<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MARCH 31, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Offering investors the opportunity for as high a level of current interest
income that is exempt from federal income taxes as is consistent with
preservation of capital
KEMPER
NATIONAL TAX-FREE INCOME SERIES
"...Midway into October, after the Federal Reserve Board
(the Fed) met and did not raise rates and as the Southeast
Asian problems continued to heat up, we lengthened the
funds' durations to a neutral to long position...
The strategy worked well....."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
6
TERMS TO KNOW
7
SHAREHOLDERS' MEETING
8
PORTFOLIO STATISTICS
10
PORTFOLIO OF INVESTMENTS
27
FINANCIAL STATEMENTS
29
NOTES TO FINANCIAL STATEMENTS
34
FINANCIAL HIGHLIGHTS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER NATIONAL TAX-FREE
INCOME FUNDS' TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
- --------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 4.11%
CLASS B 3.67%
CLASS C 3.66%
LIPPER GENERAL MUNICIPAL DEBT CATEGORY AVERAGE* 3.73%
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 3.44%
CLASS B 3.04%
CLASS C 3.08%
LIPPER INTERMEDIATE MUNICIPAL DEBT CATEGORY AVERAGE* 3.00%
- --------------------------------------------------------------------------------
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT REPRESENT FUTURE PERFORMANCE. RETURNS AND NET
ASSET VALUE FLUCTUATE. SHARES ARE REDEEMABLE AT CURRENT NET ASSET VALUE, WHICH
MAY BE MORE OR LESS THAN ORIGINAL COST.
* LIPPER ANALYTICAL SERVICES, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES
IN NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT
OF SALES CHARGES AND, IF THEY HAD, RESULTS MAY HAVE BEEN LESS FAVORABLE. THE
FUNDS ARE COMPARED TO THEIR RESPECTIVE LIPPER CATEGORIES AS FOLLOWS: GENERAL
MUNICIPAL DEBT AND INTERMEDIATE MUNICIPAL DEBT.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
3/31/98 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER MUNICIPAL BOND FUND
CLASS A $10.40 $10.46
- --------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND
CLASS B $10.38 $10.44
- --------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND
CLASS C $10.41 $10.47
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
3/31/98 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER INTERMEDIATE MUNICIPAL
BOND FUND CLASS A $10.37 $10.31
- --------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL
BOND FUND CLASS B $10.37 $10.31
- --------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL
BOND FUND CLASS C $10.37 $10.31
- --------------------------------------------------------------------------------
</TABLE>
KEMPER NATIONAL TAX-FREE INCOME FUNDS
LIPPER RANKINGS*
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THEIR RESPECTIVE LIPPER CATEGORIES
- --------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #62 OF 237 FUNDS #144 OF 237 FUNDS #154 OF 237 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #17 OF 120 FUNDS N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #16 OF 71 FUNDS N/A N/A
- --------------------------------------------------------------------------------
15-YEAR #6 OF 35 FUNDS N/A N/A
- --------------------------------------------------------------------------------
20-YEAR #6 OF 23 FUNDS N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #44 OF 140 FUNDS #83 OF 140 FUNDS #87 OF 140 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLES SHOW PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE
FUNDS AS OF MARCH 31, 1998.
- --------------------------------------------------------------------------------
KEMPER MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $.2622 $.2165 $.2183
- --------------------------------------------------------------------------------
MARCH DIVIDEND: $.0485 $.0402 $.0401
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 5.60% 4.65% 4.62%
- --------------------------------------------------------------------------------
SEC YIELD+: 3.98% 3.29% 3.28%
- --------------------------------------------------------------------------------
TAX EQUIVALENT
YIELD: 6.33% 5.23% 5.21%
- --------------------------------------------------------------------------------
</TABLE>
BASED ON A MARGINAL FEDERAL INCOME TAX RATE OF 37.1%.
- --------------------------------------------------------------------------------
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $.2262 $.1855 $.1858
- --------------------------------------------------------------------------------
MARCH DIVIDEND: $.0421 $.0343 $.0339
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.87% 3.97% 3.92%
- --------------------------------------------------------------------------------
SEC YIELD+: 3.41% 2.71% 2.73%
- --------------------------------------------------------------------------------
TAX EQUIVALENT
YIELD: 5.42% 4.31% 4.34%
- --------------------------------------------------------------------------------
</TABLE>
BASED ON A MARGINAL FEDERAL INCOME TAX RATE OF 37.1%.
+ +Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on March 31, 1998. Distribution
rate simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended March 31, 1998 shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with the
standardized method prescribed by the Securities and Exchange Commission. Tax
equivalent yield is based on the fund's yield and a marginal federal income tax
rate of 37.1 percent. Income may be subject to state and local taxes and, for
some investors, a portion may be subject to the alternative minimum tax.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVA'S PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS. HE IS ALSO A MEMBER OF THE INVESTMENT POLICY AND STRATEGY COMMITTEE
FOR KEMPER FUNDS.
SILVIA HOLDS A BACHELOR OF ARTS AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND HAS A MASTER'S DEGREE IN ECONOMICS FROM BROWN
UNIVERSITY IN PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS
WITH THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS.
IT IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT
ORGANIZATIONS WORLDWIDE, MANAGING MORE THAN $200 BILLION IN ASSETS GLOBALLY FOR
MUTUAL FUND INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND
CORPORATE CLIENTS, INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL
ACCOUNTS. IT IS ONE OF THE 10 LARGEST MUTUAL FUND COMPLEXES IN THE UNITED
STATES.
DEAR SHAREHOLDERS,
Stable economic growth, low interest rates and sustained lower inflation have
continued to produce a beneficial market environment for investors in the second
quarter of 1998. Despite heightened sensitivity to earnings estimates and
announcements, the market continued to support financial assets. We can expect
this favorable climate to continue--in spite of the sensitivity--at least over
the shorter term.
As always, expectations have been at the heart of the actions and reactions
that move the markets. Expectations appear to be high, as demonstrated by a
record flow of new cash--$37.5 billion--into mutual funds in March. This record
flow surpassed the prior monthly record of $32.7 billion in net mutual fund
investing set in January 1996. Two years ago, many experts were concerned that
the bull market was close to being on its last legs. Quite remarkably today,
investors are still betting on equities. Nearly 75 percent of the new cash
flowing into mutual funds in March went into stock funds, according to the
Investment Company Institute, a trade organization that monitors the mutual
fund industry.
Unfortunately, high expectations often combine with high anxiety--today's
investors are attuned to even the smallest hint of economic change. The result
is volatility. Many who believe that our long-running bull market is too good to
be true or that stock prices are too high are wondering when the market will
reverse.
While a reversal may not be on the immediate horizon, investors are wise to
watch for several signs that change is underway: rising prices, indicating
higher inflation; repercussions of the Asian economic crisis on American
business, which could appear in the form of reduced earnings; and a continued
widening of our trade deficit, a serious imbalance caused by heightened American
demand for foreign goods and services.
On Monday, April 27, expectations were tested by reports that the Federal
Reserve Board (Fed) was considering a hike in interest rates. The markets
reacted immediately to this news, driving stock prices downward. Ultimately, we
do not anticipate that an interest rate hike will materialize in the second
quarter; however, the Fed's monetary policy meeting shortly after the release of
this overview will provide more information.
Our positive outlook for this quarter is based primarily on the current
resiliency of our marketplace. The United States appears to be firmly planted in
the middle of an economic cycle, with no evidence of detrimental pressures that
might be associated with the market's phenomenal growth. We are not seeing price
increases for goods and services or a downturn in the housing market, both of
which we might expect late in an economic cycle.
Equities have continued to reward investors. The U.S. stock market, as
measured by the Standard & Poor's 500, gained nearly 14 percent in the first
quarter of 1998 and returned more than 15 percent year-to-date as of April 30.
Bonds have also rewarded investors in terms of real return, which is total
return less the rate of inflation. The high yield and corporate debt
fixed-income markets also have performed well.
U.S. economic growth, as measured by the gross domestic product (GDP) growth
rate, was slightly above 4 percent for the first quarter. Our general
expectation for the year is that growth will increase between 2.5 and 3 percent
over last year. In other words, the economy will remain strong, but will slow
down as the year progresses.
Consumer spending and corporate fixed investments have fueled the economy's
solid growth. Spending on both capital goods and high technology has been
strong. Corporate profits have grown between 5 and 10 percent, which appears to
be acceptable in an environment of stable interest rates. U.S. employment growth
has ranged from 2 to 2.25 percent, continuing to exceed expectations. Consumer
confidence has continued to hit near all-time highs. The increase in output
prices, an indicator of inflation measured by the Consumer Price Index (CPI),
has remained at 1.5 to 2 percent.
Adding to the good news, all seems to be quiet on the domestic policy front.
At the end of February, the U.S. federal budget deficit essentially vanished.
Recent efforts to reduce the deficit, combined with higher federal revenues due
to the robust economy, have left us with an expected budget surplus of $40
billion to $50 billion for fiscal 1998. To date, our Democratic president and
Republican Congress have not agreed on any significant legislation regarding tax
credits, spending cuts or health care that could threaten the newfound federal
budget surplus.
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund performance.
The following are some significant economic guideposts and their investment
rationale that may help your investment decision-making. The 10-year Treasury
rate and the prime rate are prevailing interest rates. The other data report
year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (4/30/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.64 5.88 6.71 6.74
PRIME RATE(2) 8.5 8.5 8.5 8.25
INFLATION RATE(3)* 1.38 2.08 2.43 2.9
THE U.S. DOLLAR(4) 3.92 9.65 6.55 8.51
CAPITAL GOODS ORDERS(5)* 10.89 11.72 8.17 6.82
INDUSTRIAL PRODUCTION(5)* 4.27 5.77 4.72 3.49
EMPLOYMENT GROWTH(6)* 2.59 2.36 2.27 1.78
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces as investor's real return. In the last five years,
inflation has been as high as 6 percent. The low, moderate inflation of
the last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of March 31, 1998.
Can we expect a little more excitement from overseas? A full-scale global
recession from last year's Asian economic crisis seems unlikely at this point.
The crisis has yet to hurt most U.S. businesses and investors. Quite the
contrary. While the mere threat of repercussions from the Asian crisis added to
the anxiety mentioned earlier, it has also had the effect of keeping U.S.
interest rates and prices in check, making the U.S. economy all the more
attractive to investors around the world.
In the global economy, the U.S. dollar continues to appreciate in value
compared to other currencies. In fact, more capital is flowing into U.S. markets
as investors generally avoid Asia. Europe has also been benefiting from the
crisis. Canada, which is a commodity-producing exporter, has been somewhat
negatively affected as commodity prices have fallen.
Other major developments abroad include the final selection of countries to
participate in Europe's single currency next year. Many European countries are
adopting more restrictive fiscal policy and reducing inflation in anticipation
of the momentous European Economic and Monetary Union (EMU). But after the EMU
is established in 1999, tensions may indeed mount as countries work to adapt to
the new structure.
As we approach the turn of the century, one caveat remains: Don't
underestimate the potential of the Year 2000 computer code problem. It appears
that a significant number of federal government agencies will not meet the
criteria necessary to avoid the problem. Many businesses are revealing that
billions of dollars are being spent on the situation. Some experts say a global
recession is in store. Others adamantly disagree. In any event, we may indeed
see a reduction in capital spending toward the end of 1998 and the first half of
next year as companies focus on fixing existing computers rather than on
purchasing new equipment. We'll keep you posted!
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
JOHN E. SILVIA
May 8, 1998
4
<PAGE> 5
PERFORMANCE UPDATE
[MIER PHOTO]
CHRISTOPHER MIER JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1986 AND IS A
MANAGING DIRECTOR. MIER WAS A VICE PRESIDENT AND PORTFOLIO MANAGER OF THE KEMPER
NATIONAL TAX-FREE INCOME SERIES FOR THE PERIOD ENDED MARCH 1998. MIER RECEIVED A
BACHELOR'S DEGREE IN ECONOMICS FROM THE UNIVERSITY OF MICHIGAN AND WENT ON TO
RECEIVE HIS M.M. IN FINANCE FROM THE KELLOGG GRADUATE SCHOOL OF MANAGEMENT AT
NORTHWESTERN UNIVERSITY. HE IS A CHARTERED FINANCIAL ANALYST.
[ASHTON PHOTO]
M. ASHTON PATTON HAS BEEN THE LEAD PORTFOLIO MANAGER OF THE KEMPER INTERMEDIATE
MUNICIPAL BOND FUND SINCE MARCH 1998. MS. PATTON JOINED SCUDDER KEMPER
INVESTMENTS IN 1990 AND IS A SENIOR VICE PRESIDENT. MS. PATTON RECEIVED A B.A.
FROM DUKE UNIVERSITY AND IS A CHARTERED FINANCIAL ANALYST.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
KEMPER MUNICIPAL BOND FUND AND KEMPER INTERMEDIATE MUNICIPAL BOND FUND
EXPERIENCED STRONG PERFORMANCE DURING THE SIX-MONTH PERIOD AGAINST A BACKDROP
OF RECORD LOW INFLATION, HIGH NEW ISSUE VOLUME AND THE ASIAN MARKETS AND
CURRENCIES CRISIS. PORTFOLIO MANAGER CHRIS MIER EXPLAINS HOW THESE FACTORS
AFFECTED THE FUNDS AND MUNICIPAL MARKET AND WHAT HE EXPECTS FOR THE REMAINDER
OF THE FUNDS' FISCAL YEARS.
Q THE FUNDS' PERFORMANCE WAS CONSISTENTLY STRONG IN THE SIX-MONTH PERIOD
ENDED MARCH 31, 1998. WHAT WAS THE OVERALL MARKET ENVIRONMENT DURING THOSE SIX
MONTHS?
A The municipal bond market was affected by four factors during the period:
strong economic growth, lower-than-expected inflation, declining interest rates
and, lastly, the Southeast Asian currency and market crisis.
Q WHAT PART DID THE ASIAN CRISIS PLAY IN THE BOND MARKET OVER THIS PERIOD?
A When the Hong Kong stock market followed other Asian markets and crashed
in October, investors worldwide sought safe investment vehicles. U.S. dollar and
dollar-denominated investments, particularly those of high quality and
liquidity, such as U.S. Treasuries, experienced a massive cash inflow. This is
generally referred to as "flight to quality." The municipal bond market, which
often moves in tandem with the Treasury market, benefited from this declining
interest rate environment.
Q HOW WERE THE FUNDS POSITIONED DURING THIS SIX-MONTH PERIOD?
A We positioned Kemper Municipal Bond Fund and Kemper Intermediate Municipal
Bond Fund with neutral to short durations going into this six-month period. We
were watching for indications of strengthening inflation and also what the
Federal Reserve Board (the Fed) might do with interest rates.
Midway into October, after the Fed met and did not raise rates and as the
Southeast Asian problems continued to heat up, we lengthened the funds'
durations to a neutral to long position. The funds performed well in October. We
kept the funds positioned neutral to long into November and December as well.
The strategy worked well. Kemper Municipal Bond Fund Class A shares
(unadjusted for any sales charge) returned 4.11 percent for the six-month period
ended March 31, 1998, versus its Lipper peer group average, which was 3.73
percent. Kemper Intermediate Municipal Bond Fund Class A shares (unadjusted for
any sales charge) returned 3.44 percent versus its peer group average of 3
percent.
Q TALKING ABOUT POSITIONING THE FUNDS, YOU REFER TO "DURATION." WHAT IS ITS
SIGNIFICANCE?
A Talking about duration is really talking about interest rate risk. The
longer a portfolio's duration, the greater its interest rate risk. Duration is a
measure of the interest rate sensitivity of a portfolio, incorporating the
average weighted time to maturity of the cash flows.
Q SO YOU MAINTAINED A NEUTRAL TO SLIGHTLY LONG DURATION STANCE FROM OCTOBER
TO DECEMBER. HOW DID YOU POSITION THE FUNDS JANUARY THROUGH THE END OF MARCH?
A We began reducing the duration of our portfolios in January, feeling that
most of the effects of the Asian crisis were already embedded in the bond market
by mid-January when prices peaked. February and the early part of March were
volatile, but generally directionless with respect to interest rates. Because we
had already reduced the funds' durations to a neutral stance, they were
positioned appropriately. In late March, we extended moderately.
5
<PAGE> 6
PERFORMANCE UPDATE
Q THE AMOUNT OF NEW MUNICIPAL ISSUES DURING THE PERIOD WAS PHENOMENAL.
APPROXIMATELY $133 BILLION OF NEW BONDS WERE ISSUED IN THE SIX-MONTH PERIOD.
WHAT EFFECT DID THIS HAVE ON THE MARKET AND THE FUNDS' PERFORMANCE?
A The tremendous number of bonds marketed during this period had a
significant effect on the market. The volume of new issues forced municipal
rates to stay attractive relative to their taxable counterparts. Municipal rates
were about 91.2 percent of a 30-year Treasury bond at the end of the funds'
six-month period.
Q DO YOU ANTICIPATE THIS HIGH VOLUME TO CONTINUE?
A The elevated supply was due to two factors -- declining interest rates,
which led to an increase in advanced refunding issues, and continued growth in
new project financing. The economy has been strong with inflation not much of a
threat, so municipalities can afford to undertake large capital improvements and
other projects that municipal bonds are issued to finance. New issue volume has
been increasing year over year, but I expect the volume after the first quarter
of 1998 will subside.
Q HOW HAS THE DIRECTION OF INTEREST RATES AFFECTED THE MARKET?
A Throughout half of this period, the Fed had indicated a bias toward
tightening rates because of strong domestic growth. When the economy expands too
quickly, inflation becomes a threat. The Fed was poised to slow that growth by
raising interest rates. However, minutes released in February indicated the Fed
went to a neutral bias at its December meetings because it was becoming apparent
the Asian crisis would have a deflationary effect and offset our very strong
economy to some degree. When the Fed met again in March, it again made no move
to change rates.
Q EL NINO AND OTHER UNUSUAL WEATHER HAS PLAGUED MUCH OF THE U.S. WILL THE
COSTS ASSOCIATED WITH REBUILDING AFFECT A MUNICIPALITY'S ABILITY TO REPAY THEIR
OBLIGATIONS?
A When a natural disaster occurs, cities, counties and states receive a
great deal of federal money and insurance money to repair whatever has been
destroyed, so the disaster isn't as much of a financial drain as would be
expected.
Q HOW HAVE YOU RESPONDED TO THE CHANGING MUNICIPAL YIELD CURVE?
A We continue to take advantage of the relative flatness of the municipal
yield curve. I think the most attractive portion of the curve is in the 15-year
area. There is very little incentive to go beyond the 20-year range. The only
30-year paper we have added is premium bonds with prices that reflect their
shorter call features or else higher yielding securities like a 'BBB' or 'A'
rated bond (see Terms to Know for callable bonds and credit ratings).
Q WHAT IS YOUR OUTLOOK FOR THE MUNICIPAL BOND MARKET?
A As I've mentioned, we expect to see supply taper off into late spring and
summer. The market is likely to be relatively range bound, and prices should
remain somewhat stable. I do think rates will trend lower again once the
domestic economy begins to slow somewhat due to the effect from the Asian
problems.
Q IS THIS STILL A GOOD TIME TO BE IN MUNICIPALS?
A I think municipals are quite attractive right now. They're at high yield
percentages to Treasuries and offer attractive real rates of interest because of
our current low rate of inflation. If supply begins to taper off and the economy
begins to slow a bit as we expect, that should be more good news for the funds.
TERMS TO KNOW
BOND RATINGS Grades assigned by credit-rating agencies to corporate and
municipal debt securities, based on the borrower's expected ability to repay.
The higher the grade, the lower the interest rate a borrower will usually pay.
The two major credit rating firms are Moody's Investors Service, Inc. and
Standard & Poor's.
CALLABLE BOND A bond issue, all or part of which may be redeemed before maturity
by the issuer under specified conditions. The term also applies to preferred
shares that may be redeemed by the issuing corporation.
DURATION A measure of the interest rate sensitivity of a portfolio,
incorporating time to maturity and coupon size. The longer the duration, the
greater the interest rate risk.
REVENUE BOND INDEX (RBI) RBI is the average yield on 25 revenue bonds with
30-year maturities compiled by THE BOND BUYER, a newspaper that reports on the
municipal bond market.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period. Total return assumes the
reinvestment of all dividends and it represents the aggregate percentage or
dollar value change over the period.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
6
<PAGE> 7
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 3, 1997, a special shareholders' meeting was held and adjourned as
necessary. Kemper National Tax-Free Income Series Fund shareholders were asked
to vote on five separate issues: election of the nine members to the Board of
Trustees, ratification of Ernst & Young LLP as independent auditors, approval of
new investment management agreement with Scudder Kemper Investments, Inc.,
approval of changes in the Fund's fundamental investment policies to permit a
master/feeder fund structure and approval of a new rule 12b-1 distribution plan
with Zurich Kemper Distributors, Inc. for Class B shares and Class C shares. The
following are the results for each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 212,403,773 3,852,460
Lewis A. Burnham 212,594,151 3,662,083
Donald L. Dunaway 212,593,454 3,662,780
Robert B. Hoffman 212,594,002 3,662,232
Donald R. Jones 212,527,934 3,728,300
Shirley D. Peterson 212,397,848 3,858,386
Daniel Pierce 212,400,280 3,855,954
William P. Sommers 212,600,600 3,655,633
Edmond D. Villani 212,376,110 3,880,123
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the current fiscal year.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
210,693,083 1,480,185 4,082,965
</TABLE>
3) Approval of new investment management agreement with Scudder Kemper
Investments, Inc.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
Municipal 195,614,879 4,391,646 7,548,567 0
Intermediate
Municipal 1,159,791 26,278 17,969 1,343
</TABLE>
4) Approval of changes in the Fund's fundamental investment policies to permit a
master/feeder fund structure.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
Municipal 167,754,077 7,328,059 10,847,408 21,625,549
Intermediate
Municipal 1,211,730 48,388 21,391 0
</TABLE>
5) To approve a new rule 12b-1 distribution plan with Zurich Kemper
Distributors, Inc.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
Municipal
Class B 3,380,495 83,985 74,788 207,025
Class C 264,078 0 6,727 19,321
Intermediate
Municipal
Class B 256,575 0 5,681 0
Class C 71,169 0 0 0
</TABLE>
7
<PAGE> 8
PORTFOLIO STATISTICS
KEMPER MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 3/31/98 ON 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 69% 72%
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 15 10
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 14 13
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 5
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/98 ON 9/30/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY ON 3/31/98 ON 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 53% 47%
- --------------------------------------------------------------------------------
AA 14 14
- --------------------------------------------------------------------------------
A 11 10
- --------------------------------------------------------------------------------
BBB 14 21
- --------------------------------------------------------------------------------
BB 3 3
- --------------------------------------------------------------------------------
B 1 1
- --------------------------------------------------------------------------------
NOT RATED 4 4
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/98 ON 9/30/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY ON 3/31/98 ON 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 17% 15%
- --------------------------------------------------------------------------------
11-20 YEARS 52 49
- --------------------------------------------------------------------------------
21+ YEARS 31 36
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/98 ON 9/30/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE MATURITY ON 3/31/98 ON 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 16.2 years 16.6 years
- --------------------------------------------------------------------------------
</TABLE>
* PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO STATISTICS
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 3/31/98 ON 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 70% 70%
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 19 17
- --------------------------------------------------------------------------------
US GOVERNMENT SECURED 10 8
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 1 5
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/98 ON 9/30/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY ON 3/31/98 ON 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 53% 48%
- --------------------------------------------------------------------------------
AA 14 14
- --------------------------------------------------------------------------------
A 5 5
- --------------------------------------------------------------------------------
BBB 18 23
- --------------------------------------------------------------------------------
NOT RATED 10 10
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/98 ON 9/30/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY ON 3/31/98 ON 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 72% 73%
- --------------------------------------------------------------------------------
11-20 YEARS 28 27
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/98 ON 9/30/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE MATURITY ON 3/31/98 ON 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 7.5 years 7.7 years
- --------------------------------------------------------------------------------
</TABLE>
* PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER MUNICIPAL BOND FUND
Portfolio of Investments at March 31, 1998 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
Scioto County, OH, USHCSO-Portsmouth Proj.,
Hospital Facilities, Rev., 7.625%, to be called
5-15-98 @ 102 $ 2,000 $ 2,049
Riverside County, CA, Riverside Juvenile
Facilities Corp., Certificates of
Participation, Rev., 8.00%, to be called
10-1-98 @ 102 4,000 4,166
Health Facilities Auth., CO, Vail Valley Medical
Center, Rev., 8.125%, to be called 6-1-99 @ 102 7,000 7,479
Clermont County Hospital Facilities, OH, Mercy
Health Systems, Rev., 7.50%, to be called
9-1-99 @ 102 7,720 8,266
Hospital Auth. of Marion County, IN, University
Heights Hospital, Rev., 8.625%, to be called
10-1-99 @ 102 7,195 7,841
Gaithersburg, MD, First Mortgage Economic Dev.,
Asbury Methodist Home Incorporated, Rev.,
7.85%, to be called 1-1-00 @ 102 4,000 4,331
Mental Health Services, NY, Facilities
Improvement, Rev., 7.75%, to be called 2-15-00
@ 102 2,955 3,216
Philadelphia, PA, Municipal Auth., Criminal
Justice Center Rev., 7.80%, to be called 4-1-00
@ 100 4,000 4,279
Higher Education Facility Commission, OH, Rev.,
6.70%, to be called 5-1-00 @ 102 6,725 7,225
Franklin County, OH, Mount Carmel Health
Hospital, Rev., 7.25%, to be called 6-1-00 @
102 5,495 5,969
Hospital Finance Auth., MI, Henry Ford Health
System, Rev., 7.00%, to be called 7-1-00 @ 102 11,000 11,912
City and County of Denver, CO, Airport System
Rev., 8.50%, to be called 11-15-00 @ 102 405 457
Health and Education Facilities Auth., MO,
Christian Health Services Dev. Corp., Rev.,
6.875%, to be called 2-15-01 @ 102 7,000 7,654
Health and Education Facilities Auth., WI, Wausau
Hospitals, Inc. Proj., Rev., 6.625%, to be
called 2-15-01 @ 102 3,000 3,260
Local Government Assistance Corp., NY, Rev.,
7.375% and 7.50%, to be called 4-1-01 @ 102 9,675 10,784
City of Battle Creek and Calhoun County, MI,
Downtown Dev. Auth., Tax Increment Rev., 7.60%,
to be called 5-1-01 @ 102 3,800 4,509
Durham County, NC, 1991 Jail Facilities and
Computer Equipment Financing Proj., Rev.,
6.625%, to be called 5-1-01 @ 102 5,500 6,003
Lancaster County Water and Sewer District, SC,
Waterworks and Sewer System Improvement, Rev.,
6.75%, to be called 5-1-01 @ 102 3,000 3,287
Cocinino County, AZ, Industrial Dev. Auth.,
Health Care Institution, The Guidance Center,
Inc. Proj., Rev., 9.25%, to be called 6-1-01 @
102 585 673
Environmental Facilities Corp., NY, State Water
Pollution Control, Revolving Fund Rev., 7.25%,
to be called 6-15-01 @ 102 4,520 5,030
Municipal Water Finance Auth., NY, Water and
Sewer System, Rev., 7.00%, to be called 6-15-01
@ 101 760 833
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Philadelphia, PA, Gas Works Rev., 7.70%, to be
called 6-15-01 @ 102 $ 14,850 $ 16,699
Industrial Development Auth., PA, Rev., 7.00%, to
be called 7-1-01 @ 102 5,000 5,511
Gen. Oblg., NY, 7.75%, to be called 8-15-01 @ 102 3,285 3,707
Clermont County Hospital Facilities, OH, Mercy
Health Systems, Rev., 7.50%, to be called
9-1-01 @ 100 2,280 2,523
Austin, TX, Water, Sewer and Electric Rev.,
14.00%, to be called 11-15-01 @ 100 105 118
Gen. Oblg., NY, 8.40%, to be called 11-15-01 @
102 27,540 31,889
Chicago, IL, Tax Increment Allocation Bonds,
Central Station, Rev., 8.90%, to be called
1-1-02 @ 102 1,680 2,028
Gen. Oblg., NY, 7.00%, to be called 2-1-02 @ 102 2,640 2,934
Health Facilities Auth., IL, South Suburban
Hospital, Rev., 7.00% to be called 2-15-02 @
102 3,055 3,405
Ector County, TX, Hospital District, Rev., 7.30%,
to be called 4-15-02 @ 102 550 622
Dormitory Auth., NY, State University Educational
Facilities, Rev., 7.25%, to be called 5-15-02 @
102 3,810 4,324
Finance Auth., IA, Trinity Regional Hospital
Proj., Rev., 7.00%, to be called 7-1-02 @ 102 12,000 13,458
Lehigh County, PA, General Purpose Auth., Lehigh
Valley Hospital Inc., Rev., 6.50%, to be called
7-1-02 @ 102 6,000 6,651
City and County of Denver, CO, Airport System
Rev., 6.75% to 8.75%, to be called 11-15-02 @
102 22,450 25,774
St. Louis, MO, Regional Convention & Sports
Complex Auth., Rev., 7.90%, to be called 8-1-03
@ 100 4,760 5,598
St. Louis, MO, Regional Convention & Sports
Complex Auth., Rev., 7.00%, to be called
8-15-03 @ 100 4,380 4,963
Jacksonville Health Facilities Auth., FL, Baptist
Medical Center, Rev., 11.50%, to be called
10-1-03 @ 100 10 13
Port Arthur Airport and Marina Improvement, TX,
Gen. Oblg., 6.125%, to be called 3-1-04 @ 100 9,000 9,872
Charleston County, SC, Charleston Public
Facilities Corp., Certificates of
Participation, Rev., 6.875% and 7.00%, to be
called 6-1-04 @ 102 7,260 8,413
Environmental Facilities Corp., NY, State Water
Pollution Control, Revolving Fund Rev., 6.875%,
to be called 6-15-04 @ 102 6,815 7,854
Metropolitan Transit Auth., NY, Transit
Facilities, Rev., 6.25%, to be called 7-1-04 @
102 6,000 6,734
Jacksonville Health Facilities Auth., FL, Baptist
Medical Center, Rev., 11.50%, to be called
10-1-04 @ 100 35 49
City and County of Denver, CO, Airport System
Rev., 7.50%, to be called 11-15-04 @ 102 1,240 1,482
Health Facilities Auth., IL, Northwestern Medical
Faculty Foundation, Inc., Healthcare Facilities
Rev., 6.50%, to be called 11-15-04 @ 102 3,900 4,450
Essex County Improvement Auth., NJ, County Jail
and Youth Housing Proj., Lease Rev., 6.90%, to
be called 12-1-04 @ 102 2,645 3,085
Purdue University, IN, Student Fees, Rev., 6.70%
and 6.75%, to be called 1-1-05 @ 103 14,250 16,501
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Medical Care Facilities Finance Agcy, NY,
Hospital Mortgage Rev., 6.75%, to be called
2-15-05 @ 102 $ 8,000 $ 9,261
Detroit, MI, Gen. Oblg., 6.70%, to be called
4-1-05 @ 101 2,500 2,861
Cuyahoga County, OH, Meridia Health System,
Hospital Rev., 6.25%, to be called 8-15-05 @
102 7,050 8,001
Arapahoe County, CO, Public Highway Auth., Rev.,
6.95% and 7.00%, to be called 8-31-05 @ 103 80,525 95,723
Jacksonville Health Facilities Auth., FL, Baptist
Medical Center, Rev., 11.50%, to be called
10-1-05 @ 100 40 58
Jacksonville Health Facilities Auth., FL, Baptist
Medical Center, Rev., 11.50%, to be called
10-1-06 @ 100 15 22
Lake of the Ozarks Community Bridge Corp., MO,
Bridge System, Rev., 6.25% and 6.40%, to be
called 12-1-06 @ 102 15,550 17,962
Albuquerque Southwest Community Health Services,
NM, Rev., 10.125%, to be called 8-1-08 @ 100 4,000 5,501
Housing Finance Agcy., OH, Single Family Mortgage
Rev., zero coupon, to be called 1-15-13 @ 82 3,360 1,319
Housing Finance Agcy., OH, Single Family Mortgage
Rev., zero coupon, to be called 7-15-13 @ 86 3,515 1,415
----------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--13.8% 440,003
- ---------------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------
NEW JERSEY--8.5% Atlantic City, Board of Education, Gen. Oblg.,
6.00% and 6.10%, 2013 and 2014 9,100 10,318
Building Auth., Rev., 5.00%, 2010 through 2012 39,945 40,381
Economic Development Auth., Rev., 5.875%, 2026 1,000 1,036
Essex County, Property and Equipment Improvement
Leasing Program, Rev., 6.50%, 2012 4,050 4,466
Health Care Facilities Financing Auth.:
Atlantic City Medical Center, Rev., 6.80%, 2011 6,840 7,541
Southern Ocean County Hospital, Rev., 6.125%,
2013 3,735 3,950
West Jersey Health System, Rev., 6.125%, 2012 11,000 11,883
Jersey City Sewer Auth., Rev., 4.50%, 2019 13,000 11,883
Salem Pollution Control Financing Auth., Rev.,
6.20%, 2030 20,000 22,039
Transportation Trust Fund Auth., Gen. Oblg.,
5.00% and 5.50%, 2012 and 2015 36,110 36,433
Turnpike Auth., Rev., 6.20% to 10.375%, 2003
through 2016 103,630 121,204
----------------------------------------------------------------------------
271,134
- ---------------------------------------------------------------------------------------------------------------------
ILLINOIS--8.0% Chicago:
Board of Education, Gen. Oblg., zero coupon to
6.25%, 2009 through 2020 58,260 43,607
Gas Supply, Peoples Gas, Light and Coke
Company, Rev., 8.10%, 2020 8,250 9,012
Gen. Oblg., 5.50%, 2014 7,400 7,883
Water Rev., zero coupon, 2012 6,350 3,060
County of Cook, Gen. Oblg., 6.50%, 2013 and 2014 39,780 47,030
Dev. Finance Auth.:
McGaw YMCA-Evanston Proj., Rev., 7.50%, 2013 3,750 4,256
Pollution Control, Commonwealth Edison Company
Proj., Rev., 6.75%, 2015 16,780 18,896
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Freeport, Single Family Mortgage Rev., 7.40%,
2010 $ 1,065 $ 1,068
Harvard, Multifamily Housing, Northfield Court,
Rev., 8.80%, 2008 3,830 4,106
Health Facilities Auth., South Suburban Hospital,
Rev., 7.00%, 2009 4,695 5,455
Metropolitan Pier & Exposition Auth., McCormick
Place Expansion, Rev., zero coupon,
2008 through 2021 40,865 15,954
O'Hare International Airport:
General Rev., 6.00% and 6.375%, 2012 20,000 21,795
International Terminal, Special Rev., 6.75%,
2018 23,350 25,427
Regional Transportation Auth., Gen. Oblg., 6.70%,
2021 25,800 31,518
Sports Facilities Auth., Rev., 7.875%, 2010 2,990 3,173
St. Charles, Wessel Court Proj., Multifamily
Housing Rev., 7.60%, 2024 3,845 3,991
University Park, Governors Gateway Industrial
Park, Tax Increment Rev., 8.50%, 2011 2,800 3,214
Will County, Community School District, Gen.
Oblg., zero coupon, 2015 8,000 3,233
----------------------------------------------------------------------------
252,678
- ---------------------------------------------------------------------------------------------------------------------
NEW YORK--6.4% Dormitory Auth.:
Bronx-Lebanon Hospital Center, Rev., 5.125% and
5.10%, 2008 and 2011 7,000 7,119
Brookdale Hospital & Medical Center, Rev.,
5.125%, 2008 7,405 7,692
Jamaica Hospital, Rev., 5.00%, 2010 980 993
New York Downtown Hospital, Rev., 5.00%, 2010 555 562
North General Hospital, Rev., 5.125%, 2008 and
2009 9,245 9,554
State University Educational Facility, Rev.,
5.75% and 6.00%, 2013 and 2014 12,500 13,928
Environmental Facilities Corp., State Water
Pollution Control, Revolving Fund Rev., 6.875%
to 7.25%, 2010 through 2014 7,540 8,388
Environmental Quality, Gen. Oblg., 6.50%, 2011 4,260 4,833
Medical Care Facilities Finance Agcy.:
Hospital and Nursing Home, Rev., 6.45%, 2009 8,540 9,422
Mental Health Services Facilities Improvement,
Rev., 7.75%, 2010 980 1,059
Metropolitan Transit Auth., Transit Facilities,
Rev., 6.00%, 2020 5,000 5,670
New York City:
Gen. Oblg., zero coupon to 8.40%, 2000 through
2019 82,465 77,571
Industrial Dev. Auth., USTA National Tennis
Center Inc. Proj., Civil Facility Rev., 6.50%
and 6.60%, 2010 and 2011 6,485 7,330
Municipal Water Finance Auth., Rev., 7.00% and
5.75%, 2015 and 2029 20,435 21,474
Port Auth. of New York and New Jersey, Rev.,
6.00% to 9.125%, 2008 through 2015 17,595 19,071
Urban Dev. Corp., Correctional Facilities, Rev.,
5.60% and 5.70%, 2015 and 2020 8,255 8,708
----------------------------------------------------------------------------
203,374
----------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TEXAS--5.3% Austin:
Combined Utility Systems Rev., 6.00%, 2013 $ 9,500 $ 10,709
Water, Sewer and Electric Rev., 14.00%, 2001 2,895 3,435
Brazos River Auth., Texas Utilities Electric
Company Proj., Rev., 8.125%, 2020 4,495 4,855
Colorado River Municipal River District, Water
Rev., 5.125%, 2016 5,000 4,997
Denison Hospital Auth. Rev., 6.125%,
2012 and 2027 7,790 8,236
Department of Housing and Community Affairs,
Rev., 6.40%, 2027 3,350 3,589
Georgetown Higher Education Finance Corp.,
Southwestern University Proj., Rev., 6.25%,
2009 840 905
Gulf Coast Waste Disposal Auth., Rev., 6.875%,
2028 12,750 14,140
Harris County:
Hospital District, Mortgage Rev., 7.40%, 2010 6,940 8,429
Toll Road Unlimited Tax and Subordinate Lien,
Rev., 6.75%, 2014 15,000 16,374
Housing Agcy., Single Family Mortgage Rev.,
7.15%, 2012 820 878
Houston:
Higher Education Finance Corp., University of
St. Thomas, Rev., 7.25%, 2007 1,445 1,583
Water and Sewer Junior Lien, Rev., 5.50%, 2016 3,000 3,123
Irving Independent School District, Rev., zero
coupon, 2014 through 2017 8,940 3,838
Public Finance Auth., Gen. Oblg., zero coupon to
7.00%, 2012 through 2014 27,592 23,025
Rio Grande Valley, Health Facilities Dev. Corp.,
Golden Palms Retirement and Health Center,
Rev., 6.40%, 2012 3,700 4,026
Sabine River Auth., Texas Utilities Electric
Company, Rev., 6.10% and 8.125%, 2018 and 2020 31,670 34,657
State Veteran's Land Bonds, Gen. Oblg., 6.40%,
2024 8,550 9,281
Titus County Hospital District Improvement, Rev.,
6.125%, 2013 6,700 6,945
Travis County Housing Finance Corp., Residential
Mortgage, Senior Rev., 7.00%, 2011 345 368
Waxahachie Independent School Dist., Gen. Oblg.,
zero coupon, 2009 through 2013 9,300 4,766
----------------------------------------------------------------------------
168,159
- ---------------------------------------------------------------------------------------------------------------------
COLORADO--5.2% Adams County, Gen. Oblg., 6.125%, 2007 4,280 4,669
Arapahoe County, Public Highway Auth., Rev., zero
coupon to 5.75%, 2012 through 2025 168,540 66,150
City and County of Denver:
Airport System Rev., 5.60% to 8.75%, 2002
through 2023 49,860 55,263
Gen. Oblg., 6.50%, 2010 6,225 7,311
Douglas County School District No. 1, Douglas and
Elbert Counties, Gen. Oblg., 7.00% and 6.50%,
2013 and 2016 10,715 13,157
Health Facilities Auth., Covenant Retirement
Communities, Inc., Rev., 6.75%, 2015 and 2025 5,900 6,598
Housing Finance Auth., Single Family Mortgage
Rev., 7.65%, 2022 540 566
Metropolitan Wastewater Reclamation District,
Gen. Oblg., 6.00%, 2010 11,505 12,178
----------------------------------------------------------------------------
165,892
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA--5.2% Foothill/Eastern Transit Corridor Agcy.,Tollroad
Rev., 5.00% to 6.50%, 2016 through 2035 $ 61,575 $ 65,106
Gen. Oblg., 5.00%, 2013 through 2016 40,710 40,458
Imperial Irrigation District, Certificates of
Participation, Electric System Proj., Rev.,
6.75%, 2011 3,500 3,971
Los Angeles County, Metropolitan Sales Tax Rev.,
5.00%, 2013 5,000 5,034
San Diego Industrial Dev. Auth., Rev., 6.10%,
2019 14,600 15,788
San Joaquin Hills, Rev., zero coupon, 2013
through 2021 77,990 33,989
----------------------------------------------------------------------------
164,346
- ---------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--4.2% Bay Transit Auth., General Transportation System,
Rev., 5.00% to 6.20%, 2011 through 2024 48,195 50,590
Consolidated Loan Series B, Gen. Oblg., 6.50%,
2011 5,940 6,439
Municipal Wholesale Electric Company, Power
Supply System, Rev., 6.00% to 6.75%, 2011
through 2018 37,055 39,910
Port Auth., Rev., 13.00%, 2013 1,500 2,569
Turnpike Auth., Rev., zero coupon to 5.00%, 2018
through 2037 87,890 35,353
----------------------------------------------------------------------------
134,861
- ---------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA--3.8% Allegheny County, Airport, Rev., 5.75%, 2013 and
2014 10,605 11,417
Armstrong County Hospital Auth., St. Francis
Medical Center Proj., Rev., 6.25%, 2013 11,350 12,271
Columbia County, Industrial Dev. Auth., First
Mortgage Rev., 9.00%, 2014 1,555 1,740
Convention Center Auth., Rev., 6.70% and 6.75%,
2014 and 2019 12,525 13,975
Hazelton-Saint Joseph Medical Center, Rev.,
6.125% and 6.20%, 2016 and 2026 6,705 7,193
Higher Educational Facilities Auth., College
Rev., 5.85% and 5.90%, 2017 and 2027 4,875 5,075
Jenrette City Health Services Auth., Rev., 6.00%,
2018 945 997
McKean County Hospital Auth., Bradford Hospital
Proj., Rev., 5.95% and 6.10%, 2008 and 2020 8,300 8,648
Monroeville, Hospital Auth., Forbes Health
System, Rev., 6.25%, 2015 6,375 6,822
Montgomery & Buck Counties, North Penn School
District, Gen. Oblg., 5.125%, 2017 8,000 7,966
New Castle Area Hospital Auth., Rev., 6.00%, 2010 845 948
Philadelphia:
Gas Works Rev., 6.375%, 2014 31,080 33,509
Municipal Auth., Lease Rev., 6.25% and 6.30%,
2013 and 2017 4,800 5,109
Parking Auth., Airport Improvement Rev.,
5.50%, 2018 6,250 6,399
----------------------------------------------------------------------------
122,069
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FLORIDA--3.5% Broward County:
Airport System Rev., 7.625%, 2013 $ 2,620 $ 2,716
Waste Energy Company, Rev., 7.95%, 2008 12,270 13,314
Citrus County, Pollution Control Rev., 6.35%,
2022 6,000 6,479
Dade County, Miami International Airport, Rev.,
5.125%, 2014 4,100 4,093
Greater Orlando Aviation Auth., Rev., 5.125% and
8.375%, 2012 and 2016 6,065 6,204
Hillsborough County, Industrial Dev. Auth., Tampa
Electric, Rev., 8.00%, 2022 10,000 11,574
Jacksonville Health Facilities Auth., Baptist
Medical Center, Rev., 11.50%, 2012 85 144
Orange County:
Health Facilities Auth., Rev., 6.25%, 2016 and
2021 7,000 8,141
Tourist Development, Rev., 5.125%, 2020 3,380 3,369
Orlando Utilities Commission, Water and
Electrical Rev., 6.75%, 2017 3,500 4,267
Pasco County, Solid Waste Disposal and Resource
Recovery, Rev., 7.80%, 2011 13,730 14,073
State Turnpike Auth., Rev., 5.00%, 2023 22,445 21,877
Sunrise County, Utility Systems Rev., 5.50% and
5.20%, 2018 and 2022 14,000 14,705
----------------------------------------------------------------------------
110,956
- ---------------------------------------------------------------------------------------------------------------------
NEW MEXICO--3.1% Albuquerque:
Health Care, Ltd. Proj., Rev., 9.75%, 2014 1,345 1,408
Southwest Community Health Services, Rev.,
10.00%, 2003 810 941
Farmington, Pollution Control Rev., 5.70% to
6.95%, 2016 through 2023 81,795 88,746
Los Alamos County, Utility System, Rev., 6.10%,
2010 4,400 4,831
Socorro Hospital System, Southwest Community
Health Services, Rev., 10.00%, 2003 1,240 1,510
Truth or Consequences, Nursing Home Improvement,
Sierra Health Care, Inc., Rev., 9.75%, 2014 900 939
----------------------------------------------------------------------------
98,375
- ---------------------------------------------------------------------------------------------------------------------
OHIO--2.3% Air Quality, Rev., 6.10%, 2020 5,000 5,263
Building Auth., Highway Safety Building Fund
Proj., Rev., 5.50% and 5.60%, 2014 and 2015 6,840 7,189
City of Springdale, Hospital Facilities First
Mortgage, Southwestern Ohio Seniors Services,
Rev.,
6.00%, 2018 1,250 1,311
Cleveland:
Airport System Rev., 5.125%, 2012 and 2013 5,250 5,231
Public Power System Improvement, First
Mortgage, Rev., 7.00%, 2017 850 930
Waterworks Improvement First Mortgage, Rev.,
6.50%, 2011 4,580 4,982
Cuyahoga County, Port Auth., Rev., 6.00%, 2007 1,250 1,283
Dublin City School District, Gen. Oblg.,
zero coupon, 2010 500 275
Lucas County Health Facilities Rev., 6.625% and
6.75%, 2014 and 2020 4,000 4,396
Marion County Health Care Facilities and
Improvement, United Church Homes Proj., Rev.,
6.375% and 6.30%, 2010 and 2015 6,900 7,324
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Village of Green Springs, St. Francis Health Care
Center Proj., Rev., 7.00% and 7.125%, 2014 and
2025 $ 8,640 $ 9,363
Water Development Auth.:
Bay Shore Power Proj., Rev., 5.875%, 2020 6,250 6,322
Pollution Control, Rev., 6.10%, 2020 8,000 8,380
Willoughby Industrial Dev. Auth., Rev.,
6.875%, 2016 2,250 2,503
Worthington City School District, Gen. Oblg.,
6.375%, 2012 6,210 6,762
----------------------------------------------------------------------------
71,514
- ---------------------------------------------------------------------------------------------------------------------
MICHIGAN--2.1% Building Auth., Rev., 6.75%, 2011 9,750 10,627
Detroit:
Gen. Oblg., 5.375% to 6.25%, 2010 10,890 11,502
Sewage Disposal System, Rev., 5.70%, 2023 12,400 12,959
Higher Education Facilities Auth., Calvin College
Proj., Rev., 5.55%, 2017 1,465 1,477
Hospital Finance Auth.:
Gratiot Community Hospital, Rev., 6.10%, 2007 2,250 2,427
McLaren Oblg. Group, Rev., 5.375% and 4.50%,
2013 and 2021 27,935 25,587
Tawas City, St. Joseph Health System, Rev.,
5.60%, 2013 3,000 2,980
----------------------------------------------------------------------------
67,559
- ---------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA--2.1% Eastern Municipal Power Agcy., Power System,
Rev., 6.00%, 2022 18,775 21,168
Mecklenburg County, Gen. Oblg., 4.40%, 2006
through 2009 27,550 27,445
Municipal Power Agcy., Catawba Electric, Rev.,
5.50%, 2014 3,660 3,882
School Improvements, Gen. Oblg., 4.75%, 2012 13,260 13,166
----------------------------------------------------------------------------
65,661
- ---------------------------------------------------------------------------------------------------------------------
MARYLAND--2.0% Community Dev. Administration, Department of
Housing and Community Dev., Rev., 7.85%, 2029 3,040 3,145
Energy Financing Administration, AES Warrior Run
Proj., Rev., 7.40%, 2019 10,000 11,104
Gen. Oblg., 5.00%, 2012 10,000 10,151
Health & Higher Educational Facilities Auth.,
Doctors' Community Hospital Proj., Rev., 5.75%
and 5.50%, 2013 and 2024 19,885 20,204
Northeast Maryland Waste Disposal Auth.,
Southwest Resource Recovery Facility, Rev.,
7.20%, 2006 1,500 1,731
Stadium Auth., Sports Facilities Lease Rev.,
7.60%, 2019 17,200 18,479
----------------------------------------------------------------------------
64,814
- ---------------------------------------------------------------------------------------------------------------------
WASHINGTON--1.8% King County, Gen. Oblg., 6.625% and 6.25%, 2015
and 2032 18,840 21,340
Public Power Supply System, Nuclear Proj. #1,
Rev., 5.125%, 2013 23,600 23,401
Public Power Supply System, Nuclear Proj. #3,
Rev., 5.20% and 5.375%, 2012 and 2015 12,675 12,803
----------------------------------------------------------------------------
57,544
</TABLE>
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TENNESSEE--1.7% Housing Dev. Agcy., Mortgage Finance Program,
Rev., 7.05% and 7.125%, 2020 and 2026 $ 24,650 $ 26,424
Metropolitan Nashville Airport Auth., Airport
Improvement, Rev., 5.00% to 6.60%, 2012
through 2015 22,100 22,446
Shelby County, Gen. Oblg., zero coupon, 2012
through 2014 11,815 5,495
----------------------------------------------------------------------------
54,365
- ---------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA--1.6% Gen. Oblg., 6.30%, 2010 4,500 4,892
Georgetown University, Rev., 8.25%, 2018 11,410 11,638
Metropolitan Washington Airports Auth., Airport
System Rev., 7.60%, 2014 3,000 3,273
Redevelopment Land Agcy., Sports Arena Special
Tax, Rev., 5.625%, 2010 9,305 9,456
Water and Sewer Auth., Rev., 6.00%,
2013 through 2016 18,500 20,644
----------------------------------------------------------------------------
49,903
- ---------------------------------------------------------------------------------------------------------------------
KENTUCKY--1.5% Dev. Finance Auth., Baptist Hospital Inc., Rev.,
7.625%, 2011 2,000 2,069
Hopkins County, The Trover Clinic Foundation,
Rev., 6.625%, 2011 4,000 4,338
Kenton County Airport Board, Greater Cincinnati
International Airport, Rev., 6.30% and 7.125%,
2015 and 2021 36,920 40,283
Turnpike Auth., Toll Road, Rev., 8.50%, 2004 780 789
----------------------------------------------------------------------------
47,479
- ---------------------------------------------------------------------------------------------------------------------
ARKANSAS--1.4% Jonesboro Residential Housing & Health Care
Facilities Board, Rev., 5.80%, 2012 4,025 4,349
North Little Rock, Electric System, Rev., 6.50%,
2010 and 2015 32,830 38,601
----------------------------------------------------------------------------
42,950
- ---------------------------------------------------------------------------------------------------------------------
GEORGIA--1.3% Chatham County School District, Gen. Oblg.,
6.15%, 2010 7,300 7,834
Fulton-DeKalb Hospital Auth., Rev., 6.55% and
6.60%, 2018 and 2028 3,870 4,094
Housing and Finance Auth., Rev., 6.25%, 2028 14,510 15,433
Metropolitan Atlanta Rapid Transit Auth., Rev.,
5.625%, 2020 5,000 5,211
Municipal Electric Auth., Power Rev., 6.60%, 2018 8,500 10,174
----------------------------------------------------------------------------
42,746
- ---------------------------------------------------------------------------------------------------------------------
UTAH--1.3% Housing Finance Agcy., Single Family Mortgage
Rev., 8.625%, 2019 370 394
Intermountain Power Agcy., Power Supply System,
Rev., 5.75% and 7.50%, 2019 and 2021 38,305 40,954
West Valley City, Salt Lake County Excise Tax,
Rev., 10.625%, 2004 845 1,048
----------------------------------------------------------------------------
42,396
</TABLE>
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALABAMA--1.2% Birmingham-Jefferson Civic Center Auth., Capital
Outlay, Special Tax Rev., 7.40%, 2008 $ 12,000 $ 12,553
City of Mobile, Mobile Energy Services,
Industrial Dev. Board, Rev., 6.95%, 2020 22,000 24,759
----------------------------------------------------------------------------
37,312
- ---------------------------------------------------------------------------------------------------------------------
MISSOURI--1.0% Clarence Cannon Wholesale Water Commission, Water
Rev., 6.00%, 2020 10,000 10,260
Health and Educational Facilities Auth., Rev.,
5.75%, 2017 3,250 3,354
Sikeston, Electric System, Rev., 6.20%, 2010 6,870 7,868
St. Louis:
Regional Convention & Sports Complex Auth.,
Rev., 7.90%, 2021 240 268
Scullin Redev. Proj., Tax Increment Rev.,
10.00%, 2010 8,395 10,616
----------------------------------------------------------------------------
32,366
- ---------------------------------------------------------------------------------------------------------------------
STATES LESS THAN AK, Energy Auth., Bradley Lake Hydroelectric
ONE PERCENT--9.9% Power, Rev., 7.25%, 2016 4,675 4,945
AK, Industrial Dev. and Export Auth., Rev., 5.70%
to 5.875%, 2012 through 2032 3,630 3,626
AK, Municipality of Anchorage, Municipal Light
and Power, Electric Rev., 6.50%, 2015 5,000 5,931
AK, North Slope Borough, Gen. Oblg., zero coupon,
2008 23,700 14,662
AZ, City of Phoenix, Gen. Oblg., 6.375%, 2013 7,400 8,117
AZ, City of Phoenix, Streets and Highway User,
Rev., 6.25%, 2011 10,000 10,863
AZ, Salt River Proj., Rev., 6.25%, 2019 8,000 8,578
CT, Dev. Auth., Pierce Memorial Baptist Home,
Rev., 9.25%, 2018 1,140 1,257
CT, Dev. Auth., Water Facilities Rev., 6.15%,
2035 7,200 7,772
CT, Greenwich Housing Auth., Rev., 6.35%, 2027 2,640 2,684
CT, Transportation Infrastructure Purposes,
Special Tax Obligation, Rev., 6.10%, 2012 5,450 5,954
HI, Gen. Oblg., Rev., 5.50%, 2007 through 2016 22,920 24,090
IA, Finance Auth., GNMA Mortgage-Backed
Securities Program, Single Family Mortgage
Rev., 7.90%, 2022 2,010 2,126
IN, Health Facility Financing Auth., Fayette
Memorial Hospital, Rev., 7.20%, 2022 1,800 1,958
IN, Indianapolis Airport Auth., Maintenance
Center Proj., Rev., 6.50%, 2031 21,100 22,946
IN, Transportation Financing Auth., Highway Rev.,
7.25%, 2015 4,000 5,013
KS, Johnson County School District, Gen. Oblg.,
5.75%, 2018 7,850 8,164
LA, Centenary College of Louisiana Project, Rev.,
5.75% and 5.90%, 2012 and 2017 2,000 2,085
LA, Parish School Board of the Parish of
Jefferson, Sales Tax, Gen. Oblg., 6.25%, 2008 11,000 11,962
ME, Health and Higher Education Facilities Auth.,
Rev., 7.10%, 2014 2,750 3,172
MN, City of Minneapolis, Housing Redev. Auth.,
Health Care System, Rev., 4.75%, 2018 3,000 2,830
MN, City of St. Louis Park, Methodist Hospital
Proj., Rev., 7.25%, 2015 6,650 7,205
MN, Housing Finance Agcy., Single Family Mortgage
Bonds, Rev., 7.90%, 2019 5,500 5,679
</TABLE>
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
----------------------------------------------------------------------------
<S> <C> <C> <C>
MS, Jones County, South Central Regional Medical
Center Proj., Rev., 5.50%, 2017 $ 2,055 $ 2,057
MT, Board of Housing, Rev., 6.15%, 2030 10,420 10,943
ND, Housing Finance Agcy., Single Family Mortgage
Program, Rev., 8.05%, 2024 900 942
NE, Investment Finance Auth., Rev., 6.70% and
6.30%, 2026 and 2028 6,500 6,931
NE, Omaha Public Power District Electric System,
Rev., 6.20%, 2017 4,700 5,294
NE, Scotts Bluff County, Hospital Auth., West
Medical Proj. Center, Rev., 6.45%, 2004 4,535 4,972
NH, Higher Education and Health Facilities Auth.,
Havenwood--Heritage Heights Issue, Rev., 7.35%
and 7.45%, 2018 and 2025 6,500 7,047
NV, City of Reno, Redev. Agcy., Tax Allocation
Rev., 5.65% and 5.75%, 2013 and 2017 7,165 7,347
NV, Humboldt County, Pollution Control, Idaho
Power Company, Rev., 8.30%, 2014 9,650 11,546
OK, Valley View Hospital Auth., Rev., 5.75% and
6.00%, 2006 and 2014 7,040 7,407
OK, Woodward Municipal Auth., Hospital Rev.,
6.45%, 2014 2,070 2,203
SC, Charleston County, Public Facilities Corp.,
Certificates of Participation, Rev., 6.875% and
7.00%, 2014 and 2019 355 402
SC, Darlington County, Carolina Power & Light
Company Proj., Pollution Control, Rev., 6.60%,
2010 7,500 8,319
SC, Grand Strand, Water and Sewer, Rev., 6.375%,
2012 5,000 5,819
SC, Santee Cooper, Public Service Auth., Rev.,
6.25%, 2022 7,000 7,728
VA, Commonwealth of Virginia, Gen. Oblg., 4.375%
and 4.50%, 2009 and 2011 13,825 13,541
VA, Richmond, Gen. Oblg., 6.25%, 2018 2,665 2,841
VA, Transportation Board, U.S. Route 58 Corridor
Proj., Rev., 5.00%, 2015 5,095 5,048
WY, Community Dev. Auth., Rev., 6.35%, 2029 4,985 5,305
WY, Community Dev. Auth., Single Family Mortgage
Rev., 7.875% and 8.125%, 2017 and 2021 1,320 1,380
P.R., Commonwealth Highway and Transportation
Auth., Rev., 6.25%, 2016 11,400 13,241
P.R., Industrial, Tourist Educational, Medical
and Environmental, Rev., 6.50%, 2026 9,190 9,986
V.I., Public Finance Auth., Rev., 7.25%, 2018 3,000 3,361
----------------------------------------------------------------------------
315,279
----------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--84.4% 2,683,732
----------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--98.2%
(Cost: $2,893,660) 3,123,735
----------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET Yield--3.75% to 4.05%
INSTRUMENTS--1.6%
Due--April 1998
(Cost: $51,225) $ 51,225 $ 51,225
----------------------------------------------------------------------------
TOTAL INVESTMENTS--99.8%
(Cost: $2,944,885) 3,174,960
----------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.2% 4,779
----------------------------------------------------------------------------
NET ASSETS--100% $3,179,739
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $2,944,885,000 for federal income tax
purposes at March 31, 1998, the gross unrealized appreciation was $231,410,000,
gross unrealized depreciation was $1,335,000 and the net unrealized appreciation
on investments was $230,075,000.
See accompanying Notes to Financial Statements.
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
Portfolio of Investments at March 31, 1998 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- --------------------------------------------------------------------------------------------------------------------
Richmond, VA, Gen. Oblg., 6.875%, to be called
1-15-00 @ 102 $100 $ 107
Bay Transportation Auth., MA, Rev., 7.625%, to be
called 3-1-00 @ 102 115 125
Dormitory Auth., NY, State University Educational
Facilities, Rev., 7.25%, to be called 5-15-00 @ 102 145 158
Local Government Assistance Corp., NY, Rev., 7.00%, to
be called 4-1-01 @ 102 100 110
Cocinino County Industrial Dev. Auth., AZ, Health Care
Institute, The Guidance Center, Inc. Proj. Rev.,
9.25%, to be called 6-1-01 @ 102 295 340
Philadelphia, PA, Gas Works Rev., 7.70%, to be called
6-15-01 @ 102 120 135
Gen. Oblg., MA, 7.00%, to be called 7-1-01 @ 102 275 304
Arlington County, VA, Industrial Dev. Auth., Arlington
Hospital, Rev., 7.125%, to be called 9-1-01 @ 102 90 100
Purdue University, IN, Student Fees, Rev., 6.70%, to be
called 1-1-05 @ 103 250 289
Detroit, MI, Gen. Oblg., 6.70%, to be called 4-1-05 @
101 300 343
Arapahoe County, CO, Capital Improvement, Highway,
Rev., 6.90% to be called 8-31-05 @ 103 300 355
---------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--10.2% 2,366
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------------
OHIO--12.6% Building Auth., Adult Correctional Building Fund Proj.,
Gen. Oblg., 6.125%, 2010 400 439
Cleveland:
Gateway Economic Dev. Corp., Rev., 7.50%, 2005 400 442
Water Works Systems, Rev., 6.125%, 2003 450 487
County of Athens, Inn-Ohio of Athens, Inc. Proj.,
Economic Dev. Rev., 6.25%, 2011 220 235
Higher Education Facility Commission, The University Of
Findlay 1996 Proj., Rev., 5.75%, 2007 375 400
Lucas County Health Facilities, Rev., 6.10%, 2006 300 322
Marion County, Health Care Facilities Refunding and
Improvement, United Church Homes, Inc. Proj., Rev.,
6.30%, 2015 250 265
Water Dev. Auth., Pure Water Improvement Proj., Rev.,
5.75% and 5.50%, 2003 and 2008 305 329
---------------------------------------------------------------------------
2,919
</TABLE>
22
<PAGE> 23
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PENNSYLVANIA--9.3% Allegheny County Hospital Dev. Auth., Magee Women's
Hospital, Rev., 6.25%, 2008 $300 $ 329
Columbia County Industrial Dev. Auth., First Mortgage
Rev., 9.00%, 2014 290 324
Health Services Auth. of Hazleton, Hazleton-Saint
Joseph Medical Center, Rev., 5.85%, 2006 220 234
Higher Educational Facilities Auth., Rev., 5.50%, 2007 265 279
Intergovernmental Cooperation Auth., City of
Philadelphia Funding Program, Rev., 6.00%, 2002 285 303
McKean County Hospital Auth., Bradford Hospital, Proj.,
Rev., 5.375%, 2003 350 364
Monroeville Hospital Auth., Forbes Health System, Rev.,
5.75%, 2005 300 321
---------------------------------------------------------------------------
2,154
- --------------------------------------------------------------------------------------------------------------------
TEXAS--8.1% Denison Hospital Auth., Texoma Medical Center Inc.
Proj., Rev., 5.90%, 2007 300 321
Fort Worth, Water and Sewer Rev., 5.90%, 2001 80 84
Harris County, Criminal Justice Center, Gen. Oblg.,
7.50%, 2004 and 2005 400 475
Houston Higher Education Finance Corp., University of
St. Thomas, Rev., 7.25%, 2007 100 110
North Richland Hills, Gen. Oblg., 6.00%, 2002 195 208
Public Finance Auth., Building Rev., 5.875%, 2002 210 223
Trinity River Auth., Ten Mile Creek System, Rev.,
5.50%, 2002 70 74
Waxahachie Independent School District, Gen. Oblg.,
zero coupon, 2009 650 379
---------------------------------------------------------------------------
1,874
- --------------------------------------------------------------------------------------------------------------------
MICHIGAN--8.0% Grand Rapids, Downtown Dev. Auth., Rev., 6.20%, 2004 175 193
Higher Educational Facilities Auth., Rev., 5.40% and
5.75%, 2006 and 2013 500 527
Macomb County, Chippewa Valley Schools, Gen. Oblg.,
7.00%, 2001 350 380
State Building Auth., Rev., zero coupon to 6.50%, 2000
through 2007 465 380
State Hospital Finance Auth., Gratiot Community
Hospital, Rev., 6.10%, 2007 350 378
---------------------------------------------------------------------------
1,858
- --------------------------------------------------------------------------------------------------------------------
CALIFORNIA--6.9% Central Valley Financing Auth., Carson Ice-Gen Proj.,
Cogeneration Proj. Rev., 6.00%, 2009 250 265
Fresno, Water System, Water Remediation Proj., Rev.,
7.50%, 2004 160 189
Los Angeles, Wastewater Systems, Rev., 5.00%, 2013 500 504
Sacramento Congeneration Auth., Procter & Gamble Proj.,
Rev., 7.00%, 2004 200 226
San Joaquin Hills Transportation Corridor Agcy., Toll
Road, Rev., zero coupon, 2012 825 418
---------------------------------------------------------------------------
1,602
</TABLE>
23
<PAGE> 24
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEW YORK--6.0% New York City:
Gen. Oblg., 6.50% and 5.75%, 2002 and 2003 $200 $ 214
Industrial Dev. Auth., USTA National Tennis Center
Inc. Proj., Rev., 6.10%, 2004 200 221
Niagara Falls, Water Treatment Plant, Rev., 6.40%, 2004 100 112
Port Auth. of New York and New Jersey, JFK
International Air Terminal LLC Proj., Rev., 6.10%,
2004 500 566
Thruway Auth., Local Highway and Bridge Service
Contract, Gen. Oblg. 6.00%, 2002 265 281
---------------------------------------------------------------------------
1,394
- --------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA--3.4% Horry County School District, Gen. Oblg., 7.00%, 2002 250 275
York County School District, Gen. Oblg., 7.00%, 2004 460 524
---------------------------------------------------------------------------
799
- --------------------------------------------------------------------------------------------------------------------
ILLINOIS--3.2% Health Facilities Auth., Franciscan Sisters Health Care
Corp. Proj., Rev., 6.25%, 2002 350 378
McHenry and Lake County School District Number 15,
Certificates of Participation, Rev., 6.125%, 2003 85 93
McHenry and Lake County School District Number 118,
School Improvements, Gen. Oblg., zero coupon, 2011 500 265
---------------------------------------------------------------------------
736
- --------------------------------------------------------------------------------------------------------------------
ARIZONA--3.1% Phoenix Civic Improvement Corp., Water System Rev.,
6.375%, 2005 495 557
State University Board of Regents, Rev., 6.50%, 2001 85 91
Transportation Board, Highway Rev., 6.10%, 2002 70 75
---------------------------------------------------------------------------
723
- --------------------------------------------------------------------------------------------------------------------
OKLAHOMA--2.9% Muskogee County, Gen. Oblg., 6.00%, 2001 10 11
Valley View Hospital Auth., Rev., 5.75%, 2006 350 368
Woodard Municipal Auth., Hospital, Rev., 5.60%, 2004 270 286
---------------------------------------------------------------------------
665
- --------------------------------------------------------------------------------------------------------------------
NEW JERSEY--2.5% Middlesex County Utility Auth., Solid Waste System,
Rev., 6.10%, 2001 300 321
Transportation Auth., Rev., 6.50%, 2011 225 265
---------------------------------------------------------------------------
586
- --------------------------------------------------------------------------------------------------------------------
MISSOURI--2.3% State Health & Education Facilities Auth., Lake of the
Ozarks, General Hospital Rev., 5.50% and 6.00%, 2001
and 2006 500 525
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
KENTUCKY--1.8% Lexington-Fayette Urban County, University of Kentucky
Alumni Association, Commonwealth Library Proj., Rev.,
6.50%, 2009 300 340
University of Kentucky, Consolidated Educational
Building, Rev., 6.00%, 1999 70 72
---------------------------------------------------------------------------
412
- --------------------------------------------------------------------------------------------------------------------
PUERTO RICO--1.6% Bank and Finance Agcy., Affordable Housing, Single
Family Mortgage Rev., 5.90%, 2010 245 256
Commonwealth of Puerto Rico, Gen. Oblg.,
zero coupon, 2017 300 114
---------------------------------------------------------------------------
370
</TABLE>
24
<PAGE> 25
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEVADA--1.5% Clark County, Motor Vehicle Fuel Tax Rev., 5.625%, 2002 $ 70 $ 74
State, Gen. Oblg., 5.90%, 2001 250 263
---------------------------------------------------------------------------
337
- --------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--1.4% Bay Transportation Auth., Rev., 6.50%, 2004 5 6
Gen. Oblg., Rev., 6.25%, 2003 250 273
Water Pollution Abatement Trust, SESD Loan Program,
Rev., 6.20%, 2010 45 49
---------------------------------------------------------------------------
328
- --------------------------------------------------------------------------------------------------------------------
INDIANA--1.4% Johnson County Hospital Association, Rev., 6.50%, 2002 300 326
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
LOUISIANA--1.4% State, Gen. Oblg., 7.00%, 2001 300 325
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
ARKANSAS--1.4% North Little Rock, Electric System, Rev., 6.00% and
6.15%, 2001 and 2003 295 321
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA--1.2% Redev. Land Agency, Sports Arena Special Tax, Rev.,
5.625%, 2010 285 290
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
MAINE--1.2% Health and Higher Education Facilities Auth., Rev.,
6.30% and 6.50%, 2004 and 2006 260 289
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE--1.2% Higher Education and Health Facilities Auth.,
Havenwood-Heritage Heights Issue, Rev., 7.10%, 2006 250 267
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
STATES LESS THAN ONE AK, Student Loan, Gen. Oblg., 5.55%, 2010 200 209
PERCENT--3.5%
CT, State, Gen. Oblg. 5.95%, 2000 5 5
FL, Broward County School District, Gen. Oblg.,
6.00%, 2004 70 75
FL, Department of Natural Resources, Preservation 2000,
Rev., 6.20%, 1999 80 82
FL, Hillsborough County Aviation Auth., Tampa
International Airport, Rev., 6.90%, 2011 5 5
GA, Atlanta International Airport, Rev., 6.50%, 2013 70 75
HI, State, Gen. Oblg., 7.25%, 2000 145 157
MD, Howard County, Consolidated Public Improvement,
Gen. Oblg., 6.90%, 1999 70 73
NE, Public Power District, Nuclear Facility, Rev.,
5.70%, 2004 50 53
WA, Tacoma, Electric System, Rev., 5.80%, 2004 70 75
---------------------------------------------------------------------------
809
---------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--85.9% 19,909
===========================================================================
TOTAL MUNICIPAL OBLIGATIONS--96.1%
(Cost: $20,966) 22,275
---------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET Yield--3.60% to 3.90%
INSTRUMENTS--2.1%
Due--April, 1998
(Cost: $500) $500 $ 500
---------------------------------------------------------------------------
TOTAL INVESTMENTS--98.2%
(Cost: $21,466) 22,775
---------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.8% 406
---------------------------------------------------------------------------
NET ASSETS--100% $23,181
---------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $21,466,000 for federal income tax purposes
at March 31, 1998, the gross unrealized appreciation was $1,314,000, the gross
unrealized depreciation was $5,000 and the net unrealized appreciation on
investments was $1,309,000.
See accompanying Notes to Financial Statements.
26
<PAGE> 27
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTERMEDIATE
MUNICIPAL MUNICIPAL
FUND FUND
<S> <C> <C>
- ----------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------
Investments, at value
(Cost: $2,944,885 and $21,466) $3,174,960 22,775
- ----------------------------------------------------------------------------------------
Cash 848 94
- ----------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 497 --
- ----------------------------------------------------------------------------------------
Investments sold 33,226 --
- ----------------------------------------------------------------------------------------
Interest 46,325 366
- ----------------------------------------------------------------------------------------
TOTAL ASSETS 3,255,856 23,235
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ----------------------------------------------------------------------------------------
Payable for:
Dividends 2,627 18
- ----------------------------------------------------------------------------------------
Fund shares redeemed 3,135 7
- ----------------------------------------------------------------------------------------
Investments purchased 68,614 --
- ----------------------------------------------------------------------------------------
Management fee 1,071 10
- ----------------------------------------------------------------------------------------
Administrative services fee 483 4
- ----------------------------------------------------------------------------------------
Distribution services fee 44 7
- ----------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 12 1
- ----------------------------------------------------------------------------------------
Trustees' fees and other 131 7
- ----------------------------------------------------------------------------------------
Total liabilities 76,117 54
- ----------------------------------------------------------------------------------------
NET ASSETS $3,179,739 23,181
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ----------------------------------------------------------------------------------------
Paid-in capital $2,949,489 21,933
- ----------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments 175 (61)
- ----------------------------------------------------------------------------------------
Net unrealized appreciation on investments 230,075 1,309
- ----------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $3,179,739 23,181
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
THE PRICING OF SHARES
- ----------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $3,105,365 17,536
- ----------------------------------------------------------------------------------------
Shares outstanding 298,494 1,691
- ----------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets (divided by) shares outstanding) $10.40 10.37
- ----------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71%/2.83% of net asset
value or 4.50%/2.75% of offering price) $10.89 10.66
- ----------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $68,076 4,885
- ----------------------------------------------------------------------------------------
Shares outstanding 6,560 471
- ----------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets (divided by) shares outstanding) $10.38 10.37
- ----------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $6,201 760
- ----------------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Shares outstanding 595 73
- ----------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets (divided by) shares outstanding) $10.41 10.37
- ----------------------------------------------------------------------------------------
CLASS I SHARES
Net assets applicable to shares outstanding $97 --
- ----------------------------------------------------------------------------------------
Shares outstanding 10 --
- ----------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets (divided by) shares outstanding) $10.40 --
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
27
<PAGE> 28
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTERMEDIATE
MUNICIPAL MUNICIPAL
FUND FUND
- ------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
- ------------------------------------------------------------------------------------------
Interest income $ 91,453 602
- ------------------------------------------------------------------------------------------
Expenses:
Management fee 6,660 62
- ------------------------------------------------------------------------------------------
Administrative services fee 2,799 25
- ------------------------------------------------------------------------------------------
Distribution services fee 268 20
- ------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 912 9
- ------------------------------------------------------------------------------------------
Professional fees 38 --
- ------------------------------------------------------------------------------------------
Reports to shareholders 273 3
- ------------------------------------------------------------------------------------------
Trustees' fees and other 47 11
- ------------------------------------------------------------------------------------------
Total expenses 10,997 130
- ------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 80,456 472
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------------------
Net realized gain on sales of investments (including
options purchased) 29,902 64
- ------------------------------------------------------------------------------------------
Net realized loss from futures transactions (1,570) (1)
- ------------------------------------------------------------------------------------------
Net realized gain 28,332 63
- ------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 21,960 201
- ------------------------------------------------------------------------------------------
Net gain on investments 50,292 264
- ------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $130,748 736
- ------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTERMEDIATE
MUNICIPAL FUND MUNICIPAL FUND
---------------------------- ---------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------
Net investment income $ 80,456 171,592 472 927
- ---------------------------------------------------------------------------------------------------------
Net realized gain 28,332 66,635 63 139
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 21,960 47,959 201 479
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 130,748 286,186 736 1,545
- ---------------------------------------------------------------------------------------------------------
Distribution from net investment income (80,456) (171,592) (472) (927)
- ---------------------------------------------------------------------------------------------------------
Distribution from net realized gain (66,970) (25,654) (140) (73)
- ---------------------------------------------------------------------------------------------------------
Total dividends to shareholders (147,426) (197,246) (612) (1,000)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (19,804) (194,265) 1,168 (557)
- ---------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (36,482) (105,325) 1,292 (12)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of period 3,216,221 3,321,546 21,889 21,901
- ---------------------------------------------------------------------------------------------------------
END OF PERIOD $3,179,739 3,216,221 23,181 21,889
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND The Kemper National Tax-Free Income Series (the
Trust) is an open-end, management investment
company comprised of Kemper Municipal Bond Fund
(Municipal Fund) and Kemper Intermediate Municipal
Bond Fund (Intermediate Municipal Fund),
collectively (the Funds). The Trust is organized as
a business trust under the laws of Massachusetts.
The Funds offer four classes of shares. Class A
shares are sold to investors subject to an initial
sales charge. Class B shares are sold without an
initial sales charge but are subject to higher
ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable on certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of each Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Financial futures and options are
valued at the settlement price established each day
by the board of trade or exchange on which they are
traded. Over-the-counter traded options are valued
based upon prices provided by market makers. Other
securities and assets are valued at fair value as
determined in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes premium and original
discount amortization on fixed income securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated between the Funds in
proportion to their relative net assets.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A Shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing each Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
29
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FEDERAL INCOME TAXES. Each Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended March 31, 1998.
DIVIDENDS TO SHAREHOLDERS. Each Fund declares and
records a daily dividend equal to its net
investment income for that day, to holders of
shares for which payment has been received. Income
dividends are distributed monthly. Net realized
capital gains, if any, will be distributed at least
annually. Dividends are determined in accordance
with income tax principles which may treat certain
transactions differently from generally accepted
accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES INVESTMENT MANAGER COMBINATION. Effective December
31, 1997, Zurich Insurance Company, the parent of
Zurich Kemper Investments, Inc. (ZKI), acquired a
majority interest in Scudder, Stevens & Clark, Inc.
(Scudder), another major investment manager. As a
result of this transaction, the operations of ZKI
were combined with Scudder to form a new global
investment organization named Scudder Kemper
Investments, Inc. (Scudder Kemper). The transaction
resulted in the termination of the Funds'
investment management agreement with ZKI, however,
a new investment management agreement between the
Funds and Scudder Kemper was approved by the Funds'
Board of Trustees and by the Funds' shareholders.
The new management agreement, which was effective
December 31, 1997, is the same in all material
respects as the previous management agreement,
except that Scudder Kemper is the new investment
adviser to the Funds. In addition, the names of the
Funds' principal underwriter and shareholder
service agent were changed to Kemper Distributors,
Inc. (KDI) and Kemper Service Company (KSvC),
respectively.
MANAGEMENT AGREEMENT. Each fund has a management
agreement with Scudder Kemper. The Municipal Fund
pays a fee at an annual rate of .45% of the first
$250 million of average daily net assets declining
to .32% of average daily net assets in excess of
$12.5 billion. The Municipal Fund paid a management
fee of $6,660,000 for the six months ended March
31, 1998.
The Intermediate Municipal Fund pays a management
fee at an annual rate of .55% of the first $250
million of average daily net assets declining to
.40% of average daily net assets in excess of $12.5
billion. The Intermediate Municipal Fund paid a
management fee of $62,000 for the six months ended
March 31, 1998.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Trust has an underwriting and distribution
services agreement with KDI. Underwriting
commissions paid in connection with the
distribution of the Trust's Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
COMMISSIONS ALLOWED BY KDI
RETAINED BY KDI TO FIRMS
----------------- --------------
<S> <C> <C>
Six months ended March 31, 1998 $146,000 827,000
</TABLE>
For services under the distribution services
agreement, each Fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares of each Fund. In addition, KDI receives any
contingent deferred sales charges
30
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees, CDSC and commissions
related to Class B and Class C shares are as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY KDI PAID BY KDI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Six months ended March 31, 1998 $335,000 379,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, each Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on assets of Fund accounts the firms service.
Administrative services fees (ASF) paid are as
follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY THE -----------------------------
TRUST TO KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- -------------
<S> <C> <C> <C>
Six months ended March 31, 1998 $2,824,000 2,839,000 9,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the KSvC is Trust's
transfer agent, KSvC is the shareholder service
agent of the Trust. Under the agreement, KSvC
received shareholder services fees of $803,000 for
the six months ended March 31, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of
Scudder Kemper. For the six months ended March 31,
1998, the Trust made no direct payments to its
officers and incurred trustees' fees of $26,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT For the six months ended March 31, 1998, investment
TRANSACTIONS transactions (excluding short-term instruments) are
as follows (in thousands):
<TABLE>
<CAPTION>
INTERMEDIATE
MUNICIPAL FUND MUNICIPAL FUND
-------------- --------------
<S> <C> <C>
Purchases $1,013,214 3,571
Proceeds from sales 991,519 2,243
</TABLE>
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the Funds (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1998 SEPTEMBER 30, 1997
MUNICIPAL ----------------------- -----------------------
FUND SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
----------------------------------------------------------------------------------
Class A 32,902 $ 345,349 36,543 $ 376,175
----------------------------------------------------------------------------------
Class B 1,092 11,424 2,441 24,932
----------------------------------------------------------------------------------
Class C 1,299 13,618 412 4,246
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 9,607 99,396 13,029 133,574
----------------------------------------------------------------------------------
Class B 183 1,888 176 1,799
----------------------------------------------------------------------------------
Class C 20 210 18 182
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
SHARES REDEEMED
----------------------------------------------------------------------------------
Class A (45,271) (474,394) (70,404) (723,896)
----------------------------------------------------------------------------------
Class B (387) (4,039) (836) (8,563)
----------------------------------------------------------------------------------
Class C (1,243) (13,046) (263) (2,714)
----------------------------------------------------------------------------------
Class I (20) (210) -- --
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
CONVERSION OF SHARES
----------------------------------------------------------------------------------
Class A 206 2,156 169 1,742
----------------------------------------------------------------------------------
Class B (206) (2,156) (169) (1,742)
----------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE
TRANSACTIONS $ (19,804) $(194,265)
----------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1998 SEPTEMBER 30, 1997
INTERMEDIATE -------------------- --------------------
MUNICIPAL FUND SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------
SHARES SOLD
---------------------------------------------------------------------------
Class A 181 $1,879 503 $ 5,105
---------------------------------------------------------------------------
Class B 69 712 104 1,058
---------------------------------------------------------------------------
Class C 27 276 35 355
---------------------------------------------------------------------------
---------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
---------------------------------------------------------------------------
Class A 32 336 51 512
---------------------------------------------------------------------------
Class B 7 72 10 109
---------------------------------------------------------------------------
Class C 1 10 2 24
---------------------------------------------------------------------------
---------------------------------------------------------------------------
SHARES REDEEMED
---------------------------------------------------------------------------
Class A (142) (1,479) (623) (6,324)
---------------------------------------------------------------------------
Class B (37) (383) (101) (1,028)
---------------------------------------------------------------------------
Class C (25) (255) (36) (368)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
CONVERSION OF SHARES
---------------------------------------------------------------------------
Class A 11 112 1 10
---------------------------------------------------------------------------
Class B (11) (112) (1) (10)
---------------------------------------------------------------------------
NET INCREASE
(DECREASE) FROM
CAPITAL SHARE
TRANSACTIONS $1,168 $ (557)
---------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Municipal Fund has entered into exchange traded
financial futures contracts on U.S. Treasury
securities in order to take advantage of
anticipated market conditions and, as such, bears
the risk that arises from entering into these
contracts.
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and its broker as the market value
of the futures contract fluctuates. At March 31,
1998, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $530,570. The Fund also has liquid
assets in excess of the face amount of open futures
contracts. At March 31, 1998 the Fund had the
following futures contracts open:
<TABLE>
<CAPTION>
FACE EXPIRATION LOSS AT
TYPE AMOUNT POSITION MONTH 3/31/98
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Note $63,986,000 Long Jun. '98 $494,000
-----------------------------------------------------------------------------
</TABLE>
33
<PAGE> 34
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------
CLASS A
------------------------------------------
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, -----------------------------
MUNICIPAL FUND 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------
Net asset value, beginning of period $10.46 10.18 10.15 9.69 10.95
- ------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .26 .54 .55 .55 .55
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .16 .36 .06 .50 (.92)
- ------------------------------------------------------------------------------------
Total from investment operations .42 .90 .61 1.05 (.37)
- ------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .26 .54 .55 .55 .56
- ------------------------------------------------------------------------------------
Distribution from net realized gain .22 .08 .03 .04 .33
- ------------------------------------------------------------------------------------
Total dividends .48 .62 .58 .59 .89
- ------------------------------------------------------------------------------------
Net asset value, end of period $10.40 10.46 10.18 10.15 9.69
- ------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.11% 9.15 6.00 11.15 (3.67)
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------
Expenses .66% .68 .66 .66 .60
- ------------------------------------------------------------------------------------
Net investment income 5.05% 5.29 5.35 5.63 5.42
- ------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 35
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------------------
CLASS B
------------------------------------------------------
SIX MONTHS YEAR ENDED SEPTEMBER MAY 31
ENDED 30, TO
MARCH 31, --------------------- SEPTEMBER 30,
MUNICIPAL FUND 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.44 10.15 10.13 9.67 9.95
- -------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .22 .45 .46 .46 .14
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .16 .37 .05 .50 (.26)
- -------------------------------------------------------------------------------------------------
Total from investment operations .38 .82 .51 .96 (.12)
- -------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .22 .45 .46 .46 .16
- -------------------------------------------------------------------------------------------------
Distribution from net realized gain .22 .08 .03 .04 --
- -------------------------------------------------------------------------------------------------
Total dividends .44 .53 .49 .50 .16
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $10.38 10.44 10.15 10.13 9.67
- -------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.67% 8.32 4.97 10.17 (1.24)
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses 1.53% 1.55 1.54 1.55 1.56
- -------------------------------------------------------------------------------------------------
Net investment income 4.18% 4.42 4.47 4.74 4.55
- -------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------- ---------------------------------------
CLASS C CLASS I
---------------------------------------------- ---------------------------------------
SIX MONTHS YEAR ENDED SIX MONTHS
ENDED SEPTEMBER 30, MAY 31 TO ENDED YEAR ENDED APRIL 19 TO
MARCH 31, ------------------- SEPTEMBER 30, MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
MUNICIPAL FUND 1998 1997 1996 1995 1994 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------- ----------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------- ----------------------------------------
Net asset value, beginning of
period $10.47 10.18 10.16 9.69 9.95 10.46 10.18 10.11
- ------------------------------------------------------------------------------- ----------------------------------------
Income from investment
operations:
Net investment income .22 .46 .46 .47 .16 .26 .55 .24
- ------------------------------------------------------------------------------- ----------------------------------------
Net realized and unrealized
gain (loss) .16 .37 .05 .51 (.26) .16 .36 .07
- ------------------------------------------------------------------------------- ----------------------------------------
Total from investment
operations .38 .83 .51 .98 (.10) .42 .91 .31
- ------------------------------------------------------------------------------- ----------------------------------------
Less dividends:
Distribution from net
investment income .22 .46 .46 .47 .16 .26 .55 .24
- ------------------------------------------------------------------------------- ----------------------------------------
Distribution from net
realized gain .22 .08 .03 .04 -- .22 .08 --
- ------------------------------------------------------------------------------- ----------------------------------------
Total dividends .44 .54 .49 .51 .16 .48 .63 .24
- ------------------------------------------------------------------------------- ----------------------------------------
Net asset value, end of period $10.41 10.47 10.18 10.16 9.69 10.40 10.46 10.18
- ------------------------------------------------------------------------------- --------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.66% 8.34 4.99 10.32 (1.03) 4.13 9.27 3.10
- ------------------------------------------------------------------------------- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------- ----------------------------------------
Expenses 1.51% 1.53 1.51 1.51 1.53 .59 .58 .56
- ------------------------------------------------------------------------------- ----------------------------------------
Net investment income 4.20% 4.44 4.50 4.78 4.56 5.12 5.39 5.60
- ------------------------------------------------------------------------------- ----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, ------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $3,179,739 3,216,221 3,321,546 3,510,648 3,716,997
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 60% 77 97 86 50
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES FOR ALL FUNDS:
Total return does not reflect the effect of any sales charges. Data for the
period ended March 31, 1998 is unaudited.
36
<PAGE> 37
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------
CLASS A
-------------------------------------------
SIX MONTHS YEAR ENDED NOVEMBER 1,
ENDED SEPTEMBER 30, 1994 TO
MARCH 31, -------------- SEPTEMBER 30,
INTERMEDIATE MUNICIPAL FUND 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.31 10.06 10.18 9.50
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .23 .46 .46 .45
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .13 .29 (.04) .68
- --------------------------------------------------------------------------------------------
Total from investment operations .36 .75 .42 1.13
- --------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .23 .46 .46 .45
- --------------------------------------------------------------------------------------------
Distribution from net realized gain .07 .04 .08 --
- --------------------------------------------------------------------------------------------
Total dividends .30 .50 .54 .45
- --------------------------------------------------------------------------------------------
Net asset value, end of period $10.37 10.31 10.06 10.18
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.44% 7.62 4.15 12.08
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------
Expenses absorbed by the Fund .96% .96 .92 .55
- --------------------------------------------------------------------------------------------
Net investment income 4.39% 4.55 4.45 5.00
- --------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------
Expenses .96% .96 1.04 1.05
- --------------------------------------------------------------------------------------------
Net investment income 4.39% 4.55 4.33 4.50
- --------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------
CLASS B
----------------------------------------------
YEAR ENDED
SIX MONTHS SEPTEMBER 30, NOVEMBER 1,
ENDED -------------- 1994 TO
MARCH 31, SEPTEMBER 30,
INTERMEDIATE MUNICIPAL FUND 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.31 10.06 10.18 9.50
- -----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .19 .38 .38 .36
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .13 .29 (.04) .68
- -----------------------------------------------------------------------------------------------------
Total from investment operations .32 .67 .34 1.04
- -----------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .19 .38 .38 .36
- -----------------------------------------------------------------------------------------------------
Distribution from net realized gain .07 .04 .08 --
- -----------------------------------------------------------------------------------------------------
Total dividends .26 .42 .46 .36
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $10.37 10.31 10.06 10.18
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.04% 6.78 3.34 11.13
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses absorbed by the Fund 1.75% 1.76 1.71 1.42
- -----------------------------------------------------------------------------------------------------
Net investment income 3.60% 3.75 3.66 4.13
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.75% 1.76 1.83 1.92
- -----------------------------------------------------------------------------------------------------
Net investment income 3.60% 3.75 3.54 3.63
- -----------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------
CLASS C
--------------------------------------------
SIX MONTHS YEAR ENDED NOVEMBER 1
ENDED SEPTEMBER 30, 1994 TO
MARCH 31, -------------- SEPTEMBER 30,
INTERMEDIATE MUNICIPAL FUND 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.31 10.06 10.19 9.50
- -------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .19 .39 .38 .38
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .13 .29 (.05) .69
- -------------------------------------------------------------------------------------------
Total from investment operations .32 .68 .33 1.07
- -------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .19 .39 .38 .38
- -------------------------------------------------------------------------------------------
Distribution from net realized gain .07 .04 .08 --
- -------------------------------------------------------------------------------------------
Total dividends .26 .43 .46 .38
- -------------------------------------------------------------------------------------------
Net asset value, end of period $10.37 10.31 10.06 10.19
- -------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.08% 6.77 3.26 11.43
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.73% 1.73 1.65 1.28
- -------------------------------------------------------------------------------------------
Net investment income 3.62% 3.78 3.72 4.27
- -------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------
Expenses 1.73% 1.73 1.77 1.78
- -------------------------------------------------------------------------------------------
Net investment income 3.62% 3.78 3.60 3.77
- -------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------------------
SIX MONTHS YEAR ENDED NOVEMBER 1
ENDED SEPTEMBER 30, 1994 TO
MARCH 31, ------------------- SEPTEMBER 30,
1998 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $23,181 21,889 21,901 16,169
- -------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 21% 80 80 60
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR INTERMEDIATE MUNICIPAL FUND:
The investment manager agreed to waive the management fee of the Intermediate
Municipal Fund from its inception, November 1, 1994 through April 30, 1995.
Thereafter, the management fee was gradually reinstated through April 30, 1996.
"Other ratios to average net assets" are computed without the undertaking to
waive the management fee.
39
<PAGE> 40
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE ROBERT C. PECK, JR.
President and Trustee Vice President
DAVID W. BELIN MARK S. CASADY KATHRYN L. QUIRK
Trustee President Vice President
LEWIS A. BURNHAM PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President, Vice President
Secretary and Treasurer
DONALD L. DUNAWAY JOHN R. HEBBLE
Trustee JERALD K. HARTMAN Assistant Treasurer
Vice President
ROBERT B. HOFFMAN MAUREEN E. KANE
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
DONALD R. JONES CAROLINE PEARSON
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
SHIRLEY D. PETERSON ELIZABETH C. WERTH
Trustee CHRISTOPHER J. MIER Assistant Secretary
Vice President
WILLIAM P. SOMMERS
Trustee M. ASHTON PATTON
Vice President
EDMOND D. VILLANI
Trustee
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LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania
Kansas City, MO 64105
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Tax-Free Income Funds prospectus.
KNTIS - 3 (5/98) 1047050
