAMPLE
<TABLE>
<CAPTION>
CLASS A SHARES FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
You would pay the following expenses Municipal Fund $ 51 $65 $ 80 $124
on a $1,000 investment, assuming Inter. Mun. Fund $ 37 $57 $ 79 $142
(1) 5% annual return and (2) California Fund $ 53 $69 $ 86 $137
redemption at the end of each time period: Florida Fund $ 53 $71 $ 90 $144
Michigan Fund $ 54 $74 $ 96 $158
New Jersey Fund $ 54 $74 $ 96 $158
New York Fund $ 53 $70 $ 89 $143
Ohio Fund $ 54 $73 $ 93 $152
Pennsylvania Fund $ 55 $76 $ 98 $163
Texas Fund $ 54 $73 $ 94 $153
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES(6) FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
You would pay the following expenses Municipal Fund $ 46 $69 $ 94 $138
on a $1,000 investment, assuming Inter. Mun. Fund $ 49 $78 $ 109 $171
(1) 5% annual return and (2) California Fund $ 47 $71 $ 99 $150
redemption at the end of each time period: Florida Fund $ 47 $73 $ 101 $156
Michigan Fund $ 48 $75 $ 105 $167
New Jersey Fund $ 48 $75 $ 105 $166
New York Fund $ 47 $73 $ 102 $156
Ohio Fund $ 48 $74 $ 104 $162
Pennsylvania Fund $ 48 $76 $ 107 $171
Texas Fund $ 48 $76 $ 107 $167
You would pay the following Municipal Fund $ 16 $49 $ 84 $138
expenses on the same investment, Inter. Mun. Fund $ 19 $58 $ 99 $171
assuming no redemption: California Fund $ 17 $51 $ 89 $150
Florida Fund $ 17 $53 $ 91 $156
Michigan Fund $ 18 $55 $ 95 $167
New Jersey Fund $ 18 $55 $ 95 $166
New York Fund $ 17 $53 $ 92 $156
Ohio Fund $ 18 $55 $ 94 $162
Pennsylvania Fund $ 18 $56 $ 97 $171
Texas Fund $ 18 $56 $ 97 $167
</TABLE>
- ---------------
(6) Assumes conversion to Class A shares six years after purchase and was
calculated based upon the assumption that the shareholder was an owner of
the shares on the first day of the first year and the contingent deferred
sales charge was applied as follows: 1 year (3%), 3 years (2%), 5 years (1%)
and 10 years (0%). See "Redemption or Repurchase of Shares--Contingent
Deferred Sales Charge--Class B Shares" for more information regarding the
calculation of the contingent deferred sales charge.
4
<PAGE> 8
<TABLE>
<CAPTION>
CLASS C SHARES(7) FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
You would pay the following expenses Municipal Fund $ 15 $48 $82 $180
on a $1,000 investment, assuming Inter. Mun. Fund $ 17 $54 $93 $203
(1) 5% annual return and (2) redemption California Fund $ 17 $52 $89 $194
at the end of each time period: Florida Fund $ 17 $52 $89 $194
Michigan Fund $ 18 $54 $94 $204
New Jersey Fund $ 17 $54 $93 $203
New York Fund $ 17 $53 $91 $198
Ohio Fund $ 18 $55 $94 $205
Pennsylvania Fund $ 18 $55 $95 $207
Texas Fund $ 18 $55 $95 $207
</TABLE>
- ---------------
(7) Assumes the shareholder was the owner on the first day of the first year and
the contingent deferred sales charge was not applicable for any of the
periods shown. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class C Shares."
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in a Fund will bear directly or
indirectly. The table is based upon actual expenses incurred in the last fiscal
year, except as noted below.
As discussed under "Investment Manager and Underwriter" in the Statement of
Additional Information, effective the date of the prospectus ZKI has agreed to
temporarily reduce its management fee and reimburse or pay certain operating
expenses to the extent necessary to limit the "Total Operating Expenses" of the
Intermediate Municipal, Michigan, New Jersey and Pennsylvania Funds to their
respective levels indicated in the tables above. Without the expense limitation,
"Other Expenses" for Class A shares of said Funds would be .49%, .98%, .90% and
.84%, respectively, Class B shares would be .53%, .96%, 1.02%, and .86%,
respectively, and Class C shares would be .47%, .66%, .72%, and .83%,
respectively. "Total Operating Expenses" for the Class A shares of said Funds
would be 1.04%, 1.53%, 1.45% and 1.39%, respectively, Class B shares Funds would
be 1.83%, 2.26%, 2.32% and 2.16%, respectively, and Class C shares of said Funds
would be 1.77%, 1.96%, 2.02% and 2.13%, respectively.
The Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of any Fund. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The tables below show financial information for each Fund expressed in terms of
one share outstanding throughout the period. The information in the table for
each Fund is covered by the report of the Trusts' independent auditors. The
report is contained in each Trust's Registration Statement and is available from
that Trust. The financial statements contained in the Trusts' 1996 Annual
Reports to Shareholders are incorporated herein by reference and may be obtained
by writing or calling the applicable Trust.
5
<PAGE> 9
MUNICIPAL FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $10.15 9.69 10.95 10.29 10.05 9.40 9.59 9.40 9.08 9.61
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .55 .55 .55 .61 .65 .69 .69 .70 .70 .70
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .06 .50 (.92) .82 .35 .62 (.19) .19 .34 (.51)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .61 1.05 (.37) 1.43 1.00 1.31 .50 .89 1.04 .19
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .55 .55 .56 .62 .63 .66 .69 .70 .72 .72
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .03 .04 .33 .15 .13 -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .58 .59 .89 .77 .76 .66 .69 .70 .72 .72
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.18 10.15 9.69 10.95 10.29 10.05 9.40 9.59 9.40 9.08
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: 6.00% 11.15 (3.67) 14.50 10.36 14.36 5.25 9.74 11.88 1.80
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .66% .66 .60 .47 .48 .48 .49 .49 .51 .53
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.35 5.63 5.42 5.78 6.44 6.97 7.14 7.26 7.55 7.29
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
--------------------------------- ---------------------------------
MAY 31, MAY 31,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1994 1996 1995 1994
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B AND C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.13 9.67 9.95 10.16 9.69 9.95
- ------------------------------------------------------------------------------------------- ---------------------------------
Income from investment operations:
Net investment income .46 .46 .14 .46 .47 .16
- ------------------------------------------------------------------------------------------- ---------------------------------
Net realized and unrealized gain (loss) .05 .50 (.26) .05 .51 (.26)
- ------------------------------------------------------------------------------------------- ---------------------------------
Total from investment operations .51 .96 (.12) .51 .98 (.10)
- ------------------------------------------------------------------------------------------- ---------------------------------
Less dividends:
Distribution from net investment income .46 .46 .16 .46 .47 .16
- ------------------------------------------------------------------------------------------- ---------------------------------
Distribution from net realized gain .03 .04 -- .03 .04 --
- ------------------------------------------------------------------------------------------- ---------------------------------
Total dividends .49 .50 .16 .49 .51 .16
- ------------------------------------------------------------------------------------------- ---------------------------------
Net asset value, end of period $10.15 10.13 9.67 10.18 10.16 9.69
- ------------------------------------------------------------------------------------------- ---------------------------------
TOTAL RETURN (NOT ANNUALIZED): 4.97% 10.17 (1.24) 4.99 10.32 (1.03)
- ------------------------------------------------------------------------------------------- ---------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.54% 1.55 1.56 1.51 1.51 1.53
- ------------------------------------------------------------------------------------------- ---------------------------------
Net investment income 4.47 4.74 4.55 4.50 4.78 4.56
- ------------------------------------------------------------------------------------------- ---------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALL
CLASSES
SUPPLEMENTAL
DATA:
Net
assets
at end
of year
(in
thousands) $3,321,546 3,510,648 3,716,997 4,072,626 3,154,972 2,465,928 2,070,200 1,835,412 1,480,836 1,195,939
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio
turnover
rate 97% 86 50 52 32 29 30 37 30 27
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 10
INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------ ------------------------------ ------------------------------
NOVEMBER 1, NOVEMBER 1, NOVEMBER 1,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO YEAR ENDED 1994 TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995 1996 1995
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 10.18 9.50 10.18 9.50 10.19 9.50
- ----------------------------------------------------------- --------------------------- ---------------------------
Income from investment
operations:
Net investment income .46 .45 .38 .36 .38 .38
- ----------------------------------------------------------- --------------------------- ---------------------------
Net realized and unrealized
gain (loss) (.04) .68 (.04) .68 (.05) .69
- ----------------------------------------------------------- --------------------------- ---------------------------
Total from investment
operations .42 1.13 .34 1.04 .33 1.07
- ----------------------------------------------------------- --------------------------- ---------------------------
Less dividends:
Distribution from net
investment income .46 .45 .38 .36 .38 .38
- ----------------------------------------------------------- --------------------------- ---------------------------
Distribution from net
realized gains .08 -- .08 -- .08 --
- ----------------------------------------------------------- --------------------------- ---------------------------
Total dividends .54 .45 .46 .36 .46 .38
- ----------------------------------------------------------- --------------------------- ---------------------------
Net asset value, end of
period $ 10.06 10.18 10.06 10.18 10.06 10.19
- ----------------------------------------------------------- --------------------------- ---------------------------
TOTAL RETURN (NOT
ANNUALIZED): 4.15% 12.08 3.34 11.13 3.26 11.43
- ----------------------------------------------------------- --------------------------- ---------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED): (a)
Expenses absorbed by the Fund .92% .55 1.71 1.42 1.65 1.28
- ----------------------------------------------------------- --------------------------- ---------------------------
Net investment income 4.45 5.00 3.66 4.13 3.72 4.27
- ----------------------------------------------------------- --------------------------- ---------------------------
OTHER RATIOS TO AVERAGE NET
ASSETS (ANNUALIZED): (a)
Expenses 1.04% 1.05 1.83 1.92 1.77 1.78
- ----------------------------------------------------------- --------------------------- ---------------------------
Net investment income 4.33 4.50 3.54 3.63 3.60 3.77
- ----------------------------------------------------------- --------------------------- ---------------------------
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 1,
YEAR ENDED 1994 TO
SEPTEMBER 30, SEPTEMBER 30,
ALL CLASSES 1996 1995
------------- -------------
<S> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $21,901 16,169
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 80% 60
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES FOR BOTH NATIONAL TAX-FREE INCOME SERIES FUNDS:
(a) ZKI agreed to waive the management fee of the Intermediate Municipal Fund
from its inception, November 1, 1994, through April 30, 1995. Thereafter,
the management fee was gradually reinstated until 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.
7
<PAGE> 11
CALIFORNIA FUND
<TABLE>
<CAPTION>
OCTOBER 1,
1989 TO YEAR ENDED SEPTEMBER
YEAR ENDED AUGUST 31, AUGUST 31, 30,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
--------------------------------------------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $7.35 7.22 8.01 7.57 7.31 6.96 $ 7.17 7.03 6.76 7.11
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .39 .39 .39 .44 .46 .46 .43 .49 .50 .50
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .04 .17 (.44) .53 .29 .35 (.09) .22 .27 (.35)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .43 .56 (.05) .97 .75 .81 .34 .71 .77 .15
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .39 .39 .39 .44 .46 .46 .43 .49 .50 .50
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .08 .04 .35 .09 .03 -- .12 .08 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .47 .43 .74 .53 .49 .46 .55 .57 .50 .50
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.31 7.35 7.22 8.01 7.57 7.31 6.96 7.17 7.03 6.76
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: 5.92% 8.13 (.74) 13.21 10.47 12.00 4.86 10.36 11.72 2.51
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .78% .74 .74 .63 .64 .66 .64 .63 .63 .65
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.18 5.53 5.30 5.68 6.11 6.43 6.58 6.78 7.15 6.92
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------------- -----------------------------------
MAY 31, MAY 31,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1996 1995 1994 1996 1995 1994
-------------------- ----------- -------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS B AND C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.35 7.22 7.23 7.34 7.22 7.23
- ------------------------------------------------------------------------------------------ -----------------------------------
Income from investment operations:
Net investment income .32 .33 .08 .32 .33 .08
- ------------------------------------------------------------------------------------------ -----------------------------------
Net realized and unrealized gain (loss) .05 .17 (.01) .05 .16 (.01)
- ------------------------------------------------------------------------------------------ -----------------------------------
Total from investment operations .37 .50 .07 .37 .49 .07
- ------------------------------------------------------------------------------------------ -----------------------------------
Less dividends:
Distribution from net investment income .32 .33 .08 .32 .33 .08
- ------------------------------------------------------------------------------------------ -----------------------------------
Distribution from net realized gain .08 .04 -- .08 .04 --
- ------------------------------------------------------------------------------------------ -----------------------------------
Total dividends .40 .37 .08 .40 .37 .08
- ------------------------------------------------------------------------------------------ -----------------------------------
Net asset value, end of period $7.32 7.35 7.22 7.31 7.34 7.22
- ------------------------------------------------------------------------------------------ -----------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.16% 7.17 1.05 5.15 7.08 .96
- ------------------------------------------------------------------------------------------ -----------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.63% 1.60 1.60 1.64 1.56 1.56
- ------------------------------------------------------------------------------------------ -----------------------------------
Net investment income 4.33 4.67 4.48 4.32 4.71 4.76
- ------------------------------------------------------------------------------------------ -----------------------------------
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 1, 1989
YEAR ENDED AUGUST 31, TO YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992 1991 AUGUST 31, 1990 1989 1988 1987
--------------------------------------------------------------------- --------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALL
CLASSES
SUPPLEMENTAL
DATA:
Net assets
at end
of year
(in
thousands) $1,040,538 1,087,232 1,168,449 1,331,377 1,182,891 973,408 736,824 546,432 384,971 291,550
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio
turnover
rate 100% 69 37 59 15 17 15 25 27 44
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See footnotes after tables.
8
<PAGE> 12
FLORIDA FUND
<TABLE>
<CAPTION>
APRIL 25,
TO
YEAR ENDED AUGUST 31, AUGUST 31,
1996 1995 1994 1993 1992 1991
---------------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.27 10.11 10.98 10.22 9.69 9.50
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .52 .53 .52 .58 .64 .23
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 .30 (.52) .81 .53 .19
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .60 .83 -- 1.39 1.17 .42
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .52 .53 .52 .58 .64 .23
- -----------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .14 .14 .35 .05 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total dividends .66 .67 .87 .63 .64 .23
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.21 10.27 10.11 10.98 10.22 9.69
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.83% 8.62 (.11) 13.96 12.51 4.27
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED): (a)
Expenses .84% .80 .79 .63 .25 --
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 5.00 5.30 5.04 5.48 6.25 6.52
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------------- --------------------------------------
MAY 31, MAY 31,
TO TO
YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED AUGUST 31, AUGUST 31,
1996 1995 1994 1996 1995 1994
------------------------ ---------- ------------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
CLASS B AND C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.26 10.10 10.13 10.26 10.10 10.13
- ------------------------------------------------------------------------------------- ------------------------------------
Income from investment operations:
Net investment income .43 .44 .11 .43 .45 .11
- ------------------------------------------------------------------------------------- ------------------------------------
Net realized and unrealized gain (loss) .07 .30 (.03) .08 .30 (.03)
- ------------------------------------------------------------------------------------- ------------------------------------
Total from investment operations .50 .74 .08 .51 .75 .08
- ------------------------------------------------------------------------------------- ------------------------------------
Less dividends:
Distribution from net investment income .43 .44 .11 .43 .45 .11
- ------------------------------------------------------------------------------------- ------------------------------------
Distribution from net realized gain .14 .14 -- .14 .14 --
- ------------------------------------------------------------------------------------- ------------------------------------
Total dividends .57 .58 .11 .57 .59 .11
- ------------------------------------------------------------------------------------- ------------------------------------
Net asset value, end of period $10.19 10.26 10.10 10.20 10.26 10.10
- ------------------------------------------------------------------------------------- ------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 4.84% 7.67 .74 4.97 7.84 .75
- ------------------------------------------------------------------------------------- ------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.68% 1.65 1.70 1.64 1.52 1.54
- ------------------------------------------------------------------------------------- ------------------------------------
Net investment income 4.16 4.45 4.28 4.20 4.58 4.52
- ------------------------------------------------------------------------------------- ------------------------------------
</TABLE>
<TABLE>
<CAPTION>
APRIL 25,
TO
YEAR ENDED AUGUST 31, AUGUST 31,
1996 1995 1994 1993 1992 1991
---------------------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
ALL CLASSES
SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $108,105 117,292 124,721 129,702 109,276 41,923
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 119% 96 53 35 20 33
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See footnotes after tables.
9
<PAGE> 13
<TABLE>
<CAPTION>
MICHIGAN FUND
CLASS A CLASS B CLASS C
------------------------ ------------------------ ------------------------
MARCH 15, MARCH 15, MARCH 15,
YEAR ENDED TO YEAR ENDED TO YEAR ENDED TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.76 9.50 9.77 9.50 9.76 9.50
- ---------------------------------------------------------------------- --------------------- ---------------------
Income from investment operations:
Net investment income .44 .22 .36 .18 .37 .18
- ---------------------------------------------------------------------- --------------------- ---------------------
Net realized and unrealized gain .16 .26 .14 .27 .15 .26
- ---------------------------------------------------------------------- --------------------- ---------------------
Total from investment operations .60 .48 .50 .45 .52 .44
- ---------------------------------------------------------------------- --------------------- ---------------------
Less distribution from net investment income .44 .22 .36 .18 .37 .18
- ---------------------------------------------------------------------- --------------------- ---------------------
Net asset value, end of period $ 9.92 9.76 9.91 9.77 9.91 9.76
- ---------------------------------------------------------------------- --------------------- ---------------------
TOTAL RETURN: (NOT ANNUALIZED) 6.19% 5.00 5.19 4.72 5.36 4.63
- ---------------------------------------------------------------------- --------------------- ---------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):(b)
Expenses absorbed by the Fund 1.21% .41 1.94 1.21 1.64 1.21
- ---------------------------------------------------------------------- --------------------- ---------------------
Net investment income 4.36 4.82 3.63 4.02 3.93 4.02
- ---------------------------------------------------------------------- --------------------- ---------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):(b)
Expenses 153% .96 2.26 1.76 1.96 1.76
- ---------------------------------------------------------------------- --------------------- ---------------------
Net investment income 4.04 4.27 3.31 3.47 3.61 3.47
- ---------------------------------------------------------------------- --------------------- ---------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 15,
YEAR ENDED TO
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
<S> <C> <C>
ALL CLASSES
SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $3,286 3,079
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 135% 161
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See footnotes after tables.
10
<PAGE> 14
<TABLE>
<CAPTION>
NEW JERSEY FUND
CLASS A CLASS B CLASS C
------------------------ ------------------------ ------------------------
MARCH 15, MARCH 15, MARCH 15,
YEAR ENDED TO YEAR ENDED TO YEAR ENDED TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.75 9.50 9.77 9.50 9.77 9.50
- ------------------------------------------------------------------------- ------------------------ ------------------------
Income from investment operations:
Net investment income .43 .22 .36 .18 .36 .18
- ------------------------------------------------------------------------- ------------------------ ------------------------
Net realized and unrealized gain .10 .25 .11 .27 .11 .27
- ------------------------------------------------------------------------- ------------------------ ------------------------
Total from investment operations .53 .47 .47 .45 .47 .45
- ------------------------------------------------------------------------- ------------------------ ------------------------
Less distribution from net investment income .43 .22 .36 .18 .36 .18
- ------------------------------------------------------------------------- ------------------------ ------------------------
Net asset value, end of period $ 9.85 9.75 9.88 9.77 9.88 9.77
- ------------------------------------------------------------------------- ------------------------ ------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.50% 4.89 4.80 4.69 4.89 4.75
- ------------------------------------------------------------------------- ------------------------ ------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED): (b)
Expenses absorbed by the Fund 1.13% .39 2.00 1.18 1.70 1.18
- ------------------------------------------------------------------------- ------------------------ ------------------------
Net investment income 4.41 4.99 3.54 4.20 3.84 4.20
- ------------------------------------------------------------------------- ------------------------ ------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED): (b)
Expenses 1.45% .94 2.32 1.73 2.02 1.73
- ------------------------------------------------------------------------- ------------------------ ------------------------
Net investment income 4.09 4.44 3.22 3.65 3.52 3.65
- ------------------------------------------------------------------------- ------------------------ ------------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 15,
YEAR ENDED TO
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
<S> <C> <C>
ALL CLASSES
SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $3,982 4,309
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 128% 68
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See footnotes after tables.
11
<PAGE> 15
NEW YORK FUND
<TABLE>
<CAPTION>
JULY 1, TO
YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED JUNE 30,
CLASS A SHARES 1996 1995 1994 1993 1992 1991 1990 1990 1989 1988 1987
----------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $10.80 10.73 11.59 10.97 10.41 9.90 10.02 10.22 9.63 9.75 9.62
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .56 .58 .58 .63 .65 .69 .12 .72 .64 .55 .53
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) -- .20 (.60) .72 .56 .51 (.12) (.18) .59 (.12) .13
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .56 .78 (.02) 1.35 1.21 1.20 -- .54 1.23 .43 .66
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .56 .58 .58 .63 .65 .69 .12 .72 .64 .55 .53
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .14 .13 .26 .10 -- -- -- .02 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .70 .71 .84 .73 .65 .69 .12 .74 .64 .55 .53
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.66 10.80 10.73 11.59 10.97 10.41 9.90 10.02 10.22 9.63 9.75
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: 5.26% 7.62 (.19) 12.82 12.07 12.54 .02 5.53 13.18 4.56 6.97
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:(c)
Expenses .83% .81 .76 .67 .66 .40 .72 .72 1.42 1.97 2.05
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.15 5.47 5.29 5.69 6.12 6.77 6.45 6.33 5.25 5.41 4.58
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------------- ---------------------------------
YEAR ENDED MAY 31, TO YEAR ENDED MAY 31, TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
CLASS B AND C SHARES 1996 1995 1994 1996 1995 1994
---------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.80 10.73 10.77 10.79 10.73 10.77
- --------------------------------------------------------------------------------------- --------------------------------
Income from investment operations:
Net investment income .47 .48 .12 .47 .48 .12
- --------------------------------------------------------------------------------------- --------------------------------
Net realized and unrealized gain (loss) -- .20 (.04) -- .19 (.04)
- --------------------------------------------------------------------------------------- --------------------------------
Total from investment operations .47 .68 .08 .47 .67 .08
- --------------------------------------------------------------------------------------- --------------------------------
Less dividends:
Distribution from net investment income .47 .48 .12 .47 .48 .12
- --------------------------------------------------------------------------------------- --------------------------------
Distribution from net realized gain .14 .13 -- .14 .13 --
- --------------------------------------------------------------------------------------- --------------------------------
Total dividends .61 .61 .12 .61 .61 .12
- --------------------------------------------------------------------------------------- --------------------------------
Net asset value, end of period $10.66 10.80 10.73 10.65 10.79 10.73
- --------------------------------------------------------------------------------------- --------------------------------
TOTAL RETURN (NOT ANNUALIZED): 4.36 % 6.69 .75 4.38 6.64 .70
- --------------------------------------------------------------------------------------- --------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.69 % 1.67 1.68 1.67 1.62 1.63
- --------------------------------------------------------------------------------------- --------------------------------
Net investment income 4.24 4.61 4.36 4.31 4.66 4.68
- --------------------------------------------------------------------------------------- --------------------------------
</TABLE>
<TABLE>
<CAPTION>
JULY 1, TO
YEAR ENDED AUGUST 31, AUGUST 31 YEAR ENDED JUNE 30,
ALL CLASSES 1996 1995 1994 1993 1992 1991 1990 1990 1989 1988 1987
---------------------------------------------------------- ---------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
year (in thousands) $302,346 319,477 342,839 354,461 290,464 229,350 174,911 165,847 55,406 4,220 4,148
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover
rate 104% 112 43 36 16 26 33 32 32 9 67
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See footnotes after tables.
12
<PAGE> 16
OHIO FUND
<TABLE>
<CAPTION>
MARCH 22, TO
YEAR ENDED AUGUST 31, AUGUST 31,
CLASS A SHARES 1996 1995 1994 1993
---------------------------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $9.81 9.56 9.98 9.50
- ----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .48 .50 .53 .24
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .12 .25 (.41) .48
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .60 .75 .12 .72
- ----------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .48 .50 .53 .24
- ----------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- .01 --
- ----------------------------------------------------------------------------------------------------------------------------
Total dividends .48 .50 .54 .24
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.93 9.81 9.56 9.98
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 6.16% 8.20 1.23 7.54
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED): (d)
Expenses absorbed by the Fund .91% .63 .02 --
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 4.78 5.27 5.44 5.21
- ----------------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED): (d)
Expenses .91% .83 .82 .86
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 4.78 5.07 4.64 4.36
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------- -------------------------------
YEAR ENDED AUGUST MAY 31, TO YEAR ENDED AUGUST MAY 31, TO
31, AUGUST 31, 31, AUGUST 31,
CLASS B AND C SHARES 1996 1995 1994 1996 1995 1994
------------------ --------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $9.81 9.56 9.54 9.81 9.56 9.54
- --------------------------------------------------------------------------------------- -------------------------------
Income from investment operations:
Net investment income .39 .44 .14 .39 .44 .14
- --------------------------------------------------------------------------------------- -------------------------------
Net realized and unrealized gain .12 .25 .02 .12 .25 .02
- --------------------------------------------------------------------------------------- -------------------------------
Total from investment operations .51 .69 .16 .51 .69 .16
- --------------------------------------------------------------------------------------- -------------------------------
Less distribution from net investment income .39 .44 .14 .39 .44 .14
- --------------------------------------------------------------------------------------- -------------------------------
Net asset value, end of period $9.93 9.81 9.56 9.93 9.81 9.56
- --------------------------------------------------------------------------------------- -------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.30% 7.57 1.55 5.28 7.56 1.55
- --------------------------------------------------------------------------------------- -------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED): (d)
Expenses absorbed by the Fund 1.73% 1.32 .22 1.74 1.27 .21
- --------------------------------------------------------------------------------------- -------------------------------
Net investment income 3.96 4.58 4.72 3.95 4.63 5.04
- --------------------------------------------------------------------------------------- -------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED): (d)
Expenses 1.73% 1.75 1.72 1.74 1.69 1.67
- --------------------------------------------------------------------------------------- -------------------------------
Net investment income 3.96 4.15 3.22 3.95 4.21 3.58
- --------------------------------------------------------------------------------------- -------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, MARCH 22, TO
ALL CLASSES 1996 1995 1994 AUGUST 31,
1993
------------------------------- ----------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $37,100 31,450 23,769 15,530
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 86% 90 103 17
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See footnotes after tables.
13
<PAGE> 17
<TABLE>
<CAPTION>
PENNSYLVANIA FUND
CLASS A CLASS B CLASS C
----------------------- ----------------------- -----------------------
MARCH 15, MARCH 15, MARCH 15,
YEAR ENDED TO YEAR ENDED TO YEAR ENDED TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1996 1995 1996 1995 1996 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.81 9.50 9.80 9.50 9.81 9.50
- ---------------------------------------------------------------------------- -------------------- --------------------
Income from investment operations:
Net investment income .44 .22 .37 .18 .37 .19
- ---------------------------------------------------------------------------- -------------------- --------------------
Net realized and unrealized gain .14 .31 .15 .30 .14 .31
- ---------------------------------------------------------------------------- -------------------- --------------------
Total from investment operations .58 .53 .52 .48 .51 .50
- ---------------------------------------------------------------------------- -------------------- --------------------
Less distribution from net investment income .44 .22 .37 .18 .37 .19
- ---------------------------------------------------------------------------- -------------------- --------------------
Net asset value, end of period $ 9.95 9.81 9.95 9.80 9.95 9.81
- ---------------------------------------------------------------------------- -------------------- --------------------
TOTAL RETURN (NOT ANNUALIZED): 6.01% 5.54 5.29 5.05 5.19 5.18
- ---------------------------------------------------------------------------- -------------------- --------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED): (b)
Expenses absorbed by the Fund 1.06% .46 1.83 1.24 1.80 1.21
- ---------------------------------------------------------------------------- -------------------- --------------------
Net investment income 4.33 4.93 3.56 4.15 3.59 4.18
- ---------------------------------------------------------------------------- -------------------- --------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED): (b)
Expenses 1.39% 1.01 2.16 1.79 2.13 1.76
- ---------------------------------------------------------------------------- -------------------- --------------------
Net investment income 4.00 4.38 3.23 3.60 3.26 3.63
- ---------------------------------------------------------------------------- -------------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 15,
YEAR ENDED TO
AUGUST 31, AUGUST 31,
ALL CLASSES 1996 1995
---------- ----------
<S> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $4,449 2,118
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 158% 85
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See footnotes after tables.
14
<PAGE> 18
TEXAS FUND
<TABLE>
<CAPTION>
NOVEMBER 1,
1991 TO
YEAR ENDED AUGUST 31, AUGUST 31,
1996 1995 1994 1993 1992
--------------------------------- -----------
<S> <C> <C> <C> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.42 10.14 10.69 9.95 9.50
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .51 .54 .56 .60 .50
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .21 .36 (.42) .74 .45
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .72 .90 .14 1.34 .95
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .51 .54 .56 .60 .50
- ---------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .27 .08 .13 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total dividends .78 .62 .69 .60 .50
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.36 10.42 10.14 10.69 9.95
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 7.04% 9.28 1.28 13.89 10.15
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED): (e)
Expenses absorbed by the Fund .92% .70 .36 .08 --
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income 4.88 5.37 5.38 5.79 5.98
- ---------------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED): (e)
Expenses .92% .89 .90 .79 .93
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income 4.88 5.18 4.82 5.08 5.05
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------- ----------------------------
MAY 31, MAY 31,
YEAR ENDED TO YEAR ENDED TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1996 1995 1994 1996 1995 1994
--------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
CLASS B AND C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.42 10.15 10.17 10.42 10.15 10.17
- ----------------------------------------------------------------------------------------------- --- ------------------------
Income from investment operations:
Net investment income .42 .45 .12 .42 .46 .12
- ----------------------------------------------------------------------------------------------- --- ------------------------
Net realized and unrealized gain (loss) .21 .35 (.02) .21 .35 (.02)
- ----------------------------------------------------------------------------------------------- --- ------------------------
Total from investment operations .63 .80 .10 .63 .81 .10
- ----------------------------------------------------------------------------------------------- --- ------------------------
Less dividends:
Distribution from net investment income .42 .45 .12 .42 .46 .12
- ----------------------------------------------------------------------------------------------- --- ------------------------
Distribution from net realized gain .27 .08 -- .27 .08 --
- ----------------------------------------------------------------------------------------------- --- ------------------------
Total dividends .69 .53 .12 .69 .54 .12
- ----------------------------------------------------------------------------------------------- --- ------------------------
Net asset value, end of period $10.36 10.42 10.15 10.36 10.42 10.15
- ----------------------------------------------------------------------------------------------- --- ------------------------
TOTAL RETURN (NOT ANNUALIZED): 6.11% 8.16 .92 6.13 8.27 .88
- ----------------------------------------------------------------------------------------------- --- ------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED): (e)
Expenses absorbed by the Fund 1.79% 1.54 1.24 1.76 1.50 1.23
- ----------------------------------------------------------------------------------------------- --- ------------------------
Net investment income 4.01 4.53 4.44 4.04 4.57 3.96
- ----------------------------------------------------------------------------------------------- --- ------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED): (e)
Expenses 1.79% 1.73 1.78 1.76 1.69 1.77
- ----------------------------------------------------------------------------------------------- --- ------------------------
Net investment income 4.01 4.34 3.90 4.04 4.38 3.42
- ----------------------------------------------------------------------------------------------- --- ------------------------
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 1,
1991 TO
YEAR ENDED AUGUST 31, AUGUST 31,
1996 1995 1994 1993 1992
------------------------------------- -----------
<S> <C> <C> <C> <C> <C>
ALL CLASSES
SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $13,595 14,877 15,409 12,341 7,810
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized): 112% 75 58 47 18
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See footnotes after tables.
15
<PAGE> 19
NOTES FOR ALL STATE TAX-FREE INCOME SERIES FUNDS:
(a) Certain expenses of the Florida Fund were waived or absorbed by ZKI during
each of the three periods shown ended August 31, 1993. If no waiver had been
in place during this time, the expense ratios would have increased .86%,
.42% and 0.1% of average net assets, respectively, with a corresponding
decrease in the net investment income ratios during these periods.
(b) ZKI agreed to waive the management fee of the Michigan Fund, New Jersey Fund
and the Pennsylvania Fund from their inception, March 15, 1995, through
September 15, 1995. Thereafter, the management fee was gradually reinstated
through September 15, 1996. "Other ratios to average net assets" are
computed without the undertaking to waive the management fee.
(c) Certain expenses of the New York Fund were waived or absorbed by ZKI during
various periods shown. Beginning July 1, 1991, the New York Fund began
paying all expenses in full. The ratios shown are computed without the
undertaking to waive or absorb expenses.
(d) Certain expenses of the Ohio Fund were waived or absorbed by ZKI from March
22, 1993 through June 30, 1994. Thereafter, these expenses were gradually
reinstated through June 30, 1995. "Other ratios to average net assets" are
computed without the undertaking to waive such expenses.
(e) Certain expenses of the Texas Fund were waived or absorbed by ZKI from
November 1, 1991 through December 31, 1992. Thereafter, these expenses were
gradually reinstated through June 30, 1995. "Other ratios to average net
assets" are computed without the undertaking to waive such expenses.
Total return does not reflect the effect of sales charges.
16
<PAGE> 20
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
Kemper Tax-Free Income Funds consist of two open-end management investment
companies ("Trusts"), Kemper National Tax-Free Income Series (the "National
Trust") and Kemper State Tax-Free Income Series (the "State Trust") that offer a
choice of investment portfolios ("Funds") designed for investors seeking a high
level of current income exempt from federal income tax and, in the case of
certain Funds, from the income taxes of a particular state. The National Trust
consists of two "National Funds": Kemper Municipal Bond Fund ("Municipal Fund")
and Kemper Intermediate Municipal Bond Fund ("Intermediate Municipal Fund") and
the State Trust consists of eight separate "State Funds". Each Trust may offer
additional Funds in the future.
Under normal conditions, as a fundamental investment policy, each Fund will
maintain at least 80% of its investments in obligations issued by or on behalf
of states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
income from which is exempt from federal income taxes ("Municipal Securities").
As indicated under "Dividends and Taxes," the Funds may invest in "private
activity bonds." The Funds currently do not consider private activity bonds to
be Municipal Securities for purposes of the 80% limitation.
The assets of each Fund consist of (a) Municipal Securities; (b) temporary
investments in high grade taxable fixed income instruments including repurchase
agreements (See "Temporary Investments" below for more information); (c)
financial futures contracts and options (which may produce taxable gains) as
described under "Additional Investment Information" below; and (d) cash. From
time to time, a Fund may purchase insurance on the securities in the Fund's
portfolio. While such insurance provides protection against default of the
issuer, it does not protect against a decline in the value of a security as a
result of market conditions. For the Municipal Fund, all Municipal Securities
will be rated at the time of purchase within the four highest grades assigned by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps Credit Rating
Co. ("Duff") or any other Nationally Recognized Statistical Rating Organization
("NRSRO") as designated by the Securities and Exchange Commission ("SEC"),
provided that up to 10% of the net assets of the Municipal Fund may be invested
in Municipal Securities that are lower rated ("junk bonds") or unrated. For the
Intermediate Municipal Fund and the State Funds, all Municipal Securities will
be rated at the time of purchase within the four highest grades assigned by
Moody's, S&P, Fitch or Duff or any other NRSRO as designated by the SEC, or will
be of comparable quality as determined by the Fund's investment manager,
provided that up to 10% of a Fund's net assets may be invested without regard to
this limitation. The top four ratings currently assigned by these organizations
are as follows: Moody's (Aaa, Aa, A or Baa), S&P (AAA, AA, A or BBB), Fitch
(AAA, AA, A or BBB) and Duff (AAA, AA, A or BBB).
Municipal Securities are debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Securities may be issued include the refunding of outstanding
obligations, obtaining funds for general operating expenses and the obtaining of
funds to loan to other public institutions and facilities. In addition, certain
types of industrial development bonds are issued by or on behalf of public
authorities to obtain funds to provide privately-operated housing facilities,
sports facilities, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities and
certain local facilities for water supply, gas, electricity or sewage or solid
waste disposal. Such obligations, which may include lease arrangements, are
included within the term Municipal Securities if the interest paid thereon
qualifies as exempt from federal income tax. Other types of industrial
development bonds, the proceeds of which are used for the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities, may constitute Municipal Securities, although the current federal
tax laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class
17
<PAGE> 21
of facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Industrial development bonds that are Municipal
Securities are in most cases revenue bonds and do not generally constitute the
pledge of the credit of the issuer of such bonds. There are, of course,
variations in the degree of risk of Municipal Securities, both within a
particular classification and between classifications, depending on numerous
factors.
There are market and investment risks with any security and the value of an
investment in a Fund will fluctuate over time. Normally, the value of a Fund's
investments varies inversely with changes in interest rates and longer-term
securities are more susceptible to changes in value as a result of interest-rate
changes than are shorter-term securities. There can be no assurance that the
objective of any Fund will be achieved. Municipal Securities rated within the
four highest grades by Moody's, S&P, Fitch or Duff are generally considered to
be "investment grade." Like higher rated securities, securities rated in the
Baa/BBB categories are considered to have adequate capacity to pay principal and
interest, although they may have fewer protective provisions than higher rated
securities and thus may be adversely affected by severe economic circumstances
and are considered to have speculative characteristics. For a discussion of
lower rated or non-rated securities and related risks, see "Special Risk
Factors--High Yield (High Risk) Bonds" below.
Each State Fund is "non-diversified" and, as such, may invest more than 5% of
its assets in the obligations of an issuer, subject to the diversification
requirements of Subchapter M of the Internal Revenue Code applicable to the
Fund. This allows a State Fund, as to 50% of its assets, to invest more than 5%
of its assets, but not more than 25%, in the fixed income securities of any
municipality or other tax-exempt issuer. Since a State Fund may invest a
relatively high percentage of its assets in the obligations of a limited number
of issuers, it will be more susceptible to economic, political or regulatory
occurrences than a diversified fund. See "Investment Restrictions" in the
Statement of Additional Information. Also, see "Investments--Special Risk
Factors" in the Statement of Additional Information for more information
concerning the risks associated with investment in Municipal Securities of the
particular states.
MUNICIPAL FUND. The objective of the Municipal Fund is to provide as high a
level of current interest income exempt from federal income taxes as is
consistent with preservation of capital. The Municipal Fund seeks to achieve its
objective by investing primarily in a diversified portfolio of Municipal
Securities. Although the Municipal Fund is not limited as to portfolio maturity,
the dollar-weighted average portfolio maturity of this Fund, under normal market
conditions, is expected to be longer than 10 years.
INTERMEDIATE MUNICIPAL FUND. The objective of the Intermediate Municipal Fund is
to provide as high a level of current income that is exempt from federal income
taxes as is consistent with preservation of capital. The Intermediate Municipal
Fund seeks to achieve its objective by investing in a diversified portfolio of
Municipal Securities.
As a non-fundamental policy, the dollar-weighted average portfolio maturity of
this Fund, under normal market conditions, will be between 3 and 10 years. The
maturity of a security held by the Fund will generally be considered to be the
time remaining until repayment of the principal amount of such security, except
that a security will be treated as having a maturity earlier than its stated
maturity date if it has technical features (such as puts or demand features) or
a variable rate of interest which, in the judgment of the Fund's investment
manager, will result in the security being valued in the market as though it has
the earlier maturity. Intermediate-term securities generally are more stable and
less susceptible to changes in market value than longer term securities although
they in most cases offer lower yields than securities with longer maturities.
The investment manager believes that investment in intermediate-term securities
allows the Fund to seek both high current income and preservation of capital.
There is, however, no assurance that the Fund's objective will be achieved. The
return and net asset value of the Fund will fluctuate.
CALIFORNIA FUND. The objective of the California Fund is to provide a high level
of current income that is exempt from federal and California income taxes. The
California Fund seeks to achieve its objective by investing
18
<PAGE> 22
in a non-diversified portfolio of Municipal Securities. The California Fund
intends to generate dividends that are exempt from California income taxes. Such
dividend income may be subject to local taxes. Under California law a mutual
fund must have at least 50% of its total assets invested in California state and
local issues the income from which is exempt from California income tax
("California Municipal Securities") at the end of each quarter of its taxable
year in order to be eligible to pay to California residents dividends that are
wholly or partially exempt from California income taxes. Accordingly, the
California Fund intends to invest a minimum of 50% of its assets in California
Municipal Securities and may invest up to 100% of its assets in such securities.
The California Fund normally maintains at least 80% of its investments in
California Municipal Securities.
Investors should be aware that certain California constitutional amendments,
legislative measures, executive orders, civil actions and voter initiatives, as
well as the general financial condition of the State, could result in certain
adverse consequences for owners of California Municipal Securities. The natural
disasters that California has experienced in recent years may impair local
issuer financial performance. In addition, amendments in recent years to the
California Constitution and statutes that limit the taxing and spending
authority of California governmental entities may impair the ability of the
issuers of some California Municipal Securities to maintain debt service on
their obligations. Other measures affecting the taxing or spending authority of
California or its political subdivisions may be approved or enacted in the
future.
FLORIDA FUND. The objective of the Florida Fund is to provide a high level of
current income that is exempt from federal income taxes. The Florida Fund seeks
to achieve its objective by investing primarily in a non-diversified portfolio
of obligations issued by the State of Florida, its political subdivisions,
agencies or instrumentalities and other securities that are exempt from the
Florida intangibles tax and the interest from which is exempt from federal
income taxes ("Florida Municipal Securities"). Dividends representing interest
income received by the Florida Fund on Florida Municipal Securities will be
exempt from federal income taxes. Dividend income may be subject to state and
local taxes. Florida currently has no income tax for individuals. Since the
investment manager believes that exemption from the Florida intangibles tax is
likely to be available, the Florida Fund generally will seek investments
enabling shares of the Florida Fund to be exempt from the intangibles tax.
However, there is no assurance that an exemption from the Florida intangibles
tax will be available. See "Dividends and Taxes." Florida Municipal Securities
may at times have lower yields than other tax-exempt securities. Taking
advantage of the exemption from the Florida intangibles tax could result in
higher portfolio turnover and related transaction costs. As a temporary
defensive position, to the extent Florida Municipal Securities are at any time
unavailable or unattractive for investment by the Florida Fund, it will invest
in other debt securities the interest from which is exempt from federal income
tax. Under normal market conditions, as a non-fundamental policy, the Florida
Fund will maintain at least 65% of its total assets in Florida Municipal
Securities. See also "Dividends and Taxes."
Florida is characterized by rapid growth, substantial capital needs, a
manageable debt burden, a diversifying but still somewhat narrow economic base
and good financial operations. The State continues to experience rapid
population growth although not as great as in previous years. The slower
population growth rate should allow the State to catch up on its capital needs.
Technology-based manufacturing, healthcare and financial services have joined
tourism and agriculture as leading elements of Florida's continued economic
growth. Florida's overall financial position remains healthy, despite swings in
financial operations over the past several years. The swings are reflective of
the State's reliance on the sales tax as the major revenue source. Florida has
increased its funding of capital projects through more frequent debt issuance
rather than the historical pay-as-you-go method.
MICHIGAN FUND. The objective of the Michigan Fund is to provide a high level of
current income that is exempt from federal and Michigan income taxes. The
Michigan Fund seeks to achieve its objective by investing primarily in a
non-diversified portfolio of obligations issued by or on behalf of Michigan, its
political subdivisions, agencies or instrumentalities the interest from which is
exempt from federal and Michigan income taxes ("Michigan Municipal Securities").
Dividends representing interest income received by the Michigan Fund on Michigan
Municipal Securities will be exempt from federal and Michigan income taxes. Such
dividend income may be subject to other state and local taxes. To the extent
that Michigan Municipal Securities are at any time
19
<PAGE> 23
unavailable or unattractive for investment by the Michigan Fund, it will invest
temporarily in other debt securities the interest from which is exempt from
federal income tax. Under normal market conditions, as a non-fundamental policy,
the Michigan Fund will maintain at least 65% of its total assets in Michigan
Municipal Securities.
Michigan's economic performance relies heavily on national economic trends. Its
economy is highly industrialized with an economic base concentrated in the
manufacturing sector. This concentration has generally caused the State's
economy to be more volatile than that of more diversified states, although its
long term growth has kept pace with the nation due to gains in other sectors.
The most recent economic recession had a milder affect on the State compared to
the recession of the 1980's. The restructuring of the State's manufacturing
industry following the recession of the 1980's improved the industry's overall
competitive position. In addition, the rebound in the automotive industry of the
past several years has improved the State's current economic and financial
position. Michigan's future economic growth will likely come from growth in its
service sector.
NEW JERSEY FUND. The objective of the New Jersey Fund is to provide a high level
of current income that is exempt from federal and New Jersey income taxes. The
New Jersey Fund seeks to achieve its objective by investing primarily in a
non-diversified portfolio of obligations issued by or on behalf of New Jersey,
its political subdivisions, agencies or instrumentalities the interest from
which is exempt from federal and New Jersey income taxes ("New Jersey Municipal
Securities"). Dividends representing interest income received by the New Jersey
Fund on New Jersey Municipal Securities will be exempt from federal and New
Jersey income taxes. Such dividend income may be subject to other state and
local taxes. To the extent that New Jersey Municipal Securities are at any time
unavailable or unattractive for investment by the New Jersey Fund, it will
invest temporarily in other debt securities the interest from which is exempt
from federal income tax. Under normal market conditions, as a non-fundamental
policy, the New Jersey Fund will maintain at least 65% of its total assets in
New Jersey Municipal Securities.
New Jersey is the ninth most populous state in the nation. Per capita income in
1993 was the second highest of the states and 129% of the national average. The
distribution of employment in New Jersey mirrors that of the nation. After an
extraordinary boom in the mid-1980's, New Jersey and the rest of the Northeast
fell into a recession a year before the national recession officially began.
Along with the rest of the Northeast, New Jersey climbed out of the recession
more slowly than the rest of the nation. Since 1992, the unemployment rate in
New Jersey has exceeded the national average; the unemployment rates for New
Jersey and the nation during the first quarter of 1995 were 6.9% and 5.9%,
respectively.
NEW YORK FUND. The objective of the New York Fund is to provide a high level of
current income that is exempt from federal, New York State and New York City
income taxes. The New York Fund seeks to achieve its objective by investing in a
non-diversified portfolio of obligations issued by or on behalf of New York
State, its political subdivisions, authorities and corporations, and territories
and possessions of the United States and their political subdivisions, agencies
and instrumentalities the interest from which is exempt from federal, New York
State and New York City income taxes ("New York Municipal Securities").
Dividends representing interest income received by the New York Fund on New York
Municipal Securities will be exempt from federal, New York State and New York
City income taxes. Such dividend income may be subject to other state and local
taxes. To the extent New York Municipal Securities are at any time unavailable
or unattractive for investment by the New York Fund, it will invest temporarily
in other debt securities the interest from which is exempt from federal income
tax. Under normal market conditions, as a non-fundamental policy, the New York
Fund will maintain at least 65% of its total assets in New York Municipal
Securities.
New York is the third most populous state in the nation; New York City accounts
for about 40% of the State's population. After a boom in the mid-1980's, New
York and the rest of the Northeast fell into a recession a year before the
national recession officially began. Along with the rest of the Northeast, New
York climbed out of the recession more slowly than the rest of the nation. New
York ranks fourth in the nation in personal income. In 1990, per capita personal
income was 120% of the national average. Employment distribution is similar to
that of
20
<PAGE> 24
the nation except for a higher concentration in the Finance, Insurance and Real
Estate ("FIRE") sector and a lower concentration in manufacturing. Historically,
unemployment is more cyclical than for the United States as a whole. Since 1991,
New York unemployment has exceeded the U.S. average.
OHIO FUND. The objective of the Ohio Fund is to provide a high level of current
income that is exempt from federal and Ohio income taxes. The Ohio Fund seeks to
achieve its objective by investing primarily in a non-diversified portfolio of
obligations issued by or on behalf of the State of Ohio, its political
subdivisions, agencies or instrumentalities the interest from which is exempt
from federal and Ohio income taxes ("Ohio Municipal Securities"). Dividends
representing interest income received by the Ohio Fund on Ohio Municipal
Securities will be exempt from federal and Ohio income taxes. Such dividend
income may be subject to other state and local taxes. To the extent Ohio
Municipal Securities are at any time unavailable or unattractive for investment
by the Ohio Fund, it will invest temporarily in other debt securities the
interest from which is exempt from federal income tax. Under normal market
conditions, as a non-fundamental policy, the Ohio Fund will maintain at least
65% of its total assets in Ohio Municipal Securities.
Ohio dealt successfully with financial difficulties in prior years and may face
long-term problems in certain regions and the economy. The economy depends in
part upon durable goods manufacturing, primarily motor vehicles and equipment,
steel, rubber products and household appliances. As a result, economic activity
in Ohio tends to be more cyclical than some other states and the nation as a
whole. However, since 1982, the State's economy has been growing and
diversifying as employment shifts into services, trade, finance and insurance.
PENNSYLVANIA FUND. The objective of the Pennsylvania Fund is to provide a high
level of current income that is exempt from federal and Pennsylvania income
taxes. The Pennsylvania Fund seeks to achieve its objective by investing
primarily in a non-diversified portfolio of obligations issued by or on behalf
of the Commonwealth of Pennsylvania, its political subdivisions, agencies or
instrumentalities the interest from which is exempt from federal and
Pennsylvania income taxes ("Pennsylvania Municipal Securities"). Dividends
representing interest income received by the Pennsylvania Fund on Pennsylvania
Municipal Securities will be exempt from federal and Pennsylvania income taxes
and (for residents of Philadelphia) from Philadelphia School District Income Tax
and (for residents of Pittsburgh) from the intangibles tax for the City and
School District of Pittsburgh. Such dividend income may be subject to other
state and local taxes. To the extent that Pennsylvania Municipal Securities are
at any time unavailable or unattractive for investment by the Pennsylvania Fund,
it will invest temporarily in other debt securities the interest from which is
exempt from federal income tax. Under normal market conditions, as a
non-fundamental policy, the Pennsylvania Fund will maintain at least 65% of its
total assets in Pennsylvania Municipal Securities.
While Pennsylvania is among the leading states in manufacturing and mining, it
is transforming into a services and high-tech economy as evidenced by its
growing reputation as a health and education center. The recent recession
adversely affected the Commonwealth starting in 1991, but has been more moderate
than in other Mid-Atlantic and Northeastern states because its economy is less
dependent upon financial services and the defense/aerospace industries.
Competition from foreign markets, particularly in the steel industry,
contributed to the job losses in the Commonwealth's manufacturing sector;
however, the result was a restructuring in the industry which helped the
Commonwealth weather the recent recession much more successfully than in past
recessions. The economy has performed similar to that of the nation and slightly
stronger than its neighboring states due to the restructuring and modernization
of many of its manufacturing factories. The growth will still lag that of the
South and Midwest. The replacement of highly paid manufacturing jobs for those
in the services and trade sectors will impede income growth. Relative cost
advantages which are available to businesses in the Commonwealth compared to its
neighboring states, as well as the restructuring and modernization of
manufacturing plans, should aid in boosting the economy.
TEXAS FUND. The objective of the Texas Fund is to provide a high level of
current income that is exempt from federal income taxes. The Texas Fund seeks to
achieve its objective by investing primarily in a non-diversified portfolio of
obligations issued by or on behalf of Texas, its political subdivisions,
agencies or instrumentalities the
21
<PAGE> 25
interest from which is exempt from federal income taxes ("Texas Municipal
Securities"). Dividends representing interest income received by the Texas Fund
on Texas Municipal Securities will be exempt from federal income taxes. Such
dividend income may be subject to state and local taxes. However, Texas
currently has no income tax for individuals. To the extent Texas Municipal
Securities are at any time unavailable or unattractive for investment by the
Texas Fund, it will invest temporarily in other debt securities the interest
from which is exempt from federal income tax. Under normal market conditions, as
a non-fundamental policy, the Texas Fund will maintain at least 65% of its total
assets in Texas Municipal Securities.
The State's economy is diversified and mirrors the national economy in terms of
employment composition. The services sector has been the largest source of
employment growth with many high tech firms locating in the State. On an
absolute basis, Texas was second among the states in terms of new jobs added
between April 1995 and April 1996. On a percentage of the workforce basis it was
ranked eleventh among the states. Gross State Product growth outpaced the nation
for calendar year 1995, growing by 3.7% as opposed to 2.1% for the nation.
Although the investment manager anticipates that most of the bonds in the Texas
Fund will be revenue obligations or general obligations of local governments or
authorities, rather than general obligations of the State of Texas itself, any
circumstances that adversely affect the State's credit standing may also affect
the market value of these other bonds held by the Texas Fund, either directly or
indirectly, as a result of a dependency of local governments and other
authorities upon State aid and reimbursement programs.
SPECIAL RISK FACTORS--HIGH YIELD (HIGH RISK) BONDS. As stated above, the
Municipal Fund may invest up to 10% of its net assets in Municipal Securities
that are in the lower rating categories (securities rated below the fourth
category) or are unrated, and the Intermediate Municipal Fund and each State
Fund may invest up to 10% of its net assets without regard to the limitation
that Municipal Securities in which it invests be rated at the time of purchase
within the four highest grades by an NRSRO or of comparable quality as
determined by the Fund's investment manager. After a Fund has bought a security,
its quality level may fall below the minimum required for purchase by the Fund.
That would not require the Fund to sell the security, but the investment manager
will consider such an event in determining whether a Fund should continue to
hold the security in its portfolio.
These lower rated and non-rated fixed income securities are commonly referred to
as "junk bonds" and are considered, on balance, to be predominantly speculative
as to the issuer's capacity to pay interest and repay principal in accordance
with the terms of the obligation, and they generally involve more credit risk
than securities in the higher rating categories. The market values of such
securities tend to reflect individual issuer developments to a greater extent
than do those of higher rated securities, which react primarily to fluctuations
in the general level of interest rates. Lower rated securities also are more
sensitive to economic conditions than are higher rated securities. Adverse
publicity and investor perceptions regarding lower rated bonds, whether or not
based on fundamental analysis, may depress the prices for such securities. A
Fund may have difficulty disposing of certain high yield securities because
there may be a thin trading market for such securities. The lack of a liquid
secondary market may have an adverse effect on market price and the Fund's
ability to dispose of particular issues and may also make it more difficult for
the Fund to obtain accurate market quotations for purposes of valuing these
assets. The characteristics of the rating categories are described in the
Statement of Additional Information under "Appendix--Ratings of Investments."
ADDITIONAL INVESTMENT INFORMATION. A Fund, other than the Intermediate Municipal
Fund, may take full advantage of the entire range of maturities of Municipal
Securities and may adjust the average maturity of its investments from time to
time, depending on the investment manager's assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates. However, it is anticipated that, under normal market
conditions, each such Fund will invest primarily in long-term Municipal
Securities (generally, maturities of ten years or more), except that the
Intermediate Municipal Fund, under normal market conditions, will maintain a
dollar weighted average portfolio maturity between 3 and 10 years.
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<PAGE> 26
A Fund will not normally engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, a Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities in anticipation
of a decline in interest rates. In addition, a security may be sold and another
of comparable quality purchased at approximately the same time to take advantage
of what the Fund believes to be a temporary disparity in the normal yield
relationship between the two securities. Yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, such as changes in the overall demand for or
supply of various types of Municipal Securities or changes in the investment
objectives of some investors. Frequency of portfolio turnover will not be a
limiting factor should a Fund deem it desirable to purchase or sell securities.
The portfolio turnover rates for the Funds are listed under "Financial
Highlights." The difference in portfolio turnover rates between fiscal years
1994 and 1995 for the Florida and New York Funds was primarily due to two
portfolio restructurings for each Fund in order to lengthen their durations in
response to the interest rate environment. It is anticipated that, under normal
circumstances, the portfolio turnover rate for the Michigan and New York Funds
will not exceed 100%.
The National Funds and the California Fund will not borrow money except for
temporary or emergency purposes (but not to purchase investments) and then only
in an amount not to exceed 5% for the National Funds or 10% for the California
Fund of net assets; or pledge its securities or receivables or transfer, assign
or otherwise encumber them in an amount exceeding the amount of the borrowing
secured thereby. Except for the California Fund, each State Fund will not borrow
money except for temporary purposes (but not to purchase investments) and then
only in an amount not to exceed one-third of the value of its total assets
(including the amount borrowed) in order to meet redemption requests that
otherwise might result in the untimely disposition of securities; or pledge its
securities or receivables or transfer or assign or otherwise encumber them in an
amount to exceed 10% of its net assets to secure borrowings.
Certain fundamental investment restrictions have been adopted for each Fund,
which are presented in the Statement of Additional Information and that,
together with the investment objective and policies of each Fund, cannot be
changed without approval by holders of a majority of its outstanding voting
shares. As defined in the Investment Company Act of 1940 ("1940 Act"), this
means the lesser of the vote of (a) 67% of the shares of the Fund present at a
meeting where more than 50% of the outstanding shares are present in person or
by proxy; or (b) more than 50% of the outstanding shares of the Fund.
OPTIONS AND FINANCIAL FUTURES TRANSACTIONS. A Fund may deal in options on
securities and securities indexes, which options may be listed for trading on a
national securities exchange or traded over-the-counter. A Fund may write (sell)
covered call options and secured put options on up to 25% of its net assets and
may purchase put and call options provided that no more than 5% of its net
assets may be invested in premiums on such options. The ability to engage in
options transactions enables a Fund to pursue its investment objective and also
to hedge against market risks but is not intended for speculation.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security or other asset at the exercise price
during the option period. A put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying security or other asset at
the exercise price during the option period. The writer of a covered call owns
securities or other assets that are acceptable for escrow and the writer of a
secured put invests an amount not less than the exercise price in eligible
securities or other assets to the extent that it is obligated as a writer. If a
call written by a Fund is exercised, the Fund foregoes any possible profit from
an increase in the market price of the underlying security or other asset over
the exercise price plus the premium received. In writing puts, there is a risk
that the Fund may be required to take delivery of the underlying security or
other asset at a disadvantageous price.
Over-the-counter traded options ("OTC options") differ from exchange traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer as a result of the insolvency of such dealer or otherwise, in which event
a Fund may experience material
23
<PAGE> 27
losses. However, in writing options the premium is paid in advance by the
dealer. OTC options are available for a greater variety of securities or other
assets, and a wider range of expiration dates and exercise prices, than are
exchange traded options.
A Fund may engage in financial futures transactions. Financial futures contracts
are commodity contracts that obligate the long or short holder to take or make
delivery of a specified quantity of a financial instrument, such as a security,
or the cash value of a securities index during a specified future period at a
specified price. A Fund will "cover" futures contracts sold by the Fund and
maintain in a segregated account certain liquid assets in connection with
futures contracts purchased by the Fund as described under "Investment Policies
and Techniques" in the Statement of Additional Information. A Fund will not
enter into any futures contracts or options on futures contracts if the
aggregate of the contract value of the outstanding futures contracts of the Fund
and futures contracts subject to outstanding options written by the Fund would
exceed 50% of the total assets of the Fund.
A Fund may engage in financial futures transactions and may use index options in
an attempt to hedge against the effects of fluctuations in interest rates and
other market conditions. For example, if a Fund owned long-term Municipal
Securities and interest rates were expected to rise, it could sell futures
contracts on a Municipal Securities Index. If interest rates did increase, the
value of the Municipal Securities in a Fund would decline, but this decline
would be offset in whole or in part by an increase in the value of the Fund's
futures contracts. If on the other hand, long-term interest rates were expected
to decline, a Fund could hold short-term Municipal Securities and benefit from
the income earned by holding such securities, while at the same time the Fund
could purchase futures contracts on a Municipal Securities Index. Thus, a Fund
could take advantage of the anticipated rise in the value of long-term Municipal
Securities without actually buying them. The futures contracts and short-term
Municipal Securities could then be liquidated and the cash proceeds used to buy
long-term Municipal Securities.
Futures contracts entail risks. If the investment manager's judgment about the
general direction of interest rates or markets is wrong, the overall performance
may be poorer than if no such contracts had been entered into. There may be an
imperfect correlation between movements in prices of futures contracts and
portfolio securities being hedged. In addition, the market prices of futures
contracts may be affected by certain factors. If participants in the futures
market elect to close out their contracts through offsetting transactions rather
than meet margin requirements, distortions in the normal relationship between
the debt securities and futures market could result. Price distortions could
also result if investors in futures contracts decide to make or take delivery of
underlying securities rather than engage in closing transactions because of the
resultant reduction in the liquidity of the futures market. In addition,
because, from the point of view of speculators, margin requirements in the
futures market are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures market could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities and movements in the prices of futures contracts, a correct
forecast of market trends by the investment manager may still not result in a
successful hedging transaction. If this should occur, a Fund could lose money on
the financial futures contracts and also on the value of its portfolio
securities. The costs incurred in connection with futures transactions could
reduce a Fund's yield.
Options on futures contracts and index options involve risks similar to those
risks relating to transactions in financial futures contracts described above.
Also, an option purchased by a Fund may expire worthless, in which case the Fund
would lose the premium paid therefor.
A Fund may engage in futures transactions only on commodities exchanges or
boards of trade. A Fund will not engage in transactions in index options,
financial futures contracts or related options for speculation, but only as an
attempt to hedge against changes in interest rates or market conditions
affecting the values of securities which the Fund owns or intends to purchase.
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<PAGE> 28
DERIVATIVES. In addition to options and financial futures transactions,
consistent with its objective, each Fund may invest in a broad array of
financial instruments and securities in which the value of the instrument or
security is "derived" from the performance of an underlying asset or a
"benchmark" such as a security index or an interest rate ("derivatives").
Derivatives are most often used to manage investment risk, to increase or
decrease exposure to an asset class or benchmark (as a hedge or to enhance
return), or to create an investment position indirectly (often because it is
more efficient or less costly than direct investment). The types of derivatives
used by each Fund and the techniques employed by the investment manager may
change over time as new derivatives and strategies are developed or regulatory
changes occur.
SPECIAL RISK FACTORS--OPTIONS, FUTURES AND OTHER DERIVATIVES. The Statement of
Additional Information contains further information about the characteristics,
risks and possible benefits of options, futures and other derivative
transactions. See "Investment Policies and Techniques" in the Statement of
Additional Information. The principal risks are: (a) possible imperfect
correlation between movements in the prices of options, futures or other
derivatives contracts and movements in the prices of the securities hedged, used
for cover or that the derivatives intended to replicate; (b) lack of assurance
that a liquid secondary market will exist for any particular option, futures or
other derivatives contract at any particular time; (c) the need for additional
skills and techniques beyond those required for normal portfolio management; (d)
losses on futures contracts resulting from market movements not anticipated by
the investment manager; (e) the possible need to defer closing out certain
options, futures or other derivatives contracts in order to continue to qualify
for beneficial tax treatment afforded "regulated investment companies" under the
Internal Revenue Code; and (f) the possible non-performance of the counter-party
to the derivative contract.
CERTIFICATES OF PARTICIPATION. A Fund may purchase Certificates of Participation
in trusts that hold Municipal Securities. A Certificate of Participation gives a
Fund an undivided interest in the Municipal Security in the proportion that the
Fund's interest bears to the total principal amount of the Municipal Security.
Certificates of Participation may be variable rate or fixed rate. Because
Certificates of Participation are interests in Municipal Securities that are
generally funded through government appropriations, they are subject to the risk
that sufficient appropriations as to the timely payment of principal and
interest on the underlying Municipal Securities may not be made. A Certificate
of Participation may be backed by a guarantee of a financial institution that
satisfies rating agencies as to the credit quality of the Municipal Security
supporting the payment of principal and interest on the Certificate of
Participation. Payments of principal and interest would be dependent upon the
underlying Municipal Security and may be guaranteed under a letter of credit to
the extent of such credit. The quality rating by a rating service of an issue of
Certificates of Participation is based primarily upon the rating of the
Municipal Security held by the trust and the credit rating of the issuer of any
letter of credit and of any other guarantor providing credit support to the
issue. The Funds' investment manager considers these factors as well as others,
such as any quality ratings issued by the rating services identified above, in
reviewing the credit risk presented by a Certificate of Participation and in
determining whether the Certificate of Participation is appropriate for
investment by a Fund. It is anticipated by the Funds' investment manager that,
for most publicly offered Certificates of Participation, there will be a liquid
secondary market or there may be demand features enabling a Fund to readily sell
its Certificates of Participation prior to maturity to the issuer or a third
party.
ADVANCE REFUNDED BONDS. A Fund may purchase Municipal Securities that are
subsequently refunded by the issuance and delivery of a new issue of bonds prior
to the date on which the outstanding issue of bonds can be redeemed or paid. The
proceeds from the new issue of bonds are typically placed in an escrow fund
consisting of U.S. Government obligations that are used to pay the interest,
principal and call premium on the issue being refunded. A Fund may also purchase
Municipal Securities that have been refunded prior to purchase by a Fund.
DELAYED DELIVERY TRANSACTIONS. A Fund may purchase or sell portfolio securities
on a when-issued or delayed delivery basis. When-issued or delayed delivery
transactions involve a commitment by a Fund to purchase or sell securities with
payment and delivery to take place in the future in order to secure what is
considered to be an advantageous price or yield to the Fund at the time of
entering into the transaction. The value of fixed income securities to be
delivered in the future will fluctuate as interest rates vary. Because a Fund is
required to set aside cash or liquid securities to satisfy its commitments to
purchase when-issued or delayed delivery securities,
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<PAGE> 29
flexibility to manage the Fund's investments may be limited if commitments to
purchase when-issued or delayed delivery securities were to exceed 25% of the
value of its assets.
To the extent a Fund engages in when-issued or delayed delivery purchases, it
will do so for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies. The Fund reserves the right to sell
these securities before the settlement date if deemed advisable.
In when-issued or delayed delivery transactions, delivery of the securities
occurs beyond normal settlement periods, but the Fund would not pay for such
securities or start earning interest on them until they are delivered. However,
when the Fund purchases securities on a when-issued or delayed delivery basis,
it immediately assumes the risks of ownership, including the risk of price
fluctuation. Failure to deliver a security purchased on a when-issued or delayed
delivery basis may result in a loss or missed opportunity to make an alternative
investment. Depending on market conditions, the Fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which its
total assets, including the value of when-issued and delayed delivery securities
its holds, exceed its net assets.
TEMPORARY INVESTMENTS. On a temporary basis because of market conditions, a Fund
may invest up to 100% of its assets in any of the following fixed income
obligations, the interest on which is subject to federal income taxes:
obligations of the U.S. Government, its agencies or instrumentalities; debt
securities rated within the three highest grades by Moody's or S&P; commercial
paper rated in the highest two grades by either of those rating services (P-1,
P-2 or A-1, A-2, respectively); certificates of deposit of domestic banks with
assets of $1 billion or more; and Municipal Securities or any of the foregoing
temporary investments subject to short-term repurchase agreements. A repurchase
agreement is an instrument under which the purchaser acquires ownership of a
security from a broker-dealer or bank that agrees to repurchase the security at
a mutually agreed upon time and price (which price is higher than the purchase
price), thereby determining the yield during the holding period. Maturity of the
securities subject to repurchase may exceed one year. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, a Fund might
incur expenses in enforcing its rights, and could experience losses, including a
decline in the value of the underlying securities and loss of income. No Fund
presently intends to invest more than 5% of its net assets in repurchase
agreements during the current year. Dividends from interest income from
temporary investments may be taxable to shareholders as ordinary income. See
"Dividends and Taxes." For a description of the ratings of commercial paper and
other debt securities permitted as temporary investments, see "Appendix--Ratings
of Investments" in the Statement of Additional Information.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Zurich Kemper Investments, Inc. ("ZKI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, is the investment manager of the Trusts and
provides the Trusts with continuous professional investment supervision. ZKI is
one of the largest investment managers in the country and has been engaged in
the management of investment funds for more than forty-eight years and is one of
the largest investment managers in the country. ZKI and its affiliates provide
investment advice and manage investment portfolios for the Kemper Funds,
affiliated insurance companies and other corporate, pension, profit-sharing and
individual accounts representing approximately $76 billion under management. ZKI
acts as investment manager for 30 open-end and seven closed-end investment
companies, with 77 separate investment portfolios, representing more than
million shareholder accounts. ZKI is an indirect subsidiary of Zurich Insurance
Company, an internationally recognized company providing services in life and
non-life insurance, reinsurance and asset management.
Responsibility for overall management of each Trust rests with its Board of
Trustees and officers. Professional investment supervision is provided by ZKI.
The investment management agreement for a Fund provides that ZKI shall act as
the Fund's investment adviser, manage its investments and provide the Fund with
various services and facilities.
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<PAGE> 30
Christopher J. Mier is the portfolio manager of the Funds. Mr. Mier has served
in this capacity since 1989 or the commencement of a Fund's operations,
whichever is later. Mr. Mier is a Senior Vice President of ZKI and a Vice
President of each Trust. He received a B.A. in Economics from the University of
Michigan, Ann Arbor, Michigan, and an M.M. in Finance from the Kellogg Graduate
School of Management at Northwestern University, Chicago, Illinois. Mr. Mier is
a Chartered Financial Analyst.
The Municipal Fund pays ZKI an investment management fee, payable monthly, at
the annual rate of .45% of the first $250 million of average daily net assets,
.43% of average daily net assets between $250 million and $1 billion, .41% of
average daily net assets between $1 billion and $2.5 billion, .40% of average
daily net assets between $2.5 billion and $5 billion, .38% of average daily net
assets between $5 billion and $7.5 billion, .36% of average daily net assets
between $7.5 billion and $10 billion, .34% of average daily net assets between
$10 billion and $12.5 billion and .32% of average daily net assets over $12.5
billion.
Each State Fund and the Intermediate Municipal Fund pay ZKI an investment
management fee, payable monthly, at the annual rate (computed separately for
each State Fund and for the Intermediate Municipal Fund) of .55% of the first
$250 million of average daily net assets, .52% of average daily net assets
between $250 million and $1 billion, .50% of average daily net assets between $1
billion and $2.5 billion, .48% of average daily net assets between $2.5 billion
and $5 billion, .45% of average daily net assets between $5 billion and $7.5
billion, .43% of average daily net assets between $7.5 billion and $10 billion,
.41% of average daily net assets between $10 billion and $12.5 billion and .40%
of average daily net assets over $12.5 billion.
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with each Trust, Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of
ZKI, is the principal underwriter and distributor of each Trust's shares and
acts as agent of each Trust in the sale of its shares. KDI bears all its
expenses of providing services pursuant to the distribution agreement, including
the payment of any commissions. KDI provides for the preparation of advertising
or sales literature and bears the cost of printing and mailing prospectuses to
persons other than shareholders. KDI bears the cost of qualifying and
maintaining the qualification of Trust shares for sale under the securities laws
of the various states and each Trust bears the expense of registering its shares
with the Securities and Exchange Commission. KDI may enter into related selling
group agreements with various broker-dealers, including affiliates of KDI, that
provide distribution services to investors. KDI also may provide some of the
distribution services.
CLASS A SHARES. KDI receives no compensation from the Trusts as principal
underwriter for Class A shares and pays all expenses of distribution of each
Fund's Class A shares under the distribution agreement not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays or
allows concessions or discounts to firms for the sale of each Fund's shares.
CLASS B SHARES. For its services under the distribution agreement, KDI receives
a fee from each Trust, payable monthly, at the annual rate of .75% of average
daily net assets of each Fund attributable to Class B shares. This fee is
accrued daily as an expense of Class B shares. KDI also receives any contingent
deferred sales charges. See "Redemption or Repurchase of Shares--Contingent
Deferred Sales Charge--Class B Shares." KDI currently compensates firms for
sales of Class B shares at a commission rate of 3.75%.
CLASS C SHARES. For its services under the distribution agreement, KDI receives
a fee from each Trust, payable monthly, at the annual rate of .75% of average
daily net assets of each Fund attributable to Class C shares. This fee is
accrued daily as an expense of Class C shares. KDI currently advances to firms
the first year distribution fee at a rate of .75% of the purchase price of Class
C shares. For periods after the first year, KDI currently pays firms for sales
of Class C shares a distribution fee, payable quarterly, at an annual rate of
.75% of net assets attributable to Class C shares maintained and serviced by the
firm and the fee continues until terminated by KDI or a Trust. KDI also receives
any contingent deferred sales charges. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charges--Class C Shares".
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<PAGE> 31
RULE 12B-1 PLAN. Since each distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares. The table below shows amounts paid in connection with
each Fund's then existing Rule 12b-1 Plan during its 1996 fiscal year.
<TABLE>
<CAPTION>
DISTRIBUTION FEES
PAID CONTINGENT DEFERRED
DISTRIBUTION EXPENSES BY FUND TO SALES CHARGES PAID
INCURRED BY UNDERWRITER UNDERWRITER TO UNDERWRITER
----------------------- -------------------- --------------------
FUND CLASS B CLASS C CLASS B CLASS C CLASS B CLASS C
- ----------------------------------- ---------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Municipal.......................... $1,523,000 124,000 285,000 20,000 92,000 1,000
Intermediate Municipal............. $ 185,000 27,000 27,000 6,000 4,000 0
California......................... $ 687,000 31,000 109,000 4,000 69,000 0
Florida............................ $ 100,000 7,000 21,000 1,000 8,000 0
Michigan........................... $ 57,000 26,000 8,000 2,000 1,000 0
New Jersey......................... $ 125,000 6,000 16,000 1,000 17,000 0
New York........................... $ 307,000 43,000 41,000 6,000 20,000 0
Ohio............................... $ 262,000 8,000 48,000 2,000 16,000 0
Pennsylvania....................... $ 85,000 29,000 11,000 4,000 2,000 0
Texas.............................. $ 17,000 5,000 3,000 1,000 4,000 0
</TABLE>
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of a Fund to make payments to KDI pursuant to the Plan will cease
and the Fund will not be required to make any payments past the termination
date. Thus, there is no legal obligation for the Fund to pay any expenses
incurred by KDI in excess of its fees under a Plan, if for any reason the Plan
is terminated in accordance with its terms. Future fees under a Plan may or may
not be sufficient to reimburse KDI for its expenses incurred.
ADMINISTRATIVE SERVICES. KDI provides information and administrative services
for shareholders of each Trust pursuant to the administrative services
agreements ("administrative agreements"). KDI may enter into related
arrangements with various financial services firms, such as broker-dealer firms
or banks ("firms"), that provide services and facilities for their customers or
clients who are shareholders of the Trusts. Such administrative services and
assistance may include, but are not limited to, establishing and maintaining
shareholder accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding each Trust and its special
features, and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. KDI bears all its expenses
of providing services pursuant to the administrative agreement, including the
payment of any service fees. For services under the administrative agreements,
each Trust pays KDI a fee, payable monthly, at an annual rate of up to .25% of
average daily net assets of Class A, B and C shares of such Trust. With respect
to Class A shares, KDI then pays each firm a service fee at an annual rate of
(a) up to .10% of net assets of those accounts in the Trust that it maintains
and services attributable to Class A shares acquired prior to October 1, 1993,
and (b) up to .25% of net assets of those accounts in the Trust that it
maintains and services attributable to Class A shares acquired on or after
October 1, 1993. With respect to Class B shares and Class C shares, KDI pays
each firm a service fee, payable quarterly, at an annual rate of up to .25% of
net assets of those accounts in the Trust that it maintains and services
attributable to Class B shares and Class C shares, respectively. Firms to which
service fees may be paid include broker-dealers affiliated with KDI.
CLASS A SHARES. For Class A shares, a firm becomes eligible for the service fee
based on assets in Trust accounts maintained and serviced by the firms,
commencing in the month following the month of purchase and the fee continues
until terminated by KDI or a Trust. The fees are calculated monthly and paid
quarterly.
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<PAGE> 32
CLASS B AND CLASS C SHARES. KDI currently advances to firms the first year
service fee at a rate of up to .25% of the purchase price of such shares. For
periods after the first year, KDI currently intends to pay firms a service fee
at a rate of up to .25% (calculated monthly and paid quarterly) of the net
assets attributable to Class B and Class C shares maintained and serviced by the
firm and the fee continues until terminated by KDI or a Trust.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreements not paid to firms to compensate
itself for administrative functions performed for each Trust. Currently, the
administrative services fee payable to KDI is based only upon Trust assets in
accounts for which there is a firm listed on a Trust's records and it is
intended that KDI will pay all the administrative services fee that it receives
from each Trust to firms in the form of service fees. The effective
administrative services fee rate to be charged against all assets of each Trust
while this procedure is in effect will depend upon the proportion of Trust
assets that is in accounts for which there is a firm of record, as well as, with
respect to Class A shares, the date when the shares representing such assets
were purchased. In addition, KDI may, from time to time, from its own resources
pay certain firms additional amounts for ongoing administrative services and
assistance provided to their customers and clients who are shareholders of the
Trusts.
CUSTODIAN AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary Trust Company
("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as custodian, and
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, as sub-custodian, have custody of all securities and cash of the Trusts.
IFTC also is the Trusts' transfer agent and dividend-paying agent. Pursuant to a
services agreement with IFTC, Kemper Service Company, an affiliate of ZKI,
serves as "Shareholder Service Agent" of the Trusts and, as such, performs all
of IFTC's duties as transfer agent and dividend-paying agent. For a description
of shareholder service agent fees payable to the Shareholder Service Agent, see
"Investment Manager and Underwriter" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS. ZKI places all orders for purchases and sales of each
Fund's securities. Subject to seeking best execution of orders, ZKI may consider
sales of shares of a Fund and other funds managed by ZKI or its affiliates as a
factor in selecting broker-dealers. See "Portfolio Transactions" in the
Statement of Additional Information.
DIVIDENDS AND TAXES
DIVIDENDS. All the net investment income of a Fund is declared daily as a
dividend on shares for which the Fund has received payment. Net investment
income of a Fund consists of all interest income earned on portfolio assets less
all expenses of the Fund. Income dividends will be distributed monthly and
dividends of net realized capital gains will be distributed annually.
Dividends paid by a Fund as to each class of its shares will be calculated in
the same manner, at the same time and on the same day. The level of income
dividends per share (as a percentage of net asset value) will be lower for Class
B and Class C shares than for Class A shares primarily as a result of the
distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same amount for each
class.
Income and capital gain dividends, if any, for a Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
at net asset value except that, upon written request to the Shareholder Service
Agent, a shareholder may select one of the following options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
(2) To receive both income and capital gain dividends in cash.
Any dividends of a Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have Fund dividends
invested in shares of the same class of another Kemper Fund at the net asset
value of such class of such
29
<PAGE> 33
other fund. See "Special Features--Class A Shares--Combined Purchases" for a
list of such other Kemper Funds. To use this privilege of investing a Fund's
dividends in shares of another Kemper Fund, shareholders must maintain a minimum
account value of $1,000 in the Fund distributing the dividends. The Funds will
reinvest dividend checks (and future dividends) in shares of that same Fund and
class if checks are returned as undeliverable. Dividends and other distributions
of a Fund in the aggregate amount of $10 or less are automatically reinvested in
shares of the Fund unless the shareholder requests that such policy not be
applied to the shareholder's account.
TAXES. Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code (the "Code") and, if so
qualified, will not be liable for federal income taxes to the extent its
earnings are distributed. Each Fund intends to meet the requirements of the Code
applicable to regulated investment companies distributing tax-exempt interest
dividends and, therefore, dividends representing net interest received on
Municipal Securities will not be includable by shareholders in their gross
income for federal income tax purposes, except to the extent such interest is
subject to the alternative minimum tax as discussed below. Dividends
representing taxable net investment income (such as net interest income from
temporary investments in obligations of the U.S. Government) and net short-term
capital gains, if any, are taxable to shareholders as ordinary income and
long-term capital gain dividends are taxable to shareholders as long-term
capital gains, regardless of how long the shares have been held and whether
received in cash or shares. Gains attributable to market discount on Municipal
Securities acquired after April 30, 1993 are treated as ordinary income.
Long-term capital gain dividends received by individual shareholders are taxed
at a maximum rate of 28%. Dividends declared by a Fund in October, November or
December to shareholders of record as of a date in one of those months and paid
during the following January are treated as paid on December 31 of the calendar
year declared for federal income tax purposes.
A taxable dividend received shortly after the purchase of shares reduces the net
asset value of the shares by the amount of the dividend and, although in effect
a return of capital, will be taxable to the shareholder. If the net asset value
of shares were reduced below the shareholder's cost by dividends representing
gains realized on sales of securities, such dividends would be a return of
investment though taxable as stated above.
Net interest on certain "private activity bonds" issued on or after August 8,
1986 is treated as an item of tax preference and may, therefore, be subject to
both the individual and corporate alternative minimum tax. To the extent
provided by regulations to be issued by the Secretary of the Treasury,
exempt-interest dividends from a Fund are to be treated as interest on "private
activity bonds" in proportion to the interest the Fund receives from private
activity bonds, reduced by allowable deductions. For the 1995 calendar year,
14%, 8%, 7%, 18%, 11%, 12%, 9% and 9% of the net interest income of the
Municipal, Intermediate Municipal, California, Florida, New York, Ohio,
Pennsylvania and Texas Funds, respectively, was derived from "private activity
bonds."
Exempt-interest dividends, except to the extent of interest from "private
activity bonds", are not treated as a tax preference item. For a corporate
shareholder, however, such dividends will be included in determining such
corporate shareholder's "adjusted current earnings." Seventy-five percent of the
excess, if any, of "adjusted current earnings" over the corporate shareholder's
alternative minimum taxable income with certain adjustments will be a tax
preference item. Corporate shareholders are advised to consult their tax
advisers with respect to alternative minimum tax consequences.
Shareholders will be required to disclose on their federal income tax returns
the amount of tax-exempt interest earned during the year, including
exempt-interest dividends received from a Fund.
Individuals whose modified income exceeds a base amount will be subject to
federal income tax on up to 85% of their Social Security benefits. Modified
income includes adjusted gross income, tax-exempt interest, including
exempt-interest dividends from a Fund, and 50% of Social Security benefits.
MUNICIPAL FUND. During the fiscal year ended September 30, 1996, 100% of the
income dividends paid by the Municipal Fund constituted tax-exempt dividends for
federal income tax purposes.
30
<PAGE> 34
INTERMEDIATE MUNICIPAL FUND. During the fiscal year ended September 30, 1996,
100% of the income dividends paid by the Intermediate Municipal Fund constituted
tax-exempt dividends for federal income tax purposes.
CALIFORNIA FUND. Dividends paid by the California Fund, to the extent of
interest received on California state and local government issues, will be
exempt from California income taxes provided at least 50% of the total assets of
the California Fund are invested in such issues at the close of each quarter in
the taxable year. Any short-term and long-term capital gain dividends will be
includable in California personal taxable income as dividend income and
long-term capital gain, respectively, and are taxed at ordinary income tax
rates. During the fiscal year ended August 31, 1996, 100% of the income
dividends paid by the California Fund constituted tax-exempt dividends for
federal and California income tax purposes. Dividends paid by the California
Fund, including capital gain distributions, will be taxable to corporate
shareholders subject to the California corporate franchise tax.
FLORIDA FUND. Dividends paid by the Florida Fund, including capital gain
distributions, to individual shareholders will not be subject to the Florida
income tax since Florida does not impose a personal income tax. Dividends paid
by the Florida Fund, including capital gain distributions, will be taxable to
corporate shareholders that are subject to the Florida corporate income tax.
During the fiscal year ended August 31, 1996, 100% of the income dividends paid
by the Florida Fund constituted tax-exempt dividends for federal income tax
purposes. Additionally, Florida imposes an "intangibles tax" at the rate of
$2.00 per $1,000 of taxable value of certain securities and other intangible
assets owned by Florida residents. U.S. Government securities and Florida
Municipal Securities are exempt from this intangibles tax. The Florida Fund has
received a technical assistance advisement from the State of Florida Department
of Revenue that if, on December 31 of any year, the Florida Fund's portfolio
consists of both exempt and non-exempt assets, then only the portion of the
value of the Florida Fund's shares attributable to U.S. Government securities
will be exempt from the Florida intangibles tax payable in the following year.
Thus, in order to take full advantage of the exemption from the intangibles tax
in any year, the Florida Fund would be required to sell all non-exempt assets
held in its portfolio and reinvest the proceeds in exempt assets prior to
December 31. Transaction costs involved in restructuring the portfolio in this
fashion would likely reduce the Florida Fund's investment return and might
exceed any increased investment return the Florida Fund achieved by investing in
non-exempt assets during the year. On December 31, 1995, the Florida Fund's
portfolio consisted solely of assets exempt from the intangibles tax.
MICHIGAN FUND. Dividends paid by the Michigan Fund derived from interest income
from obligations of Michigan, its political or governmental subdivisions or
obligations of the U.S., its agencies, instrumentalities or possessions will be
exempt from the Michigan personal income tax and Michigan Single Business Tax
provided that at least 50% of the total assets of the Michigan Fund are invested
in such issues at the end of each quarter. During the fiscal year ended August
31, 1996, 100% of the income dividends paid by the Michigan Fund constituted
tax-exempt dividends for federal and Michigan income tax purposes. Any
short-term and long-term capital gain dividends will be includable in Michigan
taxable income as dividend income and long-term capital gain, respectively, and
are taxed at ordinary income tax rates. Long-term capital gain dividends paid by
the Fund will be taxable to entities subject to the Michigan Single Business
Tax. Michigan also exempts from its intangible personal property tax obligations
of Michigan, its political and governmental subdivisions and obligations of the
U.S. and its possessions, agencies and instrumentalities. To the extent that the
Fund's portfolio includes such exempt assets, the value of the Fund shares will
also be exempt. Capital gain distributions from the Fund that are reinvested in
additional shares are exempt from the intangibles taxes, whereas capital gain
distributions paid in cash are taxable.
NEW JERSEY FUND. Dividends paid by the New Jersey Fund will be exempt from New
Jersey Gross Income Tax to the extent that the dividends are derived from
interest on obligations of the State or its political subdivisions or
authorities or on obligations issued by certain other government authorities or
from capital gains from the disposition of such obligations, as long as the Fund
meets certain investment and filing requirements necessary to establish and
maintain its status as a "Qualified Investment Fund" in New Jersey. It is the
Fund's intention to satisfy these requirements and maintain Qualified Investment
Fund status. Given this status, capital gain distributions related to exempt
assets and net gains derived from the sale of shares of the Fund will not be
subject
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<PAGE> 35
to the New Jersey Gross Income Tax. Dividends paid by the Fund derived from
interest on non-exempt assets, and capital gain distributions related to such
non-exempt assets will be subject to New Jersey Gross Income Tax. Dividends paid
by the Fund, including capital gain distributions, will be taxable to corporate
shareholders subject to the New Jersey corporation business (franchise) tax.
During the fiscal year ended August 31, 1996, 100% of the income dividends paid
by the New Jersey Fund constituted tax-exempt dividends for federal and New
Jersey income tax purposes.
NEW YORK FUND. Dividends paid by the New York Fund representing net interest
received on New York Municipal Securities will be exempt from New York State and
New York City income taxes. Any short-term and long-term capital gain dividends
will be includable in New York State and New York City taxable income as
dividend income and long-term capital gain, respectively, and are taxed at
ordinary income tax rates. During the fiscal year ended August 31, 1996, 100% of
the income dividends paid by the New York Fund constituted tax-exempt dividends
for federal, New York State and New York City income tax purposes. Dividends
paid by the New York Fund, including capital gain distributions, will be taxable
to corporate shareholders that are subject to New York State and New York City
corporate franchise tax.
OHIO FUND. Dividends paid by the Ohio Fund that are attributable to interest on,
or gain from the sale, exchange or disposition of, Ohio Municipal Securities are
not subject to the Ohio personal income tax, Ohio school district income taxes
or Ohio municipal income taxes, and are not includable in the net income base of
the Ohio corporate franchise tax. For the fiscal period ended August 31, 1996,
100% of the income dividends paid by the Ohio Fund constituted tax-exempt
dividends for federal income tax purposes.
PENNSYLVANIA FUND. Dividends paid by the Pennsylvania Fund will be exempt from
Pennsylvania income tax to the extent that the dividends are derived from
interest on obligations of Pennsylvania, any public authority, commissions,
board or other state agency, any political subdivision of the state or its
public authority, and certain obligations of the U.S. or its territories
(including Puerto Rico, Guam and the Virgin Islands). During the fiscal year
ended August 31, 1996, 100% of the income dividends paid by the Pennsylvania
Fund constituted tax-exempt dividends for federal and Pennsylvania income tax
purposes. Any dividends of net short-term and long-term capital gain earned by
the Fund are generally included in the Pennsylvania taxable income as dividend
income and long-term capital gain respectively, and are taxed at ordinary income
tax rates. Dividends paid by the Fund representing interest income on
Pennsylvania Municipal Securities are also generally exempt from the
Philadelphia School District Income Tax for residents of Philadelphia and from
the intangibles tax for the City and School District of Pittsburgh for residents
of Pittsburgh. Shareholders of the Fund who are subject to the Pennsylvania
property tax in their county of residence will be exempt from county personal
property tax to the extent that the portfolio of the Fund consists of such
exempt obligations on the annual assessment date of January 1.
TEXAS FUND. Currently, Texas does not impose any income tax on individuals,
trusts or estates. During the fiscal year ended August 31, 1996, 100% of the
income dividends paid by the Texas Fund constituted tax-exempt dividends for
federal income tax purposes. Dividends paid by the Texas Fund to corporate
shareholders subject to the Texas corporate franchise tax, will be exempt to the
extent of interest received from federal, state and local government issues.
GENERAL. The tax exemption of Fund dividends for federal income tax and, if
applicable, particular state or local tax purposes does not necessarily result
in exemption under the income or other tax laws of any other state or local
taxing authority. The laws of the several states and local taxing authorities
vary with respect to the taxation of interest income and investments, and
shareholders are advised to consult their own tax advisers as to the status of
their accounts under state and local tax laws. The Funds may not be appropriate
investments for qualified retirement plans and Individual Retirement Accounts.
The Trusts are required by law to withhold 31% of taxable dividends and
redemption proceeds paid to certain shareholders who do not furnish a correct
taxpayer identification number (in the case of individuals, a social security
number) and in certain other circumstances.
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<PAGE> 36
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving dividend reinvestment and periodic
investment and redemption programs. Information for federal income tax purposes
will be provided after the end of the calendar year. Shareholders are encouraged
to retain copies of their account confirmation statements or year-end statements
for tax reporting purposes. However, those who have incomplete records may
obtain historical account transaction information at a reasonable fee.
When more than one shareholder resides at the same address, certain reports and
communications to be delivered to such shareholders may be combined in the same
mailing package, and certain duplicate reports and communications may be
eliminated. Similarly, account statements to be sent to such shareholders may be
combined in the same mailing package or consolidated into a single statement.
However, a shareholder may request that the foregoing policies not be applied to
the shareholder's account.
NET ASSET VALUE
The net asset value per share of a Fund is determined separately for each class
by dividing the value of the Fund's net assets attributable to that class by the
number of shares of that class outstanding. The per share net asset value of the
Class B and Class C shares of a Fund will generally be lower than that of the
Class A shares of the Fund because of the higher expenses borne by the Class B
and Class C shares. The declaration of daily dividends of net investment income
by the Funds, however, will tend to minimize any such differences. Fixed income
securities are valued by using market quotations, or independent pricing
services that use prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with similar
characteristics. Exchange traded options are valued at the 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 current prices provided by
market makers. Financial futures and options thereon are valued at the
settlement price established each day by the board of trade or exchange on which
they are traded. Other securities and assets are valued at fair value as
determined in good faith by the Board of Trustees. If an event were to occur,
after the value of a security was so established but before the net asset value
per share was determined, which was likely to materially change the net asset
value, then that security would be valued using fair value determinations by the
Board of Trustees or its delegates. On each day the New York Stock Exchange (the
"Exchange") is open for trading, the net asset value is determined as of the
earlier of 3:00 p.m. Chicago time or the close of the Exchange.
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of each Fund 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, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of each Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. See,
also, "Summary of Expenses." Each
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<PAGE> 37
class has distinct advantages and disadvantages for different investors, and
investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge None Initial sales charge waived
of 4.5% (2.75% Intermediate or reduced for certain
Municipal Fund only) of the purchases
public offering price
Class B Maximum contingent deferred 0.75% Shares convert to Class A
sales charge of 4% of shares six years after
redemption proceeds; issuance
declines to zero after six
years
Class C Contingent deferred sales 0.75% No conversion feature
charge of 1% of redemption
proceeds for redemptions
made during first year after
purchase
</TABLE>
The minimum initial investment for each Fund is $1,000 and the minimum
subsequent investment is $100. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion. The Trusts allocate net investment
income for each Fund to those shares for which the Trust has received payment.
To begin accruing dividends as soon as possible, purchasers may wire payment to
the Trust's sub-custodian, State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
Share certificates are issued only on request to the Fund and may not be
available for certain types of accounts. It is recommended that investors not
request share certificates unless needed for a specific purpose. You cannot
redeem shares by telephone or wire transfer or use the telephone exchange
privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
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<PAGE> 38
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE
--------------------------------------
ALLOWED
TO
DEALERS
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF NET OF
OFFERING ASSET OFFERING
AMOUNT OF PURCHASE PRICE VALUE* PRICE
------------------ ------ ------ ------
<S> <C> <C> <C>
ALL FUNDS EXCEPT INTERMEDIATE MUNICIPAL FUND
Less than $100,000..................................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000........................ 3.50 3.63 3.00
$250,000 but less than $500,000........................ 2.60 2.67 2.25
$500,000 but less than $1 million...................... 2.00 2.04 1.75
$1 million and over.................................... 0.00** 0.00** ***
INTERMEDIATE MUNICIPAL FUND ONLY
Less than $100,000..................................... 2.75 2.83 2.25
$100,000 but less than $250,000........................ 2.50 2.56 2.00
$250,000 but less than $500,000........................ 2.00 2.04 1.75
$500,000 but less than $1 million...................... 1.50 1.52 1.25
$1 million and over.................................... 0.00** 0.00** ***
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as discussed below.
*** Commissions payable by KDI as discussed below.
</TABLE>
The Trusts receive the entire net asset value of all Class A shares sold. KDI,
the Trusts' principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has sales
agreements, KDI may reallow up to the full applicable sales charge, as shown in
the above table, during periods and for transactions specified in such notice
and such reallowances may be based upon attainment of minimum sales levels.
During periods when 90% or more of the sales charge is reallowed, such dealers
may be deemed to be underwriters as that term is defined in the Securities Act
of 1933.
Class A shares of a Fund may be purchased at net asset value to the extent that
the amount invested represents the net proceeds from a redemption of shares of a
mutual fund for which ZKI or an affiliate does not serve as investment manager
("non-Kemper Fund") provided that: (a) the investor has previously paid either
an initial sales charge in connection with the purchase of the non-Kemper Fund
shares redeemed or a contingent deferred sales charge in connection with the
redemption of the non-Kemper Fund shares, and (b) the purchase of Fund shares is
made within 90 days after the date of such redemption. To make such a purchase
at net asset value, the investor or the investor's dealer must, at the time of
purchase, submit a request that the purchase be processed at net asset value
pursuant to this privilege. The redemption of the shares of the non-Kemper Fund
is, for federal income tax purposes, a sale upon which a gain or loss may be
realized.
Class A shares of a Fund may be purchased at net asset value by any purchaser
provided that the amount invested in such Fund or other Kemper Mutual Funds
listed under "Special Features--Class A Shares--Combined Purchases" totals at
least $1,000,000 including purchases of Class A shares pursuant to the "Combined
Purchases," "Letter of Intent" and "Cumulative Discount" features described
under "Special Features" (the "Large Order NAV Purchase Privilege"). The Large
Order NAV Purchase Privilege for certain Kemper Mutual Funds other than the
Funds also applies to purchases by certain participant-directed retirement plans
as described in the prospectuses for those Kemper Mutual Funds. Redemption
within two years of shares purchased under the
35
<PAGE> 39
Large Order NAV Purchase Privilege may be subject to a contingent deferred sales
charge. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of each Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, .50% on the next $45 million and .25% on amounts over $50 million.
For purposes of determining the appropriate commission percentage to be applied
to a particular sale, KDI will consider the cumulative amount invested by the
purchaser in a Fund and other Kemper Mutual Funds listed under "Special
Features--Class A Shares--Combined Purchases," including purchases pursuant to
the "Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
referred to above. The privilege of purchasing Class A shares of a Fund at net
asset value under the Large Order NAV Purchase Privilege is not available if
another net asset value purchase privilege is also applicable.
Effective on February 1, 1996, Class A shares of a Fund or any other Kemper
Mutual Fund listed under "Special Features--Class A Shares Combined Purchases"
may be purchased at net asset value in any amount by members of the plaintiff
class in the proceeding known as HOWARD AND AUDREY TABANKIN, ET AL. V. KEMPER
SHORT-TERM GLOBAL INCOME FUND, ET AL., Case No. 93 C 5231 (N.D. IL). This
privilege is generally non-transferrable and continues for the lifetime of
individual class members and for a ten year period for non-individual class
members. To make a purchase at net asset value under this privilege, the
investor must, at the time of purchase, submit a written request that the
purchase be processed at net asset value pursuant to this privilege specifically
identifying the purchaser as a member of the "Tabankin Class." Shares purchased
under this privilege will be maintained in a separate account that includes only
shares purchased under this privilege. For more details concerning this
privilege, class members should refer to the Notice of (1) Proposed Settlement
with Defendants; and (2) Hearing to Determine Fairness of Proposed Settlement,
dated August 31, 1995, issued in connection with the aforementioned court
proceeding. For sales of Fund shares at net asset value pursuant to this
privilege, KDI may at its discretion pay investment dealers and other financial
services firms a concession, payable quarterly, at an annual rate of up to .25%
of net assets attributable to such shares maintained and serviced by the firm. A
firm becomes eligible for the concession based upon assets in accounts
attributable to shares purchased under this privilege in the month after the
month of purchase and the concession continues until terminated by KDI. The
privilege of purchasing Class A shares of a Fund at net asset value under this
privilege is not available if another net asset value purchase privilege also
applies.
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of .50% of the
amount of Class A shares purchased.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
each Trust, its investment manager, its principal underwriter or certain
affiliated companies, for themselves or members of their families; (b)
registered representatives and employees of broker-dealers having selling group
agreements with KDI and officers, directors and employees of service agents of
the Trusts, for themselves or their spouses or dependent children; (c)
shareholders who owned shares of Kemper-Dreman Fund, Inc. ("KDF") on September
8, 1995, and have continuously owned shares of KDF (or a Kemper Fund acquired by
exchange of KDF shares) since that date, for themselves or members of their
families, and (d) any trust or pension, profit sharing or other benefit plan for
only such persons. Class A shares may be sold at net asset value in any amount
to selected employees (including their spouses and dependent children) of banks
and other financial services firms that provide administrative services related
to order placement and payment to facilitate transactions in shares of each Fund
for their clients pursuant to an agreement with KDI or one of its affiliates.
Only those employees of such banks and other firms who as part of their usual
duties provide services related to transactions in Fund shares may purchase Fund
Class A shares at net asset value hereunder. Class A shares may be sold at net
asset value in any amount to unit investment trusts sponsored by
36
<PAGE> 40
Ranson & Associates, Inc. In addition, unitholders of unit investment trusts
sponsored by Ranson & Associates, Inc. or its predecessors may purchase Fund
Class A shares at net asset value through reinvestment programs described in the
prospectuses of such trusts that have such programs. Class A shares of a Fund
may be sold at net asset value through certain investment advisers registered
under the Investment Advisers Act of 1940 and other financial services firms
that adhere to certain standards established by KDI, including a requirement
that such shares be sold for the benefit of their clients participating in an
investment advisory program under which such clients pay a fee to the investment
adviser or other firm for portfolio management and other services. Such shares
are sold for investment purposes and on the condition that they will not be
resold except through redemption or repurchase by the Trusts. The Trusts may
also issue Class A shares at net asset value in connection with the acquisition
of the assets of or merger or consolidation with another investment company, or
to shareholders in connection with the investment or reinvestment of income and
capital gains dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or other organized group of persons
whether incorporated or not, provided the organization has been in existence for
at least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of a Fund will automatically convert to Class A shares of the
same Fund six years after issuance on the basis of the relative net asset value
per share. Class B shareholders who originally acquired their shares as Initial
Shares of Kemper Portfolios, formerly known as Kemper Investment Portfolios
("KIP"), hold them subject to the same conversion period schedule as that of
their KIP Portfolio. Class B shares representing Initial Shares of a former KIP
Portfolio will automatically convert to Class A shares of the applicable Fund
six years after issuance of the Initial Shares for shares issued on or after
February 1, 1991 and seven years after issuance of the Initial Shares for shares
issued before February 1, 1991. The purpose of the conversion feature is to
relieve holders of Class B shares from the distribution services fee when they
have been outstanding long enough for KDI to have been compensated for
distribution related expenses. For purposes of conversion to Class A shares,
shares purchased through the reinvestment of dividends and other distributions
paid with respect to Class B shares in a shareholder's account will be converted
to Class A shares on a pro rata basis.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of a
Fund is the next determined net asset value. No initial sales charge is imposed.
Since Class C shares are sold without an initial sales charge, the full amount
of the investor's purchase payment will be invested in Class C shares for his or
her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
C Shares." KDI currently advances to firms the first year distribution fee at a
rate of .75% of the purchase price of such shares. For periods after the first
year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of .75% of net assets
attributable to Class C
37
<PAGE> 41
shares maintained and serviced by the firm. KDI is compensated by each Fund for
services as distributor and principal underwriter for Class C shares. See
"Investment Manager and Underwriter."
WHICH ARRANGEMENT IS BETTER FOR YOU? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. For more
information about the three sales arrangements, consult your financial
representative or the Funds' Shareholder Service Agent. Financial services firms
may receive different compensation depending upon which class of shares they
sell.
GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Fund for their clients, and KDI may pay them a transaction fee up to
the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. Management does not believe that termination of a
relationship with a bank would result in any material adverse consequences to a
Fund.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell shares
of a Fund. Non-cash compensation includes luxury merchandise and trips to luxury
resorts. In some instances, such discounts, commissions or other incentives will
be offered only to certain firms who sell or are expected to sell during
specified time periods certain minimum amounts of shares of a Fund, or other
funds underwritten by KDI.
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of such Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value of such Fund effective on that
day ("trade date"). The Trusts reserve the right to determine the net asset
value more frequently than once a day if deemed desirable. Dealers and other
financial services firms are obligated to transmit orders promptly. Collection
may take significantly longer for a check drawn on a foreign bank than for a
check drawn on a domestic bank. Therefore, if an order is accompanied by a check
drawn on a foreign bank, funds must normally be collected before shares will be
purchased. See "Purchase and Redemption of Shares" in the Statement of
Additional Information.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem Fund shares. Some may establish higher minimum
investment requirements than set forth above. Firms may arrange with their
clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
Fund shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Trusts' transfer agent will have no
information with respect to or control over accounts of specific shareholders.
Such shareholders may obtain access to their accounts and information about
their accounts only from their firm. Certain of these firms may receive
compensation from the Trusts through the Shareholder Service Agent for
recordkeeping and other expenses relating to these nominee accounts. In
addition, certain privileges with respect to the purchase and redemption of
shares or the reinvestment of dividends may not be available through such firms.
Some firms may participate in a program allowing them access to their clients'
accounts for
38
<PAGE> 42
servicing including, without limitation, transfers of registration and dividend
payee changes; and may perform functions such as generation of confirmation
statements and disbursement of cash dividends. Such firms, including affiliates
of KDI, may receive compensation from the Trusts through the Shareholder Service
Agent for these services. This prospectus should be read in connection with such
firms' material regarding their fees and services.
The Trusts reserve the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders. Also, from time to time, the
Trusts may temporarily suspend the offering of any class of the shares of a Fund
to new investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require a Trust to redeem his or her shares. When
shares are held for the account of a shareholder by the Trusts' transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. When certificates for shares have been
issued, they must be mailed to or deposited with the Shareholder Service Agent,
along with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
The redemption price for shares of a Fund will be the net asset value per share
of that Fund next determined following receipt by the Shareholder Service Agent
of a properly executed request with any required documents as described above.
Payment for shares redeemed will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed requested
accompanied by any outstanding share certificates in proper form for transfer.
When a Trust is asked to redeem shares for which it may not have yet received
good payment (i.e., purchases by check, Express-Transfer or Bank Direct
Deposit), it may delay transmittal of redemption proceeds until it has
determined that collected funds have been received for the purchase of such
shares, which will be up to 10 days from receipt by a Trust of the purchase
amount. The redemption within two years of Class A shares purchased at net asset
value under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge (see "Purchase of Shares Initial Sales Charge
Alternative--Class A Shares") and the redemption of Class B shares within six
years may be subject to a contingent deferred sales charge (see "Contingent
Deferred Sales Charge--Class B Shares" below), and the redemption of Class C
Shares within the first year following purchase may be subject to a contingent
deferred sales charge (See "Contingent Deferred Sales Charge--Class C Shares"
below).
Because of the high cost of maintaining small accounts, the Trusts reserve the
right to redeem an account (and impose any applicable contingent deferred sales
charge) in any Fund that falls below the minimum investment level, currently
$1,000, as a result of redemptions. A shareholder will be notified in writing
and will be allowed 60 days to make additional purchases to bring the account
value up to the minimum investment level before a Trust redeems the shareholder
account. The investment required to reach that level may be made at net asset
value (without any initial sales charge in the case of Class A shares).
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose
39
<PAGE> 43
these privileges on the account application or by contacting the Shareholder
Service Agent for appropriate instructions. Please note that the telephone
exchange privilege is automatic unless the shareholder refuses it on the account
application. A Trust or its agents may be liable for any losses, expenses or
costs arising out of fraudulent or unauthorized telephone requests pursuant to
these privileges unless the Trust or its agents reasonably believe, based upon
reasonable verification procedures, that the telephonic instructions are
genuine. The SHAREHOLDER WILL BEAR THE RISK OF LOSS, including loss resulting
from fraudulent or unauthorized transactions, as long as the reasonable
verification procedures are followed. Verification procedures include recording
instructions, requiring certain identifying information before acting upon
instructions and sending written confirmations.
TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming of shares by telephone request or
by written request without a signature guarantee may not be used to redeem
shares held in certificated form and may not be used if the shareholder's
account has had an address change within 30 days of the redemption request.
During periods when it is difficult to contact the Shareholder Service Agent by
telephone, it may be difficult to use the telephone redemption privilege,
although investors can still redeem by mail. The Trusts reserve the right to
terminate or modify this privilege at any time.
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which a Trust has authorized to act as its agent. There is
no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of a Fund can be redeemed and proceeds sent by federal wire
transfer to a single previously designated account. Requests received by the
Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value of the Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption request of $250,000 or more may be delayed by the Fund for up to
seven days if ZKI deems it appropriate under then current market conditions.
Once authorization is on file, the Shareholder Service Agent will honor requests
by telephone at 1-800-621-1048 or in writing, subject to the limitations on
liability described under "General" above. The Trusts are not responsible for
the efficiency of the federal wire system or the account holder's financial
services firm or bank. The Trusts currently do not charge the account holder for
wire transfers. The account holder is responsible for any charges imposed by the
account holder's firm or bank. There is a $1,000 wire redemption minimum
40
<PAGE> 44
(including any contingent deferred sales charge). To change the designated
account to receive wire redemption proceeds, send a written request to the
Shareholder Service Agent with signatures guaranteed as described above or
contact the firm through which shares of the Fund were purchased. Shares
purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may not be
redeemed by wire transfer until such shares have been owned for at least 10
days. Account holders may not use this privilege to redeem shares held in
certificated form. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the expedited
redemption privilege. The Trusts reserve the right to terminate or modify this
privilege at any time.
CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and .50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemption of shares of a shareholder (including a registered
joint owner) who has died; (b) redemption of shares of a shareholder (including
a registered joint owner) who after purchase of the shares being redeemed
becomes totally disabled (as evidenced by a determination by the federal Social
Security Administration); (c) redemptions under a Fund's Systematic Withdrawal
Plan at a maximum of 10% per year of the net asset value of the account; and (d)
redemptions of shares whose dealer of record at the time of the investment
notifies KDI that the dealer waives the discretionary commission applicable to
such Large Order NAV Purchase.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES
YEAR OF REDEMPTION AFTER PURCHASE CHARGE
------------------------------------------------------------------------ ----------
<S> <C>
First................................................................... 4%
Second.................................................................. 3%
Third................................................................... 3%
Fourth.................................................................. 2%
Fifth................................................................... 2%
Sixth................................................................... 1%
</TABLE>
Class B shareholders who originally acquired their shares as Initial Shares of
Kemper Portfolios, formerly known as Kemper Investment Portfolios ("KIP"), hold
them subject to the same CDSC schedule that applied when those shares were
purchased, as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
-------------------------------------------------------------------------------------
SHARES PURCHASED ON OR AFTER
SHARES PURCHASED ON OR AFTER FEBRUARY 1, 1991 AND BEFORE SHARES PURCHASED BEFORE
YEAR OF REDEMPTION AFTER PURCHASE MARCH 1, 1993 MARCH 1, 1993 FEBRUARY 1, 1991
- ---------------------------------- ---------------------------- ---------------------------- -----------------------
<S> <C> <C> <C>
First............................. 4% 3% 5%
Second............................ 3% 3% 4%
Third............................. 3% 2% 3%
Fourth............................ 2% 2% 2%
Fifth............................. 2% 1% 2%
Sixth............................. 1% 1% 1%
</TABLE>
41
<PAGE> 45
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner) and (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below).
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner) and (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features--Systematic Withdrawal Plan").
CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of a Fund's Class B shares and that 16 months
later the value of the shares has grown by $1,000 through reinvested dividends
and by an additional $1,000 in appreciation to a total of $12,000. If the
investor were then to redeem the entire $12,000 in share value, the contingent
deferred sales charge would be payable only with respect to $10,000 because
neither the $1,000 of reinvested dividends nor the $1,000 of share appreciation
is subject to the charge. The charge would be at the rate of 3% ($300) because
it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 1996 will be eligible for the second year's charge if redeemed on or
after December 1, 1997. In the event no specific order is requested when
redeeming shares subject to a contingent deferred sales charge, the redemption
will be made first from shares representing reinvested dividends and then from
the earliest purchase of shares. KDI receives any contingent deferred sales
charge directly.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of the
Trusts or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
the Trusts or of the other listed Kemper Mutual Funds. A shareholder of a Fund
or any other Kemper Mutual Fund who redeems Class A shares purchased under the
Large Order NAV Purchase Privilege (see "Purchase of Shares--Initial Sales
Charge Alternative--Class A Shares") or Class B shares or Class C shares and
incurs a contingent deferred sales charge may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares,
Class B shares or Class C shares, as the case may be, of a Fund or of other
Kemper Mutual Funds. The amount of any contingent deferred sales charge also
will be reinvested. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares of the Trusts or of the other Kemper Mutual Funds listed under
"Special Features--Class A Shares--Combined Purchases." Purchases through the
reinvestment privilege are subject to the minimum investment requirements
applicable to the shares being purchased and may only be made for Kemper Mutual
Funds available for sale in the shareholder's state of residence as listed under
"Special Features--Exchange Privilege." The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the redemption. If a loss is realized on the redemption of a Fund's
shares, the reinvestment in the same Fund may
42
<PAGE> 46
be subject to the "wash sale" rules if made within 30 days of the redemption,
resulting in a postponement of the recognition of such loss for federal income
tax purposes. The reinvestment privilege may be terminated or modified at any
time.
SPECIAL FEATURES
CLASS A SHARES--COMBINED PURCHASES. Class A shares of any Fund may be purchased
at the rate applicable to the discount bracket attained by combining concurrent
investments in Class A shares of any of the following funds: Kemper Technology
Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper Small Capitalization
Equity Fund, Kemper Income and Capital Preservation Fund, Kemper Municipal Bond
Fund, Kemper Diversified Income Fund, Kemper High Yield Fund, Kemper U.S.
Government Securities Fund, Kemper International Fund, Kemper State Tax-Free
Income Series, Kemper Adjustable Rate U.S. Government Fund, Kemper Blue Chip
Fund, Kemper Global Income Fund, Kemper Target Equity Fund (series are subject
to a limited offering period), Kemper Intermediate Municipal Bond Fund, Kemper
Cash Reserves Fund, Kemper U.S. Mortgage Fund, Kemper Short-Intermediate
Government Fund, Kemper-Dreman Fund, Inc., Kemper Value+Growth Fund, Kemper
Quantitative Equity Fund, Kemper Horizon Fund, Kemper Europe Fund and Kemper
Asian Growth Fund ("Kemper Mutual Funds"). Except as noted below, there is no
combined purchase credit for direct purchases of shares of Kemper Money Funds,
Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account
Trust, Tax-Exempt New York Money Market Fund or Investors Cash Trust ("Money
Market Funds"), which are not considered "Kemper Mutual Funds" for purposes
hereof. For purposes of the Combined Purchases feature described above as well
as for the Letter of Intent and Cumulative Discount features described below,
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent may include: (a)
Money Market Funds as "Kemper Mutual Funds," (b) all classes of shares of any
Kemper Mutual Fund and (c) the value of any other plan investments, such as
guaranteed investment contracts and employer stock, maintained on such
sub-account record keeping system.
CLASS A SHARES--LETTER OF INTENT. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through KDI may have special
provisions regarding payment of any increased sales charge resulting from a
failure to satisfy the intended purchase under the Letter. A shareholder may
include the value (at the maximum offering price) of all shares of such Kemper
Mutual Funds held of record as of the initial purchase date under the Letter as
an "accumulation credit" toward the completion of the Letter, but no price
adjustment will be made on such shares. Only investments in Class A shares of a
Fund are included for this privilege.
CLASS A SHARES--CUMULATIVE DISCOUNT. Class A shares of any Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of a Fund's shares being purchased the value of all Class A shares of
the Kemper Mutual Funds (computed at the maximum offering price at the time of
the purchase for which the discount is applicable) already owned by the
investor.
CLASS A SHARES--AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or
43
<PAGE> 47
reduced sales charge is applicable to a purchase. Upon such notification, the
investor will receive the lowest applicable sales charge. Quantity discounts
described above may be modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.
CLASS A SHARES. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Tax-Exempt New York
Money Market Fund and Investors Cash Trust are available on exchange but only
through a financial services firm having a services agreement with KDI.
Class A shares of a Fund purchased under the Large Order NAV Purchase Privilege
may be exchanged for Class A shares of another Kemper Mutual Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of the contingent deferred sales charge.
CLASS B SHARES. Class B shares of a Fund and Class B shares of any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset value. Class B
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For purposes of the contingent deferred sales charge
that may be imposed upon the redemption of the Class B shares received on
exchange, amounts exchanged retain their original cost and purchase date.
CLASS C SHARES. Class C shares of a Fund and Class C shares of any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset value. Class C
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For determining whether there is a contingent deferred
sales charge that may be imposed upon the redemption of the Class C shares
received by exchange, they retain the cost and purchase date of the shares that
were originally purchased and exchanged.
GENERAL. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15-Day Hold Policy"). For purposes of
determining whether the 15-Day Hold Policy applies to a particular exchange, the
value of the shares to be exchanged shall be computed by aggregating the value
of shares being exchanged for all accounts under common control, direction or
advice, including without limitation accounts administered by a financial
services firm offering market timing, asset allocation or similar services. The
total value of shares being exchanged must at least equal the minimum investment
requirement of the fund into which they are being exchanged. Exchanges are made
based on relative dollar values of the shares involved in the exchange. There is
no service fee for an exchange; however, dealers or other firms may charge for
their services in effecting exchange transactions. Exchanges will be effected by
redemption of shares of the fund held and purchase of shares of the other fund.
For federal income tax purposes, any such exchange constitutes a sale upon which
a gain or loss will be realized, depending upon whether the value of the shares
being exchanged is more or less than the shareholder's adjusted cost basis of
such shares. Shareholders interested in exercising the exchange privilege may
obtain prospectuses of the other funds from dealers, other firms or KDI.
Exchanges may be accomplished by a written request to Kemper Service Company,
Attention: Exchange Department, P.O. Box 419557, Kansas City, Missouri
64141-6557, or by telephone if the shareholder has given authorization. Once the
authorization is on file, the Shareholder Service Agent will honor requests by
telephone at 1-800-621-1048 or in writing, subject to the limitations on
liability
44
<PAGE> 48
under "Redemption or Repurchase of Shares-- General." Any share certificates
must be deposited prior to any exchange of such shares. During periods when it
is difficult to contact the Shareholder Service Agent by telephone, it may be
difficult to use the telephone exchange privilege. The exchange privilege is not
a right and may be suspended, terminated or modified at any time. Except as
otherwise permitted by applicable regulations, 60 days' prior written notice of
any termination or material change will be provided. Exchanges may only be made
for funds that are available for sale in the shareholder's state of residence.
Currently, Tax-Exempt California Money Market Fund is available for sale only in
California and Tax-Exempt New York Money Market Fund is available for sale only
in New York, Connecticut, New Jersey and Pennsylvania.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the other
Kemper Fund. Exchanges are subject to the terms and conditions described above
under "Exchange Privilege," except that the $1,000 minimum investment
requirement for the Kemper Fund acquired on exchange is not applicable. This
privilege may not be used for the exchange of shares held in certificated form.
EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in a Fund. Shareholders can also redeem shares (minimum $500 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from ANY PERSON to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares--General." Once enrolled in
EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048 Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable time to act upon the request.
EXPRESS-Transfer cannot be used with passbook savings accounts.
BANK DIRECT DEPOSIT. A shareholder may purchase additional Fund shares through
an automatic investment program. With the Bank Direct Deposit Purchase Plan,
investments are made automatically from the shareholder's account at a bank,
savings and loan or credit union into the shareholder's Fund account. By
enrolling in Bank Direct Deposit, the shareholder authorizes the Trust and its
agents to either draw checks or initiate Automated Clearing House debits against
the designated account at a bank or other financial institution. This privilege
may be selected by completing the appropriate section on the Account Application
or by contacting the Shareholder Service Agent for appropriate forms. A
shareholder may terminate his or her Plan by sending written notice to Kemper
Service Company, P.O. Box 419415, Kansas City, Missouri 64141-6415. Termination
by a shareholder will become effective within thirty days after the Shareholder
Service Agent has received the request. A Trust may immediately terminate a
shareholder's Plan in the event that any item is unpaid by the shareholder's
financial institution. A Trust may terminate or modify this privilege at any
time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in a Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in a Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) A Trust is not responsible for the efficiency of the
employer or government agency making the payment or any financial institution
transmitting payment.
45
<PAGE> 49
SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of a Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The minimum periodic payment
is $100. The maximum annual rate at which Class B shares may be redeemed (and
Class A shares purchased under the Large Order NAV Purchase Privilege and Class
C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. Any income and capital gain dividends will be automatically reinvested at
net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested and fluctuations in the net asset value of the shares redeemed,
redemptions for the purpose of making such payments may reduce or even exhaust
the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, the Trusts will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B and Class C shares made pursuant to a systematic withdrawal plan. The right is
reserved to amend the systematic withdrawal plan on 30 days' notice. The plan
may be terminated at any time by the investor or the Trusts.
PERFORMANCE
A Fund may advertise several types of performance information for a class of
shares, including "yield," "tax equivalent yield," "average annual total return"
and "total return." Performance information will be computed separately for
Class A, Class B and Class C shares. Each of these figures is based upon
historical results and is not representative of the future performance of any
class of a Fund. A Fund with fees or expenses being waived or absorbed by ZKI
may also advertise performance information before and after the effect of the
fee waiver or expense absorption.
A Fund's yield is a measure of the net investment income per share earned by the
Fund 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. Yield is
an annualized figure, which means that it is assumed that the Fund generates the
same level of net investment income over a one year period. Net investment
income is assumed to be compounded semiannually when it is annualized.
Tax equivalent yield is that which a taxable investment must generate in order
to equal a Fund's yield for an investor at a stated combined federal and, if
applicable, state and local tax rate (normally assumed to be the maximum tax
rate). Tax equivalent yield is based upon, and will be higher than, the portion
of a Fund's yield that is tax-exempt.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund for the
period in question, assuming the reinvestment of all dividends. Thus, these
figures reflect the change in the value of an investment in a Fund during a
specified period. Average annual total return will be quoted for at least the
one, five and ten year periods ending on a recent calendar quarter (or if such
periods have not yet elapsed, at the end of a shorter period corresponding to
the life of a Fund for performance purposes). Average annual total return
figures represent the average annual percentage change over the period in
question. Total return figures represent the aggregate percentage or dollar
value change over the period in question.
A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged bond indexes such as the Lehman Brothers Municipal Bond Index
and the Salomon Brothers High Grade Bond Index, and may also be compared to the
performance of other fixed income, state municipal bond funds (as applicable) or
general municipal bond mutual funds or mutual fund indexes as reported by
independent mutual fund
46
<PAGE> 50
reporting services such as Lipper Analytical Services, Inc. ("Lipper"). Lipper
performance calculations are based upon changes in net asset value with all
dividends reinvested and do not include the effect of any sales charges.
Information may be quoted from publications such as MORNINGSTAR INC., THE WALL
STREET JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE,
USA TODAY, INSTITUTIONAL INVESTOR and REGISTERED REPRESENTATIVE. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit, money market funds and U.S. Treasury
obligations. Bank product performance may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) or various certificate of deposit indexes.
Money market fund performance may be based upon, among other things,
IBC/Donoghue's Money Fund Report(R) or Money Market Insight(R), reporting
services on money market funds. Performance of U.S. Treasury obligations may be
based upon, among other things, various U.S. Treasury bill indexes. Certain of
these alternative investments may offer fixed rates of return, and guaranteed
principal and may be insured.
A Fund may depict the historical performance of the securities in which the Fund
may invest over periods reflecting a variety of market or economic conditions
either alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A Fund may also describe its
portfolio holdings and depict its size or relative size compared to other mutual
funds, the number and make-up of its shareholder base and other descriptive
factors concerning the Fund.
A Fund may include in its sales literature and shareholder reports a quotation
of the current "distribution rate" for a class of a Fund. Distribution rate is
simply a measure of the level of dividends distributed for a specified period.
It differs from yield, which is a measure of the income actually earned by the
Fund's investments, and from total return, which is a measure of the income
actually earned by, plus the effect of any realized and unrealized appreciation
or depreciation of such investments during the period. Distribution rate is,
therefore, not intended to be a complete measure of performance. Distribution
rate may sometimes be greater than yield since, for instance, it may include
gains from the sale of options or other short-term and possibly long-term gains
(which may be non-recurring) and may not include the effect of amortization of
bond premiums. As reflected under "Investment Objectives, Policies and Risk
Factors--Additional Investment Information," option writing can limit the
potential for capital appreciation.
A Fund's Class A shares are sold at net asset value per share of such Fund plus
a maximum sales charge of 4.5% (2.75% for the Intermediate Municipal Fund) of
the offering price. While the maximum sales charge is normally reflected in a
Fund's Class A performance figures, certain total return calculations may not
include such charge and those results would be reduced if it were included.
Class B shares and Class C shares are sold at net asset value. Redemptions of
Class B shares within the first six years after purchase may be subject to a
contingent deferred sales charge that ranges from 4% during the first year to 0%
after six years. Redemption of Class C shares within the first year after
purchase may be subject to a 1% contingent deferred sales charge. Yield figures
for Class B shares and Class C shares do not include the effect of any
contingent deferred sales charge. Average annual total return figures do, and
total return figures may, include the effect of the contingent deferred sales
charge for the Class B shares and Class C shares that may be imposed at the end
of the period in question. Performance figures for the Class B shares and Class
C shares not including the effect of the applicable contingent deferred sales
charge would be reduced if it were included.
A Fund's returns and net asset value will fluctuate. Shares of a Fund are
redeemable by an investor at the then current net asset value per share for such
Fund, which may be more or less than original cost. Redemption of Class B shares
and Class C shares may be subject to a contingent deferred sales charge as
described above. Additional information concerning each Fund's performance
appears in the Statement of Additional Information. Additional information about
a Fund's performance also appears in its Annual Report to Shareholders, which is
available without charge from the applicable Trust.
47
<PAGE> 51
CAPITAL STRUCTURE
The National Trust was organized under the name "Kemper Municipal Bond Fund" as
a business trust under the laws of Massachusetts on October 24, 1985 with a
single investment portfolio. Effective January 31, 1986 the Municipal Trust,
pursuant to a reorganization, succeeded to the assets and liabilities of Kemper
Municipal Bond Fund, Inc., a Maryland corporation organized in 1977 as a
successor to Kemper Municipal Bond Fund, Ltd., a Nebraska limited partnership
organized in April 1976. Effective November 1, 1994, the Trust changed its name
to "Kemper National Tax-Free Income Series."
The State Trust was organized under the name "Kemper California Tax-Free Income
Fund" as a business trust under the laws of Massachusetts on October 24, 1985
with a single investment portfolio. Effective January 31, 1986, the Trust
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
California Tax-Free Income Fund, Inc., a Maryland corporation organized in 1983.
On July 27, 1990, the Trust changed its name to "Kemper State Tax-Free Income
Series" and changed the name of its initial portfolio to "Kemper California
Tax-Free Income Fund." The predecessor to the New York Fund, also named "Kemper
New York Tax-Free Income Fund," was organized as a business trust under the laws
of Massachusetts on August 9, 1985. Prior to May 28, 1988, that investment
company was known as "Tax-Free Income Portfolios" and it offered two series of
shares, the National Portfolio and the New York Portfolio. Pursuant to a
reorganization on May 27, 1988, the National Portfolio was terminated and the
New York Portfolio continued as the sole remaining series of Kemper New York
Tax-Free Income Fund, which was reorganized into the New York Fund as a series
of the State Trust on July 27, 1990.
Each Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Funds," all having no par value, which may be divided by the
Board of Trustees into classes of shares. Currently, the National Trust has two
Funds that offer four classes of shares and the State Trust has eight Funds that
offer three classes of shares. These are Class A, Class B and Class C shares, as
well as (for the National Trust only) Class I shares, which have different
expenses, which may affect performance, and that are available for purchase
exclusively by the following investors: (a) tax-exempt retirement plans of ZKI
and its affiliates; and (b) the following investment advisory clients of ZKI and
its investment advisory affiliates that invest at least $1 million in the
National Funds: (1) unaffiliated benefit plans, such as qualified retirement
plans (other than individual retirement accounts and self-directed retirement
plans); (2) unaffiliated banks and insurance companies purchasing for their own
accounts; and (3) endowment funds of unaffiliated non-profit organizations. The
Board of Trustees of either Trust may authorize the issuance of additional
classes and additional Funds if deemed desirable, each with its own investment
objective, policies and restrictions. Since the Trusts may offer multiple Funds,
each is known as a "series company." Shares of each Fund of a Trust have equal
noncumulative voting rights except that Class B and Class C shares have separate
and exclusive voting rights with respect to each Fund's Rule 12b-1 Plan. Shares
of each class also have equal rights with respect to dividends, assets and
liquidation of such Fund subject to any preferences (such as resulting from
different Rule 12b-1 distribution fees), rights or privileges of any classes of
shares of a Fund. Shares of each Trust are fully paid and nonassessable when
issued, are transferable without restriction and have no preemptive or
conversion rights. The Trusts are not required to hold annual shareholder
meetings and do not intend to do so. However, they will hold special meetings as
required or deemed desirable for such purposes as electing trustees, changing
fundamental policies or approving an investment management agreement. Subject to
the Agreement and Declaration of Trust of each Trust, shareholders may remove
trustees. Shareholders will vote by Fund and not in the aggregate or by class
except when voting in the aggregate is required under the 1940 Act, such as for
the election of trustees, or when voting by class is appropriate.
48
<PAGE> 52
KTFIF-1 (12/96)
KDI 610111
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
[RECYCLE LOGO] printed on recycled paper
PROSPECTUS
KEMPER
TAX-FREE
INCOME
FUNDS
DECEMBER 20, 1996
Kemper Municipal Bond Fund
Kemper Intermediate
Municipal Bond Fund
Kemper California
Tax-Free Income Fund
Kemper Florida
Tax-Free Income Fund
Kemper Michigan
Tax-Free Income Fund
Kemper New Jersey
Tax-Free Income Fund
Kemper New York
Tax-Free Income Fund
Kemper Ohio
Tax-Free Income Fund
Kemper Pennsylvania
Tax-Free Income Fund
Kemper Texas
Tax-Free Income Fund
[KEMPER LOGO] KEMPER FUNDS
<PAGE> 53
KEMPER TAX-FREE INCOME FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 20, 1996
KEMPER NATIONAL TAX-FREE INCOME SERIES ("NATIONAL TRUST"):
KEMPER MUNICIPAL BOND FUND ("MUNICIPAL FUND")
KEMPER INTERMEDIATE MUNICIPAL BOND FUND ("INTERMEDIATE MUNICIPAL FUND")
KEMPER STATE TAX-FREE INCOME SERIES ("STATE TRUST"):
KEMPER CALIFORNIA TAX-FREE INCOME FUND ("CALIFORNIA FUND")
KEMPER FLORIDA TAX-FREE INCOME FUND ("FLORIDA FUND")
KEMPER MICHIGAN TAX-FREE INCOME FUND ("MICHIGAN FUND")
KEMPER NEW JERSEY TAX-FREE INCOME FUND ("NEW JERSEY FUND")
KEMPER NEW YORK TAX-FREE INCOME FUND ("NEW YORK FUND")
KEMPER OHIO TAX-FREE INCOME FUND ("OHIO FUND")
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND ("PENNSYLVANIA FUND")
KEMPER TEXAS TAX-FREE INCOME FUND ("TEXAS FUND")
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
1-800-621-1048
Kemper Tax-Free Income Funds are two open-end management investment companies
("Trusts"); the National Trust and the State Trust that together offer a choice
of ten investment portfolios ("Funds").
This Statement of Additional Information is not a prospectus. It is the combined
Statement of Additional Information for the Trusts. It should be read in
conjunction with the combined prospectus of the Trusts dated December 20, 1996.
The prospectus may be obtained without charge from the Trusts.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investments......................................................... B-1
Investment Policies and Techniques.................................. B-9
Investment Restrictions............................................. B-13
Dividends and Taxes................................................. B-16
Performance......................................................... B-17
Investment Manager and Underwriter.................................. B-42
Portfolio Transactions.............................................. B-48
Purchase and Redemption of Shares................................... B-49
Officers and Trustees............................................... B-50
Shareholder Rights.................................................. B-60
Appendix--Ratings of Investments.................................... B-62
</TABLE>
The financial statements appearing in the Trusts' 1996 Annual Reports to
Shareholders are incorporated herein by reference. The financial statements for
the Fund for which this Statement of Additional Information is requested
accompany this document.
KTFIF-13 12/96 [PRINTED ON RECYCLED PAPER LOGO]
<PAGE> 54
INVESTMENTS
MUNICIPAL SECURITIES. The yields on Municipal Securities are dependent on a
variety of factors, including general money market conditions, general
conditions of the Municipal Securities market, size of a particular offering,
the maturity of the obligation and rating of the issue. The ratings of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"),
Fitch Investors Services, Inc. ("Fitch") and Duff & Phelps Credit Rating Co.
("Duff") represent their opinions as to the quality of the Municipal Securities
which they undertake to rate. It should be emphasized, however, that ratings are
relative and subjective and are not absolute standards of quality. Consequently,
Municipal Securities with the same maturity, coupon and rating may have
different yields while Municipal Securities of the same maturity and coupon with
different ratings may have the same yield.
The Funds may invest in tax-exempt leases. A tax-exempt lease is an obligation,
often a lease purchase or installment contract, pursuant to which a governmental
user of a capital asset, such as an item of equipment, agrees to make payments
of the purchase price plus interest over a period of years, normally with the
right to purchase the asset at the termination of the lease for a nominal
amount. Tax-exempt leases normally have a term of only two to seven years, a
relatively short period of time, and often have a higher interest rate than
tax-exempt investments of a comparable term. Currently, it is anticipated that
not more than 5% of the net assets of a Fund will be invested in tax-exempt
leases during the coming year.
Provisions of the federal bankruptcy statutes relating to the adjustment of
debts of political subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivisions or authorities.
The National Funds do not intend to invest more than 25% of their total assets
in any one state.
Litigation challenging the validity under state constitutions of present systems
of financing public education has been initiated or adjudicated in a number of
states, and legislation has been introduced to effect changes in public school
finances in some states. In other instances there has been litigation
challenging the issuance of pollution control revenue bonds or the validity of
their issuance under state or federal law which litigation could ultimately
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
SPECIAL RISK FACTORS. The following information as to certain risk factors is
given to investors because each State Fund concentrates its investments in
Municipal Securities (as defined in the prospectus) of a particular state. Such
information constitutes only a summary, does not purport to be a complete
description and is based upon information from official statements relating to
securities offerings of state issuers. Investors should remember that rating
agencies do change ratings periodically so that ratings mentioned here may have
changed.
CALIFORNIA FUND. In recent years, California voters have approved a number of
changes to the State constitution that have limited the ability of State and
local issuers to raise revenues and adjust appropriations.
In 1978, California voters approved Proposition 13 which added Article XIII A to
the California Constitution. Article XIII A changed the definition of assessed
property value and placed restrictions on a taxing entity's ability to increase
real property taxes. In 1979, voters also approved Proposition 4, the so-called
Gann Initiative, which added Article XIII B to the California Constitution. The
purpose of Article XIII B was to limit the annual appropriations of the State
and any local government unit to the level of appropriations for the prior year,
as adjusted for changes in cost of living, population and services required.
Article XIII B also specified that debt service obligations incurred prior to
January 1, 1979 were excluded from the appropriations limits.
In the general elections of 1986, 1988, 1990 and 1996, California voters
approved various measures that amended Article XIII A and XIII B and added
Article XIII C and XIII D to the State Constitution. Propositions 58 and 60
clarified the definitions of "purchased property" and "change of ownership"
found in Article XIII A. Proposition 98, in addition to guaranteeing a percent
of State funding for public schools, modified Article XIII B to
B-1
<PAGE> 55
permit excess State revenues to be transferred to public schools and community
colleges rather than returned to taxpayers. Finally, Proposition 111 amended
Article XIII B to ease restrictions on certain expenditure categories in
calculating the annual appropriation ceiling. Article XIII C and XIII D place
additional requirements on revenue raising abilities of local government units.
Future voter initiatives, if proposed and adopted, could further modify Articles
XIII A, XIII B, XIII C, and XIII D and place increased pressures on the State
and local entities' ability to raise revenue and adjust appropriations.
California's economy is the largest among the 50 states and one of the largest
in the world. This diversified economy has major components in agriculture,
manufacturing, high technology, trade entertainment, tourism, construction and
services. Total State gross domestic product of about $890 billion in 1995 was
larger than all but six nations in the world.
After suffering a severe recession in the early 1990s, California's economy has
experienced a steady recovery since 1994. This expansion has helped create a
larger number of jobs than were lost during the recession. The strongest growth
has been in export-related industries, business services, electronics,
entertainment and tourism. Current employment and personal income growth rates
exceed the national average. A recent economic forecast by the UCLA Business
Forecasting Project predicts that California's employment growth rate will
continue to outpace the nation through the year 2000.
The strengthening economy has had a generally positive impact on State finances.
The State's improved cash position allowed it to repay the $4.0 billion Revenue
Anticipation Warrants on April 25, 1996, and restore the State to a normal cash
flow borrowing cycle. According to the FY96-97 adopted budget, the State
projects an ending General Fund balance surplus of $611 million (modified
accrual basis).
California's economic and financial improvement prompted the three major rating
agencies to raise the State's general obligation bond rating in 1996. The
current ratings are A1/A+/A+.
Recent State budgets have included large cuts in local government transfer
payments. These reductions may cause deterioration in local issuer financial
performance and result in a reduced bond rating for certain local government
issuers.
On December 6, 1994, Orange County, California filed for bankruptcy protection
under Chapter 9 of the United States Bankruptcy Code. A Plan of Adjustment was
confirmed and successfully implemented in June 1996.
FLORIDA FUND. In 1992, Florida voters approved a constitutional amendment
referred to as "Save Our Homes." This amendment limits ad valorem taxes on
homestead properties and restricts the ability of taxing entities to increase
real property taxes. While property taxes levied for payment of debt service are
not restricted by the limitation, the overall creditworthiness of the
governmental entity may be adversely affected. Taxing entities consisting
primarily of residential areas, particularly school districts, and those
entities close to their tax rate limitations are most likely to be adversely
affected.
Under current law, the State of Florida is required to maintain a balanced
budget such that current expenses are met from current revenues. Although
Florida does not currently impose an individual income tax, it does impose a
corporate income tax that is allocable to the State, in addition to an ad
valorem tax on intangible personal property and sales and use taxes. These taxes
are a major source of funds to meet Florida expenses, including repayment of,
and interest on, obligations backed solely by the full faith and credit of the
State, without recourse to any specific project.
Florida has experienced substantial population increases as a result of
migration to Florida from other areas of the United States and from foreign
countries which is expected to continue. Florida's growth was close to three
times the national average during the 1980's. This pace fueled concerns about
the need for resource management and conservation. Although growth has slowed
recently to about twice the national 1% annual rate, it is expected to remain
well above average for the indefinite future. According to the 1990 census
report, Florida's population of
B-2
<PAGE> 56
12.7 million was the fourth highest in the nation and 31% above 1980's 9.7
million, and it is expected to approach 15 million by 2000. It is anticipated
that corresponding increases in State revenues will be necessary during this
decade to meet increased burdens on the various public and social services
provided by Florida.
Florida's ability to meet the needs of its population will depend in part upon
its ability to foster business and economic growth. Florida's economy picked up
in 1993, partly due to the rebuilding following Hurricane Andrew (discussed
below) and to some resurgence in the nationwide economy. Real gross state
product grew 4.1% in 1995, down from 4.9% in 1994. Employment numbers reflect
the improved economic picture in the State. The unemployment rate for 1995 was
5.5%, after peaking at 8.2% in 1992. Commercial construction remained weak while
residential construction improved. Construction has shifted to lower-valued
multi-family units rather than the higher priced single-family homes.
International trade continues to grow in southern Florida almost 10% of the
state's workforce are directly or indirectly involved in foreign trade. Florida
also continues to experience employment gains in the technology-based industry,
the light manufacturing industry and the service sector. Service industry
payrolls grew by 109,000 jobs in fiscal year 1994-1995. This growth rate is
expected to stabilize over the next several years. Healthcare jobs are
forecasted to be a large contributor to the increase in service industry jobs.
The largest contributor is business services. This growth continues to diversify
and better position Florida's overall economy, which was previously dominated by
agriculture and tourism. Tourism remains a major industry in the state and
accounts for 11% of Florida's economy. The number of visitors to the state had
steadily grown; however, in 1991 the number had dropped for the first time.
Visitors have steadily increased since then and the state is expecting an
increase of 4% for 1997. The number of visitors to the state in 1996 is expected
to exceed 42 million. Latin Americans have become an increasingly larger portion
of the number of visitors to the state. The tourism industry directly employs
about 900,000 people and generates $33 billion in taxable spending. Florida's
future economic and business growth could be restricted by the natural
limitations of available environmental resources and the ability to finance
adequate public facilities such as roads and schools.
In August 1992, Hurricane Andrew, the costliest natural disaster in Florida's
history, hit Southern Dade County. Hurricane Andrew was very localized and hurt
primarily Southern Dade County including wiping out the City of Homestead. There
have been no adverse credit implications from the Hurricane for local
governmental units or the State. The Hurricane has actually had an economic
stimulating effect on Dade County and some surrounding areas as disaster aid and
insurance refunds are received. Construction of homes and purchases of large
items has boomed. The boom in construction and large ticket purchases has led to
higher employment levels as well as increased sales tax receipts, the largest
revenue source for the State of Florida. In December 1993, the State Legislature
established the Hurricane Andrew Recovery and Rebuilding Trust Fund funded from
transfers from Sales Tax Collections attributed to Hurricane Andrew. These funds
are earmarked for Dade County.
Despite Florida's rapid growth and recent acceleration in debt financing, the
State's debt burden remains lower than that of other large population states.
Net debt payable from state revenues is $613 per capita.
Fiscal year 1995 ended with a General Fund balance of $340.5 million including
$219.9 million in the working capital fund and $120 million in the budget
stabilization fund. Year-to-date fiscal year 1996 is expected to end on target.
Sales tax collection are basically on target with estimates while corporate
income tax collections are well above. Fiscal year 1996 will be the first year
the State must operate under the revenue growth cap established in 1994. Revenue
growth is limited to a five year average growth in personal income. For fiscal
year 1996 this totaled 5.87% or $20.7 billion. The State's continued population
growth, reliance on sales tax receipts for its major revenue source, growing
capital needs and the limitation placed on revenue growth will continue to
challenge the State's ability to maintain a strong financial position.
The State's economy should continue to benefit from good population growth,
economic diversification and an increase in foreign trade. These positive
economic factors combined with the State's moderate debt burden suggest a
certain level of stability in the State's credit outlook.
As of December 12, 1996, the State's general obligation debt was rated Aa by
Moody's and AA by S&P.
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MICHIGAN FUND. The principal sectors of Michigan's diversified economy are
manufacturing of durable goods (including automobiles and components and office
equipment), tourism and agriculture. The transportation equipment sector still
dominates manufacturing jobs at 31% of the total. As reflected in historical
employment figures, the State's economy has lessened its dependence upon durable
goods manufacturing. In 1960, employment in such industry accounted for 33% of
the State's workforce. This figure fell to 17.1% for the first 11 months of
1994. However, such manufacturing continues to be an important part of the
State's economy. This particular industry is highly cyclical, which adversely
affects the revenue streams of the State and its political subdivisions because
it adversely impacts tax sources, particularly sales taxes.
Michigan is a large exporter state. It mainly exports to Canada and Mexico. With
the passage of NAFTA, concerns were raised about its affect upon the State's
manufacturing base; but there has been little noticeable effect. Exports of
automobiles declined slightly, but this resulted more from the number of new
auto plants located outside of Michigan than from NAFTA. The State ended 1993
with the highest employment level in fifteen years. The unemployment rate for
1993 was 7.0% compared to 8.8% and 9.2% for 1992 and 1991, respectively. The
1994 unemployment rate was 5.9% and a record low rates were achieved throughout
1995, reflecting the continued improvement in Michigan's economy, particularly
the auto industry.
The State's financial position has improved in the last year because of greater
than anticipated revenues. Michigan's economy has continued to strengthen due to
the automotive industry. It had to do major maneuvering in fiscal years 1991
through 1993 to balance the books. The State used accounting changes,
expenditure reductions (hiring freeze, reduction in public aid) and delayed
payments to local governments to balance the budget. The State eliminated a
structural deficit in fiscal year 1992 and began 1993 with limited reserves. Due
to continued cost cutting efforts and greater than anticipated revenues from the
better than expected economic growth, fiscal year 1993 ended with a $312 million
surplus compared to $1.8 billion deficit from 1991. Fiscal year 1994 saw similar
results, and the strong revenue growth continued in fiscal year 1995. The
State's Rainy Day Fund contained $1 billion, or 6.7% of the General and School
Aid Funds at the conclusion of fiscal 1995. The State forecast underlying
revenue growth for fiscal year 1995 of 6%. The 1996 fiscal year budget was based
on a conservative revenue growth rate of 4.7%. Fiscal 1996 is expected to end
with a modest operating surplus. The fiscal 1997 budget is premised upon
conservative revenue growth assumptions.
At the present time the State does not levy any ad valorem taxes on real or
tangible personal property. In addition, the State Constitution limits the
extent to which municipalities or political subdivisions may levy taxes upon
real and personal property through a process that regulates assessments. On May
1, 1992, the Governor signed into law a bill relating to the manner by which
property taxes are assessed in Michigan. The bill required, among other things,
that 1992 real property tax assessments remain at 1991 assessment levels,
subject to certain adjustments. Two proposals relating to property tax reform
and to amend the State Constitution appeared on the ballot for the November 1992
general election and were defeated, and a third proposal was rejected at a
special election held June 2, 1992. In addition to the foregoing, several other
proposals for property tax reform in Michigan have been suggested and may again
be submitted to the electors at future elections. On July 21, 1993, the Michigan
State Legislature passed Senate Bill 1 and the Governor signed the Bill into law
on August 19, 1993. Senate Bill 1, which upon passage became Act 145 of the
Michigan Public Acts of 1993 ("Act 145"), is the latest development in a
long-term effort by the State and its electorate to modify the local ad valorem
property tax system. The law significantly affects financing of K-12 school
operations beginning with July 1, 1994 tax levies. Act 145 exempts all property
in the State of Michigan from millage levied for local school and intermediate
school district operating purposes. Millage levied for community colleges and
millage levied for voter-approved general obligation debt are not encompassed
within the exemption. Act 145 did not contain a method for replacing revenues
lost by these exemptions or provide for other means of financing public
education. In December 1993, the Michigan Legislature proposed a school funding
program that included two funding mechanisms. The initial funding program was to
be voted on by the electorate at an election that was held on March 15, 1994 and
an alternative funding program that would automatically go into effect should
the initial program fail to be approved. On March 15, 1994 the initial funding
program was approved by the voters and became effective July 1, 1994. The new
funding program included an increase in the state sales tax to 6 cents from 4
cents, a 2% real estate transfer
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tax, a six mill property tax levied by the State on all property and an eighteen
mill property tax on commercial property, an interstate phone charge, an
increase in the cigarette tax, and additional revenue generated from the
implementation of Keno. In exchange for the implementation of the property tax
and increased taxes, the State's income tax was decreased to 4.4% from 4.6%. The
full effect of the change in the revenue structure for financing K-12 public
education has not been realized at either the local or state level. Depending
upon its effect on the State's finances, and as the funding for education
matures the State's method of financing public education may be altered.
As of December, 1996, the State's general obligation bonds are rated Aa by
Moody's, AA by Standard & Poor's and AA by Fitch.
NEW JERSEY FUND. New Jersey is the ninth most populous state in the nation. Per
capita income in 1993 was the second highest of the states and 129% of the
national average. The distribution of employment in New Jersey mirrors that of
the nation. After an extraordinary boom in the mid-1980's, New Jersey and the
rest of the Northeast fell into a recession a year before the national recession
officially began. Along with the rest of the Northeast, New Jersey climbed out
of the recession more slowly than the rest of the nation. Since 1992, the
unemployment rate in New Jersey has exceeded the national average; the
unemployment rates for New Jersey and the nation during the first quarter of
1995 were 6.9% and 5.9%, respectively.
New Jersey has a complicated debt structure. The State has $3.6 billion in G.O.
debt outstanding, nearly $2.0 billion in appropriation backed debt, and another
$1.2 billion in other tax-supported debt. Net tax-supported debt per capita is
$864, or twice the median and eleventh in the nation. Net tax-supported debt
represents 3.2% of personal income, 50% above the median and fifteenth in the
nation.
On a GAAP ("Generally Accepted Accounting Principles") basis, New Jersey has
achieved a surplus in each of the last three fiscal years, increasing its fund
balance to a large 12% of expenditures. On a budgetary basis, the State has
purposely drawn down the undesignated General Fund fund balance in recent years.
Even so, at the end of fiscal year 1994, the undesignated fund balance was 6% of
expenditures on a GAAP basis. Preliminary numbers for fiscal year 1995 indicate
a modest budgetary deficit, smaller than planned; the GAAP results cannot be
predicted yet. The fiscal year 1996 budget substantially reduces the reliance on
one-shots, and assumes a slower economy than in 1995. The budget has been well
received by the rating agencies.
The New Jersey Constitution provides, in part, that no money shall be drawn from
the State treasury except for appropriations made by law and that no law
appropriating money for any State purpose shall be enacted if the appropriations
contained therein, together with all prior appropriations made for the same
fiscal period, shall exceed the total amount of the revenue on hand and
anticipated to be available to meet such appropriations during such fiscal
period, as certified by the Governor.
The Local Government Cap Law (the "Cap Law") generally limits the year-to-year
increase of the total appropriations of any municipality and the tax levy of any
county to either five percent or an index rate determined annually by the
Director, whichever is less. However, where the index percentage rate exceeds
five percent, the Cap Law permits the governing body of any municipality or
county to approve the use of a higher percentage rate up to the index rate.
Further, where the index percentage rate is less than five percent, the Cap Law
also permits the governing body of any municipality or county to approve the use
of a higher percentage rate up to five percent. Regardless of the rate utilized,
certain exceptions exist to the Cap Law's limitation on increases in
appropriations. The principal exceptions to this limitation are municipal and
county appropriations to pay debt service requirements; to comply with certain
other State or federal mandates; amounts approved by referendum; and, in the
case of municipalities only, to fund the preceding year's cash deficit or to
reserve for shortfalls in tax collections.
State law also regulates the issuance of debt by local units. The Local Budget
Law limits the amount of tax anticipation notes that may be issued by local
units and requires the repayment of such notes within 120 days of the end of the
fiscal year (six months in the case of the counties) in which issued. With
certain exceptions, no
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local unit is permitted to issue bonds for the payment of current expenses.
Local units may not issue bonds to pay outstanding bonds, except for refunding
purposes and then only with the approval of the Local Finance Board. Local units
may issue bond anticipation notes for temporary periods not exceeding in the
aggregate approximately ten years from the date of first issue. The debt that
any local unit may authorize is limited to a percentage of its equalized
valuation basis, which is the average of the equalized value of all taxable real
property and improvements within the geographic boundaries of the local unit, as
annually determined by the Director of the Division of Taxation, for each of the
three most recent years.
As of October, 1996, the State's general obligation ratings were Aa1 by Moody's,
AA+ by Standard & Poor's and AA+ by Fitch.
NEW YORK FUND. With a population of 18 million, New York ranks third in
population among the fifty states. According to the census, New York gained 2.5%
in population between 1980 and 1990 after a loss of 3.7% in the prior decade.
New York City accounts for about 40% of the State's population. New York ranks
fourth in the nation in personal income; in 1990, per capita personal income was
120% of the national average. Employment peaked in 1989 at 8.2 million, and
declined 425,000 between 1989 and 1992. This was the most severe job loss since
recordkeeping began in 1939. Since then, the State has gained back about 200,000
private sector jobs, while government employment declined by 20,000. Employment
distribution is similar to that of the nation as a whole, except for a higher
concentration in Finance, Insurance and Real Estate (9.4% versus 6.0%
nationally), and a lower concentration in manufacturing (12.7% versus 16.2%
nationally). Unemployment is historically more cyclical than for the United
States as a whole, with lower unemployment in good times and higher unemployment
in bad. Since 1991, New York unemployment has exceeded the U.S. average.
The State's financial performance has weakened since fiscal year 1994. This year
the legislature approved tax reductions that will make achieving a balanced
budget in fiscal year 1996 more difficult. The State still has an accumulated
deficit in its General Fund equal to 5% of expenditures.
Numerous bonds issued by various State agencies and authorities are either
guaranteed by the State or supported by the State through lease-purchase
arrangements, other contractual obligations or moral obligation provisions. As
of October 6, 1995, the principal amount of New York State general obligation
bonds outstanding was $5.2 billion and the principal amount of state-guaranteed,
lease-purchase debt and other tax-supported bonds outstanding was $22.7 billion.
Between fiscal year 1992 and fiscal year 1994, New York materially improved its
finances. At the end of fiscal year 1991, the accumulated General Fund deficit
exceeded $6 billion on a GAAP basis. There followed three consecutive surpluses,
which, combined with LGAC financing, reduced the deficit to $1.6 billion.
The State's fiscal year 1996 budget projects disbursements $344 million lower
than disbursements in fiscal year 1995. This is the first absolute
year-over-year decline in General Fund disbursements in more than fifty years.
Total State spending (exclusive of federal pass-throughs) is projected to
increase 2 1/2%. After deferring planned reductions for six years, the first
phase of a planned three year, 20% income tax cut occurs this year.
Certain State agencies, such as the New York State Urban Development Corporation
("UDC"), the Battery Park City Authority and the Housing Finance Agency ("HFA")
are dependent upon State legislative appropriations in order to meet their bond
obligations. In February, 1975, UDC defaulted on $1 billion of its short-term
notes and the State appropriated amounts to cure the default. HFA has a $390
million mortgage on the Co-op City Project located in New York City. Co-op City
has had difficulties in meeting its mortgage payments to HFA owing to rent
strikes by tenants, disputes with the City of New York and other factors.
Yonkers and Buffalo have also experienced financial difficulties, which have
required State appropriations to meet the financial obligations of both cities.
In the case of Yonkers, a State agency that has been monitoring finances since
1984 took control of all City spending in view of court fines and financial
problems resulting from Yonkers' refusal and delay in implementing a Court
ordered desegregation plan. In addition, counties and other localities on Long
Island have
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financial problems, including those relating to the Long Island Lighting
Company's construction of its Shoreham nuclear power facility, that could lead
to requests for additional State assistance.
In 1975, New York City (the "City") suffered several financial crises. To help
New York City out of its financial difficulties, the State legislature created
the Municipal Assistance Corporation ("MAC") in 1975. MAC has the authority to
issue bonds and notes and pay or lend the proceeds to the City. MAC also has the
authority to exchange its obligations for City obligations. MAC bonds are
payable out of certain State sales and use taxes imposed within the City, State
stock transfer taxes and per capita State aid to the City. The State is not,
however, obligated to continue these taxes, nor to continue appropriating
revenues from these taxes, nor to continue the appropriation of per capita State
aid to pay MAC obligations. MAC does not have taxing powers, and its bonds are
not obligations enforceable against either the City or the State.
Since 1975, the City's financial condition has been subject to oversight and
review by the New York State Financial Control Board (the "Control Board") and
since 1978 its financial statements have been audited by independent accounting
firms. To be eligible for guarantees and assistance, the City was required to
submit annually to the Control Board a financial plan for the next four fiscal
years covering the City and certain agencies showing balanced budgets determined
in accordance with generally accepted accounting principles. Although the
Control Board's powers of prior approval were suspended effective June 30, 1986
because the City had satisfied certain statutory conditions, the City continues
to submit four year plans to the Control Board for its review. The City
completed fiscal year 1995 with a balanced budget.
In March 1990, S&P lowered its rating of New York State's general obligation
debt from AA- to A. In addition, S&P and Moody's lowered their ratings of New
York State's short-term notes from SP-1+ to SP-1 and from MIG-1 to MIG-2,
respectively. In February 1991, Moody's lowered its rating of New York City's
general obligation debt from A to BAA1. In January 1992, Moody's lowered its
rating of New York State legislative appropriations bonds from A to Baa1 and S&P
lowered its rating of New York State legislative appropriations bonds from BBB+
to BBB and of New York State general obligation bonds from A to A-. As of
December, 1996 New York City's general obligation debt are rated BBB+. As of
October, 1996, general obligation bonds of the State of New York are rated A and
A- by Moody's and S&P, respectively.
OHIO FUND. At one time, manufacturing dominated Ohio's economy. This
concentration left the State vulnerable to cyclical economic fluctuation. Ohio's
economy has been growing and diversifying as employment has shifted into
services, trade, finance, insurance, and real estate. Most components of the
economy have closely mirrored that of the nation. Between 1981 and 1988, Ohio
lost more than 129,000 manufacturing jobs while gaining 417,000 services and
trade jobs. Manufacturing, however, still accounts for a disproportionately
large share of employment in the State, comprising 21% of all nonfarm jobs
versus the U.S. average of 16%. Unemployment rates, down sharply from the 1982
recessionary peak of 12.5%, have gradually declined and have been in line or
below the national average. Ohio is ranked 22nd among states for per capita
personal income.
Pursuant to its constitution, Ohio is precluded from ending a fiscal year or
biennium in a deficit position. In fact, the Governor has the power to issue
orders to state agencies to reduce expenditures, if necessary, to avoid
encumbering a deficit.
Assisted by its stronger economy, Ohio's financial position improved through the
1980s although the recent recession, as with the rest of the nation, had a
negative effect upon revenue sources. Following a period of troublesome fiscal
operations in the early 1980s, the State established and began contributing to a
separate Budget Stabilization Fund. The purpose of this fund is to provide a
cushion against the financial impact of an unforeseen economic event. With
continued contributions, the Budget Stabilization Fund is expected to be
maintained at $300 million or higher. The 1995 fiscal year-end General Revenue
Fund balance was $1.7 billion, or 10% of operating revenue, up from $896 million
the year before. Of this, approximately $828 million is in the Budget
Stabilization Fund. Fiscal 1996 is expected to end with another operating
surplus in the General Fund. The State balanced the 1996-97 budget without the
use of reserves.
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Ohio generally follows conservative debt policies. The majority of outstanding
debt is appropriation-backed. Although debt has been increasing and current
ratios are about average, bonds have rapid retirement schedules. The State's
voters, in November 1995, approved a $1.2 billion general obligation debt for
public intrastructure improvements and highway projects. The debt is expected to
be issued over the next 10 to 15 years.
As of October 6, 1995, Ohio's general obligation bonds were rated Aa by Moody's
and AA by S&P.
PENNSYLVANIA FUND. Pennsylvania is the fifth largest state in terms of
population. Pennsylvania's resource base has remained stable during the past two
decades. The Census Bureau estimates that the Commonwealth's population
increased 1.6% between 1990 and 1995 to 12.1 million people. This is positive
news after the Commonwealth's population increased a slight .1% during the
1980's to 11,882,000 in 1990 from 11,864,000 in 1980. Pennsylvania is a highly
urbanized state with approximately 85% of its population residing in
metropolitan areas. Similar to national trends, the Commonwealth's central
cities have lost population to the outlying areas. Pittsburgh and Philadelphia
contain approximately 50% of the Commonwealth's population. Pittsburgh and
Philadelphia lost population while their metropolitan areas experienced a total
gain. Philadelphia's population decreased 6% during the 1980's while
Pittsburgh's declined 12.8%.
Pennsylvania's large population base provides the sixth largest workforce in the
U.S. The economic activity in the Commonwealth has traditionally centered around
manufacturing and mining, particularly steel and coal. The 1980's saw
Pennsylvania diversify the economic base away from the traditional manufacturing
and mining industries into the service industry. Manufacturing employment as a
percent of total employment declined from 22% in 1986 to 19% in 1991 and has
fallen slightly further to 18.4% in 1993. Manufacturing employment continues to
experience some decline although the overall percentage has remained stable
during 1994. Employment in the service industries continues to offset any
decline in manufacturing. Service employment increased to 29.9% of total
employment in 1994 compared to 25% in 1986.
The Commonwealth has been able to favorably improve its financial position since
a financial crisis in 1991. The Commonwealth faced a $1.1 billion deficit in
1991 following a severe recession and a correspondent decline in revenues.
Following a major budgetary revision package in 1992 and improved economic
activity the Commonwealth has turned its financial position around and ended
fiscal year 1994 with a General Fund unreserved balance of $329 million.
Operations in 1994-95 concluded with revenues about 3% over estimates. The
general fund closed with a fund balance of $540 million. By law, 10% of the
balance is to be deposited in the tax stabilization fund. The governor has
recommended a further 5% plus $30 million in the reserve for a total of $111
million. The balance would be $177.3 million or 1.1% of revenues. The remaining
$429 million will be used in the fiscal year 1995-96. The general fund is
budgeted to have a balance of $100 million at year end 1996. The Governor has
put into place several tax reductions which have caused a reduction in base
revenues for the Commonwealth. The corporate income tax rate was reduced from
12.25% to 9.99% over the past three years. The Commonwealth has been able to
maintain growth in expenditures to only 5% since 1993. This reduction has helped
the Commonwealth maintain a satisfactory financial position despite the loss in
revenues.
The proposed 1997 budget totals $31.8 billion and reflects savings of $272
million from tighter Medicaid eligibility requirements and $329 million from
welfare reform. The budget anticipates only $5.1 billion in federal monies while
in 1996 the Commonwealth estimated $5.6 billion. The budget anticipates a
contribution of $17.7 million to the Rainy Day Fund which will total $209.6
million. The budget anticipates only a $5 million surplus.
As of December 12, 1996, all outstanding general obligation bonds of the
Commonwealth of Pennsylvania were rated AA- by S&P and A1 by Moody's. Local
municipalities issuing Pennsylvania municipal securities, although impacted in
general by the economic condition of the Commonwealth, have credit ratings that
are determined with reference to the economic condition of such local
municipalities. For example, as of December 12, 1996, the ratings on the
long-term obligations of the City of Philadelphia (the "City") supported by
payments from the City's General Fund were rated Baa by Moody's and BBB- by S&P.
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TEXAS FUND. On a cash basis, Texas' general revenue fund posted an operating
surplus during fiscal year 1995 and the cash balance as of the end of May 1996
was in excess of $2.5 billion. Sales tax revenues continue to be the dominant
revenue stream to the State's general operating fund and on a year over year
basis have increased by 4.8% as of May, 1996. The growth can be attributed to a
growing economy, albeit at a slower pace than in fiscal year 1995. The majority
of the expenses in the State's general operating fund are health, human services
and education.
The debt burden of the State is low compared to other states. The debt issued
going forward will be to finance capital projects. The State's goal going
forward is to finance self supporting projects, which will not affect General
Fund operations. The State has utilized a number of commercial paper borrowings
to smooth out cash flows during the fiscal year and will continue to do so going
forward.
The State has no personal or corporate income tax currently. In November 1993
legislation was approved by the voters requiring voter approval to implement a
personal income tax. Corporations pay a corporate franchise tax based on the
amount of the corporation's capital and "earned surplus" which includes
corporate net income and officers' and directors' compensation (3.19% fiscal
year 1994 General Fund revenues). The State constitution prohibits the State
from levying an ad valorem tax on property for general revenue purposes. The
State constitution also limits the rate of growth of appropriations from tax
revenues not dedicated by the constitution during any biennium, to the estimated
rate of growth for the State's economy. The legislature may avoid the
constitutional limitation if it finds, by majority vote of both houses, that an
emergency exists. The State constitution authorizes the Legislature to provide
by law for the implementation of this restriction; and the legislature, pursuant
to such authorization, has defined the estimated rate of growth in the State's
economy to mean the estimated increase in personal income for the State.
The State's economy should continue to benefit from increased employment and
industry diversification, job growth, expanded trade with Mexico through NAFTA,
and a modest debt burden. As of October 23, 1995, the State's general obligation
debt was rated Aa by Moody's, AA by S&P and AA+ by Fitch.
INVESTMENT POLICIES AND TECHNIQUES
GENERAL. Each Fund may engage in futures, options and other derivatives
transactions such as delayed delivery transactions in accordance with its
investment objective and policies. Each Fund intends to engage in such
transactions if it appears advantageous to the investment manager to do so, in
order to pursue its investment objective and also to hedge against the effects
of market risks but not for speculative purposes. The use of futures and
options, and possible benefits and attendant risks, are discussed below, along
with information concerning certain other investment policies and techniques.
FINANCIAL FUTURES CONTRACTS. A Fund may enter into financial futures contracts
for the future delivery of a financial instrument, such as a security, or the
cash value of a securities index. This investment technique is designed
primarily to hedge (i.e., protect) against anticipated future changes in market
conditions which otherwise might adversely affect the value of securities which
a Fund holds or intends to purchase. A "sale" of a futures contract means the
undertaking of a contractual obligation to deliver the securities or the cash
value of an index called for by the contract at a specified price during a
specified delivery period. A "purchase" of a futures contract means the
undertaking of a contractual obligation to acquire the securities or cash value
of an index at a specified price during a specified delivery period. At the time
of delivery in the case of fixed income securities pursuant to the contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate than that specified in the
contract. In some cases, securities called for by a futures contract may not
have been issued at the time the contract was written.
Although some financial futures contracts by their terms call for the actual
delivery or acquisition of securities, in most cases a party will close out the
contractual commitment before delivery without having to make or take delivery
of the security by purchasing (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, if effected through a member of an exchange, cancels the
obligation to make or take delivery of the underlying securities. All
transactions in the
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futures market are made, offset or fulfilled through a clearing house associated
with the exchange on which the contracts are traded. A Fund will incur brokerage
fees when it purchases or sells contracts, and will be required to maintain
margin deposits. At the time a Fund enters into a futures contract, it is
required to deposit with its custodian, on behalf of the broker, a specified
amount of cash or eligible securities, called "initial margin." The initial
margin required for a futures contract is set by the exchange on which the
contract is traded. Subsequent payments, called "variation margin", to and from
the broker are made on a daily basis as the market price of the futures contract
fluctuates. The costs incurred in connection with futures transactions could
reduce a Fund's yield. Futures contracts entail risks. If the investment
manager's judgment about the general direction of markets is wrong, the overall
performance may be poorer than if no such contracts had been entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio securities being hedged. The degree of difference in
price movements between futures contracts and the securities being hedged
depends upon such things as variations in speculative market demand for futures
contracts and debt securities and differences between the securities being
hedged and the securities underlying the futures contracts, e.g., interest
rates, tax status, maturities and credit-worthiness of issuers. While interest
rates on taxable securities generally move in the same direction as interest
rates on Municipal Securities, there are frequently differences in the rate of
such movements and temporary dislocations. Accordingly, the use of a financial
futures contract on a taxable security or a taxable securities index may involve
a greater risk of an imperfect correlation between the price movements of the
futures contract and of the Municipal Security being hedged than when using a
financial futures contract on a Municipal Security or a Municipal Securities
index. In addition, the market prices of futures contracts may be affected by
certain factors. If participants in the futures market elect to close out their
contracts through offsetting transactions rather than meet margin requirements,
distortions in the normal relationship between the debt securities and futures
markets could result. Price distortions could also result if investors in
futures contracts decide to make or take delivery of underlying securities
rather than engage in closing transactions because of the resultant reduction in
the liquidity of the futures market. In addition, because, from the point of
view of speculators, margin requirements in the futures market are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures market could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment adviser may still not result in a successful hedging
transaction. If any of these events should occur, a Fund could lose money on the
financial futures contracts and also on the value of its portfolio securities.
OPTIONS ON FINANCIAL FUTURES CONTRACTS. A Fund may purchase and write call and
put options on financial futures contracts. An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time during
the period of the option. Upon exercise, the writer of the option delivers the
futures contract to the holder at the exercise price. A Fund would be required
to deposit with its custodian initial margin and maintenance margin with respect
to put and call options on futures contracts written by it. A Fund will
establish segregated accounts or will provide cover with respect to written
options on financial futures contracts in a manner similar to that described
under "Options on Securities." Options on futures contracts involve risks
similar to those risks relating to transactions in financial futures contracts
described above. Also, an option purchased by a Fund may expire worthless, in
which case such Fund would lose the premium paid therefor.
OPTIONS ON SECURITIES. A Fund may write (sell) "covered" call options on
securities as long as it owns the underlying securities subject to the option or
an option to purchase the same underlying securities, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain for the term of the option a segregated account
consisting of cash or liquid securities ("eligible securities") to the extent
required by applicable regulation. A Fund may write "covered" put options
provided that as long as the Fund is obligated as a writer of a put option, the
Fund will own an option to sell the underlying securities subject to the option,
having an exercise price equal to or greater than the exercise price of the
"covered" option, or it will deposit and maintain in a segregated account
eligible securities having a value equal to or greater than the
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exercise price of the option. A call option gives the purchaser the right to
buy, and the writer the obligation to sell, the underlying security at the
exercise price during the option period. A put option gives the purchaser the
right to sell, and the writer has the obligation to buy, the underlying security
at the exercise price during the option period. The premium received for writing
an option will reflect, among other things, the current market price of the
underlying security, the relationship of the exercise price to such market
price, the price volatility of the underlying security, the option period,
supply and demand and interest rates. A Fund may write or purchase spread
options, which are options for which the exercise price may be a fixed dollar
spread or yield spread between the security underlying the option and another
security it does not own, but that is used as a bench mark. The exercise price
of an option may be below, equal to or above the current market value of the
underlying security at the time the option is written. The buyer of a put who
also owns the related securities is protected by ownership of a put option
against any decline in that security's price below the exercise price less the
amount paid for the option. The ability to purchase put options allows the Fund
to protect capital gains in an appreciated security it owns, without being
required to actually sell that security. At times the Fund would like to
establish a position in a security upon which call options are available. By
purchasing a call option the Fund is able to fix the cost of acquiring the
securities, this being the cost of the call plus the exercise price of the
option. This procedure also provides some protection from an unexpected downturn
in the market because the Fund is only at risk for the amount of the premium
paid for the call option which it can, if it chooses, permit to expire.
During the option period, the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain and the buyer a loss in the amount of
the premium. If the covered call option writer has to sell the underlying
security because of the exercise of the call option, it realizes a gain or loss
from the sale of the underlying security, with the proceeds being increased by
the amount of the premium.
If a secured put option expires unexercised, the writer realizes a gain and the
buyer a loss in the amount of the premium. If the secured put writer has to buy
the underlying security because of the exercise of the put option, the secured
put writer incurs an unrealized loss to the extent that the current market value
of the underlying security is less than the exercise price of the put option,
minus the premium received.
OVER-THE-COUNTER OPTIONS. As indicated in the prospectus (see "Investment
Objectives, Policies and Risk Factors"), each Fund may deal in over-the-counter
traded options ("OTC options"). OTC options differ from exchange traded options
in several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of non-performance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event the Fund
may experience material losses. However, in writing options the premium is paid
in advance by the dealer. OTC options are available for a greater variety of
securities, and a wider range of expiration dates and exercise prices, than are
exchange traded options. Since there is no exchange, pricing is normally done by
reference to information from market makers, which information is carefully
monitored by the Trust's investment manager and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, a Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it.
Similarly, when a Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment
B-11
<PAGE> 65
purposes, while it is obligated as a put writer. Similarly, a purchaser of such
put or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
The Trusts understand the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. Each Trust's investment
manager disagrees with this position and has found the dealers with which it
engages in OTC options transactions generally agreeable to and capable of
entering into closing transactions. The Trusts have adopted procedures for
engaging in OTC options for the purpose of reducing any potential adverse effect
of such transactions upon the liquidity of a Fund's portfolio. A brief
description of such procedures is set forth below.
A Fund will only engage in OTC options transactions with dealers that have been
specifically approved by the investment manager pursuant to procedures adopted
by the Board of Trustees of each Trust. The investment manager believes that
such dealers should be able to enter into closing transactions if necessary and,
therefore, present minimal credit risks to a Fund. The investment manager will
monitor the creditworthiness of the approved dealers on an on-going basis. A
Fund currently will not engage in OTC options transactions if the amount
invested by the Fund in OTC options, plus a "liquidity charge" related to OTC
options written by the Fund, plus the amount invested by the Fund in illiquid
securities, would exceed 15% of the Fund's net assets. The "liquidity charge"
referred to above is computed as described below.
The Trusts anticipate entering into agreements with dealers to which a Fund
sells OTC options. Under these agreements the Fund would have the absolute right
to repurchase the OTC options from the dealer at any time at a price no greater
than a price established under the agreements (the "Repurchase Price"). The
"liquidity charge" referred to above for a specific OTC option transaction will
be the Repurchase Price related to the OTC option less the intrinsic value of
the OTC option. The intrinsic value of an OTC call option for such purposes will
be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
will be the amount by which the exercise price exceeds the current market value
of the underlying security. If there is no such agreement requiring a dealer to
allow the Fund to repurchase a specific OTC option written by the Fund, the
"liquidity charge" will be the current market value of the assets serving as
"cover" for such OTC option.
OPTIONS ON SECURITIES INDICES. A Fund also may purchase and write call and put
options on securities indices in an attempt to hedge against market conditions
affecting the value of securities that the Fund owns or intends to purchase, and
not for speculation. Through the writing or purchase of index options, a Fund
can achieve many of the same objectives as through the use of options on
individual securities. Options on securities indices are similar to options on a
security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends upon price movements in the market generally (or in a particular
industry or segment of the market), rather than upon price movements in
individual securities. Price movements in securities that the Fund owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index since the prices of such securities may be affected by
somewhat different factors and, therefore, the Fund bears the risk that a loss
on an index option would not be completely offset by movements in the price of
such securities.
When a Fund writes an option on a securities index, it will segregate and
mark-to-market eligible securities to the extent required by applicable
regulation. In addition, where the Fund writes a call option on a securities
index at a time when the contract value exceeds the exercise price, the Fund
will segregate and mark-to-market, until the option expires or is closed out,
cash or cash equivalents equal in value to such excess.
B-12
<PAGE> 66
Options on futures contracts and index options involve risks similar to those
risks relating to transactions in financial futures contracts described above.
Also, an option purchased by a Fund may expire worthless, in which case such
Fund would lose the premium paid therefor.
DELAYED DELIVERY TRANSACTIONS. A Fund may purchase or sell portfolio securities
on a when-issued or delayed delivery basis. When-issued or delayed delivery
transactions involve a commitment by a Fund to purchase or sell securities with
payment and delivery to take place in the future in order to secure what is
considered to be an advantageous price or yield to the Fund at the time of
entering into the transaction. When a Fund enters into a delayed delivery
purchase, it becomes obligated to purchase securities and it has all the rights
and risks attendant to ownership of a security, although delivery and payment
occur at a later date. The value of fixed income securities to be delivered in
the future will fluctuate as interest rates vary. At the time a Fund makes the
commitment to purchase a security on a when-issued or delayed delivery basis, it
will record the transaction and reflect the liability for the purchase and the
value of the security in determining its net asset value. Likewise, at the time
a Fund makes the commitment to sell a security on a delayed delivery basis, it
will record the transaction and include the proceeds to be received in
determining its net asset value; accordingly, any fluctuations in the value of
the security sold pursuant to a delayed delivery commitment are ignored in
calculating net asset value so long as the commitment remains in effect. A Fund
generally has the ability to close out a purchase obligation on or before the
settlement date, rather than take delivery of the security.
To the extent a Fund engages in when-issued or delayed delivery purchases, it
will do so for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies. The Fund reserves the right to sell
these securities before the settlement date if deemed advisable.
REGULATORY RESTRICTIONS. To the extent required to comply with applicable
regulation, when purchasing a futures contract, writing a put option or entering
into a delayed delivery purchase, a Fund will maintain eligible securities in a
segregated account. A Fund will use cover in connection with selling a futures
contract.
A Fund will not engage in transactions in financial futures contracts or options
thereon for speculation, but only to attempt to hedge against changes in market
conditions affecting the values of securities that the Fund holds or intends to
purchase.
INVESTMENT RESTRICTIONS
Certain fundamental investment restrictions have been adopted for each Fund
which, together with the investment objective and policies of each Fund, cannot
be changed for a Fund without approval of a majority of its outstanding voting
shares. As defined in the Investment Company Act of 1940, this means the lesser
of the vote of (a) 67% of the shares of the Fund present at a meeting where more
than 50% of the outstanding shares are present in person or by proxy or (b) more
than 50% of the outstanding shares of the Fund.
THE MUNICIPAL FUND AND THE INTERMEDIATE MUNICIPAL FUND EACH MAY NOT, AS A
FUNDAMENTAL POLICY:
(1) Make investments other than in accordance with its investment objective and
policies.
(2) With respect to temporary investments, purchase securities (other than
securities of the United States Government, its agencies or instrumentalities)
if as a result of such purchase more than 25% of the Fund's total assets would
be invested in any industry.
(3) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the Fund's total assets would be invested in securities
of that issuer.
(4) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited.
B-13
<PAGE> 67
(5) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or pledge the Fund's securities or receivables or
transfer or assign or otherwise encumber them in an amount exceeding the amount
of the borrowing secured thereby.
(6) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credit as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and options transactions.
(7) Write, purchase or sell puts, calls or combinations thereof, except in
accordance with its investment objective and policies.
(8) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts.
(9) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in real
estate.
(10) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(11) Issue senior securities except as permitted under the Investment Company
Act of 1940.
THE CALIFORNIA FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities or make investments other than in accordance with its
investment objective and policies.
(2) Purchase securities (other than securities of the United States Government,
its agencies or instrumentalities, or the State of California or its political
subdivisions) if as a result of such purchase more than 25% of the Fund's total
assets would be invested in any industry.
(3) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the total value of the Fund's assets would be invested
in securities of that issuer, except that, with respect to 50% of the Fund's
total assets, the Fund may invest up to 25% of its total assets in securities of
any one issuer.
(4) Make loans, except in accordance with its investment objective and policies.
(5) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 10%
of the Fund's net assets; or pledge its securities or receivables or transfer or
assign or otherwise encumber them in an amount exceeding the amount of the
borrowing secured thereby.
(6) Make short sales of securities or purchase any securities on margin, except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and options transactions.
(7) Write, purchase or sell puts, calls or combinations thereof, except in
accordance with its investment objective and policies.
(8) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts.
(9) Invest in real estate, although it may invest in Municipal Securities which
are secured by real estate and securities of issuers which invest or deal in
real estate.
(10) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(11) Issue senior securities except as permitted under the Investment Company
Act of 1940.
B-14
<PAGE> 68
THE FLORIDA FUND, THE MICHIGAN FUND, THE NEW JERSEY FUND, THE NEW YORK FUND, THE
OHIO FUND, THE PENNSYLVANIA FUND AND THE TEXAS FUND EACH MAY NOT, AS A
FUNDAMENTAL POLICY:
(1) Make investments other than in accordance with its investment objective and
policies.
(2) Purchase securities (other than securities of the United States Government,
its agencies or instrumentalities, or of a state or its political subdivisions)
if as a result of such purchase 25% or more of its total assets would be
invested in any industry.
(3) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited.
(4) Borrow money except for temporary purposes (but not for the purpose of
purchase of investments) and then only in an amount not to exceed one-third of
the value of its total assets (including the amount borrowed) in order to meet
redemption requests which otherwise might result in the untimely disposition of
securities; or pledge its securities or receivables or transfer or assign or
otherwise encumber them in an amount to exceed 10% of its net assets to secure
borrowings. Reverse repurchase agreements are permitted within the limitations
of this paragraph. The Fund will not purchase securities or make investments
while reverse repurchase agreements or borrowings are outstanding.
(5) Make short sales of securities, or purchase any securities on margin, except
to obtain such short-term credit as may be necessary for the clearance of
transactions; however, it may make margin deposits in connection with financial
futures and options transactions.
(6) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in premiums
on put and call options, combinations thereof or similar options; however, the
Fund may buy or sell options on financial futures contracts.
(7) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(8) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts.
(9) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in real
estate.
(10) Issue senior securities except as permitted under the Investment Company
Act of 1940.
(11) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the total value of the Fund's assets would be invested
in securities of that issuer except that, with respect to 50% of the Fund's
total assets, the Fund may invest up to 25% of its total assets in securities of
any one issuer.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. In the event
a Fund acquires illiquid assets as a result of the exercise of a security
interest relating to Municipal Securities, the Fund will dispose of such assets
as promptly as possible. A Fund may invest more than 25% of its net assets in
industrial development bonds. For purposes of diversification, identification of
the issuer of a Municipal Security depends on the terms and conditions of the
obligation. Each Fund considers the issuer to be the party with the primary
financial obligation for the issue. The Funds did not borrow money as permitted
by investment restriction number 5 for the Municipal, Intermediate Municipal and
California Funds and number 4 for the Florida, Michigan, New Jersey, New York,
Ohio, Pennsylvania and Texas Funds in the latest fiscal year. None of the Funds
has any present intention of borrowing during the current year. Each Fund has
adopted the
B-15
<PAGE> 69
following non-fundamental restrictions, which may be changed by the Board of
Trustees without shareholder approval. Each Fund may not:
(1) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Trust or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
(2) Invest for the purpose of exercising control or management of another
issuer.
(3) Purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets.
(4) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities ("Municipal Securities" for
the California Fund) of issuers which invest in or sponsor such programs.
(5) Invest more than 5% of the Fund's total assets in industrial revenue bonds
if sponsored by companies which with their predecessors have less than three
years continuous operation.
(6) Invest more than 15% of its net assets in illiquid securities.
(7) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(8) Invest in oil, gas, and other mineral leases.
(9) Purchase or sell real property (including limited partnership interests in
real estate investment trusts or readily marketable securities of companies
which invest in real estate).
(10) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in restricted securities will not exceed 15% of total
assets.
(11) Invest more than 10% of its total assets in securities of real estate
investment trusts.
DIVIDENDS AND TAXES
DIVIDENDS. All the net investment income of a Fund is declared daily as a
dividend on shares for which the Fund has received payment. Net investment
income of a Fund consists of all interest income earned on portfolio assets less
all expenses of the Fund. Income dividends will be distributed monthly and
dividends of net realized capital gains will be distributed annually.
The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C shares than for Class A shares primarily
as a result of the distribution services fee applicable to Class B and Class C
shares. Distributions of capital gains, if any, will be paid in the same amount
for each class.
A Fund may at any time vary the foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and long-
term capital gains as the Board of Trustees of the Trust determines appropriate
under the then current circumstances. In particular, and without limiting the
foregoing, a Fund may make additional distributions of net investment income or
capital gain net income in order to satisfy the minimum distribution
requirements contained in the Internal Revenue Code (the "Code"). Dividends will
be reinvested in shares of the Fund paying such dividends unless shareholders
indicate in writing that they wish to receive them in cash or in shares of other
Kemper Funds as provided in the prospectus.
TAXES. Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code and, if so qualified, will not be liable
for federal income taxes to the extent its earnings are distributed. One
B-16
<PAGE> 70
of the requirements of Subchapter M is that a Fund must derive less than 30% of
its gross income from gains (not reduced by losses) on stocks and securities and
certain other investments held for less than three months. A Fund may be limited
in its options and futures transactions in order to prevent recognition of such
gains. Dividends from a Fund will not be eligible for the dividends received
deduction available to corporate shareholders.
A Fund's options and futures transactions are subject to special tax provisions
that may accelerate or defer recognition of certain gains or losses, change the
character of certain gains or losses, or alter the holding periods of certain of
a Fund's securities. For federal income tax purposes, a Fund is generally
required to recognize its unrealized gains and losses at year end on financial
futures contracts, options thereon, index options and listed options on debt
securities. Any gain or loss recognized on such financial instruments is
generally considered to be 60% long-term and 40% short-term without regard to
the holding period of the contract or option.
A shareholder who redeems shares of a Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the adjusted cost basis of the shares. The gain or loss
will be a capital gain or loss and will be long-term if the shares are held for
a period of more than one year. Any loss on shares held six months or less will
be a long-term capital loss to the extent any long-term capital gain
distribution is made with respect to such shares during the period the investor
owns the shares. In the case of shareholders holding shares of a Fund for six
months or less and subsequently selling those shares at a loss after receiving
an exempt-interest dividend, the loss will be disallowed to the extent of the
exempt-interest dividends received. However, the Secretary of the Treasury may
issue regulations to shorten the required holding period from six months to 31
days.
A shareholder who has redeemed shares of a Fund or any Kemper Mutual Fund listed
in the prospectus under "Special Features--Class A Shares--Combined Purchases"
may reinvest the amount redeemed at net asset value at the time of the
reinvestment in shares of any Fund or in shares of the other Kemper Mutual Funds
within six months of the redemption as described in the prospectus under
"Redemption or Repurchase of Shares--Reinvestment Privilege." If the redeemed
shares were purchased after October 3, 1989 and were held less than 91 days,
then the lesser of (a) the sales charge waived on the reinvestment shares, or
(b) the sales charge incurred on the redeemed shares, is included in the basis
of the reinvestment shares and is not included in the basis of the redeemed
shares. If a shareholder realizes a loss on the redemption or exchange of a
Fund's shares and reinvests in that same Fund's shares within 30 days before or
after the redemption or exchange, the transactions may be subject to the wash
sale rules resulting in a postponement of the recognition of such loss for
federal income tax purposes. An exchange of a Fund's shares for shares of
another fund is treated as a redemption and reinvestment for federal income tax
purposes upon which gain or loss may be recognized.
Interest on indebtedness which is incurred to purchase or carry shares of a
mutual fund which distributes exempt-interest dividends during the year is not
deductible for federal income tax purposes. Further, the Funds may not be
appropriate investments for persons who are "substantial users" of facilities
financed by industrial development bonds held by the Funds or are "related
persons" to such users; such persons should consult their tax advisers before
investing in the Funds.
The "Superfund Act of 1986" (the "Superfund Act") imposes a separate tax on
corporations at a rate of 0.12 percent of the excess of such corporation's
"modified alternative minimum taxable income" over $2 million. A portion of
tax-exempt interest, including exempt-interest dividends from a Fund, may be
includible in modified alternative minimum taxable income. Corporate
shareholders are advised to consult their tax advisers with respect to the
consequences of the Superfund Act.
PERFORMANCE
As described in the prospectus, a Fund's historical performance or return for a
class of shares may be shown in the form of "yield," "tax equivalent yield,"
"average annual total return" and "total return" figures. These various measures
of performance are described below. Performance information will be computed
separately for each class. ZKI has waived or reduced its management fee and, in
certain cases, absorbed certain operating expenses for some of the Funds for the
periods and to the extent specified in the prospectus and this Statement of
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<PAGE> 71
Additional Information. See "Investment Manager and Underwriter." Because of
these waivers and expense absorptions, the performance results for such Funds
may be shown with and without the effect of these waivers and expense
absorptions. Performance results not giving effect to waivers and expense
absorptions will be lower. Certain performance information set forth in this
section for the New York Fund are for the predecessor of the New York Fund, also
named "Kemper New York Tax-Free Income Fund." Additional information appears
under "Capital Structure" in the prospectus.
Yield is a measure of the net investment income per share earned by a Fund over
a specific one month or 30-day period expressed as a percentage of the maximum
offering price of the Fund's shares (which is net asset value for Class B and
Class C shares) at the end of the period. Tax equivalent yield is the yield that
a taxable investment must generate in order to equal a Fund's yield for an
investor in a stated federal income tax bracket for the Municipal Fund, the
Intermediate Municipal Fund, the Florida Fund or the Texas Fund, in a stated
combined federal and state income tax bracket for the California Fund, the Ohio
Fund, the Michigan Fund, the New Jersey Fund and the Pennsylvania Fund, and in a
stated combined federal, New York State and New York City income tax bracket for
the New York Fund. The tax equivalent yield for the Florida Fund does not
include the potential effect of an exemption from the Florida intangibles tax.
Average annual total return and total return measure both the net investment
income generated by, and the effect of any realized or unrealized appreciation
or depreciation of, the underlying investments in a Fund.
A Fund's yield is computed in accordance with a standardized method prescribed
by rules of the Securities and Exchange Commission. The yields are shown below
based upon the one month period ended September 30, 1996 for the Municipal and
Intermediate Municipal Funds and August 31, 1996 for the State Funds.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Municipal Fund....................................................... 4.83% 4.19% 4.20%
Intermediate Municipal Fund.......................................... 3.98% 3.29% 3.33%
California Fund...................................................... 4.68% 4.01% 4.01%
Florida Fund......................................................... 4.73% 4.10% 4.18%
Michigan Fund........................................................ 3.85% 3.30% 3.48%
New Jersey Fund...................................................... 4.04% 3.37% 3.57%
New York Fund........................................................ 4.68% 4.01% 4.04%
Ohio Fund............................................................ 4.62% 3.99% 3.98%
Pennsylvania Fund.................................................... 4.10% 3.49% 3.52%
Texas Fund........................................................... 4.56% 3.88% 3.91%
</TABLE>
A Fund's yield is computed by dividing the net investment income per share
earned during the specified one month or 30-day period by the maximum offering
price per share (which is net asset value for Class B and Class C shares) on the
last day of the period, according to the following formula:
<TABLE>
<S> <C> <C>
a - b
YIELD = 2[( ------- +1)(6) - 1
cd
</TABLE>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period
(which is net asset value for Class B and Class C shares).
In computing the foregoing yield, each Trust follows certain standardized
accounting practices specified by Securities and Exchange Commission rules.
These practices are not necessarily consistent with those that each Trust uses
to prepare its annual and interim financial statements in conformity with
generally accepted accounting principles.
B-18
<PAGE> 72
Each Fund's tax equivalent yield is computed by dividing that portion of the
Fund's yield (computed as described above) that is tax-exempt by (one minus the
stated federal income tax rate) and adding the result to that portion, if any,
of the yield of the Fund that is not tax-exempt. The California Fund's, Michigan
Fund's, New Jersey Fund's, New York Fund's, Ohio Fund's and Pennsylvania Fund's
Class A shares' tax equivalent yield is computed by dividing that portion of the
Fund's Class A shares' yield (computed as described above) that is tax-exempt by
(one minus the stated combined federal, state and, if applicable, city income
tax rate) and adding the result to that portion, if any, of the yield of the
Class A shares of the Fund that is not tax-exempt. For additional information
concerning tax-exempt yields, see "Tax-Exempt versus Taxable Yield" below. The
tax equivalent yields for the Municipal and Intermediate Municipal Funds for the
one month period ended September 30, 1996 and for the State Funds for the one
month period ended August 31, 1996 are set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
FUND--TAX TYPE (MARGINAL RATE) SHARES SHARES SHARES
- -------------------------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Municipal--Federal (37.1%)................................................ 7.68% 6.66% 6.68%
Intermediate Municipal Fund--Federal (37.1%).............................. 6.33% 5.23% 5.29%
California--Combined (42.9%).............................................. 8.20% 7.02% 7.02%
California--Federal only (37.1%).......................................... 7.44% 6.38% 6.38%
Florida--Federal only (37.1%)............................................. 7.52% 6.52% 6.65%
Michigan--Combined (39.9%)................................................ 6.41% 5.49% 5.79%
Michigan--Federal only (37.1%)............................................ 6.12% 5.25% 5.53%
New Jersey--Combined (40.6%).............................................. 6.80% 5.67% 6.01%
New Jersey--Federal only (37.1%).......................................... 6.42% 5.36% 5.68%
New York--Combined (44.0%)................................................ 8.36% 7.16% 7.21%
New York--Federal only (37.1%)............................................ 7.44% 6.38% 6.42%
Ohio--Combined (41.2%).................................................... 7.86% 6.79% 6.77%
Ohio--Federal only (37.1%)................................................ 7.34% 6.34% 6.33%
Pennsylvania--Combined (38.9%)............................................ 6.71% 5.71% 5.76%
Pennsylvania--Federal only (37.1%)........................................ 6.52% 5.55% 5.60%
Texas--Federal only (37.1%)............................................... 7.25% 6.17% 6.22%
</TABLE>
A Fund's average annual total return quotation is computed in accordance with a
standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the Fund's shares on the first day of the period, adjusting to deduct the
maximum sales charge (in the case of Class A shares), and computing the
"redeemable value" of that investment at the end of the period. The redeemable
value in the case of Class B shares includes the effect of the applicable
contingent deferred sales charge that may be imposed at the end of the period.
The redeemable value is then divided by the initial investment, and this
quotient is taken to the Nth root (N representing the number of years in the
period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value on the reinvestment
dates during the period. Average annual total return figures for various periods
are set forth in the table below.
Calculation of a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the Fund's "Financial Highlights" table
in the Fund's financial statements and prospectus. Total return performance for
a specific period is calculated by first taking a hypothetical investment
("initial investment") in the Fund's shares on the first day of the period,
either adjusting or not adjusting to deduct the maximum sales charge (in the
case of Class A shares), and computing the "ending value" of that investment at
the end of the period. The total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The ending value in the case of Class B shares may or may not include the effect
of the applicable contingent deferred sales charge that
B-19
<PAGE> 73
may be imposed at the end of the period. The calculation assumes that all income
and capital gains dividends paid by the Fund have been reinvested at net asset
value on the reinvestment dates during the period. Total return may also be
shown as the increased dollar value of the hypothetical investment over the
period. Total return calculations that do not include the effect of the sales
charge for Class A shares or the contingent deferred sales charge for Class B
shares would be reduced if such charge were included. Total return figures for
various periods are set forth in the table below.
A Fund's performance figures are based upon historical results and are not
necessarily representative of future performance. A Fund's Class A shares are
sold at net asset value plus a maximum sales charge of 4.5% (2.75% for the
Intermediate Municipal Fund) of the offering price. Class B shares and Class C
shares are sold at net asset value. Redemptions of Class B shares may be subject
to a contingent deferred sales charge that is 4% in the first year following the
purchase, declines by a specified percentage each year thereafter and becomes
zero after six years. Redemption of Class C shares may be subject to a 1%
contingent deferred sales charge in the first year following purchase. Returns
and net asset value will fluctuate. Factors affecting a Fund's performance
include general market conditions, operating expenses and investment management.
Any additional fees charged by a dealer or other financial services firm would
reduce the returns described in this section. Shares of a Fund are redeemable at
the then current net asset value of the Fund, which may be more or less than
original cost.
The figures below show performance information for various periods. Comparative
information with respect to certain indices is also included. There are
differences and similarities between the investments which a Fund may purchase
and the investments measured by the indexes which are described herein. The
Consumer Price Index is generally considered to be a measure of inflation. The
Salomon Brothers High Grade Corporate Bond Index is an unmanaged index that
generally represents the performance of high grade long-term taxable bonds
during various market conditions. The Lehman Brothers Municipal Bond Index is an
unmanaged index that generally represents the performance of high grade
intermediate and long-term municipal bonds during various market conditions.
IBC's All Tax-Free Money Fund Averages(R) is currently based upon the total
return, assuming reinvestment of dividends, of 382 tax-free money market funds.
The Towers Data Systems U.S. Treasury Bill Index is an unmanaged index based on
the average monthly yield of U.S. Treasury Bills maturing in six months. The
market prices and yields of taxable and tax-exempt bonds will fluctuate. There
are important differences among the various investments included in the indexes
that should be considered in reviewing this information. For more information,
see the disclosure after the charts below. The net asset value and returns of
each class of shares of a Fund will fluctuate. No adjustment has been made for
taxes, if any, payable on dividends. Each period indicated was one of
fluctuating securities prices and interest rates.
B-20
<PAGE> 74
MUNICIPAL FUND--SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Initial Income Ending Percentage Ending Percentage
TOTAL $10,000 Capital Gain Dividends Value Increase Value Increase
RETURN Investment Dividends Reinvested (adjusted) (adjusted) (unadjusted) (unadjusted)
TABLE (1) Reinvested (2) (1) (1) (1) (1)
- ------------------ ---------- ------------ ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 9,723 $1,834 $ 33,887 $ 45,444 354.4% $ 47,580 375.8%
Ten Years 10,119 792 9,700 20,611 106.1 21,576 115.8
Five Years 9,672 526 3,498 13,701 37.0 14,342 43.4
One Year 9,577 9 536 10,122 1.2 10,600 6.0
Year to Date 9,221 0 382 9,603 (4.0) 10,058 0.6
CLASS B SHARES
Life of Fund(++) 10,201 50 1,171 11,122 11.2 11,422 14.2
One Year 10,019 10 468 10,197 2.0 10,497 5.0
Year to Date 9,648 0 332 9,594 (4.1) 9,980 (0.2)
CLASS C SHARES
Life of Fund(++) 10,230 50 1,184 * * 11,464 14.6
One Year 10,020 10 470 * * 10,500 5.0
Year to Date 9,649 0 334 9,887 (1.1) 9,983 (0.2)
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
------------------------------------------------------------------------------------
Salomon
TOTAL Consumer Bros. IBC's U.S. Towers Data
RETURN Price High Grade Lehman Bros. Money Fund T-Bill Systems
TABLE Index(3) Corp.(4) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- -------- ---------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 180.4% 597.3% *% * % 329.0% 375.6%
Ten Years 42.7 150.0 113.7 45.0 73.7 75.8
Five Years 14.7 52.8 43.2 14.2 24.2 23.2
One Year 2.7 3.7 6.0 3.1 5.2 5.2
Year to Date 2.5 (2.8) 1.8 2.2 2.6 2.6
</TABLE>
<TABLE>
<CAPTION>
Salomon Towers
Bros. IBC's Data
AVERAGE ANNUAL Fund Fund Fund Consumer High Lehman Money U.S. Systems
TOTAL RETURN Class A Class B Class C Price Grade Bros. Fund T-Bill CD
TABLE Shares Shares Shares Index(3) Corp.(4) Muni(5) Index(6) Index(7) Index(8)
- ---------------- -------- ------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund
Class A(+)(++) 7.7% * % * % 5.2% 10.0% *% * % 7.4% 7.9%
Class B & C
(5-31-94) * 4.7 6.0 2.8 9.7 7.3 3.1 5.7 5.7
Ten Years 7.5 * * 3.6 9.6 7.9 3.8 5.7 5.8
Five Years 6.5 * * 2.8 8.8 7.5 2.8 4.4 4.3
One Year 1.2 2.0 5.0 2.7 3.7 6.0 3.1 5.2 5.2
</TABLE>
- ---------------
+ Since April 20, 1976 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
* Not applicable.
See footnotes following tables.
B-21
<PAGE> 75
INTERMEDIATE MUNICIPAL FUND--SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Initial Income Ending Percentage Ending Percentage
TOTAL $10,000 Capital Gain Dividends Value Increase Value Increase
RETURN Investment Dividends Reinvested (adjusted) (adjusted) (unadjusted) (unadjusted)
TABLE (1) Reinvested (2) (1) (1) (1) (1)
- ----------------- ---------- ------------ ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 10,296 $0 $1,054 $ 11,350 13.5% $ 11,673 16.7%
One Year 9,608 0 518 10,126 1.3 10,415 4.2
Year to Date 9,499 0 322 9,821 (1.8) 10,098 1.0
CLASS B SHARES
Life of Fund(+) 10,589 0 895 11,184 11.8 11,484 14.8
One Year 9,882 452 10,038 0.4 10,334 3.3
Year to Date 9,777 0 270 9,656 (3.4) 10,047 0.5
CLASS C SHARES
Life of Fund(+) 10,590 0 917 * * 11,507 15.1
One Year 9,873 453 * * 10,326 3.3
Year to Date 9,767 0 271 9,940 (0.6) 10,038 0.4
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------------------------------
Salomon
TOTAL Consumer Bros. IBC's U.S. Towers Data
RETURN Price High Grade Lehman Bros. Money Fund T-Bill Systems
TABLE Index(3) Corp.(4) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- -------- ------------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 5.2% 25.8% 20.0% 6.2% 11.4% 11.2%
One Year 2.7 3.7 6.0 3.1 5.2 5.2
Year to Date 2.5 (2.8) 1.8 2.2 2.6 2.6
</TABLE>
<TABLE>
<CAPTION>
IBC's
AVERAGE ANNUAL Fund Fund Fund Consumer Salomon Bros. Money U.S.
TOTAL RETURN Class A Class B Class C Price High Grade Lehman Bros. Fund T-Bill
TABLE Shares Shares Shares Index(3) Corp.(4) Muni(5) Index(6) Index(7)
- ----------------- ------- ------- ------- -------- ------------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 6.8% 6.0%(9) 7.6% 2.7% 12.7% 10.0% 3.3% 5.8%
One Year 1.3 0.4 3.3 2.7 3.7 6.0 3.1 5.2
<CAPTION>
AVERAGE ANNUAL Towers Data
TOTAL RETURN Systems
TABLE CD Index(8)
- ----------------- -----------
<S> <C>
Life of Fund(+) 5.7%
One Year 5.2
</TABLE>
- ---------------
+ Since November 1, 1994 for all classes.
* Not applicable.
See footnotes following tables.
B-22
<PAGE> 76
CALIFORNIA FUND--AUGUST 31, 1996
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending Percentage
RETURN $10,000 Dividends Dividends Value Increase Value Increase
TABLE Investment(1) Reinvested Reinvested(2) (adjusted)(1) (adjusted)(1) (unadjusted)(1) (unadjusted)(1)
- ----------------- ---------- ------------ ---------- ---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 11,187 $1,978 $ 17,974 $ 31,139 211.4% $ 32,610 226.1%
Ten Years 9,767 1,281 9,123 20,171 101.7 21,116 111.2
Five Years 9,556 664 3,365 13,585 35.9 14,216 42.2
One Year 9,493 32 585 10,110 1.1 10,592 5.9
Year to Date 9,126 0 324 9,450 (5.5) 9,894 (1.1)
CLASS B SHARES
Life of Fund(++) 10,125 89 1,175 11,089 10.9 11,389 13.9
One Year 9,959 33 524 10,217 2.2 10,516 5.2
Year to Date 9,556 0 282 9,456 (5.4) 9,838 (1.6)
CLASS C SHARES
Life of Fund(++) 10,111 89 1,168 * * 11,368 13.7
One Year 9,959 33 523 * * 10,515 5.2
Year to Date 9,556 0 281 9,741 (2.6) 9,837 (1.6)
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------------
TOTAL Consumer IBC's U.S. Towers Data
RETURN Price Lehman Bros. Money Fund T-Bill Systems
TABLE Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- -------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Life of Fund(+) 60.7% 230.4% 72.8% 130.0% 137.4%
Ten Years 43.4 111.3 45.1 73.7 75.8
Five Years 15.2 43.1 14.3 24.2 23.2
One Year 2.9 5.2 3.1 5.2 5.2
Year to Date 2.5 0.4 2.5 2.6 2.6
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL Fund Fund Fund Consumer Lehman IBC's U.S. Towers Data
TOTAL RETURN Class A Class B Class C Price Brothers Money Fund T-Bill Systems
TABLE Shares Shares Shares Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- ------- ------- ------- -------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund
Class A(+)(++) 8.8% *% *% 3.6% 9.2% 4.1% 6.4% 6.6%
Class B & C
(5-31-94) * 4.7 5.8 2.9 6.9 3.1 5.9 5.9
Ten Years 7.3 * * 3.7 7.8 3.8 5.7 5.8
Five Years 6.3 * * 2.9 7.4 2.9 4.4 4.3
One Year 1.1 2.2 5.2 2.9 5.2 3.1 5.2 5.2
</TABLE>
- ---------------
+ Since February 17, 1983 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
* Not applicable.
See footnotes following tables.
B-23
<PAGE> 77
FLORIDA FUND--AUGUST 31, 1996
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(1) Reinvested Reinvested(2) (adjusted)(1) (adjusted)(1) (unadjusted)(1)
- ----------------- ------------- ------------ ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $10,261 $554 $ 3,842 $14,657 46.6% $15,352
Five Years 10,059 531 3,465 14,055 40.6 14,723
One Year 9,497 87 526 10,110 1.1 10,583
Year to Date 9,149 0 310 9,459 (5.4) 9,902
CLASS B SHARES
Life of Fund(++) 10,059 244 1,070 11,073 10.7 11,373
One Year 9,931 91 462 10,181 1.8 10,484
Year to Date 9,577 0 268 9,462 (5.4) 9,845
CLASS C SHARES
Life of Fund(++) 10,069 244 1,091 * * 11,404
One Year 9,941 91 465 * * 10,497
Year to Date 9,586 0 268 9,758 (2.4) 9,854
<CAPTION>
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(1)
- ----------------- ---------------
<S> <C<C>
Life of Fund(+) 53.5%
Five Years 47.2
One Year 5.8
Year to Date (1.0)
Life of Fund(++) 13.7
One Year 4.8
Year to Date (1.6)
Life of Fund(++) 14.0
One Year 5.0
Year to Date (1.5)
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------------
TOTAL Consumer IBC's U.S. Towers Data
RETURN Price Lehman Bros. Money Fund T-Bill Systems
TABLE Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- -------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Life of Fund(+) 16.4% 47.9% 15.9% 27.8% 26.8%
Five Years 15.2 43.1 14.3 24.2 23.2
One Year 2.9 5.2 3.1 5.2 5.2
Year to Date 2.5 0.4 2.5 2.6 2.6
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL Fund Fund Fund Consumer Lehman IBC's U.S. Towers Data
TOTAL RETURN Class A Class B Class C Price Brothers Money Fund T-Bill Systems
TABLE Shares Shares Shares Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- ------- ------- ------- -------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund
Class A(+)(++) 7.4% * % * % 2.9% 7.6% 2.8% 4.7% 4.5%
Class B & C
(5-31-94) * 4.6 6.0 2.9 6.9 3.1 5.9 5.9
Five Years 7.1 * * 2.9 7.4 2.9 4.4 4.3
One Year 1.1 1.8 5.0 2.9 5.2 3.1 5.2 5.2
</TABLE>
- ---------------
+ Since April 25, 1991 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
* Not applicable.
See footnotes following tables.
B-24
<PAGE> 78
MICHIGAN FUND--AUGUST 31, 1996
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(1) Reinvested Reinvested(2) (adjusted)(1) (adjusted)(1) (unadjusted)(1)
- ----------------- -------------- ------------ ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 9,970 $0 $ 677 $10,647 6.5% $11,151
One Year 9,706 0 435 10,141 1.4 10,619
Year to Date 9,219 0 257 9,476 (5.2) 9,919
CLASS B SHARES
Life of Fund(+) 10,432 0 584 10,716 7.2 11,016
One Year 10,143 0 376 10,219 2.2 10,519
Year to Date 9,640 0 220 9,474 (5.3) 9,860
CLASS C SHARES
Life of Fund(+) 10,432 0 592 * * 11,024
One Year 10,153 0 383 * * 10,536
Year to Date 9,640 0 226 9,770 (2.3) 9,866
<CAPTION>
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(1)
- ----------------- ---------------
<S> <C<C>
Life of Fund(+) 11.5%
One Year 6.2
Year to Date (0.8)
Life of Fund(+) 10.2
One Year 5.2
Year to Date (1.4)
Life of Fund(+) 10.2
One Year 5.4
Year to Date (1.3)
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------------
TOTAL Consumer IBC's U.S. Towers Data
RETURN Price Lehman Bros. Money Fund T-Bill Systems
TABLE Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- -------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Life of Fund(+) 4.2% 11.4% 4.9% 8.0% 7.9%
One Year 2.9 5.2 3.1 5.2 5.2
Year to Date 2.5 0.4 2.5 2.6 2.6
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL Fund Fund Fund Consumer Lehman IBC's U.S. Towers Data
TOTAL RETURN Class A Class B Class C Price Brothers Money Fund T-Bill Systems
TABLE Shares Shares Shares Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- ------- ------- ------- -------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 4.4% 4.7%(9) 6.9% 2.9% 7.7% 3.2% 5.4% 5.3%
One Year 1.4 2.2 5.4 2.9 5.2 3.1 5.2 5.2
</TABLE>
- ---------------
+ Since March 15, 1995 for all classes.
* Not applicable.
See footnotes following tables.
B-25
<PAGE> 79
NEW JERSEY FUND--AUGUST 31, 1996
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(1) Reinvested Reinvested(2) (adjusted)(1) (adjusted)(1) (unadjusted)(1)
- ----------------- ------------- ------------ ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 9,900 $0 $ 666 $10,566 5.7% $11,066
One Year 9,648 0 427 10,075 0.8 10,550
Year to Date 9,179 0 253 9,432 (5.7) 9,874
CLASS B SHARES
Life of Fund(+) 10,400 0 571 10,671 6.7 10,971
One Year 10,113 0 367 10,180 1.8 10,480
Year to Date 9,621 0 214 9,450 (5.5) 9,835
CLASS C SHARES
Life of Fund(+) 10,400 0 586 * * 10,986
One Year 10,113 0 376 * * 10,489
Year to Date 9,620 0 223 9,747 (2.5) 9,843
<CAPTION>
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(1)
- ----------------- ---------------
<S> <C<C>
Life of Fund(+) 10.7%
One Year 5.5
Year to Date (1.3)
Life of Fund(+) 9.7
One Year 4.8
Year to Date (1.7)
Life of Fund(+) 9.9
One Year 4.9
Year to Date (1.6)
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------------
TOTAL Consumer IBC's U.S. Towers Data
RETURN Price Lehman Bros. Money Fund T-Bill Systems
TABLE Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- -------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Life of Fund(+) 4.2% 11.4% 4.9% 8.0% 7.9%
One Year 2.9 5.2 3.1 5.2 5.2
Year to Date 2.5 0.4 2.5 2.6 2.6
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL Fund Fund Fund Consumer Lehman IBC's U.S. Towers Data
TOTAL RETURN Class A Class B Class C Price Brothers Money Fund T-Bill Systems
TABLE Shares Shares Shares Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- ------- ------- ------- -------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 3.8% 4.4%(9) 6.6% 2.9% 7.7% 3.2% 5.4% 5.3%
One Year 0.8 1.8 4.9 2.9 5.2 3.1 5.2 5.2
</TABLE>
- ---------------
+ Since March 15, 1995 for all classes.
* Not applicable.
See footnotes following tables.
B-26
<PAGE> 80
NEW YORK FUND--AUGUST 31, 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(1) Reinvested Reinvested(2) (adjusted)(1) (adjusted)(1) (unadjusted)(1)
- ----------------- ---------- ------------ ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 10,714 $847 $ 9,538 $21,099 111.0% $22,098
Ten Years 10,123 781 8,549 19,453 94.5 20,362
Five Years 9,780 531 3,343 13,654 36.5 14,297
One Year 9,426 95 531 10,052 0.5 10,526
Year to Date 9,103 0 321 9,424 (5.8) 9,871
CLASS B SHARES
Life of Fund(++) 9,898 232 1,083 10,910 9.1 11,213
One Year 9,870 99 467 10,140 1.4 10,436
Year to Date 9,535 0 279 9,433 (5.7) 9,814
CLASS C SHARES
Life of Fund(++) 9,889 232 1,088 * * 11,209
One Year 9,871 99 468 * * 10,438
Year to Date 9,534 0 281 9,720 (2.8) 9,815
<CAPTION>
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(1)
- ----------------- ---------------
<S> <C<C>
Life of Fund(+) 121.0%
Ten Years 103.6
Five Years 43.0
One Year 5.3
Year to Date (1.3)
Life of Fund(++) 12.1
One Year 4.4
Year to Date (1.9)
Life of Fund(++) 12.1
One Year 4.4
Year to Date (1.9)
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------------
TOTAL Consumer IBC's U.S. Towers Data
RETURN Price Lehman Bros. Money Fund T-Bill Systems
TABLE Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- -------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Life of Fund(+) 43.9% 143.1% 49.5% 79.2% 81.4%
Ten Years 43.4 111.3 45.1 73.7 75.8
Five Years 15.2 43.1 14.3 24.2 23.2
One Year 2.9 5.2 3.1 5.2 5.2
Year to Date 2.5 0.4 2.5 2.6 2.6
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL Fund Fund Fund Consumer Lehman IBC's U.S. Towers Data
TOTAL RETURN Class A Class B Class C Price Brothers Money Fund T-Bill Systems
TABLE Shares Shares Shares Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- ------- ------- ------- -------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund
Class A(+)(++) 7.3% * % * % 3.5% 8.7% 3.8% 5.6% 5.7%
Class B & C
(5-31-94) * 3.9 5.2 2.9 6.9 3.1 5.9 5.9
Ten Years 6.9 * * 3.7 7.8 3.8 5.7 5.8
Five Year 6.4 * * 2.9 7.4 2.9 4.4 4.3
One Year 0.5 1.4 4.4 2.9 5.2 3.1 5.2 5.2
</TABLE>
- ---------------
+ Since December 31, 1985 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
* Not applicable.
See footnotes following tables.
B-27
<PAGE> 81
OHIO FUND--AUGUST 31, 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(1) Reinvested Reinvested(2) (adjusted)(1) (adjusted)(1) (unadjusted)(1)
- ----------------- ---------- ------------ ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 9,980 $0 $ 1,959 $11,939 19.4% $12,504
One Year 9,669 0 471 10,140 1.4 10,616
Year to Date 9,220 0 299 9,519 (4.8) 9,963
CLASS B SHARES
Life of Fund(++) 10,408 0 1,094 11,202 12.0 11,502
One Year 10,123 0 407 10,230 2.3 10,530
Year to Date 9,650 0 258 9,522 (4.8) 9,908
CLASS C SHARES
Life of Fund(++) 10,409 0 1,091 * * 11,500
One Year 10,122 0 406 * * 10,528
Year to Date 9,650 0 256 9,809 (1.9) 9,906
<CAPTION>
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(1)
- ----------------- ---------------
<S> <C<C>
Life of Fund(+) 25.0%
One Year 6.2
Year to Date (0.4)
Life of Fund(++) 15.0
One Year 5.3
Year to Date (0.9)
Life of Fund(++) 15.0
One Year 5.3
Year to Date (0.9)
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------------
TOTAL Consumer IBC's U.S. Towers Data
RETURN Price Lehman Bros. Money Fund T-Bill Systems
TABLE Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- -------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Life of Fund(+) 9.5% 21.1% 9.5% 17.6% 17.0%
One Year 2.9 5.2 3.1 5.2 5.2
Year to Date 2.5 0.4 2.5 2.6 2.6
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL Fund Fund Fund Consumer Lehman IBC's U.S. Towers Data
TOTAL RETURN Class A Class B Class C Price Brothers Money Fund T-Bill Systems
TABLE Shares Shares Shares Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- ------- ------- ------- -------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund
Class A(+)(++) 5.3% *% *% 2.7% 5.7% 2.8% 4.8% 4.7%
Class B & C
(5-31-94) * 5.2 6.4 2.9 6.9 3.1 5.9 5.9
One Year 1.4 2.3 5.3 2.9 5.2 3.1 5.2 5.2
</TABLE>
- ---------------
+ Since March 22, 1993 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
* Not applicable.
See footnotes following tables.
B-28
<PAGE> 82
PENNSYLVANIA FUND--AUGUST 31, 1996
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending Percentage
RETURN $10,000 Dividends Dividends Value Increase Value Increase
TABLE Investment(1) Reinvested Reinvested(2) (adjusted)(1) (adjusted)(1) (unadjusted)(1) (unadjusted)(1)
- ----------------- ---------- ------------ ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 10,000 $0 $683 $ 10,683 6.8% $ 11,189 11.9%
One Year 9,688 0 438 10,126 1.3 10,601 6.0
Year to Date 9,179 0 263 9,442 (5.6) 9,889 (1.1)
CLASS B SHARES
Life of Fund(+) 10,473 0 587 10,760 7.6 11,060 10.6
One Year 10,153 0 376 10,229 2.3 10,529 5.3
Year to Date 9,623 0 223 9,461 (5.4) 9,846 (1.5)
CLASS C SHARES
Life of Fund(++) 10,474 0 590 * * 11,064 10.6
One Year 10,143 0 376 * * 10,519 5.2
Year to Date 9,613 0 226 9,743 (2.6) 9,839 (1.6)
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------------
TOTAL Consumer IBC's U.S. Towers Data
RETURN Price Lehman Bros. Money Fund T-Bill Systems CD
TABLE Index(3) Muni(5) Index(6) Index(7) Index
- ----------------- -------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Life of Fund(+) 4.2% 11.4% 4.9% 8.0% 7.9%
One Year 2.9 5.2 3.1 5.2 5.2
Year to Date 2.5 0.4 2.5 2.6 2.6
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL Fund Fund Fund Consumer Lehman IBC's U.S. Towers Data
TOTAL RETURN Class A Class B Class C Price Brothers Money Fund T-Bill Systems
TABLE Shares Shares Shares Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- ------- ------- ------- -------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 4.6% 5.0%(9) 7.1% 2.9% 7.7% 3.2% 5.4% 5.3%
One Year 1.3 2.3 5.2 2.9 5.2 3.1 5.2 5.2
</TABLE>
- ---------------
+ Since March 15, 1995 all classes.
* Not applicable.
See footnotes following tables.
B-29
<PAGE> 83
TEXAS FUND--AUGUST 31, 1996
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(1) Reinvested Reinvested(2) (adjusted)(1) (adjusted)(1) (unadjusted)(1)
- ----------------- ------------- ------------ ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $10,412 $308 $ 3,468 $14,188 41.9% $14,860
One Year 9,496 87 640 10,223 2.2 10,704
Year to Date 9,266 0 307 9,573 (4.3) 10,022
CLASS B SHARES
Life of Fund(++) 10,187 179 1,216 11,282 12.8 11,582
One Year 9,942 90 579 10,313 3.1 10,611
Year to Date 9,710 0 263 9,585 (4.2) 9,973
CLASS C SHARES
Life of Fund(++) 10,188 179 1,226 * * 11,593
One Year 9,943 90 580 * * 10,613
Year to Date 9,700 0 264 9,867 (1.3) 9,964
<CAPTION>
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(1)
- ----------------- ---------------
<S> <C<C>
Life of Fund(+) 48.6%
One Year 7.0
Year to Date 0.2
Life of Fund(++) 15.8
One Year 6.1
Year to Date (0.3)
Life of Fund(++) 15.9
One Year 6.1
Year to Date (0.4)
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------------
TOTAL Consumer IBC's U.S. Towers Data
RETURN Price Lehman Bros. Money Fund T-Bill Systems
TABLE Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- -------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Life of Fund(+) 14.5% 40.0% 13.6% 24.2% 23.2%
One Year 2.9 5.2 3.1 5.2 5.2
Year to Date 2.5 0.4 2.5 2.6 2.6
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL Fund Fund Fund Consumer Lehman IBC's U.S. Towers Data
TOTAL RETURN Class A Class B Class C Price Brothers Money Fund T-Bill Systems
TABLE Shares Shares Shares Index(3) Muni(5) Index(6) Index(7) CD Index(8)
- ----------------- ------- ------- ------- -------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund
Class A(+)(++) 7.5% *% *% 2.8% 7.2% 2.8% 4.6% 4.4%
Class B & C
(5-31-94) * 5.5 6.8 2.9 6.9 3.1 5.9 5.9
One Year 2.2 3.1 6.1 2.9 5.2 3.1 5.2 5.2
</TABLE>
- ---------------
* Not available.
+ Since November 1, 1991 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
* Not applicable.
See footnotes following tables.
FOOTNOTES FOR ALL FUNDS
(1) The Initial Investment and adjusted amounts for Class A shares were adjusted
for the maximum initial sales charge at the beginning of the period, which is
4.5%. The Initial Investment for Class B and Class C shares was not adjusted.
Amounts were adjusted for Class B shares for the contingent deferred sales
charge that may be imposed at the end of the period based upon the schedule for
shares sold currently, see "Redemption or Repurchase of Shares" in the
prospectus. No adjustments were made to Class C shares.
(2) Includes short-term capital gain dividends, if any.
(3) 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. Source is Towers Data Systems.
(4) Salomon Brothers High Grade Corporate Bond Index is on a total return basis
with all dividends reinvested and is comprised of high grade long-term (taxable)
industrial and utility bonds rated in the top two rating categories. This index
is unmanaged. Source is Towers Data Systems.
(5) Lehman Brothers Municipal Bond Index is on a total return basis with all
dividends reinvested and is comprised of high grade long-term municipal bonds.
This index is unmanaged. Source is Towers Data Systems.
B-30
<PAGE> 84
(6) IBC's All Tax-Free Money Fund Averages(R) is currently based upon the total
return, assuming reinvestment of dividends, of 382 tax-free money market funds.
Source is IBC Financial Data, Inc.
(7) U.S. Treasury Bill Index is an unmanaged index based on the average monthly
yield of U.S. Treasury Bills maturing in 6 months. Source is Towers Data
Systems.
(8) Certificate of Deposit Index is an unmanaged index based on the average
monthly yield of 6 month certificates of deposit. Source is Towers Data Systems.
Investors may want to compare a Fund's performance to that of certificates of
deposit offered by banks and other depository institutions. Certificates of
deposit represent an alternative (taxable) income producing product.
Certificates of deposit may offer fixed or variable interest rates and principal
is guaranteed and may be insured. Withdrawal of the deposits prior to maturity
normally will be subject to a penalty. Rates offered by banks and other
depository institutions are subject to change at any time specified by the
issuing institution. The shares of a Fund are not insured and net asset value as
well as yield will fluctuate. Shares of a Fund are redeemable at net asset value
which may be more or less than original cost. Redemption of Class B and Class C
shares may be subject to a contingent deferred sales charge. The bonds held by a
Fund are generally of longer term than most certificates of deposit and may
reflect longer term market interest rate fluctuations.
Investors also may want to compare the performance of a Fund to that of U.S.
Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. The net asset value of a Fund will fluctuate. Shares of a Fund are
redeemable at net asset value which may be more or less than original cost.
Redemption of Class B and Class C shares may be subject to a contingent deferred
sales charge. Each Fund's yield will also fluctuate.
Investors may also want to compare performance of a Fund to that of money market
funds. Money market fund yields will fluctuate and shares are not insured, but
share values usually remain stable.
From time to time, a Fund may compare its after-tax total return to that of
taxable investments, including but not limited to certificates of deposit,
taxable money market funds or U.S. Treasury bills. Tax equivalent total return
represents the total return that would be generated by a taxable investment that
produced the same amount of after-tax income and change in net asset value as
the Fund in each period.
B-31
<PAGE> 85
The following tables illustrate an assumed $10,000 investment in Class A shares
of each Fund which includes the maximum sales charge of 4.5% (2.75% for the
Intermediate Municipal Fund), with income and capital gain dividends reinvested
in additional shares. Each table covers the period from commencement of
operations of the Fund to September 30, 1996 for the Municipal and the
Intermediate Municipal Funds and to August 31, 1996 for the State Funds.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNICIPAL FUND
---------- DIVIDENDS---------- ------ CUMULATIVE VALUE OF SHARES ACQUIRED ------
ANNUAL ANNUAL
YEAR INCOME CAPITAL GAIN REINVESTED REINVESTED
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME CAPITAL GAIN TOTAL
12/31+ REINVESTED* REINVESTED INVESTMENT DIVIDENDS DIVIDENDS* VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1976 $ 267 $ 0 $ 10,133 $ 282 $ 0 $10,415
1977 561 0 10,343 854 0 11,197
1978 596 93 9,550 1,360 88 10,998
1979 669 0 8,882 1,887 80 10,849
1980 810 0 7,067 2,217 65 9,349
1981 947 0 5,740 2,622 52 8,414
1982 1,123 0 7,334 4,639 67 12,040
1983 1,308 0 7,583 6,105 69 13,757
1984 1,301 0 7,630 7,477 70 15,177
1985 1,423 0 8,490 9,821 78 18,389
1986 1,543 0 9,369 12,444 85 21,898
1987 1,664 0 8,948 13,543 82 22,573
1988 1,797 0 9,006 15,437 82 24,525
1989 1,855 0 9,330 17,881 86 27,297
1990 1,956 0 9,273 19,756 85 29,114
1991 1,930 351 9,712 22,679 444 32,834
1992 2,240 378 9,779 25,090 827 35,694
1993 2,528 868 10,144 28,554 1,711 40,409
1994 2,307 141 8,996 27,528 1,659 38,183
1995 2,308 43 10,067 33,215 1,899 45,181
September 30, 1996 1,810 0 9,723 33,887 1,834 45,444
</TABLE>
+ Unless otherwise noted.
* Includes short-term capital gain dividends, if any.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE MUNICIPAL FUND
---------- DIVIDENDS---------- ------ CUMULATIVE VALUE OF SHARES ACQUIRED ------
ANNUAL ANNUAL
YEAR INCOME CAPITAL GAIN REINVESTED REINVESTED
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME CAPITAL GAIN TOTAL
12/31+ REINVESTED* REINVESTED INVESTMENT DIVIDENDS DIVIDENDS* VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 $ 67 $ 0 $ 9,785 $ 68 $ 0 $ 9,853
1995 611 0 10,543 698 0 11,241
September 30, 1996 374 0 10,296 1,054 0 11,350
</TABLE>
+ Unless otherwise noted.
* Includes short-term capital gain dividends, if any.
- --------------------------------------------------------------------------------
B-32
<PAGE> 86
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA FUND
---------- DIVIDENDS ---------- ------ CUMULATIVE VALUE OF SHARES ACQUIRED ------
ANNUAL ANNUAL
YEAR INCOME CAPITAL GAIN REINVESTED REINVESTED
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME CAPITAL GAIN TOTAL
12/31+ REINVESTED* REINVESTED INVESTMENT DIVIDENDS DIVIDENDS* VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1983 $ 652 $ 0 $ 9,242 $ 645 $ 0 $ 9,888
1984 924 0 9,111 1,565 0 10,680
1985 1,036 0 10,184 2,845 0 13,029
1986 1,086 0 11,171 4,243 0 15,419
1987 1,189 0 10,781 5,284 0 16,065
1988 1,170 204 10,673 6,393 206 17,272
1989 1,273 236 10,964 7,840 449 19,252
1990 1,292 0 10,950 9,145 448 20,542
1991 1,371 76 11,408 10,936 543 22,887
1992 1,435 260 11,501 12,465 807 24,773
1993 1,614 1,016 11,746 14,322 1,823 27,891
1994 1,460 134 10,460 14,144 1,758 26,362
1995 1,789 101 11,706 17,695 2,070 31,471
August 31, 1996 1,076 0 11,187 17,974 1,978 31,139
</TABLE>
+ Unless otherwise noted.
* Includes short-term capital gain dividends, if any.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLORIDA FUND
---------- DIVIDENDS ---------- ------ CUMULATIVE VALUE OF SHARES ACQUIRED ------
ANNUAL ANNUAL
YEAR INCOME CAPITAL GAIN REINVESTED REINVESTED
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME CAPITAL GAIN TOTAL
12/31+ REINVESTED* REINVESTED INVESTMENT DIVIDENDS DIVIDENDS* VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1991 $ 452 $ 0 $ 10,043 $ 466 $ 0 $10,509
1992 666 39 10,274 1,153 39 11,466
1993 829 217 10,724 2,032 255 13,011
1994 649 173 9,648 2,451 403 12,502
1995 759 130 10,714 3,510 578 14,802
August 31, 1996 484 0 10,261 3,842 554 14,657
</TABLE>
+ Unless otherwise noted.
* Includes short-term capital gain dividends, if any.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MICHIGAN FUND
---------- DIVIDENDS---------- ------ CUMULATIVE VALUE OF SHARES ACQUIRED ------
ANNUAL ANNUAL
YEAR INCOME CAPITAL GAIN REINVESTED REINVESTED
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME CAPITAL GAIN TOTAL
12/31+ REINVESTED* REINVESTED INVESTMENT DIVIDENDS DIVIDENDS* VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 $ 385 $ 0 $ 10,332 $402 $ 0 $10,734
August 31, 1996 675 0 9,970 677 0 10,647
</TABLE>
+ Unless otherwise noted.
* Includes short-term capital gain dividends, if any.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY FUND
---------- DIVIDENDS---------- ------ CUMULATIVE VALUE OF SHARES ACQUIRED ------
ANNUAL ANNUAL
YEAR INCOME CAPITAL GAIN REINVESTED REINVESTED
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME CAPITAL GAIN TOTAL
12/31+ REINVESTED* REINVESTED INVESTMENT DIVIDENDS DIVIDENDS* VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 $ 382 $ 0 $ 10,301 $399 $ 0 $10,700
August 31, 1996 285 0 9,900 666 0 10,566
</TABLE>
+ Unless otherwise noted.
* Includes short-term capital gain dividends, if any.
- --------------------------------------------------------------------------------
B-33
<PAGE> 87
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW YORK FUND
---------- DIVIDENDS----------
ANNUAL ANNUAL ------ CUMULATIVE VALUE OF SHARES ACQUIRED ------
YEAR INCOME CAPITAL GAIN REINVESTED REINVESTED
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME CAPITAL GAIN TOTAL
12/31+ REINVESTED* REINVESTED INVESTMENT DIVIDENDS DIVIDENDS* VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1985 $ 0 $ 0 $ 9,550 $ 0 $ 0 $ 9,550
1986 434 0 10,304 449 0 10,753
1987 583 0 9,640 1,000 0 10,640
1988 606 0 9,831 1,632 0 11,463
1989 884 25 10,224 2,591 25 12,840
1990 930 0 10,083 3,494 25 13,602
1991 949 0 10,706 4,690 26 15,423
1992 1,025 84 10,937 5,826 111 16,876
1993 1,080 329 11,437 7,180 443 19,060
1994 996 220 10,171 7,331 615 18,117
1995 1,107 207 11,236 9,250 888 21,374
August 31, 1996 728 0 10,714 9,538 847 21,099
</TABLE>
+ Unless otherwise noted.
* Includes short-term capital gain dividends, if any.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OHIO FUND
---------- DIVIDENDS----------
ANNUAL ANNUAL ------ CUMULATIVE VALUE OF SHARES ACQUIRED ------
YEAR INCOME CAPITAL GAIN REINVESTED REINVESTED
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME CAPITAL GAIN TOTAL
12/31+ REINVESTED* REINVESTED INVESTMENT DIVIDENDS DIVIDENDS* VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 $ 421 $ 0 $ 10,080 $ 429 $ 0 $10,509
1994 565 0 9,186 938 0 10,124
1995 556 0 10,341 1,642 0 11,983
August 31, 1996 376 0 9,980 1,959 0 11,939
</TABLE>
+ Unless otherwise noted.
* Includes short-term capital gain dividends, if any.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA FUND
---------- DIVIDENDS----------
ANNUAL ANNUAL ------ CUMULATIVE VALUE OF SHARES ACQUIRED ------
YEAR INCOME CAPITAL GAIN REINVESTED REINVESTED
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME CAPITAL GAIN TOTAL
12/31+ REINVESTED* REINVESTED INVESTMENT DIVIDENDS DIVIDENDS* VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 $ 382 $ 0 $ 10,402 $401 $ 0 $10,803
August 31, 1996 300 0 10,000 683 0 10,683
</TABLE>
+ Unless otherwise noted.
* Includes short-term capital gain dividends, if any.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TEXAS FUND
---------- DIVIDENDS----------
ANNUAL ANNUAL ------ CUMULATIVE VALUE OF SHARES ACQUIRED ------
YEAR INCOME CAPITAL GAIN REINVESTED REINVESTED
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME CAPITAL GAIN TOTAL
12/31+ REINVESTED* REINVESTED INVESTMENT DIVIDENDS DIVIDENDS* VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1991 $ 86 $ 0 $ 9,698 $ 87 $ 0 $ 9,785
1992 622 0 10,030 722 0 10,752
1993 703 94 10,693 1,485 93 12,271
1994 660 91 9,779 1,996 177 11,952
1995 892 122 10,734 3,106 318 14,158
August 31, 1996 455 0 10,412 3,468 308 14,188
</TABLE>
+ Unless otherwise noted.
* Includes short-term capital gain dividends, if any.
- --------------------------------------------------------------------------------
B-34
<PAGE> 88
The following tables compare the performance of the Class A shares of each Fund
over various periods with that of other mutual funds within the categories
described below according to data reported by Lipper Analytical Services, Inc.
("Lipper"), New York, New York, which is a mutual fund reporting service. Lipper
performance figures are based on changes in net asset value, with all income and
capital gain dividends reinvested. Such calculations do not include the effect
of any sales charges. Future performance cannot be guaranteed. Lipper publishes
performance analyses on a regular basis. The funds in each Lipper category have
a variety of objectives, policies and market and credit risks that should be
considered in reviewing the rankings.
MUNICIPAL FUND
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance Analysis
----------------------
General
Municipal
Bond Funds
----------------------
<S> <C>
Ten Years (Period ended 9/30/96)............................................... 9 of 62
Five Years (Period ended 9/30/96).............................................. 19 of 103
One Year (Period ended 9/30/96)................................................ 84 of 230
</TABLE>
The Lipper General Municipal Bond Fund category includes funds which invest 60%
or more of their assets in the top four tax-exempt credit ratings.
INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance Analysis
----------------------
Intermediate
Municipal
Bond Funds
----------------------
<S> <C>
One Year (Period ended 9/30/96)................................................ 79 of 139
</TABLE>
The Lipper Intermediate Municipal Bond Funds category includes funds that limit
at least 60% or more of their assets in the top four tax-exempt credit ratings.
CALIFORNIA FUND
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance Analysis
----------------------
California
Municipal
Bond Funds
----------------------
<S> <C>
Ten Years (Period ended 9/30/96)............................................... 2 of 26
Five Years (Period ended 9/30/96).............................................. 18 of 46
One Year (Period ended 9/30/96)................................................ 32 of 95
</TABLE>
The Lipper California Municipal Bond Funds category includes funds that limit at
least 65% of their investments to those securities that are exempt from federal
and State of California income tax (double tax exempt).
B-35
<PAGE> 89
FLORIDA FUND
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance Analysis
----------------------
Florida
Municipal
Bond Funds
----------------------
<S> <C>
Five Years (Period ended 9/30/96).............................................. 2 of 16
One Year (Period ended 9/30/96)................................................ 26 of 80
</TABLE>
The Lipper Florida Municipal Bond Funds category includes funds that limit at
least 65% of their investments to those securities that are exempt from federal
income tax.
MICHIGAN FUND
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance Analysis
----------------------
Michigan
Municipal
Bond Funds
----------------------
<S> <C>
One Year (Period ended 9/30/96)................................................ 9 of 46
</TABLE>
The Lipper Michigan Municipal Bond Funds category includes funds that limit at
least 65% of their investments to those securities that are exempt from federal
and State of Michigan income tax (double tax exempt).
NEW JERSEY FUND
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance Analysis
--------------------
New Jersey
Municipal
Bond Funds
--------------------
<S> <C>
One Year (Period ended 9/30/96)................................................. 15 of 53
</TABLE>
The Lipper New Jersey Municipal Bond Funds category includes funds that limit at
least 65% of their investments to those securities that are exempt from federal
and State of New Jersey income tax (double tax exempt).
NEW YORK FUND
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance Analysis
--------------------
New York
Municipal
Bond Funds
--------------------
<S> <C>
Ten Years (Period ended 9/30/96)................................................ 3 of 20
Five Years (Period ended 9/30/96)............................................... 9 of 43
One Year (Period ended 9/30/96)................................................. 29 of 99
</TABLE>
The Lipper New York Municipal Bond Funds category includes funds that limit at
least 65% of their investments to those securities that are exempt from federal,
State of New York and New York City income tax (triple tax exempt).
B-36
<PAGE> 90
OHIO FUND
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance Analysis
--------------------
Ohio
Municipal
Bond Funds
--------------------
<S> <C>
One Year (Period ended 9/30/96)................................................. 10 of 56
</TABLE>
The Lipper Ohio Municipal Bond Funds category includes funds that limit at least
65% of their investments to those securities that are exempt from federal and
State of Ohio income tax (double tax exempt).
PENNSYLVANIA FUND
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance Analysis
--------------------
Pennsylvania
Municipal
Bond Funds
--------------------
<S> <C>
One Year (Period ended 9/30/96)................................................. 10 of 65
</TABLE>
The Lipper Pennsylvania Municipal Bond Funds category includes funds that limit
at least 65% of their investments to those securities that are exempt from
federal and State of Pennsylvania income tax (double tax exempt).
TEXAS FUND
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance Analysis
--------------------
Texas
Municipal
Bond Funds
--------------------
<S> <C>
Three Years (Period ended 9/30/96).............................................. 1 of 11
One Year (Period ended 9/30/96)................................................. 2 of 23
</TABLE>
The Lipper Texas Municipal Bond Funds category includes funds that limit at
least 65% of their investments to those securities that are exempt from federal
income tax.
TAX-EXEMPT VERSUS TAXABLE YIELD. You may want to determine which
investment--tax-exempt or taxable--will provide you with a higher after-tax
return. To determine the taxable equivalent yield, simply divide the yield from
the tax-exempt investment by [1 minus your marginal tax rate]. The tables below
are provided for your convenience in making this calculation for selected
tax-exempt yields and taxable income levels. These yields are presented for
purposes of illustration only and are not representative of any yield that any
class of shares of a Fund may generate. The tables are based upon the 1996
federal and state tax rates and brackets.
B-37
<PAGE> 91
TAXABLE EQUIVALENT YIELD TABLE FOR PERSONS WHOSE ADJUSTED GROSS INCOME IS UNDER
$117,950
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YOUR
MARGINAL A TAX-EXEMPT YIELD OF:
TAXABLE INCOME FEDERAL TAX 4% 5% 6% 7% 8% 9%
SINGLE JOINT RATE IS EQUIVALENT TO A TAXABLE YIELD OF:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$24,000 - $58,150 $40,100 - $96,900 28.0% 5.56 6.94 8.33 9.72 11.11 12.50
- ----------------------------------------------------------------------------------------------------------------------
Over $58,150 Over $96,900 31.0 5.80 7.25 8.70 10.14 11.59 13.04
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMBINED
CALIFORNIA A TAX-EXEMPT YIELD OF:
TAXABLE INCOME AND FEDERAL 4% 5% 6% 7% 8% 9%
SINGLE JOINT TAX RATE IS EQUIVALENT TO A TAXABLE YIELD OF:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$24,000 - $24,484 $40,100 - $50,968 32.3% 5.91 7.39 8.86 10.34 11.82 13.30
- ----------------------------------------------------------------------------------------------------------------------
$24,484 - $32,207 $50,968 - $64,414 33.8 6.04 7.55 9.06 10.57 12.08 13.60
- ----------------------------------------------------------------------------------------------------------------------
$32,207 - $58,150 $64,414 - $96,900 34.7 6.13 7.66 9.19 10.72 12.25 13.78
- ----------------------------------------------------------------------------------------------------------------------
Over $58,150 Over $96,900 37.4 6.39 7.99 9.58 11.18 12.78 14.38
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMBINED
MICHIGAN A TAX-EXEMPT YIELD OF:
TAXABLE INCOME AND FEDERAL 4% 5% 6% 7% 8% 9%
SINGLE JOINT TAX RATE IS EQUIVALENT TO A TAXABLE YIELD OF:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$24,000 - $58,150 $40,100 - $96,900 31.2% 5.81 7.26 8.72 10.17 11.62 13.08
- ----------------------------------------------------------------------------------------------------------------------
Over $58,150 Over $96,900 34.0 6.06 7.58 9.10 10.61 12.13 13.64
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMBINED
NEW JERSEY A TAX-EXEMPT YIELD OF:
TAXABLE INCOME AND FEDERAL 4% 5% 6% 7% 8% 9%
SINGLE JOINT TAX RATE IS EQUIVALENT TO A TAXABLE YIELD OF:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$24,000 - $35,000 $40,100 - $50,000 29.3% 5.65 7.07 8.48 9.90 11.31 12.72
- ----------------------------------------------------------------------------------------------------------------------
$50,000 - $70,000 29.8 5.70 7.12 8.54 9.97 11.39 12.81
- ----------------------------------------------------------------------------------------------------------------------
$35,000 - $40,000 $70,000 -$80,000 30.5 5.76 7.20 8.64 10.07 11.51 12.95
- ----------------------------------------------------------------------------------------------------------------------
$40,000 - $58,150 $80,000 - $96,900 32.0 5.88 7.35 8.82 10.29 11.76 13.23
- ----------------------------------------------------------------------------------------------------------------------
Over $58,150 Over $96,900 34.8 6.14 7.67 9.20 10.74 12.27 13.81
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
B-38
<PAGE> 92
TAXABLE EQUIVALENT YIELD TABLE FOR PERSONS WHOSE ADJUSTED GROSS INCOME IS UNDER
$117,950
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMBINED
N.Y. CITY,
N.Y. STATE
TAXABLE INCOME AND FEDERAL A TAX-EXEMPT YIELD OF:
TAX RATE 4% 5% 6% 7% 8% 9%
SINGLE JOINT IS EQUIVALENT TO A TAXABLE YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
$24,000 - $58,150 $40,100 - $96,900 35.9% 6.24 7.80 9.36 10.92 12.48 14.04
- ----------------------------------------------------------------------------------------------------------------------
Over $58,150 Over $96,900 38.6 6.51 8.14 9.77 11.40 13.03 14.66
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMBINED
OHIO
TAXABLE INCOME AND FEDERAL 9%
SINGLE JOINT TAX RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
$24,000 - $40,000 31.0% 5.80 7.25 8.70 10.14 11.59 13.04
- ----------------------------------------------------------------------------------------------------------------------
$40,000 - $58,150 $40,000 -$80,000 31.5 5.84 7.30 8.76 10.22 11.68 13.14
- ----------------------------------------------------------------------------------------------------------------------
$58,150 - $80,000 34.4 6.09 7.62 9.14 10.66 12.19 13.71
- ----------------------------------------------------------------------------------------------------------------------
$80,000 - $96,900 32.0 5.88 7.35 8.82 10.29 11.76 13.23
- ----------------------------------------------------------------------------------------------------------------------
$80,000 - $100,000 $96,900 - $100,000 34.8 6.14 7.67 9.21 10.74 12.28 13.81
- ----------------------------------------------------------------------------------------------------------------------
Over $100,000 Over $100,000 35.4 6.20 7.75 9.29 10.84 12.39 13.94
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMBINED
PENNSYLVANIA A TAX-EXEMPT YIELD OF:
TAXABLE INCOME AND FEDERAL 4% 5% 6% 7% 8% 9%
SINGLE JOINT TAX RATE IS EQUIVALENT TO A TAXABLE YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
$24,000 - $58,150 $40,100 - $96,900 30.0% 5.72 7.14 8.57 10.00 11.43 12.86
- ----------------------------------------------------------------------------------------------------------------------
Over $58,150 Over $96,900 32.9 5.96 7.46 8.95 10.44 11.93 13.42
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
B-39
<PAGE> 93
TAXABLE EQUIVALENT YIELD TABLE FOR PERSONS WHOSE ADJUSTED GROSS INCOME IS OVER
$117,950*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YOUR
TAXABLE INCOME MARGINAL A TAX-EXEMPT YIELD OF:
FEDERAL TAX 4% 5% 6% 7% 8% 9%
SINGLE JOINT RATE IS EQUIVALENT TO A TAXABLE YIELD OF:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$58,150 - $121,300 $96,900 - $147,700 31.9% 5.87 7.34 8.81 10.28 11.75 13.22
- ----------------------------------------------------------------------------------------------------------------------
$121,300 - $263,750 $147,700 - $263,750 37.1 6.36 7.95 9.54 11.13 12.72 14.31
- ----------------------------------------------------------------------------------------------------------------------
Over $263,750 Over $263,750 40.8 6.76 8.45 10.14 11.82 13.51 15.20
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMBINED
CALIFORNIA
TAXABLE INCOME AND FEDERAL A TAX-EXEMPT YIELD OF:
SINGLE JOINT TAX RATE 4% 5% 6% 7% 8% 9%
IS EQUIVALENT TO A TAXABLE YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
$111,695 - $121,300 38.7% 6.53 8.16 9.79 11.42 13.05 14.68
- -----------------------------------------------------------------------------------------------------------------------
$147,700 - $223,390 42.9 7.01 8.76 10.51 12.26 14.01 15.76
- -----------------------------------------------------------------------------------------------------------------------
$121,300 - $223,390 $223,390 - $263,750 43.4 7.07 8.83 10.60 12.37 14.13 15.90
- -----------------------------------------------------------------------------------------------------------------------
$223,390 - $263,750 44.0 7.14 8.93 10.71 12.50 14.29 16.07
- -----------------------------------------------------------------------------------------------------------------------
$263,750 - $446,780 46.7 7.50 9.38 11.26 13.13 15.01 16.89
- -----------------------------------------------------------------------------------------------------------------------
Over $263,750 Over $446,780 47.3 7.59 9.49 11.39 13.28 15.18 17.08
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMBINED
MICHIGAN A TAX-EXEMPT YIELD OF:
TAXABLE INCOME AND FEDERAL 4% 5% 6% 7% 8% 9%
SINGLE JOINT TAX RATE IS EQUIVALENT TO A TAXABLE YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
$58,150 - $121,300 $96,900 - $147,700 34.9 % 6.14 7.68 9.22 10.75 12.29 13.82
- -----------------------------------------------------------------------------------------------------------------------
$121,300 - $263,750 $147,700 - $263,750 39.9 6.66 8.32 9.98 11.65 13.31 14.98
- -----------------------------------------------------------------------------------------------------------------------
Over $263,750 Over $263,750 43.4 7.07 8.83 10.60 12.37 14.13 15.90
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMBINED
NEW JERSEY AND A TAX-EXEMPT YIELD OF:
TAXABLE INCOME FEDERAL
SINGLE JOINT TAX RATE 4% 5% 6% 7% 8% 9%
IS EQUIVALENT TO A TAXABLE YIELD OF:
- ---------------------------------------------------------------------------------------------------------------------
$58,150 - $75,000 $96,900 - $147,700 35.7% 6.22 7.78 9.33 10.89 12.44 14.00
- ---------------------------------------------------------------------------------------------------------------------
$75,000 - $121,300 36.2 6.27 7.84 9.40 10.97 12.54 14.11
- ---------------------------------------------------------------------------------------------------------------------
$147,700 - $150,000 40.6 6.73 8.42 10.10 11.78 13.47 15.15
- ---------------------------------------------------------------------------------------------------------------------
$121,300 - $263,750 $150,000 - $263,750 41.1 6.79 8.49 10.19 11.88 13.59 15.28
- ---------------------------------------------------------------------------------------------------------------------
Over $263,750 Over $263,750 44.6 7.22 9.03 10.83 12.64 14.44 16.25
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
B-40
<PAGE> 94
TAXABLE EQUIVALENT YIELD TABLE FOR PERSONS WHOSE ADJUSTED GROSS INCOME IS OVER
$117,950*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMBINED
N.Y. CITY, N.Y. A TAX-EXEMPT YIELD OF:
STATE 4% 5% 6% 7% 8% 9%
TAXABLE INCOME AND FEDERAL
SINGLE JOINT TAX RATE
IS EQUIVALENT TO A TAXABLE YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
$121,300 - $263,750 $147,700 - $263,750 44.0% 7.14 8.93 10.71 12.50 14.29 16.07
- -------------------------------------------------------------------------------------------------------------------
Over $263,750 Over $263,750 47.3 7.59 9.49 11.39 13.28 15.18 17.08
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMBINED A TAX-EXEMPT YIELD OF:
TAXABLE INCOME OHIO AND FEDERAL
SINGLE JOINT TAX RATE 4% 5% 6% 7% 8% 9%
IS EQUIVALENT TO A TAXABLE YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
$121,300 - $200,000 $147,700 - $200,000 41.2% 6.80 8.50 10.20 11.90 13.61 15.31
- ---------------------------------------------------------------------------------------------------------------------
$200,000 - $263,750 $200,000 - $263,750 41.5 6.84 8.55 10.26 11.97 13.68 15.38
- ---------------------------------------------------------------------------------------------------------------------
Over $263,750 Over $263,750 44.9 7.26 9.07 10.89 12.70 14.52 16.33
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMBINED
PENNSYLVANIA AND A TAX-EXEMPT YIELD OF:
TAXABLE INCOME FEDERAL
SINGLE JOINT TAX RATE 4% 5% 6% 7% 8% 9%
IS EQUIVALENT TO A TAXABLE YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
$58,150 - $121,300 $96,900 - $147,700 33.8% 6.04 7.55 9.06 10.57 12.08 13.60
- ---------------------------------------------------------------------------------------------------------------------
$121,300 - $263,750 $147,700 - $263,750 38.9 6.55 8.18 9.82 11.46 13.09 14.73
- ---------------------------------------------------------------------------------------------------------------------
Over $263,750 Over $263,750 42.5 6.96 8.70 10.43 12.17 13.91 15.65
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
* This table assumes a decrease of $3.00 of itemized deductions for each $100
of adjusted gross income over $117,950. For a married couple with an adjusted
gross income between $176,950 and $299,450 (single between $117,950 and
$240,450), add 0.7% to the above Marginal Federal Tax Rate for each personal
and dependency exemption. The taxable equivalent yield is the tax-exempt
yield divided by: 100% minus the adjusted tax rate. For example, if the table
tax rate is 37.1% and you are married with no dependents, the adjusted tax
rate is 38.5% (37.1% + 0.7% + 0.7%). For a tax-exempt yield of 6%, the
taxable equivalent yield is about 9.8% (6% / (100% - 38.5%)).
B-41
<PAGE> 95
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Zurich Kemper Investments, Inc. ("ZKI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, is the Trusts' investment manager. ZKI is wholly
owned by ZKI Holding Corp. ZKI Holding Corp. is a more than 90% owned subsidiary
of Zurich Holding Company of America, Inc., which is a wholly-owned subsidiary
of Zurich Insurance Company, an internationally recognized company providing
services in life and non-life insurance, reinsurance and asset management. There
is one investment management agreement for the Municipal Fund, one for the
Intermediate Municipal Fund and a separate investment management agreement for
the State Funds. The agreements are substantially the same. Pursuant to the
investment management agreements, ZKI acts as each Fund's investment adviser,
manages its investments, administers its business affairs, furnishes office
facilities and equipment, provides clerical, bookkeeping and administrative
services and permits any of its officers or employees to serve without
compensation as trustees or officers of the Trust if elected to such positions.
The agreements provide that the Trust pays the charges and expenses of its
operations including the fees and expenses of the trustees (except those who are
officers or employees of ZKI), independent auditors, counsel, custodian and
transfer agent and the cost of share certificates, reports and notices to
shareholders, brokerage commissions or transaction costs, costs of calculating
net asset value, taxes and membership dues. Each Trust bears the expenses of
registration of its shares with the Securities and Exchange Commission, while
KDI, as principal underwriter, pays the cost of qualifying and maintaining the
qualification of the Trust's shares for sale under the securities laws of the
various states. ZKI has agreed to reimburse the Municipal Fund should all
operating expenses of that Fund, including the compensation of ZKI, but
excluding interest, taxes, distribution fees, extraordinary expenses and
brokerage commissions or transaction costs, exceed 1% of average net assets of
the Municipal Fund on an annual basis. ZKI has agreed to reimburse the
California Fund should all operating expenses of the California Fund, including
the compensation of ZKI, but excluding taxes, interest, distribution services
fees, extraordinary expenses, and brokerage commissions or transaction costs,
exceed 1 1/2% of the first $30 million of average daily net assets and 1% of
average daily net assets over $30 million on an annual basis.
The agreements provide that ZKI shall not be liable for any error of judgment or
of law, or for any loss suffered by the Trusts in connection with the matters to
which the agreements relate, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of ZKI in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties under the agreements.
Each of the investment management agreements continues in effect from year to
year so long as its continuation is approved at least annually by a majority of
the trustees of the applicable Trust who are not parties to such agreement or
interested persons of any such party except in their capacity as trustees of the
Trust and by the shareholders of the Fund subject thereto or the Board of
Trustees. Each agreement may be terminated at any time upon 60 days' notice by
either party, or by a majority vote of the outstanding shares of the Fund
subject thereto, and will terminate automatically upon assignment. If additional
Funds become subject to the investment management agreements, the provisions
concerning continuation, amendment and termination shall be on a Fund by Fund
basis. Additional Funds may be subject to a different agreement.
B-42
<PAGE> 96
The current investment management fee rates paid by the Funds are located in the
prospectus, see "Investment Manager and Underwriter." The investment management
fees paid by each Fund for its last three fiscal years are shown in the table
below.
<TABLE>
<CAPTION>
FUND FISCAL 1996 FISCAL 1995 FISCAL 1994
- ------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Municipal................................................... $14,261,000 14,685,000 15,291,000
Intermediate Municipal+..................................... $ 82,000 5,000* N/A
California.................................................. $ 5,661,000 5,765,000 6,827,000
Florida..................................................... $ 642,000 661,000 712,000
Michigan++.................................................. $ 7,000* 0* N/A
New Jersey++................................................ $ 11,000* 0* N/A
New York.................................................... $ 1,717,000 1,738,000 1,959,000
Ohio........................................................ $ 192,000 108,000* 0*
Pennsylvania++.............................................. $ 8,000* 0* N/A
Texas....................................................... $ 78,000 54,000* 2,000*
</TABLE>
- ---------------
+ Commenced operations November 1, 1994.
++ Commenced operations March 15, 1995.
* Fee waivers and/or expense absorptions in effect during the period, see
below.
Prior to May 31, 1994, the Municipal Fund paid an investment management fee,
payable monthly, at the annual rate of .55 of 1% of the first $200 million of
average daily net assets, .45 of 1% of the next $300 million of average daily
net assets, and .35 of 1% of average daily net assets over $500 million.
ZKI agreed to waive its full investment management fee for the Intermediate
Municipal Fund from November 1, 1994 (commencement of operations) through April
30, 1995. Thereafter the full management fee was gradually reinstated under a
schedule determined by ZKI and fully reinstated by April 30, 1996. If the fee
waiver had not been in effect, ZKI would have received investment management
fees from the Intermediate Municipal Fund of $104,000 and $58,000 for the fiscal
periods ended September 30, 1996 and 1995, respectively. Effective the date of
the prospectus, ZKI has agreed to temporarily reduce its management fee and
reimburse or pay certain operating expenses to the extent necessary to limit the
"Total Operating Expenses" of the Intermediate Municipal Fund for Class A, B and
C shares to .96%, 1.83% and 1.72%, respectively.
Prior to May 31, 1994, the investment management fee applicable to each then
existing State Fund, payable monthly, was at the annual rate of .55 of 1% of
average daily net assets.
ZKI agreed to waive its full investment management fee and to absorb all other
operating expenses of the Ohio Fund from March 22, 1993 (commencement of
operations) through June 30, 1994. Thereafter, the full management fee and all
other operating expenses were gradually instituted under a schedule determined
by ZKI and fully reinstated by June 30, 1995. For this purpose, "operating
expenses" do not include taxes, interest, extraordinary expenses, brokerage
commissions or transaction costs. If the fee waiver had not been in effect for
the fiscal years ended August 31, 1995 and 1994 ZKI would have received
investment management fees from the Ohio Fund of $155,000 and $107,000,
respectively.
ZKI agreed to waive its full investment management fee and absorb other
operating expenses of the Texas Fund for the period from November 1, 1991
(commencement of operations) through December 31, 1992. Thereafter, expenses
were gradually reinstated until they were paid in full (excluding the management
fee) effective October 1, 1993. The management fee was reinstated gradually
commencing June 1, 1994 and fully reinstated by June 30, 1995. For this purpose,
"operating expenses" do not include taxes, interest, extraordinary expenses,
brokerage commissions or transaction costs. If the fee waiver had not been in
effect for the fiscal year ended
B-43
<PAGE> 97
August 31, 1995 and 1994, ZKI would have received investment management fees
from the Texas Fund of $83,000 and $79,000, respectively.
ZKI agreed to waive its full investment management fee for the Michigan, New
Jersey and Pennsylvania Funds from March 15, 1995 (commencement of operations)
through September 15, 1995. Thereafter, the full management fee was gradually
reinstated under a schedule determined by ZKI and fully reinstated by September
15, 1996. If the fee waiver had not been in effect, ZKI would have received
investment management fees from the Michigan, New Jersey and Pennsylvania Funds
of 17,000, 25,000 and 21,000 respectively for the fiscal year ended August 31,
1996 and $5,000, $8,000 and $4,000, respectively for the period March 15, to
August 31, 1995. Effective the date of the prospectus, ZKI has agreed to
temporarily reduce its management fee and reimburse or pay certain operating
expenses to the extent necessary to limit the "Total Operating Expenses" of the
Michigan, New Jersey and Pennsylvania Funds for Class A shares to .96%, .96% and
1.01%, respectively, Class B shares to 1.76%, 1.75% and 1.79%, respectively, and
Class C Shares to 1.73%, 1.72% and 1.76%, respectively.
PRINCIPAL UNDERWRITER. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), an affiliate of ZKI, is the principal underwriter and distributor for
the shares of each Trust and acts as agent of each Trust in the continuous
offering of its shares. KDI bears all its expenses of providing services
pursuant to the distribution agreement, including the payment of any
commissions. Each Trust pays the cost for the prospectus and shareholder reports
to be set in type and printed for existing shareholders, and KDI pays for the
printing and distribution of copies thereof used in connection with the offering
of shares to prospective investors. KDI also pays for supplementary sales
literature and advertising costs.
Each distribution agreement continues in effect from year to year so long as
such continuance is approved for each class at least annually by a vote of the
Board of Trustees of the Trust, including the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the agreement. Each agreement automatically terminates in the event of its
assignment and may be terminated for a class at any time without penalty by a
Trust or by KDI upon 60 days notice. Termination by a Fund with respect to a
class may be by vote of a majority of the Board of Trustees, or a majority of
the Trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the agreement, or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
Investment Company Act of 1940. The agreement may not be amended for a class to
increase the fee to be paid by a Fund with respect to such class without
approval by a majority of the outstanding voting securities of such class of the
Fund and all material amendments must in any event be approved by the Board of
Trustees in the manner described above with respect to the continuation of the
agreement. The provisions concerning the continuation, amendment and termination
of the distribution agreement are on a Fund by Fund basis and for each Fund on a
class by class basis.
CLASS A SHARES. The following information concerns the underwriting commissions
paid in connection with the distribution of each Fund's Class A Shares for the
fiscal years noted.
B-44
<PAGE> 98
<TABLE>
<CAPTION>
COMMISSIONS
PAID TO KEMPER
FISCAL YEAR COMMISSIONS RETAINED COMMISSIONS UNDERWRITER AFFILIATED
CLASS A SHARES ENDED BY UNDERWRITER PAID TO ALL FIRMS FIRMS
--------------- -------------------- ----------------------- --------------
<S> <C> <C> <C> <C>
Municipal Fund..................... 9/30/96 $ 351,000 $ 1,950,000 $ 142,000
9/30/95 $ 282,000 $ 1,977,000 $ 392,000
9/30/94 $ 638,000 $10,113,000 $2,519,000
Intermediate Municipal Fund........ 9/30/96 $ 9,000 $ 53,000 $ 2,000
11/1/94-9/30/95 $ 8,000 $ 44,000 $ 17,000
California Fund.................... 8/31/96 $ 138,000 $ 924,000 $ 36,000
8/31/95 $ 140,000 $ 958,000 $ 265,000
8/31/94 $ 166,000 $ 2,510,000 $ 534,000
Florida Fund....................... 8/31/96 $ 21,000 $ 81,000 $ 3,000
8/31/95 $ 20,000 $ 125,000 $ 8,000
8/31/94 $ 32,000 $ 353,000 $ 22,000
Ohio Fund.......................... 8/31/96 $ 9,000 $ 84,000 $ 0
8/31/95 $ 13,000 $ 86,000 $ 49,000
8/31/94 $ 14,000 $ 183,000 $ 98,000
Michigan Fund...................... 8/31/96 $ 4,000 $ 21,000 $ 1,000
3/15/95-8/31/95 $ 4,000 $ 31,000 $ 3,000
New Jersey Fund.................... 8/31/96 $ 2,000 $ 12,000 $ 0
3/15/95-8/31/95 $ 3,000 $ 24,000 $ 2,000
New York Fund...................... 8/31/96 $ 45,000 $ 248,000 $ 14,000
8/31/95 $ 42,000 $ 276,000 $ 8,000
8/31/94 $ 74,000 $ 1,203,000 $ 52,000
Pennsylvania Fund.................. 8/31/96 $ 1,000 $ 10,000 $ 0
3/15/95-8/31/95 $ 2,000 $ 18,000 $ 3,000
Texas Fund......................... 8/31/96 $ 3,000 $ 22,000 $ 0
8/31/95 $ 5,000 $ 37,000 $ 0
8/31/94 $ 11,000 $ 135,000 $ 12,000
</TABLE>
CLASS B AND C SHARES. Since the distribution agreement provides for fees charged
to Class B and Class C shares that are used by KDI to pay for distribution
services (see the prospectus under "Investment Manager and Underwriter"), the
agreement (the "Plan") is approved and renewed separately for the Class B and
Class C shares in accordance with Rule 12b-1 under the Investment Company Act of
1940, which regulates the manner in which an investment company may, directly or
indirectly, bear expenses of distributing its shares. Expenses of the Funds and
of KDI in connection with the Rule 12b-1 plans for the Class B and Class C
Shares are set forth below. A portion of the marketing, sales and operating
expenses shown below could be considered overhead expense.
<TABLE>
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY
CONTINGENT COMMISSIONS KDI
DISTRIBUTION DEFERRED TOTAL PAID BY KDI ------------------------------------
FEES PAID SALES COMMISSIONS TO KDI ADVERTISING MARKETING
BY FUND CHARGES PAID PAID BY KDI AFFILIATED AND PROSPECTUS AND SALES
CLASS B SHARES FISCAL YEAR TO KDI TO KDI TO FIRMS FIRMS LITERATURE PRINTING EXPENSES
------------ ------------ ------------ ----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal Fund........ 1996 $285,000 $ 92,000 $ 727,000 $ 34,000 $ 179,000 $ 13,000 $384,000
Intermediate Municipal
Fund................. 1996 $ 27,000 $ 4,000 $ 81,000 $ 1,000 $ 21,000 $ 2,000 $ 42,000
California Fund....... 1996 $109,000 $ 69,000 $ 320,000 $ 29,000 $ 74,000 $ 5,000 $165,000
Florida Fund.......... 1996 $ 21,000 $ 5,000 $ 37,000 $ 0 $ 9,000 $ 1,000 $ 20,000
Michigan Fund......... 1996 $ 8,000 $ 1,000 $ 17,000 $ 4,000 $ 7,000 $ 0 $ 15,000
New Jersey Fund....... 1996 $ 16,000 $ 17,000 $ 42,000 $ 0 $ 15,000 $ 1,000 $ 32,000
New York Fund......... 1996 $ 41,000 $ 20,000 $ 144,000 $ 69,000 $ 36,000 $ 3,000 $ 77,000
Ohio Fund............. 1996 $ 48,000 $ 16,000 $ 105,000 $ 0 $ 29,000 $ 2,000 $ 64,000
Pennsylvania Fund..... 1996 $ 11,000 $ 2,000 $ 29,000 $ 11,000 $ 10,000 $ 1,000 $ 19,000
Texas Fund............ 1996 $ 3,000 $ 4,000 $ 5,000 $ 0 $ 2,000 $ 0 $ 3,000
<CAPTION>
OTHER DISTRIBUTION EXPENSES
PAID BY
KDI
---------------------------
MISC.
OPERATING INTEREST
CLASS B SHARES EXPENSES EXPENSES
--------- --------
<S> <C> <C>
Municipal Fund........ $48,000 $171,000
Intermediate Municipal
Fund................. $19,000 $ 19,000
California Fund....... $47,000 $ 76,000
Florida Fund.......... $18,000 $ 15,000
Michigan Fund......... $11,000 $ 7,000
New Jersey Fund....... $23,000 $ 12,000
New York Fund......... $19,000 $ 28,000
Ohio Fund............. $27,000 $ 35,000
Pennsylvania Fund..... $19,000 $ 7,000
Texas Fund............ $ 4,000 $ 3,000
</TABLE>
B-45
<PAGE> 99
<TABLE>
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY
COMMISSIONS KDI
DISTRIBUTION CONTINGENT TOTAL PAID BY KDI ------------------------------------
FEES PAID DEFERRED COMMISSIONS TO KDI ADVERTISING MARKETING
BY FUND SALES CHARGES PAID BY KDI AFFILIATED AND PROSPECTUS AND SALES
CLASS B SHARES FISCAL YEAR TO KDI PAID TO KDI TO FIRMS FIRMS LITERATURE PRINTING EXPENSES
------------ ------------ ------------- ----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal Fund.......... 1995 $182,000 $62,000 $ 572,000 $ 133,000 $ 68,000 $ 7,000 $308,000
Intermediate Municipal
Fund................... 1995 $ 15,000 $ 3,000 $ 79,000 $ 46,000 $ 511,000 $ 51,000 $ 41,000
California Fund......... 1995 $ 58,000 $35,000 $ 349,000 $ 158,000 $ 36,000 $ 4,000 $171,000
Florida Fund............ 1995 $ 11,000 $ 4,000 $ 48,000 $ 5,000 $ 7,000 $ 0 $ 27,000
Michigan Fund........... 1995 $ 1,000 $ 0 $ 23,000 $ 0 $ 3,000 $ 0 $ 10,000
New Jersey Fund......... 1995 $ 3,000 $ 1,000 $ 62,000 $ 0 $ 6,000 $ 0 $ 22,000
New York Fund........... 1995 $ 19,000 $18,000 $ 75,000 $ 4,000 $ 9,000 $ 1,000 $ 44,000
Ohio Fund............... 1995 $ 25,000 $11,000 $ 157,000 $ 38,000 $ 18,000 $ 2,000 $ 76,000
Pennsylvania Fund....... 1995 $ 2,000 $ 1,000 $ 26,000 $ 0 $ 3,000 $ 0 $ 11,000
Texas Fund.............. 1995 $ 2,000 $ 0 $ 13,000 $ 0 $ 2,000 $ 0 $ 6,000
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY
KDI
------------------------------------
MISC.
OPERATING INTEREST
CLASS B SHARES EXPENSES EXPENSES
--------- --------
<S> <C> <C>
Municipal Fund.......... $54,000 $95,000
Intermediate Municipal
Fund................... $12,000 $ 8,000
California Fund......... $30,000 $37,000
Florida Fund............ $13,000 $ 7,000
Michigan Fund........... $ 3,000 $ 1,000
New Jersey Fund......... $ 4,000 $ 2,000
New York Fund........... $15,000 $12,000
Ohio Fund............... $19,000 $19,000
Pennsylvania Fund....... $ 3,000 $ 1,000
Texas Fund.............. $10,000 $ 2,000
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OTHER DISTRIBUTION
TOTAL FEES PAID EXPENSES PAID BY KDI
DISTRIBUTION CONTINGENT DISTRIBUTION BY KDI ------------------------
FEES PAID DEFERRED FEES PAID TO KDI ADVERTISING
BY FUND SALES CHARGES BY KDI AFFILIATED AND PROSPECTUS
CLASS C SHARES FISCAL YEAR TO KDI PAID TO KDI TO FIRMS FIRMS LITERATURE PRINTING
------------- ------------ ------------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Municipal Fund.......... 1996 $ 20,000 $ 1,000 $ 34,000 $1,000 $26,000 $2,000
Intermediate Municipal
Fund................... 1996 $ 6,000 0 $ 1,000 $ 0 $ 4,000 $ 0
California Fund......... 1996 $ 4,000 0 $ 7,000 $1,000 $ 6,000 $ 0
Florida Fund............ 1996 $ 1,000 0 $ 2,000 $ 0 $ 1,000 $ 0
Michigan Fund........... 1996 $ 2,000 0 $ 2,000 $ 0 $ 4,000 $ 0
New Jersey Fund......... 1996 $ 1,000 0 $ 0 $ 0 $ 0 $ 0
New York Fund........... 1996 $ 6,000 0 $ 8,000 $ 0 $ 9,000 $1,000
Ohio Fund............... 1996 $ 2,000 0 $ 1,000 $ 0 $ 1,000 $ 0
Pennsylvania Fund....... 1996 $ 4,000 0 $ 3,000 $ 0 $ 6,000 $ 0
Texas Fund.............. 1996 $ 1,000 0 $ 1,000 $ 0 $ 0 $ 0
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY
KDI
------------------------------------
MARKETING MISC.
AND SALES OPERATING INTEREST
CLASS C SHARES EXPENSES EXPENSES EXPENSES
--------- --------- --------
<S> <C> <C> <C>
Municipal Fund.......... $42,000 $11,000 $9,000
Intermediate Municipal
Fund................... $ 8,000 $12,000 $2,000
California Fund......... $14,000 $ 2,000 $2,000
Florida Fund............ $ 2,000 $ 1,000 $1,000
Michigan Fund........... $ 9,000 $ 9,000 $2,000
New Jersey Fund......... $ 0 $ 5,000 $1,000
New York Fund........... $20,000 $ 2,000 $3,000
Ohio Fund............... $ 3,000 $ 2,000 $1,000
Pennsylvania Fund....... $10,000 $ 8,000 $2,000
Texas Fund.............. $ 0 $ 2,000 $2,000
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OTHER DISTRIBUTION
TOTAL FEES PAID EXPENSES PAID BY KDI
DISTRIBUTION DISTRIBUTION BY KDI ------------------------
FEES PAID FEES PAID TO KDI ADVERTISING
BY FUND BY KDI AFFILIATED AND PROSPECTUS
CLASS C SHARES FISCAL YEAR TO KDI TO FIRMS FIRMS LITERATURE PRINTING
------------- ------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Municipal Fund.................... 1995 $7,000 $7,000 $1,000 $ 4,000 $1,000
Intermediate Municipal Fund*...... 1995 $4,000 $2,000 $ 0 $ 3,000 $ 0
California Fund................... 1995 $1,000 $1,000 $ 0 $ 1,000 $ 0
Florida Fund...................... 1995 $1,000 $ 0 $ 0 $ 0 $ 0
Michigan Fund**................... 1995 $1,000 $ 0 $ 0 $ 1,000 $ 0
New Jersey Fund**................. 1995 $1,000 $ 0 $ 0 $ 1,000 $ 0
New York Fund..................... 1995 $1,000 $1,000 $ 0 $ 1,000 $ 0
Ohio Fund......................... 1995 $2,000 $1,000 $1,000 $ 1,000 $ 0
Pennsylvania Fund**............... 1995 $1,000 $ 0 $ 0 $ 1,000 $ 0
Texas Fund........................ 1995 $3,000 $3,000 $ 0 $ 2,000 $ 0
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY
KDI
------------------------------------
MARKETING MISC.
AND SALES OPERATING INTEREST
CLASS C SHARES EXPENSES EXPENSES EXPENSES
--------- --------- --------
<S> <C> <C> <C>
Municipal Fund.................... $23,000 $11,000 $3,000
Intermediate Municipal Fund*...... $12,000 $ 3,000 $7,000
California Fund................... $ 4,000 $ 8,000 $1,000
Florida Fund...................... $ 0 $ 8,000 $ 0
Michigan Fund**................... $ 4,000 $ 2,000 $ 0
New Jersey Fund**................. $ 2,000 $ 1,000 $ 0
New York Fund..................... $ 5,000 $ 8,000 $1,000
Ohio Fund......................... $ 2,000 $ 8,000 $1,000
Pennsylvania Fund**............... $ 2,000 $ 1,000 $ 0
Texas Fund........................ $ 8,000 $10,000 $2,000
</TABLE>
- ---------------
* From 11/1/94 to 9/30/95.
** From 3/15/95 to 8/31/95.
ADMINISTRATIVE SERVICES. Administrative services are provided to each Trust
under an administrative services agreement ("administrative agreement") with
KDI. KDI bears all its expenses of providing services pursuant to the
administrative agreement between ZKI and the Trust, including the payment of
service fees. For the services under the administrative agreement, each Fund
pays KDI an administrative services fee, payable monthly, at the annual rate of
up to .25% of average daily net assets of each class of the Fund.
KDI enters into related arrangements with various financial services firms, such
as broker-dealers or banks ("firms"), that provide services and facilities for
their customers or clients who are shareholders of a Trust. The
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<PAGE> 100
firms provide such office space and equipment, telephone facilities and
personnel as is necessary or beneficial for providing information and services
to their clients. Such services and assistance may include, but are not limited
to, establishing and maintaining shareholder accounts and records, processing
purchase and redemption transactions, answering routine inquiries regarding the
Trust, assistance to clients in changing dividend and investment options,
account designations and addresses and such other services as may be agreed upon
from time to time and permitted by applicable statute, rule or regulation. With
respect to Class A shares, KDI pays each firm a service fee, payable quarterly,
at an annual rate of (a) up to .10% of the net assets in Trust accounts that it
maintains and services attributable to Class A shares acquired prior to October
1, 1993, and (b) up to .25% of the net assets in Trust accounts that it
maintains and services attributable to Class A shares acquired on or after
October 1, 1993, in each case commencing with the month after investment. With
respect to Class B and Class C shares, KDI currently advances to firms the
first-year service fee at a rate of up to .25% of the purchase price of such
shares. For periods after the first year, KDI currently intends to pay firms a
service fee at an annual rate of up to .25% (calculated monthly and paid
quarterly) of the net assets attributable to Class B and Class C shares
maintained and serviced by the firm and the fee continues until terminated by
KDI or the Trust. Firms to which service fees may be paid include broker-dealers
affiliated with KDI. The administrative services fee may be increased to an
annual rate of .25% of average daily net assets of any class of the Trust in the
discretion of the Board of Trustees and without shareholder approval.
The following information concerns the administrative services fee paid by each
Fund.
<TABLE>
<CAPTION>
ADMINISTRATIVE SERVICE FEES
PAID BY FUND TOTAL SERVICE FEES SERVICE FEES
------------------------------ PAID BY ADMINISTRATOR PAID BY ADMINISTRATOR
FUND FISCAL YEAR CLASS A CLASS B CLASS C TO FIRMS TO KEMPER AFFILIATED FIRMS
- ------------------------------ ----------- ---------- ------- ------- --------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Municipal..................... 1996 $5,178,000 $94,000 $9,000 $ 5,307,000 $198,000
Intermediate Municipal........ 1996 $ 31,000 $ 9,000 $1,000 $ 43,000 $ 1,000
California.................... 1996 $1,618,000 $36,000 $1,000 $ 1,651,000 $ 60,000
Florida....................... 1996 $ 189,000 $ 7,000 $ 0 $ 194,000 $ 8,000
Michigan...................... 1996 $ 5,000 $ 7,000 $ 0 $ 7,000 $ 0
New Jersey.................... 1996 $ 6,000 $ 5,000 $ 0 $ 10,000 $ 0
New York...................... 1996 $ 494,000 $14,000 $2,000 $ 510,000 $ 28,000
Ohio.......................... 1996 $ 52,000 $16,000 $1,000 $ 70,000 $ 0
Pennsylvania.................. 1996 $ 4,000 $ 4,000 $1,000 $ 9,000 $ 1,000
Texas......................... 1996 $ 24,000 $ 1,000 $ 0 $ 25,000 $ 0
</TABLE>
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for a Trust. Currently, the
administrative services fee payable to KDI is based only upon Trust assets in
accounts for which there is a firm listed on the Trust's records and it is
intended that KDI will pay all the administrative services fees that it receives
from the Fund to firms in the form of service fees. The effective administrative
services fee rate to be charged against all assets of the Trust while this
procedure is in effect will depend upon the proportion of Trust assets that is
in accounts for which there is a firm of record, as well as, with respect to
Class A shares, the date when shares representing such assets were purchased.
The Board of Trustees of a Trust, in its discretion, may approve basing the fee
to KDI on all Trust assets in the future.
Certain trustees or officers of the Trusts are also directors or officers of ZKI
or KDI as indicated under "Officers and Trustees."
CUSTODIAN AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary Trust Company
("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as custodian, and
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, as sub-custodian, have custody of all securities and cash of the Trusts.
They attend to the collection of principal and income, and payment for and
collection of proceeds of securities bought and sold by the Trusts. IFTC is also
the Trusts' transfer agent and dividend-paying agent. Pursuant to a services
agreement with IFTC, Kemper Service Company ("KSvC"), an affiliate of ZKI,
serves as
B-47
<PAGE> 101
"Shareholder Service Agent" of each Trust and, as such, performs all of IFTC's
duties as transfer agent and dividend paying agent. IFTC receives as transfer
agent, and pays to KSvC annual account fees at a maximum rate of $8 per account
plus account set up, transaction and maintenance charges, annual fees associated
with the contingent deferred sales charge (Class B only) and out-of-pocket
expense reimbursement. IFTC's fee is reduced by certain earnings credits in
favor of each Trust. For the National Trust for the fiscal year ended September
30, 1996, IFTC remitted shareholder service fees in the amount of $1,768,000 to
KSvC as Shareholder Service Agent. For the State Trust for the fiscal year ended
August 31, 1996, IFTC remitted shareholder service fees in the amount of $64,000
to KSvC as Shareholder Service Agent.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. Each Trust's independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on such Trust's annual financial statements, review certain
regulatory reports and such Trust's federal income tax returns, and perform
other professional accounting, auditing, tax and advisory services when engaged
to do so by the Trust. Shareholders will receive annual audited financial
statements and semi-annual unaudited financial statements.
PORTFOLIO TRANSACTIONS
ZKI and its affiliates furnish investment management services for the Kemper
Funds and other clients including affiliated insurance companies. These entities
share some common research and trading facilities. At times investment decisions
may be made to purchase or sell the same investment securities for a Fund and
for one or more of the other clients managed by ZKI or its affiliates. When two
or more of such clients are simultaneously engaged in the purchase or sale of
the same security through the same trading facility, the transactions are
allocated as to amount and price in a manner considered equitable to each.
National securities exchanges have established limitations governing the maximum
number of options in each class which may be written by a single investor or
group of investors acting in concert. An exchange may order the liquidation of
positions found to be in violation of these limits, and it may impose certain
other sanctions. These position limits may restrict the number of options a Fund
will be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the quantities or
prices of securities, options and futures contracts available to a Trust. On the
other hand, the ability of a Trust to participate in volume transactions may
produce better executions for a Trust in some cases. The Board of Trustees of
each Trust believes that the benefits of ZKI's organization outweigh any
limitations that may arise from simultaneous transactions or position
limitations.
ZKI, in effecting purchases and sales of portfolio securities for the account of
a Trust, will implement each Trust's policy of seeking best execution of orders.
ZKI may be permitted to pay higher brokerage commissions for research services
as described below. Consistent with this policy, orders for portfolio
transactions are placed with broker-dealer firms giving consideration to the
quality, quantity and nature of each firm's professional services, which include
execution, financial responsibility, responsiveness clearance procedures, wire
service quotations and statistical and other research information provided to
the Trust and ZKI and its affiliates. Subject to the policy of seeking best
execution of an order, brokerage is allocated on the basis of all services
provided. Any research benefits derived are available for all clients of ZKI and
its affiliates. In selecting among firms believed to meet the criteria for
handling a particular transaction, ZKI may give consideration to those firms
that have sold or are selling shares of the Funds and of other funds managed by
ZKI or its affiliates, as well as to those firms that provide market,
statistical and other research information to the Trusts and ZKI and its
affiliates, although ZKI is not authorized to pay higher commissions or, in the
case of principal trades, higher prices to firms that provide such services,
except as described below.
ZKI may in certain instances be permitted to pay higher brokerage commissions
solely for receipt of market, statistical and other research services as defined
in Section 28(e) of the Securities Exchange Act of 1934 and interpretations
thereunder. Such services may include, among other things: economic, industry or
company
B-48
<PAGE> 102
research reports or investment recommendations; computerized databases;
quotation and execution equipment and software; and research or analytical
computer software and services. Where products or services have a "mixed use," a
good faith effort is made to make a reasonable allocation of the cost of the
products or services in accordance with the anticipated research and
non-research uses and the cost attributable to non-research use is paid by ZKI
or one of its affiliates in cash. Subject to Section 28(e) and procedures
adopted by the Board of Trustees of each Trust, a Fund could pay a firm that
provides research services, commissions for effecting a securities transaction
for the Fund in excess of the amount other firms would have charged for the
transaction if ZKI determines in good faith that the greater commission is
reasonable in relation to the value of the brokerage and research services
provided by the executing firm viewed in terms either of a particular
transaction or ZKI's overall responsibilities to the Fund and other clients. Not
all of such research services may be useful or of value in advising a particular
Fund. Research benefits will be available for all clients of ZKI and its
affiliates. The investment management fee paid by a Fund to ZKI is not reduced
because these research services are received.
The table below shows total brokerage commissions paid by each Fund then
existing for the last three fiscal years and for the most recent fiscal year,
the percentage thereof that was allocated to firms based upon research
information provided.
<TABLE>
<CAPTION>
ALLOCATED TO FIRMS
BASED ON RESEARCH
FUND FISCAL 1996 IN FISCAL 1996 FISCAL 1995 FISCAL 1994
- ----------------------------------------------- ----------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Municipal...................................... $ 4,987,000 0% 4,309,000 $ 4,657,000
Intermediate................................... $ 37,000 0% 0 N/A
California..................................... $ 1,430,000 0% 717,000 $ 0
Florida........................................ $ 269,000 0% 122,000 $ 320,000
Michigan....................................... $ 10,000 0% 4,000 N/A
New Jersey..................................... $ 9,000 0% 4,000 N/A
New York....................................... $ 546,000 0% 303,000 $ 534,000
Ohio........................................... $ 79,000 0% 65,000 $ 68,000
Pennsylvania................................... $ 13,000 0% 2,000 N/A
Texas.......................................... $ 35,000 0% 20,000 $ 27,000
</TABLE>
PURCHASE AND REDEMPTION OF SHARES
As described in the Trusts' prospectus, shares of a Fund are sold at their
public offering price, which is the net asset value per share of the Fund next
determined after an order is received in proper form plus, with respect to Class
A shares, an initial sales charge. The minimum initial investment is $1,000 and
the minimum subsequent investment is $100 but such minimum amounts may be
changed at any time. See the prospectus for certain exceptions to these
minimums. An order for the purchase of shares that is accompanied by a check
drawn on a foreign bank (other than a check drawn on a Canadian bank in U.S.
Dollars) will not be considered in proper form and will not be processed unless
and until the Trust determines that it has received payment of the proceeds of
the check. The time required for such a determination will vary and cannot be
determined in advance. The amount received by a shareholder upon redemption or
repurchase may be more or less than the amount paid for such shares depending on
the market value of a Trust's portfolio securities at the time.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by the Trust at the applicable net asset value
per share of such Fund as described in the Trusts' prospectus.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B shares or Class C shares by certain classes of persons or
through certain types of transactions as described in the prospectus, are
provided because of anticipated economies in sales and sales related efforts.
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<PAGE> 103
A Trust may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange ("Exchange") is
closed other than customary weekend and holiday closings or during any period in
which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of a Trust's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the value of its net assets, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection of
a Trust's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to each Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
OFFICERS AND TRUSTEES
The officers and trustees of the Trusts, their birthdates, their principal
occupations and their affiliations, if any, with ZKI, the Trusts' investment
manager and KDI, the Trusts' principal underwriter, are as follows (The number
following each person's title is the number of investment companies managed by
ZKI and its affiliates, for which he or she holds similar positions):
DAVID W. BELIN (6/20/28), Trustee (24), 2000 Financial Center, 7th and Walnut,
Des Moines, Iowa; Member, Belin Harris Lamson McCormick, P.C. (attorneys).
LEWIS A. BURNHAM (1/8/33), Trustee (24), 16410 Avila Boulevard, Tampa, Florida;
Director, Management Consulting Services, McNulty & Company; formerly, Executive
Vice President, Anchor Glass Container Corporation.
DONALD L. DUNAWAY (3/8/37), Trustee (24), 7515 Pelican Bay Boulevard, Naples,
Florida; Retired; formerly, Executive Vice President, A.O. Smith Corporation
(diversified manufacturer).
ROBERT B. HOFFMAN (12/11/36), Trustee (24), 800 North Lindbergh Boulevard, St.
Louis, Missouri; Senior Vice President and Chief Financial Officer, Monsanto
Company (chemical products); prior thereto, Vice President, FMC Corporation
(manufacturer of machinery and chemicals); prior thereto, Director, Executive
Vice President and Chief Financial Officer, Staley Continental, Inc. (food
products).
DONALD R. JONES (1/17/30), Trustee (24), 1776 Beaver Pond Road, Inverness,
Illinois; Retired; Director, Motorola, Inc. (manufacturer of electronic
equipment and components); formerly, Executive Vice President and Chief
Financial Officer, Motorola, Inc.
DOMINIQUE P. MORAX (10/02/48), Trustee*(37), 222 South Riverside Plaza, Chicago,
Illinois; Member, Extended Corporate Executive Board, Zurich Insurance Company;
Director, ZKI.
SHIRLEY D. PETERSON (9/3/41), Trustee (24), 401 Rosemont Avenue, Frederick,
Maryland; President, Hood College, Maryland; prior thereto, Partner, Steptoe and
Johnson (attorneys); prior thereto, Commissioner of Internal Revenue Service;
prior thereto, Assistant Attorney General, U.S. Department of Treasury.
WILLIAM P. SOMMERS (7/22/33), Trustee (24), 333 Ravenswood Avenue, Menlo Park,
California; President and Chief Executive Officer, SRI International (research
and development); prior thereto, Executive Vice President, Iameter (medical
information and educational service provider); prior thereto, Senior Vice
President and Director, Booz, Allen & Hamilton Inc. (management consulting firm)
(retired); Director, Rohr, Inc., Therapeutic Discovery Corp. and Litton
Industries.
B-50
<PAGE> 104
STEPHEN B. TIMBERS (8/8/44), President and Trustee*(37), 222 South Riverside
Plaza, Chicago, Illinois; President, Chief Executive Officer, Chief Investment
Officer and Director, ZKI; Director, KDI, Dreman Value Advisors, Inc. and LTV
Corporation.
JOHN E. NEAL (3/9/50), Vice President*(37), 222 South Riverside Plaza, Chicago,
Illinois; President, Kemper Funds Group, a unit of ZKI; Director, ZKI, Dreman
Value Advisors, Inc. and KDI.
CHARLES R. MANZONI, JR. (1/23/47), Vice President*(37), 222 South Riverside
Plaza, Chicago, Illinois; Executive Vice President, Secretary and General
Counsel of ZKI; Secretary, ZKI Holding Corp.; Secretary, ZKI Agency, Inc.;
formerly, Partner, Gardner, Carton & Douglas (attorneys).
J. PATRICK BEIMFORD (5/25/50), JR., Vice President*(23), 222 South Riverside
Plaza, Chicago, Illinois; Executive Vice President/Chief Investment
Officer--Fixed Income Investments, ZKI.
CHRISTOPHER J. MIER (8/11/56), Vice President*(4), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, ZKI.
JEROME L. DUFFY (6/29/36), Treasurer*(37), 222 South Riverside Plaza, Chicago,
Illinois; Senior Vice President, ZKI.
PHILIP J. COLLORA (11/15/45), Vice President and Secretary*(37), 222 South
Riverside Plaza, Chicago, Illinois; Attorney, Senior Vice President and
Assistant Secretary, ZKI.
ELIZABETH C. WERTH (10/1/47), Assistant Secretary*(25), 222 South Riverside
Plaza, Chicago, Illinois; Vice President and Director of State Registrations,
ZKI.
* Interested persons as defined in the Investment Company Act of 1940.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Funds. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during
each Trust's 1996 fiscal year except that the information in the last column is
for calendar year 1995.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION FROM PENSION OR
FUNDS RETIREMENT BENEFITS TOTAL COMPENSATION
-------------------------------- ACCRUED AS PART FROM TRUSTS
NAME OF TRUSTEE NATIONAL TRUST STATE TRUST OF FUND EXPENSES PAID TO TRUSTEES**
- ------------------------------ --------------- ----------- ------------------- --------------------
<S> <C> <C> <C> <C>
David W. Belin*............... $11,100 7,200 0 149,700
Lewis A. Burnham.............. $ 7,200 4,700 0 111,000
Donald L. Dunaway*............ $11,300 7,400 0 151,000
Robert B. Hoffman............. $ 7,600 4,900 0 105,500
Donald R. Jones............... $ 7,600 4,900 0 110,700
Shirley D. Peterson***........ $ 7,300 4,800 0 44,500
William P. Sommers............ $ 7,100 4,700 0 100,700
</TABLE>
- ---------------
* Includes current fees deferred and interest pursuant to deferred
compensation agreements with the Funds. Deferred amounts accrue interest
monthly at a rate equal to the yield of Kemper Money Funds -- Kemper Money
Market Fund. Total deferred fees and interest accrued for the latest and
all prior fiscal years are $71,305 and $48,400 for Mr. Belin and $61,800
and $45,200 for Mr. Dunaway from National and State Trusts, respectively.
** Includes compensation for service on the boards of 22 Kemper funds with 40
fund portfolios. Each trustee currently serves as a trustee of 23 Kemper
funds with 40 fund portfolios.
*** Appointed a trustee of certain Kemper funds boards on June 15, 1995.
B-51
<PAGE> 105
As of November 25, 1996, the officers and trustees of each Trust, as a group,
owned less than 1% of the then outstanding shares of each Fund. As of November
25, 1996, no shareholder owned of record more than 5% of any class of
outstanding shares of the Funds except as follows:
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- --------------------- ------------------------------- ----- ----------
<S> <C> <C> <C>
Kemper Municipal
Bond Fund NFSC FEBO B 7.00%
Rosemary W. Potter
R Michael Potter
1762 Autumn Avenue
Memphis, TN 38112
NFSC FEBO C 5.86
Sharen D. Gleckman
16 Colonial Rd.
Providence, RI 02906
ADVEST INC. C 5.05
90 State House Square
Hartford, CT 06103
Alex Brown & Sons Inc. C 11.92
PO Box 1346
Baltimore, MD 21203
Salvation Army Federal I 99.96
Tax-Free Trust Pool
30840 Hawthorne Blvd.
Rancho Palos Verdes, CA 90275
Kemper Intermediate
Municipal Bond Fund Gokul C. Singhal & Renu A 10.65
Singhal JTWROS
12821 Topping Meadows
St. Louis, MO 63131
Woodstock A Partnership A 11.09
c/o Wood County Trust Co.
181 2nd St.
Wisconsin Rapids, WI 54494
Brian L. Johnson & A 7.25
Joan M. Johnson JTWROS
PO Box 408
Spooner, WI 54801
Newbridge Securities Inc. B 7.03
120 Wall Street
New York, NY 10005
William C. Grabitz FBO B 10.38
William C. Grabitz
700 S. Paulina
Chicago, IL 60612
</TABLE>
B-52
<PAGE> 106
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- --------------------- ------------------------------- ----- ----------
<S> <C> <C> <C>
Ronald Rach & Marilyn Rach B 8.69%
JTWROS
5737 S. Mason
Chicago, IL 60638
Painewebber for the Benefit of B 21.04
Granada Insurance Company
3911 SW 67th Avenue
Miami, FL 33155
NFSC FEBO C 15.39
Sharen D. Gleckmen
16 Colonial Rd.
Providence, RI 02906
Orsolina Gigante C 10.02
232 Thayer St.
River Vale, NJ 07675
Anthony B. Gigante C 10.02
232 Thayer St.
River Vale, NJ 07675
Raymond G. Altmann & C 7.68
Dolores Altmann JTWROS
7191 Beardsley St.
Englewood, FL 34224
Suzanne K. Sundquist FBO C 8.50
Suzanne K. Sundquist
72 N. Candlelight Drive
Green Valley, AZ 85614
Alex Brown & Sons Inc. C 10.17
PO Box 1346
Baltimore, MD 21203
Jed W. Shields & C 5.19
Shirlee H. Schields JTWROS
960 Donner Way 50
Salt Lake City, UT 84108
Kemper CA Tax-Free
Income Fund Smith Barney Inc. A 6.57
388 Greenwich Street
New York, NY 10013
NFSC FEBO B 10.89
Ruby L. Stauffer
516 Hollywood Way
Burbank, CA 91505
</TABLE>
B-53
<PAGE> 107
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- --------------------- ------------------------------- ----- ----------
<S> <C> <C> <C>
Smith Barney Inc. B 5.33%
388 Greenwich Street
New York, NY 10013
Merrill Lynch, Pierce, Fenner B 7.38
H. Y. Liebig and D. W. Liebig
JTWROS
88 Evergreen Dr.
NFSC FEBO C 8.98
Bauer Family Trust
516 Monterey Pass Rd.
Monterey Park, CA 91754
MLPF&S C 10.27
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville, FL 32246
Chandka Prasad C 16.79
208 Briarcliff Dr.
Folsom, CA 95630
Waldo Pike C 5.45
1608 Los Robles Dr.
Bakersfield, CA 93306
Elizabeth L. Erlandson C 16.03
10854 Darby Ave.
Northridge, CA 91326
Backs Family Trust C 9.73
2323 E. Austin
Fresno, CA 93726
Cargile Family Trust C 5.41
1701 Dinuba Ave. SP 15
Selma, CA 93662
Kemper NY Tax-Free
Income Fund NFSC FEBO A 10.62
Patrice M. McDonald
703 Franklin Ave.
Massapequa, NY 11758
BHC Securities, Inc. A 5.25
2005 Market Street Ste. 1200
Philadelphia, PA 19103
MLPF&S B 7.35
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville, FL 32246
</TABLE>
B-54
<PAGE> 108
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- --------------------- ------------------------------- ----- ----------
<S> <C> <C> <C>
Painewebber FBO C 14.92%
Mrs. Diana Riklis
1020 Park Ave.
New York, NY 10028
Raymond Blais C 6.00
1160 Bergen Ave.
Brooklyn, NY 11234
Painewebber FBO C 7.22
Mark Lawrence Tobin and
Deborah Eve Tobin JTWROS
33 Round Tree Drive
Melville, NY 11747
Josephine Benfatti & Florence C 11.93
Benfatti JTWROS
2017 Kimball St.
Brooklyn, NY 11234
Painewebber FBO C 8.08
Le Boeuf A La Mode
539 East 81st Street
New York, NY 10028
Kemper FL Tax-Free
Income Fund MLPF&S A 6.89
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville, FL 32246
NFSC FEBO B 22.00
Dorothy F Dean Trust
601 Tomahawk Trail
Brandon, FL 33511
Raymond James & Assoc. Inc. B 5.29
FAO Barbara Baldwin Picken
5214 Dover St. NE
Saint Petersburg, FL 33703
MLPF&S B 8.65
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville, FL 32246
W. Foster Dugas & Pamela L. B 5.44
Dugas JTTEN
570 Woodland Bayou Dr.
Santa Rosa Beach, FL 32459
</TABLE>
B-55
<PAGE> 109
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- --------------------- ------------------------------- ----- ----------
<S> <C> <C> <C>
NFSC FEBO C 19.00%
Susan Prince Harris-Wallace
260 Rafael Blvd. NE
St. Petersburg, FL 33704
Advest Inc. C 15.31
90 State House Square
Hartford, CT 06103
Kemper OH Tax-Free
Income Fund NFSC FEBO A 6.61
Nancy C. Young
2683 Leighton Rd.
Cleveland, OH 44120
John M. Wilson & Patricia A 6.18
Wilson
PO Box 386
Aurora, OH 44202
Smith Barney Inc. B 9.08
388 Greenwich Street
New York, NY 10013
BHC Securities Inc. B 39.18
2005 Market Street Ste. 1200
Philadelphia, PA 19103
John R. Bender C 6.35
645 Georgetown Ave.
Elyria, OH 44035
MLPF&S C 18.09
4800 Deer Lake Dr. East 3rd F.
Jacksonville, FL 32246
Jay M. Simpson & Valerie C 15.97
Stocklin JTWROS
7825 N. Dixie Ste. A
Dayton, OH 45414
Joseph E. Hahlmeister C 7.74
PO Box 210
Trenton, OH 45067
Marjorie M. Freytag C 18.45
Rt. 362
Minster, OH 45865
Spartan Corporation C 7.72
7345 Cascade Drive
West Chester, OH 45069
</TABLE>
B-56
<PAGE> 110
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- --------------------- ------------------------------- ----- ----------
<S> <C> <C>
44107Ben R. Brown & Louise B C 11.44
1664 River Road
Maumee, OH 43537
Darrell K. Cross B 6.57
597 Ryan Lane
Belton, TX 76513
Marjorie M. Nugent B 18.94
111 Dixie Lake West
Carthage, TX 75633
Felix A. Immell & Estella H. B 5.80
Immell
231 Shadyview
San Antonio, TX 78201
Southwest Securities Inc. B 45.06
Box 509002
Dallas, TX 75250
Marjorie M. Nugent B 14.52
111 Dixie Lake West
Carthage, TX 75633
Dona P. Cornutt C 8.06
PO Box 900
Pampa, TX 79066
Billy R. Hefley C 90.54
6301 East Loop 335 North
Amarillo, TX 79107
Kemper MI Tax-Free
Income Fund Lynda L. Ufer A 5.50
25712 Graceland Circle
Dearborn Heights, MI 48125
Kathryn E. Zabel A 7.24
4143 Cummings Ct. NW
Grand Rapids, MI 49544
John H. Blumenstock & A 11.89
Corinne K. Lee &
Delmer E. Blumenstock &
Dr. Brent Blumenstock
JTWROS
1100 Club Head
Virginia Beach, VA 23455
</TABLE>
B-57
<PAGE> 111
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- --------------------- ------------------------------- ----- ----------
<S> <C> <C> <C>
Prudential Securities FBO A 7.14%
Milton E. Muelder
1133 Southlawn
East Lansing, MI 48823
Lloyd J. McIntyre A 6.30
1911 N. Miller Road
Saginaw, MI 48609
Dorothy M. Converse B 8.01
201 S. Mall Dr.
Lansing, MI 48917
Karen L. Pearce B 8.11
6484 Stonebrook Lane
Flushing, MI 48433
Clinton P. Hardy & B 7.53
George L. Morris
46 Radnor Circle
Grosse Pointe Farms, MI 48236
Nina M. Williams & C 9.15
Natralie E. Williams
JTWROS
1536 N. Riviera Dr.
Stevensville, MI 49127
Salvatore Bisacia & C 22.24
Jane Philo Biasaccia
JTWROS
2530 Southlawn St.
Ypsilanti, MI 48197
Painewebber FBO C 22.82
Dorothy M. Crider
1833 Mills Ave.
N. Muskegon, MI 49445
Daniel M. Weikel C 33.88
1221 Ruddiman
Muskegon, MI 49445
Kemper NJ Tax-Free
Income Fund Wheat First FBO A 9.54
T W Nelson
827 Highland Ave
Westfield, NJ 07090
Samuel B. Kardon A 6.84
PO Box 519
Pine Plains, NY 12567
</TABLE>
B-58
<PAGE> 112
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- --------------------- ------------------------------- ----- ----------
<S> <C> <C> <C>
Agnes B. Cywinski A 9.06%
18 Springfield Ave.
Cranford, NJ 07016
Patricia A. Kitsz A 6.87
143 Highway 31
Femington, NJ 08822
Robert L. Vignolo A 7.17
842 Kimball Ave.
Westfield, NJ 07090
John R. Rosselli B 12.05
PO Box 3056
Newton, NJ 07860
BHC Securities, Inc. B 17.38
One Commerce Square
2005 Market Street Ste. 1200
Philadelphia, PA 19103
Lisa R. Caprioni C 52.03
22 Arlene Dr.
W. Long Branch, NJ 07764
Allen Van Dusen & Bonnie C 42.56
Van Dusen JTWROS
961 Farmingdale Road
Jackson, NJ 08527
Kemper PA Tax-Free
Income Fund NFSC FEBO A 36.57
UHL Construction Co.
PO Box 8
Allison Park, PA 15101
Prudential Securities FBO A 5.12
Perchonocken 1988 Family Trust
41 Conshohochen State Rd.
Bala Cynwyd, PA 19004
NFSC FEBO B 12.82
Jean F. Eberly
4836 Old Boston Road
Pittsburgh, PA 15227
Wheat First FBO B 8.85
Olga Y. Hyde
3300 Darby Rd.
Haverford, PA 19041
</TABLE>
B-59
<PAGE> 113
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- --------------------- ------------------------------- ----- ----------
<S> <C> <C> <C>
BHC Securities, Inc. B 7.74%
2005 Market Street Ste. 1200
Philadelphia, PA 19103
Parker Hunter Inc. B 10.59
FBO John V. Schroyer and
Jane Ann Schroyer
707 Davidson Avenue
Connellsville, PA 15425
NFSC FEBO C 90.98
Raymond V. Magreni
Margaret M. Magreni
70 West Manila Ave
Pittsburgh, PA 15220
Charles A. Sanbe & C 5.76
Margaret N. Sanbe JT-TEN
310 Donnelly Ave
Aston, PA 19014
</TABLE>
SHAREHOLDER RIGHTS
Each Trust generally is not required to hold meetings of its shareholders. Under
the Agreement and Declaration of Trust of each Trust ("Declaration of Trust"),
however, shareholder meetings will be held in connection with the following
matters: (a) the election or removal of trustees if a meeting is called for such
purpose; (b) the adoption of any contract for which shareholder approval is
required by the 1940 Act; (c) any termination of the Trust, a Fund or a class to
the extent and as provided in the Declaration of Trust; (d) any amendment of the
Declaration of Trust (other than amendments changing the name of the Trust,
supplying any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision thereof); and (e) such
additional matters as may be required by law, the Declaration of Trust, the
By-laws of the Trust, or any registration of the Trust with the Securities and
Exchange Commission or any state, or as the trustees may consider necessary or
desirable. The shareholders also would vote upon changes in fundamental
investment objectives, policies or restrictions.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) a Trust will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of a Trust stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, the
Trust has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
B-60
<PAGE> 114
The Declaration of Trust of each Trust provides that the presence at a
shareholder meeting in person or by proxy of at least 30% of the shares entitled
to vote on a matter shall constitute a quorum. Thus, a meeting of shareholders
of a Trust could take place even if less than a majority of the shareholders
were represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
independent auditors. Some matters requiring a larger vote under the Declaration
of Trust of a Trust, such as termination or reorganization of the Trust and
certain amendments of the Declaration of Trust, would not be affected by this
provision; nor would matters which under the 1940 Act require the vote of a
"majority of the outstanding voting securities" as defined in the 1940 Act.
The Declaration of Trust of each Trust specifically authorizes the Board of
Trustees to terminate the Trust or any Fund or class by notice to the
shareholders without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of a
Trust. The Declaration of Trust of each Trust, however, disclaims shareholder
liability for acts or obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into or
executed by the Trust or the trustees. Moreover, the Declaration of Trust of
each Trust provides for indemnification out of Trust property for all losses and
expenses of any shareholder held personally liable for the obligations of the
Trust and the Trust will be covered by insurance which the trustees consider
adequate to cover foreseeable tort claims. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is considered by
ZKI remote and not material, since it is limited to circumstances in which a
disclaimer is inoperative and the Trust itself is unable to meet its
obligations.
B-61
<PAGE> 115
APPENDIX--RATINGS OF INVESTMENTS
The four highest ratings of Moody's Investors Service, Inc. ("Moody's") for
municipal bonds are Aaa, Aa, A and Baa. Municipal bonds rated Aaa are judged to
be of the "best quality." The rating of Aa is assigned to municipal bonds which
are of "high quality by all standards," but as to which margins of protection or
other elements make long-term risks appear somewhat larger than Aaa rated
municipal bonds. The Aaa and Aa rated municipal bonds comprise what are
generally known as "high grade bonds." Municipal bonds which are rated A by
Moody's possess many favorable investment attributes and are considered "upper
medium grade obligations." Factors giving security to principal and interest of
A rated municipal bonds are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. Municipal
bonds which are rated Baa are considered as medium grade obligations; i.e., they
are neither highly protected nor poorly secured. Interest coverage and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Municipal bonds which are rated Ba are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Municipal
bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Municipal
bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Municipal bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings. Municipal bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
The four highest ratings of Standard & Poor's Corporation ("S&P") for municipal
bonds are AAA, AA, A and BBB. Municipal bonds rated AAA have the highest rating
assigned by S&P to a debt obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only in
small degree. Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories. Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this capacity than for bonds in higher rated categories. Municipal
bonds rated BB, B, CCC, CC or C are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. The rating CI is
reserved for income bonds on which no interest is being paid. Bonds rated D are
in default and payment of interest and/or repayment of principal is in arrears.
The four highest ratings of Fitch Investors Service, Inc. ("Fitch") for
municipal bonds are AAA, AA, A and BBB. Municipal bonds rated AAA are considered
to be investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events. Bonds rated AA are
considered to be investment grade and of very high credit quality. The obligor's
ability to pay interest and repay principal is very strong, although not quite
as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories
are not significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F-1+. Bonds rated A are considered to
be investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings. Bonds rated BBB are considered to be investment grade
and of satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. Bonds rated BB are considered
speculative. The obligor's
B-62
<PAGE> 116
ability to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
Bonds rated B are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue. Bonds rated CCC have certain identifiable characteristics
which, if not remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment. Bonds rated CC are
minimally protected. Default in payment of interest and/or principal seems
probable over time. Bonds rated C are in imminent default in payment of interest
or principal. Bonds rated DDD, DD and D are in default on interest and/or
principal payments. Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery on these bonds,
and D represents the lowest potential for recovery.
The four highest ratings of Duff & Phelps Credit Rating Co. ("Duff") for
municipal bonds are AAA, AA, A and BBB. Bonds rated AAA have the highest rating
assigned by Duff to a debt obligation. They are of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt. Bonds rated AA are of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions. Bonds rated A have protection factors that are
average but adequate. However, risk factors are more variable and greater in
periods of economic stress. Bonds rated BBB have below average protection
factors but are still considered sufficient for prudent investment. They have
considerable volatility in risk during economic cycles. Bonds rated BB are below
investment grade but deemed likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according to industry
conditions or company fortunes. Overall quality may move up or down frequently
within this category. Bonds rated B are below investment grade and possessing
risk that obligations will not be met when due. Financial protection factors
will fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade. Bonds rated CCC are well
below investment grade securities. Considerable uncertainty exists as to timely
payment of principal or interest. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or with
unfavorable company developments. Bonds rated D are in default. The issuer
failed to meet scheduled principal and/or interest payments.
The "debt securities" included in the discussions of temporary investments are
corporate (as opposed to municipal) debt obligations rated AAA, AA or A by S&P
or Aaa, Aa or A by Moody's. Corporate debt obligations rated AAA by S&P are
"highest grade obligations." Obligations bearing the rating of AA also qualify
as "high grade obligations" and "in the majority of instances differ from AAA
issues only in small degree." Corporate debt obligations rated A by S&P are
regarded as "upper medium grade" and have "considerable investment strength, but
are not entirely free from adverse effects of changes in economic and trade
conditions." The Moody's corporate debt ratings of Aaa, Aa and A do not differ
materially from those set forth above for municipal bonds.
Taxable or tax-exempt commercial paper ratings of A-1 or A-2 by S&P and P-1 or
P-2 by Moody's are the highest paper ratings of the respective agencies. The
issuer's earnings, quality of long-term debt, management and industry position
are among the factors considered in assigning such ratings.
Subsequent to its purchase by a Fund, an issue of Municipal Securities or a
temporary investment may cease to be rated or its rating may be reduced below
the minimum required for purchase by the Fund. Neither event requires the
elimination of such obligation from the Fund's portfolio, but KFS will consider
such an event in its determination of whether the Fund should continue to hold
such obligation in its portfolio. To the extent that the ratings accorded by
S&P, Moody's, Fitch or Duff for municipal bonds or temporary investments may
change as a result of changes in such organizations, or changes in their rating
systems, the Fund will attempt to use comparable ratings as standards for its
investments in municipal bonds or temporary investments in accordance with the
investment policies contained herein.
B-63
