Filed electronically with the Securities and Exchange Commission
on December 28, 1999.
File No. 2-47008
File No. 811-2353
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 /___/
Pre-Effective Amendment No /___/
-
Post-Effective Amendment No. 48 /_X_/
And/or --
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /___/
Amendment No. 48 /_X_/
--
Kemper National Tax-Free Income Series
--------------------------------------
(Exact Name of Registrant as Specified in Charter)
222 South Riverside Plaza, Chicago, Illinois 60606
--------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (312) 537-7000
Philip J. Collora
-----------------
Vice President and Secretary
----------------------------
Kemper National Tax-Free Income Series
--------------------------------------
222 South Riverside Plaza
-------------------------
Chicago, Illinois 60606
-----------------------
(Name and Address of Agent for Service)
<TABLE>
<CAPTION>
It is proposed that this filing will become effective (check appropriate box):
<S> <C> <C> <C>
/___/ Immediately upon filing pursuant to paragraph ( b ) /___/ days after filing pursuant to paragraph ( a ) ( 1 )
/___/ days after filing pursuant to paragraph ( a ) ( 2 ) /___/ On ( date ) pursuant to paragraph ( b )
/___/ On ( date ) pursuant to paragraph ( a ) ( 1 ) / X / On December 30, 1999 pursuant to paragraph ( a ) ( 3 ) of
Rule 485.
</TABLE>
If Appropriate, check the following box:
/ X / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
Kemper Tax Free Income Funds
SUPPLEMENT TO PROSPECTUS
DATED JANUARY 1, 2000
-----------------------
CLASS I SHARES
-----------------------
KEMPER MUNICIPAL BOND FUND
KEMPER INTERMEDIATE MUNICIPAL BOND FUND
-----------------------
The above funds currently offer four classes of shares to provide investors with
different purchasing options. These are Class A, Class B and Class C shares,
which are described in the funds' prospectus, and Class I shares, which are
described in the prospectus as supplemented hereby. When placing purchase
orders, investors must specify whether the order is for Class A, Class B, Class
C or Class I shares.
Class I shares are available for purchase exclusively by the following
categories of institutional investors: (1) tax-exempt retirement plans (Profit
Sharing, 401(k), Money Purchase Pension and Defined Benefit Plans) of Scudder
Kemper Investments, Inc. ("Scudder Kemper") and its affiliates and rollover
accounts from those plans; (2) the following investment advisory clients of
Scudder Kemper and its investment advisory affiliates that invest at least $1
million in a Fund: unaffiliated benefit plans, such as qualified retirement
plans (other than individual retirement accounts and self-directed retirement
plans); unaffiliated banks and insurance companies purchasing for their own
accounts; and endowment funds of unaffiliated non-profit organizations; (3)
investment-only accounts for large qualified plans, with at least $50 million in
total plan assets or at least 1000 participants; (4) trust and fiduciary
accounts of trust companies and bank trust departments providing fee-based
advisory services that invest at least $1 million in a Fund on behalf of each
trust; (5) policy holders under Zurich-American Insurance Group's collateral
investment program investing at least $200,000 in a Fund; and (6) investment
companies managed by Scudder Kemper that invest primarily in other investment
companies.
Class I shares currently are available for purchase only from Kemper
Distributors, Inc. ("KDI"), principal underwriter for the Funds, and, in the
case of category 4 above, selected dealers authorized by KDI. Share certificates
are not available for Class I shares.
<PAGE>
The following information supplements the indicated sections of the prospectus.
PERFORMANCE
No performance information is presented for Class I Shares since no Class I
Shares were issued as of December 31, 1999.
HOW MUCH INVESTORS PAY
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
Shareholder fees: Fees paid directly from your investment.
Maximum
Sales Maximum
Charge Deferred
(Load) Sales Maximum Redemption
Imposed on Charge Sales Fee (as %
Purchases (Load) Charge on of amount
(as % of (as % of Reinvested redeemed,
offering redemption Dividends/ if Exchange
price) proceeds) Distributions applicable) Fee
------ --------- ------------- ----------- ---
Kemper
Municipal
Bond Fund None None None None None
Kemper
Intermediate
Municipal
Bond Fund None None None None None
Annual fund operating expenses: Expenses that are deducted from fund assets.
Total
annual
fund
Investment Distribution Other operating
management fee (12b-1) fees expenses* expenses*
-------------- ------------ --------- ---------
Kemper Municipal
Bond Fund 0.41% None 0.18% 0.59%
Kemper Intermediate
Municipal Bond Fund 0.55% None 0.26% 0.81%
- -----------
* Estimated, since no Class I shares were issued as of September 30, 1999, the
fiscal year end of the funds.
2
<PAGE>
Example
Based on the figures above, this example is designed to help you compare the
expenses of a fund to those of other funds. The example assumes operating
expenses remain the same and that you invested $10,000, earned 5% annual returns
and reinvested all dividends and distributions. This is only an example; actual
expenses will be different.
Fees and expenses if you sold or held shares after:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Kemper Municipal
Bond Fund $60 $189 $329 $738
Kemper Intermediate
Municipal Bond Fund $83 $259 $450 $1,002
FINANCIAL HIGHLIGHTS
No financial information is presented for Class I shares of Kemper Municipal
Bond Fund and Kemper Intermediate Municipal Bond Fund, since no Class I shares
were issued as of September 30, 1999, the fiscal year end of the funds.
SPECIAL FEATURES
Shareholders of a Fund's Class I shares may exchange their shares for (i) shares
of Zurich Money Funds -- Zurich Money Market Fund if the shareholders of Class I
shares have purchased shares because they are participants in tax-exempt
retirement plans of Scudder Kemper and its affiliates and (ii) Class I shares of
any other "Kemper Mutual Fund" listed in the prospectus. Conversely,
shareholders of Zurich Money Funds -- Zurich Money Market Fund who have
purchased shares because they are participants in tax-exempt retirement plans of
Scudder Kemper and its affiliates may exchange their shares for Class I shares
of "Kemper Mutual Funds" to the extent that they are available through their
plan. Exchanges will be made at the relative net asset values of the shares.
Exchanges are subject to the limitations set forth in the prospectus.
As a result of the relatively lower expenses for Class I shares, the level of
income dividends per share (as a percentage of net asset value) and, therefore,
the overall investment return, typically will be higher for Class I shares than
for Class A, Class B and Class C shares.
3
<PAGE>
January 1, 2000
<PAGE>
LONG-TERM
INVESTING
IN A
SHORT-TERM
WORLD(SM)
January 1, 2000
Prospectus
- --------------------------------------------------------------------------------
KEMPER TAX-FREE INCOME FUNDS
Kemper Intermediate Municipal Bond Fund
Kemper Municipal Bond Fund
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund
As with all mutual funds, the Securities and Exchange
Commission (SEC) does not approve or disapprove these
shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal
offense for anyone to inform you otherwise.
[LOGO] KEMPER FUNDS
<PAGE>
HOW THE INVESTING IN
FUNDS WORK THE FUNDS
2 Kemper Intermediate 53 Choosing A Share
Municipal Bond Fund Class
8 Kemper Municipal 59 How To Buy Shares
Bond Fund
60 How To Exchange Or
14 Kemper California Sell Shares
Tax-Free Income Fund
61 Policies You Should
20 Kemper Florida Tax-Free Know About
Income Fund
68 Understanding
26 Kemper New York Distributions And
Tax-Free Income Fund Taxes
32 Kemper Ohio Tax-Free
Income Fund
38 Other Policies And Risks
39 Financial Highlights
<PAGE>
How The Funds Work
These funds invest mainly in municipal bonds. Each fund follows its own goal.
Two of the funds invest in municipal securities from around the country, and
seek income that is free from regular federal income tax. Four of the funds
invest in securities from particular states, and seek income that is free from
regular federal income tax as well as state and local income tax for investors
in that state.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency. Their share
prices will go up and down, so be aware that you could lose money.
<PAGE>
TICKER SYMBOLS CLASS: A) KIMAX B) KIMBX C) KIMCX
Kemper
Intermediate Municipal
Bond Fund
- --------------------------------------------------------------------------------
FUND GOAL The fund seeks as high a level of current interest income that
is exempt from federal income taxes as is consistent with preservation of
capital.
2 - Kemper Intermediate Municipal Bond Fund
<PAGE>
The Fund's Main Strategy
The fund normally invests at least 80% of net assets in municipal securities
whose income is free from regular federal income tax.
The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best income
potential, and normally prefer those that cannot be called in before maturity.
In making sell decisions, the managers typically consider a number of factors,
such as economic outlook and possible interest rate movements to specific
security characteristics and changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they will keep it between
three and ten years under normal circumstances. Also, while they're permitted to
use various types of derivatives (contracts whose value is based on, for
example, indices, commodities or securities), the managers don't intend to use
them as principal investments.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
CREDIT QUALITY POLICIES
Normally, at least 90% of the fund's municipal securities are in the top four
grades of credit quality.
Up to 10% of the fund's municipal securities may be junk bonds, which are those
below the fourth credit grade (i.e., grade BB/Ba and below).
Compared to investment-grade bonds, junk bonds generally pay higher yields and
have higher volatility and higher risk of default on payments.
3 - Kemper Intermediate Municipal Bond Fund
<PAGE>
The Main Risks Of Investing In The Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. The fund's focus on
intermediate-term bonds may reduce the effect of this risk somewhat, but will
not eliminate it. Changes in interest rates will also affect the fund's yield;
when rates decline, fund yield tends to decline as well.
A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may emphasize investments in
certain geographic regions or sectors of the municipal market increases this
risk, because any factors affecting these regions or sectors could affect a
large portion of the fund's securities in a similar manner.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
issuers, credit quality or other matters
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an attractive
price for them
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
This fund may be suitable for investors in a moderate to high tax bracket who
are seeking tax-free income and can tolerate some risk to their principal.
4 - Kemper Intermediate Municipal Bond Fund
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1995 14.08
1996 3.41
1997 7.52
1998 5.24
Best quarter: 5.19%, Q1 1995 YTD return as of 9/30/1999: -1.09%
Worst quarter: -0.95%, Q1 1996
- ------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- ------------------------------------------------------------------------------
Since 12/31/97 Since 11/1/94
1 Year Life of Class
A/B/C
- ------------------------------------------------------------------------------
Class A 2.38% 6.80%
- ------------------------------------------------------------------------------
Class B 1.50 6.25
- ------------------------------------------------------------------------------
Class C 4.42 6.70
- ------------------------------------------------------------------------------
Index 6.48 8.98*
- ------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or sales
charges.
- --------------------------------------------------------------------------------
The table includes the effects of maximum sales loads. In both the table and the
chart, returns for 1994-1996 would have been lower if operating expenses hadn't
been reduced.
* Since 10/31/94
5 - Kemper Intermediate Municipal Bond Fund
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- ------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- ------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 2.75% None None
- ------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of None* 4.00% 1.00%
redemption proceeds)
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.55% 0.55% 0.55%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
- ------------------------------------------------------------------------------
Other Expenses** 0.59 0.63 0.60
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 1.14 1.93 1.90
- ------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege ("Policies You Should Know About -- Policies about
transactions") may be subject to a deferred sales charge of 1.00% if
redeemed within one year of purchase and 0.50% if redeemed during the second
year following purchase.
** Includes cost of shareholder servicing, custody, accounting services and
similar expenses, which vary with fund size and other factors. "Other
Expenses" are restated to reflect changes in certain administrative and blue
sky fees.
Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
Example 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- ------------------------------------------------------------------------------
Class A shares $388 $627 $885 $1,623
- ------------------------------------------------------------------------------
Class B shares 596 906 1,242 1,860
- ------------------------------------------------------------------------------
Class C shares 293 597 1,026 2,222
- ------------------------------------------------------------------------------
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $388 $627 $885 $1,623
- ------------------------------------------------------------------------------
Class B shares 196 606 1,042 1,860
- ------------------------------------------------------------------------------
Class C shares 193 597 1,026 2,222
- ------------------------------------------------------------------------------
6 - Kemper Intermediate Municipal Bond Fund
<PAGE>
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY. Scudder Kemper has more than 80 years of
experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.55% of its average daily net assets.
FUND MANAGERS
Below are the people who handle the fund's day-to-day
management:
Ashton P. Goodfield Philip G. Condon
Lead Portfolio Manager o Began investment career
o Began investment career in 1976
in 1986 o Joined the advisor
o Joined the advisor in 1983
in 1986 o Joined the fund team
o Joined the fund team in 1999
in 1998
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
7 - Kemper Intermediate Municipal Bond Fund
<PAGE>
TICKER SYMBOLS CLASS: A) KMBAX B) KMBBX C) KMBCX
Kemper
Municipal Bond Fund
- --------------------------------------------------------------------------------
FUND GOAL The fund seeks as high a level of current interest income that
is exempt from federal income taxes as is consistent with preservation of
capital.
8 - Kemper Municipal Bond Fund
<PAGE>
The Fund's Main Strategy
The fund normally invests at least 80% of net assets in municipal securities
whose income is free from regular federal income tax.
The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best income
potential, and normally prefer those that cannot be called in before maturity.
In making sell decisions, the managers typically consider a number of factors,
such as economic outlook and possible interest rate movements to specific
security characteristics and changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they will keep it over 15
years under normal circumstances. Also, while they're permitted to use various
types of derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
CREDIT QUALITY POLICIES
Normally, at least 90% of the fund's municipal securities are in the top four
grades of credit quality.
Up to 10% of the fund's municipal securities may be junk bonds, which are those
below the fourth credit grade (i.e., grade BB/Ba and below).
Compared to investment-grade bonds, junk bonds generally pay higher yields and
have higher volatility and higher risk of default on payments.
9 - Kemper Municipal Bond Fund
<PAGE>
The Main Risks Of Investing In The Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.
A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may emphasize investments in
certain geographic regions or sectors of the municipal market increases this
risk, because any factors affecting these regions or sectors could affect a
large portion of the fund's securities in a similar manner.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
issuers, credit quality or other matters
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an attractive
price for them
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
Long-term investors seeking tax-free income who can tolerate some risk to their
principal may want to consider this fund.
10 - Kemper Municipal Bond Fund
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1989 11.30
1990 6.66
1991 12.78
1992 8.71
1993 13.2
1994 -5.51
1995 18.33
1996 3.33
1997 9.36
1998 5.76
Best quarter: 7.17%, Q2 1989 YTD return as of 9/30/1999: -2.74%
Worst quarter: -5.35%, Q1 1994
- ------------------------------------------------------------------------------
Since Since
Since 5/31/94 Since Since 4/20/76
12/31/97 Life of 12/31/93 12/31/88 Life of
1 Year Class B/C 5 Years 10 Years Class A
- ------------------------------------------------------------------------------
Class A 1.01% -- 4.99% 7.72% 7.71%
- ------------------------------------------------------------------------------
Class B 1.94 6.08% -- -- --
- ------------------------------------------------------------------------------
Class C 4.88 6.54 -- -- --
- ------------------------------------------------------------------------------
Index 6.48 7.72 6.22 8.22 *
- ------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or sales
charges.
- ------------------------------------------------------------------------------
* The index was not in existence on the date of Class A shares inception.
11 - Kemper Municipal Bond Fund
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- ------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- ------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 4.50% None None
- ------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of
redemption proceeds) None* 4.00% 1.00%
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.41% 0.41% 0.41%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
- ------------------------------------------------------------------------------
Other Expenses** 0.29 0.37 0.39
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 0.70 1.53 1.55
- ------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see "Policies You Should Know About -- Policies
about transactions") may be subject to a deferred sales charge of 1.00% if
redeemed within one year of purchase and 0.50% if redeemed during the
second year following purchase.
** Includes cost of shareholder servicing, custody, accounting services and
similar expenses, which vary with fund size and other factors. "Other
Expenses" are restated to reflect changes in certain administrative and
blue sky fees.
Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
- ------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- ------------------------------------------------------------------------------
Class A shares $518 $664 $822 $1,281
- ------------------------------------------------------------------------------
Class B shares 556 783 1,034 1,393
- ------------------------------------------------------------------------------
Class C shares 258 490 845 1,845
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $518 $664 $822 $1,281
- ------------------------------------------------------------------------------
Class B shares 156 483 834 1,393
- ------------------------------------------------------------------------------
Class C shares 158 490 845 1,845
- ------------------------------------------------------------------------------
12 - Kemper Municipal Bond Fund
<PAGE>
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY. Scudder Kemper has more than 80 years of
experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.41% of its average daily net assets.
[ICON]--------------------------------------------------------------------------
FUND MANAGERS
Below are the people who handle the fund's day-to-day
management:
Philip G. Condon Matthew J. Caggiano
Co-Lead Portfolio Manager o Began investment career
o Began investment career in 1989
in 1976 o Joined the advisor
o Joined the advisor in 1983 in 1991
o Joined the fund team o Joined the fund team
in 1999 in 1999
Eleanor R. Brennan
Co-Lead Portfolio Manager
o Began investment career
in 1990
o Joined the advisor in 1995
o Joined the fund team
in 1998
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
- --------------------------------------------------------------------------------
13 - Kemper Municipal Bond Fund
<PAGE>
TICKER SYMBOLS CLASS: A) KCTAX B) KCTBX C) KCTCX
Kemper
California Tax-Free
Income Fund
FUND GOAL The fund seeks a high level of current income that is exempt from
California state and federal income taxes.
14 - Kemper California Tax-Free Income Fund
<PAGE>
The Fund's Main Strategy
The fund normally invests at least 80% of net assets in California municipal
securities and other securities whose income is free from regular federal income
tax.
The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best income
potential, and normally prefer those that cannot be called in before maturity.
In making sell decisions, the managers typically consider a number of factors,
such as economic outlook and possible interest rate movements to specific
security characteristics and changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they will keep it over 15
years under normal circumstances. Also, while they're permitted to use various
types of derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments.
[ICON]--------------------------------------------------------------------------
CREDIT QUALITY POLICIES
Normally, at least 90% of the fund's municipal securities are in the top four
grades of credit quality.
Up to 10% of the fund's municipal securities may be junk bonds, which are those
below the fourth credit grade (i.e., grade BB/Ba and below).
Compared to investment-grade bonds, junk bonds generally pay higher yields and
have higher volatility and higher risk of default on payments.
15 - Kemper California Tax-Free Income Fund
<PAGE>
The Main Risks Of Investing In The Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.
A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may emphasize securities from a
single state increases this risk, because any factors affecting the state or
region, such as economic or fiscal problems, could affect a large portion of the
fund's securities in a similar manner. For example, California residents' high
sensitivity to taxes could make it hard to raise taxes in order to meet
obligations.
Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given issuer than a diversified fund, factors affecting the
issuer could affect fund performance.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends, credit
quality or other matters
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an attractive
price for them
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
This fund may suit California taxpayers who are in a moderate to high tax
bracket and are seeking a long-term income investment that generates tax-free
income.
- --------------------------------------------------------------------------------
16 - Kemper California Tax-Free Income Fund
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1989 11.48
1990 6.7
1991 11.42
1992 8.25
1993 12.59
1994 -5.47
1995 19.48
1996 2.98
1997 8.59
1998 6.02
Best quarter: 7.72%, Q2 1989 YTD return as of 9/30/1999: -2.55%
Worst quarter: -4.51%, Q1 1994
Average Annual Total Returns (as of 12/31/1998)
- ------------------------------------------------------------------------------
Since Since
Since 5/31/94 Since Since 2/17/83
12/31/97 Life of 12/31/93 12/31/88 Life of
1 Year Class B/C 5 Years 10 Years Class A
- ------------------------------------------------------------------------------
Class A 1.20% -- 5.04% 7.52% 8.65%
- ------------------------------------------------------------------------------
Class B 2.17 6.20% -- -- --
- ------------------------------------------------------------------------------
Class C 5.00 6.39 -- -- --
- ------------------------------------------------------------------------------
Index 6.48 7.72 6.22 8.22 9.14*
- ------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or sales
charges.
- ------------------------------------------------------------------------------
* Since 2/28/83
17 - Kemper California Tax-Free Income Fund
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
Fee Table Class A Class B Class C
- ------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 4.50% None None
- ------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of
redemption proceeds) None* 4.00% 1.00%
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.52% 0.52% 0.52%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
- ------------------------------------------------------------------------------
Other Expenses** 0.31 0.39 0.42
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 0.83 1.66 1.69
- ------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see "Policies You Should Know About -- Policies
about transactions") may be subject to a deferred sales charge of 1.00% if
redeemed within one year of purchase and 0.50% if redeemed during the second
year following purchase.
** Includes cost of shareholder servicing, custody, accounting services and
similar expenses, which vary with fund size and other factors. "Other
Expenses" are restated to reflect changes in certain administrative and blue
sky fees.
Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
- ------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- ------------------------------------------------------------------------------
Class A shares $531 $703 $890 $1,429
- ------------------------------------------------------------------------------
Class B shares 569 823 1,102 1,534
- ------------------------------------------------------------------------------
Class C shares 272 533 913 1,987
- ------------------------------------------------------------------------------
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $531 $703 $890 $1,429
- ------------------------------------------------------------------------------
Class B shares 169 523 902 1,534
- ------------------------------------------------------------------------------
Class C shares 172 533 913 1,987
- ------------------------------------------------------------------------------
18 - Kemper California Tax-Free Income Fund
<PAGE>
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY. Scudder Kemper has more than 80 years of
experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.52% of its average daily net assets.
[ICON]--------------------------------------------------------------------------
FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Eleanor R. Brennan
Lead Portfolio Manager Matthew J. Caggiano
o Began investment career o Began investment career
in 1990 in 1989
o Joined the advisor o Joined the advisor
in 1995 in 1991
o Joined the fund team o Joined the fund team
in 1999 in 1999
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
- --------------------------------------------------------------------------------
19 - Kemper California Tax-Free Income Fund
<PAGE>
TICKER SYMBOLS CLASS: A) KFLAX B) KFLBX C) KFLCX
Kemper
Florida Tax-Free
Income Fund
FUND GOAL The fund seeks a high level of current income that is exempt
from federal income taxes.
20 - Kemper Florida Tax-Free Income Fund
<PAGE>
The Fund's Main Strategy
The fund normally invests at least 80% of net assets in municipal securities
whose income is free from regular federal income tax. In addition, the fund
invests at least 65% of net assets in Florida municipal securities and other
securities that are exempt from the Florida intangibles tax.
The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best income
potential, and normally prefer those that cannot be called in before maturity.
In making sell decisions, the managers typically consider a number of factors,
such as economic outlook and possible interest rate movements to specific
security characteristics and changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they will keep it over 15
years under normal circumstances. Also, while they're permitted to use various
types of derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments.
[ICON]--------------------------------------------------------------------------
CREDIT QUALITY POLICIES
Normally, at least 90% of the fund's municipal securities are in the top four
grades of credit quality.
Up to 10% of the fund's municipal securities may be junk bonds, which are those
below the fourth credit grade (i.e., grade BB/Ba and below).
Compared to investment-grade bonds, junk bonds generally pay higher yields and
have higher volatility and higher risk of default on payments.
21 - Kemper Florida Tax-Free Income Fund
<PAGE>
The Main Risks Of Investing In The Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.
A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may emphasize securities from a
single state increases this risk, because any factors affecting the state or
region, such as economic or fiscal problems, could affect a large portion of the
fund's securities in a similar manner. For example, the state's agricultural,
retirement-related or tourism industries could experience cyclical downturns or
long-term erosion, hurting the local economy.
Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given issuer than a diversified fund, factors affecting the
issuer could affect fund performance.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends, credit
quality or other matters
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an attractive
price for them
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
Florida residents who are looking for tax-free income and can invest for the
long term may be interested in this fund.
- --------------------------------------------------------------------------------
22 - Kemper Florida Tax-Free Income Fund
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1992 9.11
1993 13.50
1994 -3.91
1995 18.40
1996 2.70
1997 8.67
1998 5.48
Best quarter: 7.08%, Q1 1995 YTD return as of 9/30/1999: -3.56%
Worst quarter: -4.85%, Q1 1994
Average Annual Total Returns (as of 12/31/1998)
- ------------------------------------------------------------------------------
Since Since
Since 5/31/94 Since 4/25/91
12/31/97 Life of 12/31/93 Life of
1 Year Class B/C 5 Years Class A
- ------------------------------------------------------------------------------
Class A 0.70% -- 5.05% 7.49%
- ------------------------------------------------------------------------------
Class B 1.57 6.00% -- --
- ------------------------------------------------------------------------------
Class C 4.64 6.41 -- --
- ------------------------------------------------------------------------------
Index 6.48 7.72 6.22 7.87*
- ------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or sales
charges.
- ------------------------------------------------------------------------------
The table includes the effects of maximum sales loads. In both the table and the
chart, returns for 1993 would have been lower if operating expenses hadn't been
reduced.
* Since 4/30/91
23 - Kemper Florida Tax-Free Income Fund
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- ------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- ------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 4.50% None None
- ------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of
redemption proceeds) None* 4.00% 1.00%
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.55% 0.55% 0.55%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
- ------------------------------------------------------------------------------
Other Expenses** 0.38 0.44 0.43
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 0.93 1.74 1.73
- ------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see "Policies You Should Know About -- Policies
about transactions") may be subject to a deferred sales charge of 1.00% if
redeemed within one year of purchase and 0.50% if redeemed during the second
year following purchase.
** Includes cost of shareholder servicing, custody, accounting services and
similar expenses, which vary with fund size and other factors. "Other
Expenses" are restated to reflect changes in certain administrative and blue
sky fees.
Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
- ------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- ------------------------------------------------------------------------------
Class A shares $541 $733 $942 $1,542
- ------------------------------------------------------------------------------
Class B shares 577 848 1,144 1,640
- ------------------------------------------------------------------------------
Class C shares 276 545 939 2,041
- ------------------------------------------------------------------------------
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $541 $733 $942 $1,542
- ------------------------------------------------------------------------------
Class B shares 177 548 944 1,640
- ------------------------------------------------------------------------------
Class C shares 176 545 939 2,041
- ------------------------------------------------------------------------------
24 - Kemper Florida Tax-Free Income Fund
<PAGE>
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY. Scudder Kemper has more than 80 years of
experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.55% of its average daily net assets.
FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Eleanor R. Brennan
Lead Portfolio Manager Rebecca L. Wilson
o Began investment career o Began investment career
in 1990 in 1986
o Joined the advisor o Joined the advisor
in 1995 in 1986
o Joined the fund team o Joined the fund team
in 1998 in 1999
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
- --------------------------------------------------------------------------------
25 - Kemper Florida Tax-Free Income Fund
<PAGE>
TICKER SYMBOLS CLASS: A) KNTAX B) KNTBX C) KNTCX
Kemper
New York Tax-Free
Income Fund
FUND GOAL The fund seeks a high level of current income that is exempt
from New York state and New York City income taxes and federal income taxes.
26 - Kemper New York Tax-Free Income Fund
<PAGE>
The Fund's Main Strategy
The fund normally invests at least 80% of net assets in municipal securities
whose income is free from regular federal income tax. In addition, the fund
invests at least 65% of net assets in New York municipal securities and other
securities that are exempt from New York state and New York City income taxes.
The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best income
potential, and specific characteristics, such as call features. In making sell
decisions, the managers typically weigh a number of factors against each other,
from economic outlook and possible interest rate movements to changes in supply
and demand within the municipal bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio) they will keep it over 15 years
under normal circumstances. Also, while they're permitted to use various types
of derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments.
[ICON]--------------------------------------------------------------------------
CREDIT QUALITY POLICIES
Normally, at least 90% of the fund's municipal securities are in the top four
grades of credit quality.
Up to 10% of the fund's municipal securities may be junk bonds, which are those
below the fourth credit grade (i.e., grade BB/Ba and below).
Compared to investment-grade bonds, junk bonds generally pay higher yields and
have higher volatility and higher risk of default on payments.
27 - Kemper New York Tax-Free Income Fund
<PAGE>
The Main Risks Of Investing In The Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.
A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may emphasize securities from a
single state increases this risk, because any factors affecting the state or
region, such as economic or fiscal problems, could affect a large portion of the
fund's securities in a similar manner. For example, a downturn in the financial
industry could bring on a fiscal crisis in New York City, which has experienced
such crises before.
Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given issuer than a diversified fund, factors affecting the
issuer could affect fund performance.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends, credit
quality or other matters
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an attractive
price for them
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
This fund may interest New York resident taxpayers who are looking for tax-free
income and are investing for the long term.
- --------------------------------------------------------------------------------
28 - Kemper New York Tax-Free Income Fund
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1989 12.01
1990 5.93
1991 13.39
1992 9.43
1993 12.95
1994 -4.95
1995 17.98
1996 2.54
1997 8.89
1998 6.00
Best quarter: 7.17%, Q2 1989 YTD return as of 9/30/1999: -3.45%
Worst quarter: -4.47%, Q1 1994
Average Annual Total Returns (as of 12/31/1998)
- ------------------------------------------------------------------------------
Since Since
Since 5/31/94 Since Since 12/31/85
12/31/97 Life of 12/31/93 12/31/88 Life of
1 Year Class B/C 5 Years 10 Years Class A
- ------------------------------------------------------------------------------
Class A 1.21% -- 4.85% 7.74% 7.40%
- ------------------------------------------------------------------------------
Class B 2.33 5.90% -- -- --
- ------------------------------------------------------------------------------
Class C 5.24 6.23 -- -- --
- ------------------------------------------------------------------------------
Index 6.48 7.72 6.22 8.22 8.65
- ------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or sales
charges.
- ------------------------------------------------------------------------------
The table includes the effects of maximum sales loads. In both the table and the
chart, returns for 1991 would have been lower if operating expenses hadn't been
reduced.
29 - Kemper New York Tax-Free Income Fund
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- ------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- ------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 4.50% None None
- ------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of
redemption proceeds) None* 4.00% 1.00%
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.55% 0.55% 0.55%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
- ------------------------------------------------------------------------------
Other Expenses** 0.35 0.46 0.44
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 0.90 1.76 1.74
- ------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see "Policies You Should Know About -- Policies
about transactions") may be subject to a deferred sales charge of 1.00% if
redeemed within one year of purchase and 0.50% if redeemed during the second
year following purchase.
** Includes cost of shareholder servicing, custody, accounting services and
similar expenses, which vary with fund size and other factors. "Other
Expenses" are restated to reflect changes in certain administrative and blue
sky fees.
Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
- ------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- ------------------------------------------------------------------------------
Class A shares $538 $724 $926 $1,508
- ------------------------------------------------------------------------------
Class B shares 579 854 1,154 1,637
- ------------------------------------------------------------------------------
Class C shares 277 548 944 2,052
- ------------------------------------------------------------------------------
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $538 $724 $926 $1,508
- ------------------------------------------------------------------------------
Class B shares 179 554 954 1,637
- ------------------------------------------------------------------------------
Class C shares 177 548 944 2,052
- ------------------------------------------------------------------------------
30 - Kemper New York Tax-Free Income Fund
<PAGE>
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY. Scudder Kemper has more than 80 years of
experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.55% of its average daily net assets.
[ICON]--------------------------------------------------------------------------
FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Ashton P. Goodfield
Lead Portfolio Manager Eleanor R. Brennan
o Began investment career o Began investment career
in 1986 in 1990
o Joined the advisor o Joined the advisor
in 1986 in 1995
o Joined the fund team o Joined the fund team
in 1999 in 1998
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
- --------------------------------------------------------------------------------
31 - Kemper New York Tax-Free Income Fund
<PAGE>
TICKER SYMBOLS CLASS: A) KOHAX B) KOHBX C) KOHCX
Kemper
Ohio Tax-Free
Income Fund
FUND GOAL The fund seeks a high level of current income that is exempt from
Ohio state and federal income taxes.
32 - Kemper Ohio Tax-Free Income Fund
<PAGE>
The Fund's Main Strategy
The fund normally invests at least 80% of net assets in municipal securities
whose income is free from regular federal income tax. In addition, the fund
invests at least 65% of total assets in Ohio municipal securities and other
securities that are exempt from Ohio state income taxes.
The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best income
potential, and normally prefer those that cannot be called in before maturity.
In making sell decisions, the managers typically consider a number of factors,
such as economic outlook and possible interest rate movements to specific
security characteristics and changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they will keep it over 15
years under normal circumstances. Also, while they're permitted to use various
types of derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments.
[ICON---------------------------------------------------------------------------
CREDIT QUALITY POLICIES
Normally, at least 90% of the fund's municipal securities are in the top four
grades of credit quality.
Up to 10% of the fund's municipal securities may be junk bonds, which are those
below the fourth credit grade (i.e., grade BB/Ba and below).
Compared to investment-grade bonds, junk bonds generally pay higher yields and
have higher volatility and higher risk of default on payments.
33 - Kemper Ohio Tax-Free Income Fund
<PAGE>
The Main Risks Of Investing In The Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.
A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may emphasize securities from a
single state increases this risk, because any factors affecting the state or
region, such as economic or fiscal problems, could affect a large portion of the
fund's securities in a similar manner. For example, the state's manufacturing or
agricultural industries could experience cyclical downturns or long-term
erosion, hurting the local economy.
Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given issuer than a diversified fund, factors affecting the
issuer could affect fund performance.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends, credit
quality or other matters
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an attractive
price for them
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
This fund is designed for Ohio investors in moderate to high tax brackets who
are looking for a long-term investment that seeks to offer tax-free income.
- --------------------------------------------------------------------------------
34 - Kemper Ohio Tax-Free Income Fund
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1994 -3.67
1995 18.37
1996 3.14
1997 8.74
1998 5.85
Best quarter: 7.37%, Q4 1995 YTD return as of 9/30/1999: -2.22%
Worst quarter: -5.03%, Q1 1994
- ------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- ------------------------------------------------------------------------------
Since Since
Since 5/31/94 Since 3/22/93
12/31/97 Life of 12/31/93 Life of
1 Year Class B/C 5 Years Class A
- ------------------------------------------------------------------------------
Class A 1.09% -- 5.27% 6.29%
- ------------------------------------------------------------------------------
Class B 2.11 6.32% -- --
- ------------------------------------------------------------------------------
Class C 5.02 6.67 -- --
- ------------------------------------------------------------------------------
Index 6.48 7.72 6.22 6.86*
- ------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or sales
charges.
- ------------------------------------------------------------------------------
The table includes the effects of maximum sales loads. In both the table and the
chart, returns for 1993-1994 would have been lower if operating expenses hadn't
been reduced.
* Since 3/31/93
35 - Kemper Ohio Tax-Free Income Fund
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
- ------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- ------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 4.50% None None
- ------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of
redemption proceeds) None* 4.00% 1.00%
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.55% 0.55% 0.55%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
- ------------------------------------------------------------------------------
Other Expenses** 0.51 0.56 0.59
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 1.06 1.86 1.89
- ------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see "Policies You Should Know About -- Policies
about transactions") may be subject to a deferred sales charge of 1.00% if
redeemed within one year of purchase and 0.50% if redeemed during the second
year following purchase.
** Includes cost of shareholder servicing, custody, accounting services and
similar expenses, which vary with fund size and other factors. "Other
Expenses" are restated to reflect changes in certain administrative and blue
sky fees.
Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
- ------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- ------------------------------------------------------------------------------
Class A shares $553 $772 $1,008 $1,686
- ------------------------------------------------------------------------------
Class B shares 577 848 1,144 1,707
- ------------------------------------------------------------------------------
Class C shares 292 594 1,021 2,212
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $553 $772 $1,008 $1,686
- ------------------------------------------------------------------------------
Class B shares 177 548 1,144 1,707
- ------------------------------------------------------------------------------
Class C shares 192 594 1,021 2,212
- ------------------------------------------------------------------------------
36 - Kemper Ohio Tax-Free Income Fund
<PAGE>
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY. Scudder Kemper has more than 80 years of
experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.55% of its average daily net assets.
[ICON]--------------------------------------------------------------------------
FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Eleanor R. Brennan
Lead Portfolio Manager Rebecca L. Wilson
o Began investment career o Began investment career
in 1990 in 1986
o Joined the advisor o Joined the advisor
in 1995 in 1986
o Joined the fund team o Joined the fund team
in 1999 in 1998
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
- --------------------------------------------------------------------------------
37 - Kemper Ohio Tax-Free Income Fund
<PAGE>
Other Policies And Risks
While the previous pages describe the main points of each fund's strategy and
risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, each fund's Board could
change that fund's investment goal without seeking shareholder approval.
However, the policy of investing at least 80% of net assets in municipal
securities for each fund cannot be changed without shareholder approval.
o As a temporary defensive measure, any of these funds could shift up to 100%
of assets into investments such as taxable money market securities. This
could prevent losses, but would mean that the fund would not be pursuing
its goal.
o Scudder Kemper establishes a security's credit quality when it buys the
security, using independent ratings or, for unrated securities, its own
credit determination. When ratings don't agree, a fund may use the higher
rating. If a security's credit quality falls, the advisor will determine
whether selling it would be in the shareholders' best interests.
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
Year 2000 readiness
Like all mutual funds, these funds could be affected by the inability of some
computer systems to recognize the year 2000. Scudder Kemper has a year 2000
readiness program designed to address this problem, and has researched the
readiness of suppliers and business partners as well as issuers of securities
the funds own. Still, there's some risk that the year 2000 problem could
materially affect a fund's operations (such as its ability to calculate net
asset value and to handle purchases and redemptions), its investments or
securities markets in general.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
This prospectus doesn't tell you about every policy or risk of investing in a
fund. For more information, you may want to request a copy of the SAI (the back
cover has additional information on how to do this).
- --------------------------------------------------------------------------------
38 - Other Policies and Risks
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance in recent years. The figures in the first part of each table are for
a single share. The total return figures represent the percentage that an
investor in a particular fund would have earned (or lost), assuming all
dividends and distributions were reinvested. This information has been audited
by Ernst & Young LLP, whose report, along with each fund's financial statements,
is included in that fund's annual report (see "Shareholder reports" on the back
cover).
Kemper Intermediate Municipal Bond Fund
Class A
- ------------------------------------------------------------------------------
Years ended September 30, 1999 1998 1997 1996 1995(a)
- ------------------------------------------------------------------------------
Net asset value, beginning of
period $10.53 $10.31 $10.06 $10.18 $9.50
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income .42 .45 .46 .46 .45
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.50) .29 .29 (.04) .68
- ------------------------------------------------------------------------------
Total from investment
operations (.08) .74 .75 .42 1.13
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .42 .45 .46 .46 .45
- ------------------------------------------------------------------------------
Distribution from net realized
gain .03 .07 .04 .08 --
- ------------------------------------------------------------------------------
Total dividends .45 .52 .50 .54 .45
- ------------------------------------------------------------------------------
Net asset value, end of period $10.00 $10.53 $10.31 $10.06 $10.18
- ------------------------------------------------------------------------------
Total return (not annualized) (%) (.79) 7.34 7.62 4.15 12.08
- ------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
- ------------------------------------------------------------------------------
Expenses absorbed by the fund (%) .96 .96 .96 .92 .55
- ------------------------------------------------------------------------------
Net investment income (%) 4.15 4.35 4.55 4.45 5.00
- ------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
- ------------------------------------------------------------------------------
Expenses (%) .96 .96 .96 1.04 1.05
- ------------------------------------------------------------------------------
Net investment income (%) 4.15 4.35 4.55 4.33 4.50
- ------------------------------------------------------------------------------
(a) November 1, 1994 to September 30, 1995.
39 - Financial Highlights
<PAGE>
Class B
- ------------------------------------------------------------------------------
Years ended September 30, 1999 1998 1997 1996 1995(a)
- ------------------------------------------------------------------------------
Net asset value, beginning of
period $10.52 $10.31 $10.06 $10.18 $9.50
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income .34 .37 .38 .38 .36
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.49) .28 .29 (.04) .68
- ------------------------------------------------------------------------------
Total from investment
operations (.15) .65 .67 .34 1.04
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .34 .37 .38 .38 .36
- ------------------------------------------------------------------------------
Distribution from net realized
gain .03 .07 .04 .08 --
- ------------------------------------------------------------------------------
Total dividends .37 .44 .42 .46 .36
- ------------------------------------------------------------------------------
Net asset value, end of period $10.00 $10.52 $10.31 $10.06 $10.18
- ------------------------------------------------------------------------------
Total return (not annualized) (%) (1.48) 6.38 6.78 3.34 11.13
- ------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
- ------------------------------------------------------------------------------
Expenses absorbed by the fund (%) 1.76 1.76 1.76 1.71 1.42
- ------------------------------------------------------------------------------
Net investment income (%) 3.35 3.55 3.75 3.66 4.13
- ------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
- ------------------------------------------------------------------------------
Expenses (%) 1.76 1.76 1.76 1.83 1.92
- ------------------------------------------------------------------------------
Net investment income (%) 3.35 3.55 3.75 3.54 3.63
- ------------------------------------------------------------------------------
(a) November 1, 1994 to September 30, 1995.
40 - Financial Highlights
<PAGE>
Class C
- ------------------------------------------------------------------------------
Years ended September 30, 1999 1998 1997 1996 1995(a)
- ------------------------------------------------------------------------------
Net asset value, beginning of
period $10.53 $10.31 $10.06 $10.19 $9.50
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income .34 .37 .39 .38 .38
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.50) .29 .29 (.05) .69
- ------------------------------------------------------------------------------
Total from investment
operations (.16) .66 .68 .33 1.07
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .34 .37 .39 .38 .38
- ------------------------------------------------------------------------------
Distribution from net realized
gain .03 .07 .04 .08 --
- ------------------------------------------------------------------------------
Total dividends .37 .44 .43 .46 .38
- ------------------------------------------------------------------------------
Net asset value, end of period $10.00 $10.53 $10.31 $10.06 $10.19
- ------------------------------------------------------------------------------
Total return (not annualized) (%) (1.56) 6.55 6.77 3.26 11.43
- ------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
- ------------------------------------------------------------------------------
Expenses absorbed by the fund (%) 1.72 1.73 1.73 1.65 1.28
- ------------------------------------------------------------------------------
Net investment income (%) 3.39 3.58 3.78 3.72 4.27
- ------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
- ------------------------------------------------------------------------------
Expenses (%) 1.72 1.73 1.73 1.77 1.78
- ------------------------------------------------------------------------------
Net investment income (%) 3.39 3.58 3.78 3.60 3.77
- ------------------------------------------------------------------------------
Supplemental data for all classes
- ------------------------------------------------------------------------------
Years ended September 30, 1999 1998 1997 1996 1995(a)
- ------------------------------------------------------------------------------
Net assets at end of year
(in thousands) $25,463 25,173 21,889 21,901 16,169
- ------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) (%) 30 14 80 80 60
- ------------------------------------------------------------------------------
(a) November 1, 1994 to September 30, 1995.
Notes for Intermediate Municipal Bond Fund: Scudder Kemper 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 waiver of management fee.
Total return does not reflect the effect of any sales charges.
41 - Financial Highlights
<PAGE>
Kemper Municipal Bond Fund
Class A
- ------------------------------------------------------------------------------
Years ended September 30, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
period $10.61 $10.46 $10.18 $10.15 $9.69
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income .48 .52 .54 .55 .55
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.76) .37 .36 .06 .50
- ------------------------------------------------------------------------------
Total from investment
operations (.28) .89 .90 .61 1.05
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .48 .52 .54 .55 .55
- ------------------------------------------------------------------------------
Distribution from net realized
gain .25 .22 .08 .03 .04
- ------------------------------------------------------------------------------
Total dividends .73 .74 .62 .58 .59
- ------------------------------------------------------------------------------
Net asset value, end of period $9.60 $10.61 $10.46 $10.18 $10.15
- ------------------------------------------------------------------------------
Total return (%) (2.75) 8.84 9.15 6.00 11.15
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) .69 .68 .68 .66 .66
- ------------------------------------------------------------------------------
Net investment income (%) 4.86 4.97 5.29 5.35 5.63
- ------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------
Years ended September 30, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
period $10.58 $10.44 $10.15 $10.13 $9.67
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income .40 .43 .45 .46 .46
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.75) .36 .37 .05 .50
- ------------------------------------------------------------------------------
Total from investment
operations (.35) .79 .82 .51 .96
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .40 .43 .45 .46 .46
- ------------------------------------------------------------------------------
Distribution from net realized
gain .25 .22 .08 .03 .04
- ------------------------------------------------------------------------------
Total dividends .65 .65 .53 .49 .50
- ------------------------------------------------------------------------------
Net asset value, end of period $9.58 $10.58 $10.44 $10.15 $10.13
- ------------------------------------------------------------------------------
Total return (not annualized) (%) (3.48) 7.84 8.32 4.97 10.17
- ------------------------------------------------------------------------------
Ratios to average net assets (annualized)
- ------------------------------------------------------------------------------
Expenses (%) 1.53 1.52 1.55 1.54 1.55
- ------------------------------------------------------------------------------
Net investment income (%) 4.02 4.13 4.42 4.47 4.74
- ------------------------------------------------------------------------------
42 - Financial Highlights
<PAGE>
Class C
- ------------------------------------------------------------------------------
Years ended September 30, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning
of period $10.62 $10.47 $10.18 $10.16 $9.69
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income .40 .43 .46 .46 .47
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.75) .37 .37 .05 .51
- ------------------------------------------------------------------------------
Total from investment
operations (.35) .80 .83 .51 .98
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .40 .43 .46 .46 .47
- ------------------------------------------------------------------------------
Distribution from net
realized gain .25 .22 .08 .03 .04
- ------------------------------------------------------------------------------
Total dividends .65 .65 .54 .49 .51
- ------------------------------------------------------------------------------
Net asset value, end of
period $9.62 $10.62 $10.47 $10.18 $10.16
- ------------------------------------------------------------------------------
Total return (not
annualized) (%) (3.47) 7.93 8.34 4.99 10.32
- ------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
- ------------------------------------------------------------------------------
Expenses (%) 1.54 1.52 1.53 1.51 1.51
- ------------------------------------------------------------------------------
Net investment income (%) 4.01 4.13 4.44 4.50 4.78
- ------------------------------------------------------------------------------
Supplemental data for all classes
- ------------------------------------------------------------------------------
Years ended September 30, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net assets at end of year
(in thousands) $2,812,203 3,220,643 3,126,221 3,321,546 3,510,648
- ------------------------------------------------------------------------------
Portfolio turnover rate (%) 70 65 77 97 86
- ------------------------------------------------------------------------------
Note for Municipal Bond Fund: Total return does not reflect the effect of any
sales charges.
43 - Financial Highlights
<PAGE>
Kemper California Tax-Free Income Fund
Class A
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
year $7.65 $7.52 $7.31 $7.35 $7.22
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income (loss) .34 .36 .38 .39 .39
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.41) .26 .25 .04 .17
- ------------------------------------------------------------------------------
Total from investment
operations (.07) .62 .63 .43 .56
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .34 .36 .38 .39 .39
- ------------------------------------------------------------------------------
Distribution from net realized
gain .14 .13 .04 .08 .04
- ------------------------------------------------------------------------------
Total dividends .48 .49 .42 .47 .43
- ------------------------------------------------------------------------------
Net asset value, end of year $7.10 $7.65 $7.52 $7.31 $7.35
- ------------------------------------------------------------------------------
Total return (%) (1.07) 8.56 8.78 5.92 8.13
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) .82 .78 .79 .78 .74
- ------------------------------------------------------------------------------
Net investment income (%) 4.60 4.82 5.08 5.18 5.53
- ------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
year $7.66 $7.52 $7.32 $7.35 $7.22
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income (loss) .28 .30 .32 .32 .33
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.41) .27 .24 .05 .17
- ------------------------------------------------------------------------------
Total from investment
operations (.13) .57 .56 .37 .50
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .28 .30 .32 .32 .33
- ------------------------------------------------------------------------------
Distribution from net realized
gain .14 .13 .04 .08 .04
- ------------------------------------------------------------------------------
Total dividends .42 .43 .36 .40 .37
- ------------------------------------------------------------------------------
Net asset value, end of year $7.11 $7.66 $7.52 $7.32 $7.35
- ------------------------------------------------------------------------------
Total return (%) (1.90) 7.79 7.73 5.16 7.17
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) 1.65 1.63 1.62 1.63 1.60
- ------------------------------------------------------------------------------
Net investment income (%) 3.75 3.97 4.25 4.33 4.67
- ------------------------------------------------------------------------------
44 - Financial Highlights
<PAGE>
Class C
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value,
beginning of year $7.60 $7.50 $7.31 $7.34 $7.22
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income
(loss) .28 .30 .32 .32 .33
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.41) .23 .23 .05 .16
- ------------------------------------------------------------------------------
Total from investment
operations (.13) .53 .55 .37 .49
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .28 .30 .32 .32 .33
- ------------------------------------------------------------------------------
Distribution from net
realized gain .14 .13 .04 .08 .04
- ------------------------------------------------------------------------------
Total dividends .42 .43 .36 .40 .37
- ------------------------------------------------------------------------------
Net asset value, end of year $7.05 $7.60 $7.50 $7.31 $7.34
- ------------------------------------------------------------------------------
Total return (%) (1.91) 7.21 7.59 5.15 7.08
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) 1.68 1.62 1.60 1.64 1.56
- ------------------------------------------------------------------------------
Net investment income (%) 3.71 3.98 4.27 4.32 4.71
- ------------------------------------------------------------------------------
Supplemental data for all classes
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net assets at end of year
(in thousands) $895,938 1,024,272 1,007,907 1,040,538 1,087,232
- ------------------------------------------------------------------------------
Portfolio turnover rate (%) 62 61 79 100 69
- ------------------------------------------------------------------------------
Note for California Tax-Free Income Fund: Total return does not reflect the
effect of any sales charges.
45 - Financial Highlights
<PAGE>
Kemper Florida Tax-Free Income Fund
Class A
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
year $10.62 $10.42 $10.21 $10.27 $10.11
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income (loss) .47 .49 .51 .52 .53
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.68) .35 .33 .08 .30
- ------------------------------------------------------------------------------
Total from investment
operations (.21) .84 .84 .60 .83
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .47 .49 .51 .52 .53
- ------------------------------------------------------------------------------
Distribution from net realized
gain .22 .15 .12 .14 .14
- ------------------------------------------------------------------------------
Total dividends .69 .64 .63 .66 .67
- ------------------------------------------------------------------------------
Net asset value, end of year $9.72 $10.62 $10.42 $10.21 $10.27
- ------------------------------------------------------------------------------
Total return (%) (2.13) 8.27 8.37 5.83 8.62
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) .88 .85 .83 .84 .80
- ------------------------------------------------------------------------------
Net investment income (%) 4.57 4.65 4.92 5.00 5.30
- ------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
year $10.60 $10.40 $10.19 $10.26 $10.10
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income (loss) .39 .40 .42 .43 .44
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.67) .35 .33 .07 .30
- ------------------------------------------------------------------------------
Total from investment
operations (.28) .75 .75 .50 .74
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .39 .40 .42 .43 .44
- ------------------------------------------------------------------------------
Distribution from net realized
gain .22 .15 .12 .14 .14
- ------------------------------------------------------------------------------
Total dividends .61 .55 .54 .57 .58
- ------------------------------------------------------------------------------
Net asset value, end of year $9.71 $10.60 $10.40 $10.19 $10.26
- ------------------------------------------------------------------------------
Total return (%) (2.85) 7.38 7.48 4.84 7.67
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) 1.69 1.68 1.65 1.68 1.65
- ------------------------------------------------------------------------------
Net investment income (%) 3.76 3.82 4.10 4.16 4.45
- ------------------------------------------------------------------------------
46 - Financial Highlights
<PAGE>
Class C
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
year $10.60 $10.41 $10.20 $10.26 $10.10
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income (loss) .39 .40 .42 .43 .45
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.67) .34 .33 .08 .30
- ------------------------------------------------------------------------------
Total from investment
operations (.28) .74 .75 .51 .75
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .39 .40 .42 .43 .45
- ------------------------------------------------------------------------------
Distribution from net realized
gain .22 .15 .12 .14 .14
- ------------------------------------------------------------------------------
Total dividends .61 .55 .54 .57 .59
- ------------------------------------------------------------------------------
Net asset value, end of year $9.71 $10.60 $10.41 $10.20 $10.26
- ------------------------------------------------------------------------------
Total return (%) (2.84) 7.26 7.49 4.97 7.84
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) 1.68 1.69 1.64 1.64 1.52
- ------------------------------------------------------------------------------
Net investment income (%) 3.76 3.81 4.11 4.20 4.58
- ------------------------------------------------------------------------------
Supplemental data for all classes
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net assets at end of year
(in thousands) $92,480 107,531 103,845 108,105 117,292
- ------------------------------------------------------------------------------
Portfolio turnover rate (%) 56 70 87 119 96
- ------------------------------------------------------------------------------
Note for Florida Tax-Free Income Fund: Total return does not reflect the effect
of any sales charges.
47 - Financial Highlights
<PAGE>
Kemper New York Tax-Free Income Fund
Class A
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
year $11.11 $10.93 $10.66 $10.80 $10.73
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income (loss) .49 .53 .56 .56 .58
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.63) .36 .36 -- .20
- ------------------------------------------------------------------------------
Total from investment
operations (.14) .89 .92 .56 .78
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .49 .53 .56 .56 .58
- ------------------------------------------------------------------------------
Distribution from net realized
gain .26 .18 .09 .14 .13
- ------------------------------------------------------------------------------
Total dividends .75 .71 .65 .70 .71
- ------------------------------------------------------------------------------
Net asset value, end of year $10.22 $11.11 $10.93 $10.66 $10.80
- ------------------------------------------------------------------------------
Total return (%) (1.52) 8.44 8.77 5.26 7.62
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) .88 .84 .83 .83 .81
- ------------------------------------------------------------------------------
Net investment income (%) 4.49 4.81 5.15 5.15 5.47
- ------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
year $11.13 $10.94 $10.66 $10.80 $10.73
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income (loss) .39 .44 .47 .47 .48
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.64) .37 .37 -- .20
- ------------------------------------------------------------------------------
Total from investment
operations (.25) .81 .84 .47 .68
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .39 .44 .47 .47 .48
- ------------------------------------------------------------------------------
Distribution from net realized
gain .26 .18 .09 .14 .13
- ------------------------------------------------------------------------------
Total dividends .65 .62 .56 .61 .61
- ------------------------------------------------------------------------------
Net asset value, end of year $10.23 $11.13 $10.94 $10.66 $10.80
- ------------------------------------------------------------------------------
Total return (%) (2.44) 7.65 7.96 4.36 6.69
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) 1.73 1.67 1.67 1.69 1.67
- ------------------------------------------------------------------------------
Net investment income (%) 3.64 3.98 4.31 4.29 4.61
- ------------------------------------------------------------------------------
48 - Financial Highlights
<PAGE>
Class C
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
year $11.10 $10.92 $10.65 $10.79 $10.73
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income (loss) .40 .44 .47 .47 .48
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.63) .36 .36 -- .19
- ------------------------------------------------------------------------------
Total from investment
operations (.23) .80 .83 .47 .67
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .40 .44 .47 .47 .48
- ------------------------------------------------------------------------------
Distribution from net realized
gain .26 .18 .09 .14 .13
- ------------------------------------------------------------------------------
Total dividends .66 .62 .56 .61 .61
- ------------------------------------------------------------------------------
Net asset value, end of year $10.21 $11.10 $10.92 $10.65 $10.79
- ------------------------------------------------------------------------------
Total return (%) (2.33) 7.56 7.87 4.38 6.64
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) 1.71 1.67 1.65 1.67 1.62
- ------------------------------------------------------------------------------
Net investment income (%) 3.65 3.98 4.33 4.31 4.66
- ------------------------------------------------------------------------------
Supplemental data for all classes
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net assets at end of year
(in thousands) $253,442 284,320 285,934 302,346 319,477
- ------------------------------------------------------------------------------
Portfolio turnover rate (%) 69 77 92 104 112
- ------------------------------------------------------------------------------
Note for New York Tax-Free Income Fund: Total return does not reflect the effect
of any sales charges.
49 - Financial Highlights
<PAGE>
Kemper Ohio Tax-Free Income Fund
Class A
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
year $10.54 $10.22 $9.93 $9.81 $9.56
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income (loss) .46 .47 .47 .48 .50
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.53) .39 .32 .12 .25
- ------------------------------------------------------------------------------
Total from investment
operations (.07) .86 .79 .60 .75
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .46 .47 .47 .48 .50
- ------------------------------------------------------------------------------
Distribution from net realized
gain .04 .07 .03 -- --
- ------------------------------------------------------------------------------
Total dividends .50 .54 .50 .48 .50
- ------------------------------------------------------------------------------
Net asset value, end of year $9.97 $10.54 $10.22 $9.93 $9.81
- ------------------------------------------------------------------------------
Total return (%) (.66) 8.57 8.17 6.16 8.20
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) .94 .87 .89 .91 .63
- ------------------------------------------------------------------------------
Net investment income (%) 4.38 4.51 4.69 4.78 5.07
- ------------------------------------------------------------------------------
Class B
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
year $10.54 $10.22 $9.93 $9.81 $9.56
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income (loss) .38 .38 .39 .39 .44
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.53) .39 .32 .12 .25
- ------------------------------------------------------------------------------
Total from investment
operations (.15) .77 .71 .51 .69
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .38 .38 .39 .39 .44
- ------------------------------------------------------------------------------
Distribution from net realized
gain .04 .07 .03 -- --
- ------------------------------------------------------------------------------
Total dividends .42 .45 .42 .39 .44
- ------------------------------------------------------------------------------
Net asset value, end of year $9.97 $10.54 $10.22 $9.93 $9.81
- ------------------------------------------------------------------------------
Total return (%) (1.55) 7.69 7.29 5.30 7.57
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) 1.74 1.69 1.70 1.73 1.32
- ------------------------------------------------------------------------------
Net investment income (%) 3.57 3.69 3.88 3.96 4.58
- ------------------------------------------------------------------------------
50 - Financial Highlights
<PAGE>
Class C
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net asset value, beginning of
year $10.54 $10.22 $9.93 $9.81 $9.56
- ------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------
Net investment income (loss) .37 .38 .39 .39 .44
- ------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.53) .39 .32 .12 .25
- ------------------------------------------------------------------------------
Total from investment
operations (.16) .77 .71 .51 .69
- ------------------------------------------------------------------------------
Less dividends:
- ------------------------------------------------------------------------------
Distribution from net
investment income .37 .38 .39 .39 .44
- ------------------------------------------------------------------------------
Distribution from net realized
gain .04 .07 .03 -- --
- ------------------------------------------------------------------------------
Total dividends .41 .45 .42 .39 .44
- ------------------------------------------------------------------------------
Net asset value, end of year $9.97 $10.54 $10.22 $9.93 $9.81
- ------------------------------------------------------------------------------
Total return (%) (1.48) 7.70 7.32 5.28 7.56
- ------------------------------------------------------------------------------
Ratios to average net assets
- ------------------------------------------------------------------------------
Expenses (%) 1.77 1.67 1.68 1.74 1.27
- ------------------------------------------------------------------------------
Net investment income (%) 3.53 3.71 3.90 3.95 4.63
- ------------------------------------------------------------------------------
Supplemental data for all classes
- ------------------------------------------------------------------------------
Years ended August 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Net assets at end of year
(in thousands) $44,864 43,841 39,468 37,100 31,450
- ------------------------------------------------------------------------------
Portfolio turnover rate (%) 29 15 52 86 90
- ------------------------------------------------------------------------------
Note for Ohio Tax-Free Income Fund: Scudder Kemper Investments, Inc. agreed to
temporarily waive and absorb certain operating expenses of the fund for the
fiscal year ended August 31, 1995. Absent this waiver, the ratios of expenses to
average net assets would have increased and the ratios of net investment income
to average net assets would have decreased by the following amounts:
0.20% for Class A, 0.43% for Class B and 0.42% for Class C, respectively.
Total return does not reflect the effect of any sales charges.
51 - Financial Highlights
<PAGE>
Investing in the funds
The following pages tell you about many of the services, choices and benefits of
being a Kemper Funds shareholder. You'll also find information on how to check
the status of your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.
<PAGE>
Choosing A Share Class
In this prospectus, there are three share classes for each fund. Each class has
its own fees and expenses, offering you a choice of cost structures.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
- ------------------------------------------------------------------------------
Classes and features Points to help you compare
- ------------------------------------------------------------------------------
Class A
o Sales charges of up to 4.5% (2.75% o Some investors may be able to
for Kemper Intermediate Municipal reduce or eliminate their sales
Bond Fund), charged when you buy charges; see next page
shares
o Total annual operating expenses
o In most cases, no charges when you are lower than those for Class B
sell shares or Class C
o No distribution fee
- ------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge rate
falls to zero after six years
o Deferred sales charge of up to
4.00%, charged when you sell shares o Shares automatically convert to
you bought within the last six years Class A after six years, which
means lower annual expenses going
o 0.75% distribution fee forward
- ------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge rate is
lower, but your shares never
o Deferred sales charge of 1.00%, convert to Class A, so annual
charged when you sell shares you expenses remain higher
bought within the last year
o 0.75% distribution fee
- ------------------------------------------------------------------------------
53 - Choosing A Share Class
<PAGE>
Class A shares
Class A shares have a sales charge that varies with the amount you invest:
Sales charge Sales charge as
as a % of a % of your net
Amount of Purchase offering price investment*
- ----------------------------------------------------------
All funds except Intermediate Municipal Bond Fund
- ----------------------------------------------------------
Less than $100,000 4.50% 4.71%
- ----------------------------------------------------------
$100,000 but less 3.50 3.63
than $250,000
- ----------------------------------------------------------
$250,000 but less 2.60 2.67
than $500,000
- ----------------------------------------------------------
$500,000 but less 2.00 2.04
than $1 million
- ----------------------------------------------------------
$1 million and over 0.00** 0.00**
- ----------------------------------------------------------
Intermediate Municipal Bond Fund only
- ----------------------------------------------------------
Less than $100,000 2.75 2.83
- ----------------------------------------------------------
$100,000 but less 2.50 2.56
than $250,000
- ----------------------------------------------------------
$250,000 but less 2.00 2.04
than $500,000
- ----------------------------------------------------------
$500,000 but less 1.50 1.52
than $1 million
- ----------------------------------------------------------
$1 million and over 0.00** 0.00**
- ----------------------------------------------------------
* Rounded to nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
The offering price includes the sales charge.
54 - Choosing A Share Class
<PAGE>
You may be able to lower your Class A sales charges if:
o you plan to invest at least $100,000 over the next 24 months ("letter of
intent")
o the amount of Kemper funds you already own (including shares in certain other
Kemper funds) plus the amount you're investing now is at least $100,000
("cumulative discount")
o you are investing a total of $100,000 or more in several Kemper funds at once
("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
55 - Choosing A Share Class
<PAGE>
You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o participating in an investment advisory program under which you pay a fee to
an investment advisor or other firm for portfolio management services
There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Kemper can answer
your questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. ("Large Order NAV
Purchase Privilege"). This CDSC is waived under certain circumstances (see
"Policies You Should Know About"). Your financial representative or Kemper can
answer your questions and help you determine if you're eligible.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
Class A shares may make sense for long-term investors, especially those who are
eligible for reduced or eliminated sales charges.
- --------------------------------------------------------------------------------
56 - Choosing A Share Class
<PAGE>
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% is deducted
from fund assets each year. This means the annual expenses for Class B shares
are somewhat higher (and their performance correspondingly lower) compared to
Class A shares, which don't have a 12b-1 fee. After six years, Class B shares
automatically convert to Class A, which has the net effect of lowering the
annual expenses from the seventh year on.
Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:
Year after you bought shares CDSC on shares you sell
- -----------------------------------------------------------
First year 4.00%
- -----------------------------------------------------------
Second or third year 3.00
- -----------------------------------------------------------
Fourth or fifth year 2.00
- -----------------------------------------------------------
Sixth year 1.00
- -----------------------------------------------------------
Seventh year and later None (automatic conversion
to Class A)
- -----------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper can answer your questions and
help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
Class B shares can be a logical choice for long-term investors who would prefer
to see all of their investment go to work right away, and can accept somewhat
higher annual expenses in exchange.
- --------------------------------------------------------------------------------
57 - Choosing A Share Class
<PAGE>
Class C shares
Like Class B shares, Class C shares have no up-front sales charges and have a
12b-1 Plan under which a distribution fee of 0.75% is deducted from fund assets
each year. Because of this fee, the annual expenses for Class C shares are
similar to those of Class B shares, but higher than those for Class A shares
(and the performance of Class C shares is correspondingly lower than that of
Class A).
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a CDSC, but only on shares you sell within one year of
buying them:
Year after you bought shares CDSC on shares you sell
- -------------------------------------------------------------
First year 1.00%
- -------------------------------------------------------------
Second year and later None
- -------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper can answer your questions and
help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.
- --------------------------------------------------------------------------------
58 - Choosing A Share Class
<PAGE>
How To Buy Shares
Once you've chosen a share class, use these instructions to make investments.
Make out any checks to "Kemper Funds."
- ------------------------------------------------------------------------------
First investment Additional investments
- ------------------------------------------------------------------------------
$1,000 or more for regular accounts $100 or more for regular accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic $50 or more with an Automatic
Investment Plan Investment Plan
- ------------------------------------------------------------------------------
Through a financial representative
o Contact your representative using o Contact your representative using
the method that's most convenient the method that's most convenient
for you for you
- ------------------------------------------------------------------------------
By mail or express mail (see below)
o Fill out and sign an application o Send a check and a Kemper
investment slip to us at the
o Send it to us at the appropriate appropriate address below
address, along with an investment
check o If you don't have an investment
slip, simply include a letter
with your name, account number,
the full name of the fund and the
share class and your investment
instructions
- ------------------------------------------------------------------------------
By wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
- ------------------------------------------------------------------------------
By phone
-- o Call (800) 621-1048 for instructions
- ------------------------------------------------------------------------------
With an automatic investment plan
-- o To set up regular investments,
call (800) 621-1048
- ------------------------------------------------------------------------------
On the internet
o Follow the instructions at o Follow the instructions at
www.kemper.com www.kemper.com
- ------------------------------------------------------------------------------
Regular mail: Kemper Funds, PO Box 219415, Kansas City, MO 64121-9415
Express, registered, or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
59 - How To Buy Shares
<PAGE>
How to Exchange Or Sell Shares
Use these instructions to exchange or sell shares in your account.
- ------------------------------------------------------------------------------
Exchanging into another fund Selling shares
- ------------------------------------------------------------------------------
$1,000 or more to open a new account Some transactions, including most
for over $50,000, can only be
$100 or more for exchanges between ordered in writing with a signature
existing accounts guarantee; if you're in doubt, see
page 63
- ------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by the o Contact your representative by
method that's most convenient for the method that's most convenient
you for you
- ------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
- ------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes: Write a letter that includes:
o the fund, class and account number o the fund, class and account
you're exchanging out of number from which you want to
sell shares
o the dollar amount or number of
shares you want to exchange o the dollar amount or number of
shares you want to sell
o the name and class of the fund you
want to exchange into o your name(s), signature(s) and
address, as they appear on your
o your name(s), signature(s) and account
address, as they appear on your
account o a daytime telephone number
o a daytime telephone number
- ------------------------------------------------------------------------------
With a systematic exchange plan With a systematic withdrawal plan
o To set up regular exchanges from a o To set up regular cash payments
Kemper fund account, call from a Kemper fund account, call
(800) 621-1048 (800) 621-1048
- ------------------------------------------------------------------------------
On the internet
o Follow the instructions at o Follow the instructions at
www.kemper.com www.kemper.com
- ------------------------------------------------------------------------------
60 - How To Exchante Or Sell Shares
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 3 p.m. central time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
Ordinarily, your investment will start to accrue dividends the next business day
after your purchase is processed. When selling shares you'll generally receive
the dividend for the day on which your shares were sold. The level of income
dividends will vary from one class to another based on the class' fees and
expenses.
61 - Policies You Should Know About
<PAGE>
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Kemper funds generally and on accounts held directly at Kemper. You can also use
it to make exchanges and sell shares.
EXPRESS-Transfer lets you set up a link between a Kemper account and a bank
account. Once this link is in place, you can move money between the two with a
phone call. You'll need to make sure your bank has Automated Clearing House
(ACH) services. Transactions take two to three days to be completed, and there
is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the account
application; to add it to an existing account, call (800) 621-1048.
Share certificates are available on written request. However, we don't recommend
them unless you want them for a specific purpose, because they can only be sold
by mailing them in, and if they're ever lost they're difficult and expensive to
replace.
When you call us to sell shares, we may record the call, ask you for certain
information or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The funds can only send or
accept wires of $1,000 or more.
Exchanges among Kemper funds are an option for most shareholders. Exchanges are
a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject or limit purchase orders, for
these or other reasons.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The Kemper Web site can be a valuable resource for shareholders with Internet
access. Go to www. kemper.com to get up-to-date information, review balances or
even place orders for exchanges.
- --------------------------------------------------------------------------------
62 - Policies You Should Know About
<PAGE>
When you want to sell more than $50,000 worth of shares, or send the proceeds to
a third party or to a new address, you'll usually need to place your order in
writing and include a signature guarantee. The only exception is if you want
money wired to a bank account that is already on file with us; in that case, you
don't need a signature guarantee. Also, you don't need a signature guarantee for
an exchange, although we may require one in certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers and
most banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one Kemper fund
into another don't affect CDSCs: for each investment you make, the date you
first bought Kemper shares is the date we use to calculate a CDSC on that
particular investment.
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan. Such withdrawals may
be made at a maximum of 10% per year of the net asset value of the account.
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns of
excess contributions from retirement plans
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.
- --------------------------------------------------------------------------------
63 - Policies You Should Know About
<PAGE>
o For Class A shares purchased through the Large Order NAV Purchase Privilege,
redemption of shares whose dealer of record at the time of the investment
notifies Kemper Distributors that the dealer waives the applicable
commission.
o For Class C shares, redemption of shares purchased through a dealer-sponsored
asset allocation program maintained on an omnibus record-keeping system,
provided the dealer of record has waived the advance of the first year
administrative services and distribution fees applicable to such shares and
has agreed to receive such fees quarterly.
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Kemper can answer your questions and help you determine if you are eligible.
If you sell shares in a Kemper fund and then decide to invest with Kemper again
within six months, you can take of advantage of the "reinstatement feature."
With this feature, you can put your money back into the same class of a Kemper
fund at its current NAV and for purposes of sales charges it will be treated as
if it had never left Kemper. You'll be reimbursed (in the form of fund shares)
for any CDSC you paid when you sold. Future CDSC calculations will be based on
your original investment date, rather than your reinstatement date. There is
also an option that lets investors who sold Class B shares buy Class A shares
with no sales charge, although they won't be reimbursed for any CDSC they paid.
You can only use the reinstatement feature once for any given group of shares.
To take advantage of this feature, contact Kemper or your financial
representative.
64 - Policies You Should Know About
<PAGE>
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
65 - Policies You Should Know About
<PAGE>
How the funds calculate share price
For each fund in this prospectus, the price at which you buy shares is as
follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing A Share Class")
Class B and Class C shares -- net asset value per share, or NAV
To calculate NAV, each share class of each fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For each fund and share class in this prospectus, the price at which you sell
shares is also the NAV, although a contingent deferred sales charge may be taken
out of the proceeds (see "Choosing A Share Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
66 - Policies You Should Know About
<PAGE>
Other rights we reserve
For each fund in this prospectus, you should be aware that we may do any of the
following:
o withhold 31% of your distributions as federal income tax if we have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened, we
may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below $1,000
for the entire quarter; this policy doesn't apply to most retirement accounts
or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash.
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
67 - Policies You Should Know About
<PAGE>
Understanding Distributions And Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchases and sales of shares.) A
fund may not always pay a distribution for a given period.
The funds have a regular schedule for paying out any earnings to shareholders:
o Income dividends: declared daily and paid monthly
o Short-term and long-term capital gains: November or December, or otherwise as
needed
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares (at NAV), all sent to you by
check, have one type reinvested and the other sent to you by check or have them
invested in a different fund. Tell us your preference on your application. If
you don't indicate a preference, your dividends and distributions will all be
reinvested without sales charges. For retirement plans, reinvestment is the only
option.
Buying and selling fund shares will usually have tax consequences for you. Your
sales of shares may result in a capital gain or loss for you; whether long-term
or short-term depends on how long you owned the shares. For tax purposes, an
exchange is the same as a sale.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences.
- --------------------------------------------------------------------------------
68 - Understanding Distributions And Taxes
<PAGE>
Dividends from these funds are generally tax free for most shareholders, meaning
that investors can receive them without incurring federal, and (for some
investors) state and local income tax liability. However, there are a few
exceptions:
o a portion of each fund's dividends may be taxable as ordinary income if it
came from investments in taxable securities
o because each fund can invest up to 20% of net assets in securities whose
income is subject to the federal alternative minimum tax (AMT), you may owe
taxes on a portion of your dividends if you are among those investors who
must pay AMT
The following table shows the usual tax status of transactions in fund shares as
well as that of any taxable distributions from the funds:
Generally taxed at ordinary income rates
- --------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
- --------------------------------------------------------------------------------
o taxable income dividends you receive from a fund
- --------------------------------------------------------------------------------
o short-term capital gains distributions you receive from
a fund
Generally taxed at capital gains rates
- --------------------------------------------------------------------------------
o taxable income dividends you receive from a fund
- --------------------------------------------------------------------------------
o long-term capital gains distributions you receive from a
fund
- --------------------------------------------------------------------------------
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
69 - Understanding Distributions And Taxes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns and the fund's financial statements. Shareholders
get these reports automatically. To reduce costs, we may mail one copy per
household. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Kemper or the SEC (see below). Materials you
get from Kemper are free; those from the SEC involve a copying fee. If you like,
you can look over these materials in person at the SEC's Public Reference Room
in Washington, DC.
SEC
450 Fifth Street, N.W.
Washington, DC 20549-0102
www.sec.gov
Tel (800) SEC-0330
Kemper Funds
222 South Riverside Plaza Chicago, IL 60606-5808 www.kemper.com Tel (800)
621-1048
SEC File Numbers
Kemper Intermediate Municipal Bond Fund 811-2353
Kemper Municipal Bond Fund 811-2353
Kemper California Tax-Free Income Fund 811-3657
Kemper Florida Tax-Free Income Fund 811-3657
Kemper New York Tax-Free Income Fund 811-3657
Kemper Ohio Tax-Free Income Fund 811-3657
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
[LOGO] KEMPER FUNDS
Long-term investing in a short-term world(SM)
KEMPER TAX-FREE INCOME FUNDS
STATEMENT OF ADDITIONAL INFORMATION
January 1, 2000
Kemper National Tax-Free Income Series ("National Trust"):
----------------------------------------------------------
Kemper Municipal Bond Fund ("Municipal Fund")
Kemper Intermediate Municipal Bond Fund ("Intermediate Municipal Fund")
Kemper State Tax-Free Income Series ("State Trust"):
----------------------------------------------------
Kemper California Tax-Free Income Fund ("California Fund")
Kemper Florida Tax-Free Income Fund ("Florida Fund")
Kemper New York Tax-Free Income Fund ("New York Fund")
Kemper Ohio Tax-Free Income Fund ("Ohio Fund")
(collectively the "State Funds")
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
Kemper Tax-Free Income Funds are two open-end management investment companies
("Trusts"); the National Trust and the State Trust that together offer a choice
of six investment portfolios ("Funds").
This Statement of Additional Information is not a prospectus. It is the combined
Statement of Additional Information for the Trusts. It should be read in
conjunction with the combined prospectus of the Trusts dated January 1, 2000.
The prospectus may be obtained without charge from the Trusts by writing to
Kemper Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606-5808 or
calling 1-800-621-1048.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
INVESTMENT RESTRICTIONS...................................................................................................3
INVESTMENTS...............................................................................................................5
INVESTMENT POLICIES AND TECHNIQUES.......................................................................................28
DIVIDENDS AND TAXES......................................................................................................35
PERFORMANCE..............................................................................................................39
INVESTMENT MANAGER AND UNDERWRITER.......................................................................................52
BROKERAGE COMMISSIONS....................................................................................................61
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES............................................................................63
PURCHASE OF SHARES.......................................................................................................63
REDEMPTION OR REPURCHASE OF SHARES.......................................................................................68
OFFICERS AND TRUSTEES....................................................................................................75
Capital Structure........................................................................................................85
APPENDIX --RATINGS OF INVESTMENTS........................................................................................87
</TABLE>
The financial statements appearing in the Kemper State Tax-Free Income Series'
August 31 1999 and Kemper National Tax-Free Income Series' September 30, 1999
Annual Reports to Shareholders are incorporated herein by reference. The
financial statements for the Fund for which this Statement of Additional
Information is requested accompany this document and may also be obtained by
calling 1-800-621-1048.
<PAGE>
2
<PAGE>
INVESTMENT RESTRICTIONS
Certain fundamental investment restrictions have been adopted for each Fund
which cannot be changed for a Fund without approval of a majority of its
outstanding voting shares. As defined in the Investment Company Act of 1940, as
amended, (the "1940 Act") this means the lesser of the vote of (a) 67% of the
shares of the Fund present at a meeting where more than 50% of the outstanding
shares are present in person or by proxy or (b) more than 50% of the outstanding
shares of the Fund.
The Municipal Fund and the Intermediate Municipal Fund have elected to be
classified as diversified series of an open-end investment company. The
California Fund, the Florida Fund, the New York Fund and the Ohio Fund have
elected to be classified as non-diversified series of an open-end investment
company.
Each Fund may not, as a fundamental policy:
1. Concentrate its investments in a particular industry, as that term is used
in the 1940 Act, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time.
2. Make loans except as permitted under the 1940 Act, and as interpreted or
modified by regulatory authority having jurisdiction from time to time
3. Borrow money, except as permitted under the 1940 Act, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time.
4. Purchase physical commodities or contracts relating to physical commodities.
5. Purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investments secured by
real estate or interests therein, except that the Fund reserves freedom of
action to hold and to sell real estate acquired as a result of a Fund's
ownership of securities.
6. Engage in the business of underwriting securities issued by others, except
to the extent that a Fund may be deemed to be an underwriter in connection
with the disposition of portfolio securities.
7. Issue senior securities, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. In the event
a Fund acquires illiquid assets as a result of the exercise of a security
interest relating to municipal securities, the Fund will dispose of such assets
as promptly as possible. Although no Fund has the current intention to do so, a
Fund may invest more than 25% of its net assets in industrial development bonds.
For purposes of diversification, identification of the issuer of a municipal
security depends on the terms and conditions of the obligation. Each Fund
considers the issuer to be the party with the primary financial obligation for
the issue. The Funds did not borrow money as permitted by the investment
restrictions for the Municipal, Intermediate Municipal, California, Florida, New
York, and Ohio Funds in the latest fiscal year. None of the Funds have any
present intention of borrowing during the current year.
Each Fund has adopted the following non-fundamental restrictions, which may be
changed by the Board of Trustees without shareholder approval. Each Fund may
not:
1. Invest for the purpose of exercising control or management of another
issuer.
2. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
3. Invest more than 15% of its net assets in illiquid securities.
4. Purchase options, unless the aggregate premiums paid on all such options
held by a Fund at any time do not exceed 20% of its total assets; or sell
put options, if as a result, the aggregate value of the obligations
underlying such put options would exceed 50 of its total assets.
5. Enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect
to such futures contracts entered into on behalf of a Fund and the premiums
paid for such options on futures contracts does not exceed 5% of the fair
market value of a Fund's total assets; provided that in the
3
<PAGE>
case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing the 5% limit.
The Municipal Fund and the Intermediate Municipal Fund have adopted the
following non-fundamental restrictions, which may be changed by the Board of
Trustees without shareholder approval. These Funds may not:
1. Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credit as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and options transactions.
2. Pledge the Fund's securities or receivables or transfer or assign or
otherwise encumber them in an amount exceeding the amount of the borrowing
secured thereby.
3. Write, purchase or sell puts, calls or combinations thereof, except in
accordance with its investment objective and policies.
4. Make investments other than in accordance with its investment objective and
policies, except that all or substantially all of the assets of the Fund
may be invested in another registered investment company having the same
investment objective and substantially similar investment policies as the
Fund.
The California Fund has adopted the following non-fundamental restrictions,
which may be changed by the Board of Trustees without shareholder approval. This
Fund may not:
1. Make short sales of securities or purchase any securities on margin, except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and options transactions.
2. Pledge its securities or receivables or transfer or assign or otherwise
encumber them in an amount exceeding the amount of the borrowing secured
thereby.
3. Write, purchase or sell puts, calls or combinations thereof, except in
accordance with its investment objective and policies.
4. Purchase securities or make investments other than in accordance with its
investment objective and policies, except that all or substantially all of
the assets of the Fund may be invested in another registered investment
company having the same investment objective and substantially similar
investment policies as the Fund.
The Florida Fund, New York Fund, and Ohio Fund have adopted the following
non-fundamental restrictions, which may be changed by the Board of Trustees
without shareholder approval. These Funds may not:
1. Make short sales of securities, or purchase any securities on margin,
except to obtain such short-term credit as may be necessary for the
clearance of transactions; however, it may make margin deposits in
connection with financial futures and options transactions.
2. Pledge its securities or receivables or transfer or assign or otherwise
encumber them in an amount to exceed 10% of its net assets to secure
borrowings.
3. Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in
premiums on put and call options, combinations thereof or similar options;
however, the Fund may buy or sell options on financial futures contracts.
4. Make investments other than in accordance with its investment objective and
policies, except that all or substantially all of the assets of the Fund
may be invested in another registered investment company having the same
investment objective and substantially similar investment policies as the
Fund.
Interfund Borrowing and Lending Program. The Trusts' Board of Trustees has
approved the filing of an application for exemptive relief with the SEC which
would permit the Funds to participate in an interfund lending program among
certain investment companies advised by the Adviser. If the Funds receive the
requested relief, the interfund lending program would allow the participating
funds to borrow money from and loan money to each other for temporary or
emergency purposes. The program would be subject to a number of conditions
designed to ensure fair and equitable treatment of all participating funds,
including the following: (1) no fund may borrow money through the program unless
it receives a more favorable interest rate
4
<PAGE>
than a rate approximating the lowest interest rate at which bank loans would be
available to any of the participating funds under a loan agreement; and (2) no
fund may lend money through the program unless it receives a more favorable
return than that available from an investment in repurchase agreements and, to
the extent applicable, money market cash sweep arrangements. In addition, a fund
would participate in the program only if and to the extent that such
participation is consistent with the fund's investment objectives and policies
(for instance, money market funds would normally participate only as lenders and
tax exempt funds only as borrowers). Interfund loans and borrowings would extend
overnight, but could have a maximum duration of seven days. Loans could be
called on one day's notice. A fund may have to borrow from a bank at a higher
interest rate if an interfund loan is called or not renewed. Any delay in
repayment to a lending fund could result in a lost investment opportunity or
additional costs. The program is subject to the oversight and periodic review of
the Boards of the participating funds. To the extent the Funds are actually
engaged in borrowing through the interfund lending program, the Funds, as a
matter of non-fundamental policy, may not borrow for other than temporary or
emergency purposes (and not for leveraging).
Master/feeder fund structure. The Board of Trustees has the discretion to retain
the current distribution arrangement for the Funds while investing in a master
fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
INVESTMENTS
MUNICIPAL SECURITIES. Each of the Funds invests principally in "Municipal
Securities," which are debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Securities may be issued include:
o to refund outstanding obligations
o to obtain funds for general operating expenses
o to obtain funds to loan to other public institutions and
facilities.
The two general classifications of Municipal Securities are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and interest.
Revenue bomds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source.
The yields on Municipal Securities are dependent on a variety of factors,
including general money market conditions, general conditions of the Municipal
Securities market, size of a particular offering, the maturity of the obligation
and rating of the issue. The ratings of Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P"), Fitch IBCA, Inc. ("Fitch")
and Duff & Phelps Credit Rating Co. ("Duff") represent their opinions as to the
quality of the Municipal Securities which they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Consequently, Municipal Securities with the same
maturity, coupon and rating may have different yields while Municipal Securities
of the same maturity and coupon with different ratings may have the same yield.
The Funds may invest in tax-exempt leases. A tax-exempt lease is an obligation,
often a lease purchase or installment contract, pursuant to which a governmental
user of a capital asset, such as an item of equipment, agrees to make payments
of the purchase price plus interest over a period of years, normally with the
right to purchase the asset at the termination of the lease for a nominal
amount. Tax-exempt leases normally have a term of only two to seven years, a
relatively short period of time, and often have a higher interest rate than
tax-exempt investments of a comparable term. Currently, it is anticipated that
not more than 5% of the net assets of a Fund will be invested in tax-exempt
leases during the coming year.
5
<PAGE>
Provisions of the federal bankruptcy statutes relating to the adjustment of
debts of political subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivisions or authorities.
The National Funds do not intend to invest more than 25% of their total assets
in any one state.
Litigation challenging the validity under state constitutions of present systems
of financing public education has been initiated or adjudicated in a number of
states, and legislation has been introduced to effect changes in public school
finances in some states. In other instances there has been litigation
challenging the issuance of pollution control revenue bonds or the validity of
their issuance under state or federal law which litigation could ultimately
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
SPECIAL RISK FACTORS. The following information as to certain risk factors is
given to investors because each State Fund concentrates its investments in
Municipal Securities of a particular state. Such information constitutes only a
summary, does not purport to be a complete description and is based upon
information from official statements relating to securities offerings of state
issuers. Investors should remember that rating agencies do change ratings
periodically so that ratings mentioned here may have changed.
California Fund. As described in the California Fund's prospectus, the Fund will
invest in bonds issued by the State of California or its political subdivisions.
The Fund is therefore subject to various statutory, political and economic
factors unique to the State of California. Discussed below are some of the more
significant factors that could affect the ability of the bond issuers to repay
interest and principal on California securities owned by the Fund. The
information is derived from various public sources, all of which are available
to investors generally, and which the Fund believes to be accurate.
The following information constitutes only a brief summary, does not purport to
be a complete description, and is based on information available as of the date
of this Prospectus from official statements and prospectuses relating to
securities offerings of the State of California and various local agencies in
California. While the Sponsors have not independently verified such information,
they have no reason to believe that such information is not correct in all
material respects.
1995-96 through 1997-98 Fiscal Years
With the end of the recession of the early 1990's and a growing economy
beginning in 1994, the State's financial condition improved markedly through a
combination of increasing revenues, slowdown in growth of social welfare
programs, and continued spending restraint. The last of the recession-induced
budget deficits was repaid, allowing the State's Special Fund for Economic
Uncertainties (the "SFEU") to post a positive cash balance for only the second
time in the 1990's, totaling $281 million as of June 30, 1997. The State's cash
position also improved and no deficit borrowing occurred over the last four
fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (approximately $2.2
billion in 1995-96, $1.6 billion in 1996-97, $2.4 billion in 1997-98 and $1.0
billion in 1998-99) than were initially planned when the budgets were enacted.
These additional funds were largely directed to school spending as mandated by
Proposition 98, and to make up shortfalls from reduced federal health and
welfare aid in 1995-96 and 1996-97. The accumulated budget deficit from the
recession years was eliminated.
1998-99 Fiscal Year Budget
The following were major features of the 1998 Budget Act and certain additional
fiscal bills enacted before the end of the legislative session:
The most significant feature of the 1998-99 budget was agreement on a total of
$1.4 billion of tax cuts. The central element was a bill which provided for a
phased-in reduction of the Vehicle License Fee ("VLF"). Since the VLF is
transferred to cities and counties under existing law, the bill provided for the
General Fund to replace the lost revenues. Starting on January 1, 1999, the VLF
was reduced by 25 percent, at a cost to the General Fund of approximately $500
million in the 1998-99 Fiscal Year and about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget included both temporary and
permanent increases in the personal income tax dependent credit ($612 million
General Fund cost in 1998-99, and less in future years), a nonrefundable
renter's tax credit ($133 million), and various targeted business tax credits
($106 million).
6
<PAGE>
Proposition 98 funding for K-14 schools was increased by $1.7 billion in General
Fund moneys over revised 1997-98 levels, approximately $300 million higher than
the minimum Proposition 98 guarantee. Of the 1998-99 funds, major new programs
included money for instructional and library materials, previously deferred
maintenance, support for increasing the school year to 180 days and reduction of
class sizes in Grade 9.
Funding for higher education increased substantially above the actual 1997-98
level. General Fund support was increased by $340 million (15.6 percent) for the
University of California and $267 million (14.1 percent) for the California
State University system. In addition, Community Colleges funding increased by
$300 million (6.6 percent).
The budget included increased funding for health, welfare and social services
programs. A 4.9 percent grant increase was included in the basic welfare grants,
the first increase in those grants in nine years.
Funding for the judiciary and criminal justice programs increased approximately
11 percent over 1997-98, primarily to reflect increased State support for local
trial courts and rising prison population.
Major legislation enacted after the 1998 Budget Act included new funding for
resources projects, a share of the purchase of the Headwaters Forest, funding
for the Infrastructure and Economic Development Bank ($50 million) and funding
for the construction of local jails. The State realized savings of $433 million
from a reduction in the State's contribution to the State Teacher's Retirement
System in 1998-99.
1999-2000 Fiscal Year Budget
On January 8, 1999, Governor Davis released his proposed budget for Fiscal Year
1999-2000 (the "January Governor's Budget"). The January Governor's Budget
generally reported that general fund revenues for FY 1998-99 and FY 1999-2000
would be lower than earlier projections (primarily due to weaker overseas
economic conditions perceived in late 1998), while some caseloads would be
higher than earlier projections. The January Governor's Budget proposed $60.5
billion of general fund expenditures in FY 1999-2000, with a $415 million SFEU
reserve at June 30, 2000.
The 1999 May Revision showed an additional $4.3 billion of revenues for combined
fiscal years 1998-99 and 1999-2000. The final Budget Bill was adopted by the
Legislature on June 16, 1999, and was signed by the Governor on June 29, 1999
(the "1999 Budget Act"), meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.
The final 1999 Budget Act estimated General Fund revenues and transfers of $63.0
billion, and contained expenditures totaling $63.7 billion after the Governor
used his line-item veto to reduce the legislative Budget Bill expenditures by
$581 million (both General Fund and Special Fund). The 1999 Budget Act also
contained expenditures of $16.1 billion from special funds and $1.5 billion from
bond funds. The Administration estimated that the SFEU would have a balance at
June 30, 2000, of about $880 million. Not included in this amount was an
additional $300 million which (after the Governor's vetoes) was "set aside" to
provide funds for employee salary increases (to be negotiated in bargaining with
employee unions), and for litigation reserves. The 1999 Budget Act anticipates
normal cash flow borrowing during the fiscal year.
The principal features of the 1999 Budget Act include the following:
Proposition 98 funding for K-12 schools was increased by $1.6 billion in General
Fund moneys over revised 1998-99 levels, $108.6 million higher than the minimum
Proposition 98 guarantee. Of the 1999-2000 funds, major new programs included
money for reading improvement, new textbooks, school safety, improving teacher
quality, funding teacher bonuses, providing greater accountability for school
performance, increasing preschool and after school care programs and funding
deferred maintenance of school facilities.
Funding for higher education increased substantially above the actual 1998-99
level. General Fund support was increased by $184 million (7.3 percent) for the
University of California and $126 million (5.9 percent) for the California State
University system. In addition, Community Colleges funding increased by $324.3
million (6.6 percent). As a result, undergraduate fees at the University of
California and the California State University System will be reduced for the
second consecutive year, and the per-unit charge at Community Colleges will be
reduced by $1.
The Budget included increased funding of nearly $600 million for health and
human services.
About $800 million from the General Fund will be directed toward infrastructure
costs, including $425 million in additional funding for the Infrastructure Bank,
initial planning costs for a new prison in the Central Valley, additional
equipment for train and ferry service, and payment of deferred maintenance for
state parks.
The Legislature enacted a one-year additional reduction of 10 percent of the VLF
for calendar year 2000, at a General Fund cost of about $250 million in each of
FY 1999-2000 and 2000-01 to make up lost funding to local governments.
Conversion of this one-time reduction to a permanent cut will remain subject to
the revenue tests in the legislation adopted last year.
7
<PAGE>
A one-time appropriation of $150 million, to be split between cities and
counties, was made to offset property tax shifts during the early 1990's.
Additionally, an ongoing $50 million was appropriated as a subvention to cities
for jail booking or processing fees charged by counties when an individual
arrested by city personnel is taken to a county detention facility.
Constitutional, Legislative and Other Factors
Certain California constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could produce the
adverse effects described below, among others.
Revenue Distribution. Certain Debt Obligations in the Portfolio may be
obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's General Fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
theretofore paid out of local funds. Whether and to what extent a portion of the
State's General Fund will be distributed in the future to counties, cities and
their various entities is unclear.
Health Care Legislation. Certain Debt Obligations in the Portfolio may be
obligations which are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect these
revenues and, consequently, payment on those Debt Obligations.
The Federally sponsored Medicaid program for health care services to eligible
welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice under
certain circumstances and is obligated to make contractual payments only to the
extent the California legislature appropriates adequate funding therefor.
California enacted legislation in 1982 that authorizes private health plans and
insurers to contract directly with hospitals for services to beneficiaries on
negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of California pursuant
to an insurance program implemented by the Office of Statewide Health Planning
and Development for health facility construction loans. If a default occurs on
insured Debt Obligations, the State Treasurer will issue debentures payable out
of a reserve fund established under the insurance program or will pay principal
and interest on an unaccelerated basis from unappropriated State funds. At the
request of the Office of Statewide Health Planning and Development, Arthur D.
Little, Inc. prepared a study in December 1983, to evaluate the adequacy of the
reserve fund established under the insurance program and based on certain
formulations and assumptions found the reserve fund substantially underfunded.
In September of 1986, Arthur D. Little, Inc. prepared an update of the study and
concluded that an additional 10% reserve be established for "multi-level"
facilities. For the balance of the reserve fund, the update recommended
maintaining the current reserve calculation method. In March of 1990, Arthur D.
Little, Inc. prepared a further review of the study and recommended that
separate reserves continue to be established for "multi-level" facilities at a
reserve level consistent with those that would be required by an insurance
company.
Mortgages and Deeds. Certain Debt Obligations in the Portfolio may be
obligations which are secured in whole or in part by a mortgage or deed of trust
on real property. California has five principal statutory provisions which limit
the remedies of a creditor secured by a mortgage or deed of trust. Two statutes
limit the creditor's right to obtain a deficiency judgment, one limitation being
based on the method of foreclosure and the other on the type of debt secured.
Under the former, a deficiency
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judgment is barred when the foreclosure is accomplished by means of a
nonjudicial trustee's sale. Under the latter, a deficiency judgment is barred
when the foreclosed mortgage or deed of trust secures certain purchase money
obligations. Another California statute, commonly known as the "one form of
action" rule, requires creditors secured by real property to exhaust their real
property security by foreclosure before bringing a personal action against the
debtor. The fourth statutory provision limits any deficiency judgment obtained
by a creditor secured by real property following a judicial sale of such
property to the excess of the outstanding debt over the fair value of the
property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory provision gives the debtor the right to
redeem the real property from any judicial foreclosure sale as to which a
deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to California real
property, the creditor's nonjudicial foreclosure rights under the power of sale
contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. The debtor may reinstate the
mortgage, in the manner described above, up to five business days prior to the
scheduled sale date. Therefore, the effective minimum period for foreclosing on
a mortgage could be in excess of seven months after the initial default. Such
time delays in collections could disrupt the flow of revenues available to an
issuer for the payment of debt service on the outstanding obligations if such
defaults occur with respect to a substantial number of mortgages or deeds of
trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the private-right-of-sale
proceedings violate the due process requirements of the Federal or State
Constitutions, consequently preventing an issuer from using the nonjudicial
foreclosure remedy described above.
Certain Debt Obligations in the Portfolio may be obligations which finance the
acquisition of single family home mortgages for low and moderate income
mortgagors. These obligations may be payable solely from revenues derived from
the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.
Under California law, mortgage loans secured by single-family owner-occupied
dwellings may be prepaid at any time. Prepayment charges on such mortgage loans
may be imposed only with respect to voluntary prepayments made during the first
five years during the term of the mortgage loan, and then only if the borrower
prepays an amount in excess of 20% of the original principal amount of the
mortgage loan in a 12-month period; a prepayment charge cannot in any event
exceed six months' advance interest on the amount prepaid during the 12-month
period in excess of 20% of the original principal amount of the loan. This
limitation could affect the flow of revenues available to an issuer for debt
service on the outstanding debt obligations which financed such home mortgages.
Proposition 13. Certain of the Debt Obligations may be obligations of issuers
who rely in whole or in part on ad valorem real property taxes as a source of
revenue. On June 6, 1978, California voters approved an amendment to the
California Constitution known as Proposition 13, which added Article XIIIA to
the California Constitution. The effect of Article XIIIA was to limit ad valorem
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad valorem tax on
real property to 1% of full cash value to be collected by the counties and
apportioned according to law. The 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption charges on any
bonded indebtedness for the acquisition or improvement of real property approved
by two-thirds of the votes cast by the voters voting on the proposition. Section
2 of Article XIIIA defines "full cash value" to mean "the County Assessor's
valuation of real property as shown on the 1975/76 tax bill under `full cash
value' or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment." The full cash value may be adjusted annually to reflect inflation
at a rate not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by damage, destruction or other factors.
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Legislation enacted by the California Legislature to implement Article XIIIA
provides that notwithstanding any other law, local agencies may not levy any ad
valorem property tax except to pay debt service on indebtedness approved by the
voters prior to July 1, 1978, and that each county will levy the maximum tax
permitted by Article XIIIA.
Proposition 9. On November 6, 1979, an initiative known as "Proposition 9" or
the "Gann Initiative" was approved by the California voters, which added Article
XIIIB to the California Constitution. Under Article XIIIB, State and local
governmental entities have an annual "appropriations limit" and are not allowed
to spend certain moneys called "appropriations subject to limitation" in an
amount higher than the "appropriations limit." Article XIIIB does not affect the
appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population, and certain
services provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent, the
excess is to be returned by revising tax rates or fee schedules over the
subsequent two years.
Proposition 98. On November 8, 1988, voters of the State approved Proposition
98, a combined initiative constitutional amendment and statute called the
"Classroom Instructional Improvement and Accountability Act." Proposition 98
changed State funding of public education below the university level and the
operation of the State Appropriations Limit, primarily by guaranteeing K-14
schools a minimum share of General Fund revenues. Under Proposition 98 (modified
by Proposition 111 as discussed below), K-14 schools are guaranteed the greater
of (a) in general, a fixed percent of General Fund revenues ("Test 1"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted for changes in
the cost of living (measured as in Article XIII B by reference to State per
capita personal income) and enrollment ("Test 2"), or (c) a third test, which
would replace Test 2 in any year when the percentage growth in per capita
General Fund revenues from the prior year plus one half of one percent is less
than the percentage growth in State per capita personal income ("Test 3"). Under
Test 3, schools would receive the amount appropriated in the prior year adjusted
for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If Test 3 is used in any year, the
difference between Test 3 and Test 2 would become a "credit" to schools which
would be the basis of payments in future years when per capita General Fund
revenue growth exceeds per capita personal income growth.
Proposition 98 permits the Legislature -- by two-thirds vote of both houses,
with the Governor's concurrence -- to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recession years of the early 1990s, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. In 1992, a lawsuit was filed, California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. During the
course of this litigation, a trial court determined that almost $2 billion in
"loans" which had been provided to school districts during the recession
violated the constitutional protection of support for public education. A
settlement was reached on April 12, 1996 which ensures that future school
funding will not be in jeopardy over repayment of these so-called loans.
Proposition 111. On June 30, 1989, the California Legislature enacted Senate
Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1 -- on the June 5, 1990 ballot
as Proposition 111 -- was approved by the voters and took effect on July 1,
1990. Among a number of important provisions, Proposition 111 recalculated
spending limits for the State and for local governments, allowed greater annual
increases in the limits, allowed the averaging of two years' tax revenues before
requiring action regarding excess tax revenues, reduced the amount of the
funding guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limited the amount of State tax revenue over the limit which
would be transferred to school districts and community college districts, and
exempted increased gasoline taxes and truck weight fees from the State
appropriations limit. Additionally, Proposition 111 exempted from the State
appropriations limit funding for capital outlays.
Proposition 62. On November 4, 1986, California voters approved an initiative
statute known as Proposition 62. This initiative provided the following:
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Requires that any tax for general governmental purposes imposed by local
governments be approved by resolution or ordinance adopted by a two-thirds vote
of the governmental entity's legislative body and by a majority vote of the
electorate of the governmental entity;
Requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction;
Restricts the use of revenues from a special tax to the purposes or for the
service for which the special tax was imposed;
Prohibits the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIIA;
Prohibits the imposition of transaction taxes and sales taxes on the sale of
real property by local governments;
Requires that any tax imposed by a local government on or after August 1, 1985
be ratified by a majority vote of the electorate within two years of the
adoption of the initiative;
Requires that, in the event a local government fails to comply with the
provisions of this measure, a reduction in the amount of property tax revenue
allocated to such local government occurs in an amount equal to the revenues
received by such entity attributable to the tax levied in violation of the
initiative; and
Permits these provisions to be amended exclusively by the voters of the State of
California.
In September 1988, the California Court of Appeal in City of Westminster v.
County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal. Ct. App. 1988),
held that Proposition 62 is unconstitutional to the extent that it requires a
general tax by a general law city, enacted on or after August 1, 1985 and prior
to the effective date of Proposition 62, to be subject to approval by a majority
of voters. The Court held that the California Constitution prohibits the
imposition of a requirement that local tax measures be submitted to the
electorate by either referendum or initiative. It is impossible to predict the
impact of this decision on charter cities, on special taxes or on new taxes
imposed after the effective date of Proposition 62. The California Court of
Appeal in City of Woodlake v. Logan, (1991) 230 Cal. App. 3d 1058, subsequently
held that Proposition 62's popular vote requirements for future local taxes also
provided for an unconstitutional referenda. The California Supreme Court
declined to review both the City of Westminster and the City of Woodlake
decisions.
In Santa Clara Local Transportation Authority v. Guardino, (Sept. 28, 1995) 11
Cal. 4th 220, reh'g denied, modified (Dec. 14, 1995) 12 Cal. 4th 344e, the
California Supreme Court upheld the constitutionality of Proposition 62's
popular vote requirements for future taxes, and specifically disapproved of the
City of Woodlake decision as erroneous. The Court did not determine the
correctness of the City of Westminster decision, because that case appeared
distinguishable, was not relied on by the parties in Guardino, and involved
taxes not likely to still be at issue. It is impossible to predict the impact of
the Supreme Court's decision on charter cities or on taxes imposed in reliance
on the City of Woodlake case.
In McBrearty v. City of Brawley, 59 Cal. App. 4th 1441, 69 Cal. Rptr. 2d 862
(Cal. Ct. App. 1997), the Court of Appeal held that the city of Brawley must
either hold an election or cease collection of utility taxes that were not
submitted to a vote. In 1991, the city of Brawley adopted an ordinance imposing
a utility tax on its residents and began collecting the tax without first
seeking voter approval. In 1996, the taxpayer petitioned for writ of mandate
contending that Proposition 62 required the city to submit its utility tax on
residents to vote of local electorate. The trial court issued a writ of mandamus
and the city appealed.
First, the Court of Appeal held that the taxpayer's cause of action accrued for
statute of limitation purposes at the time of the Guardino decision rather than
at the time when the city adopted the tax ordinance which was July 1991. Second,
the Court held that the voter approval requirement in Proposition 62 was not an
invalid mechanism under the state constitution for the involvement of the
electorate in the legislative process. Third, the Court rejected the city's
argument that Guardino should only be applied on a prospective basis. Finally,
the Court held Proposition 218 (see discussion below) did not impliedly protect
any local general taxes imposed prior January 1, 1995 against challenge.
Assembly Bill 1362 (Mazzoni), introduced February 28, 1997, which would have
made the Guardino decision inapplicable to any tax first imposed or increased by
an ordinance or resolution adopted before December 14, 1995, was vetoed by the
Governor on October 11, 1997. The California State Senate had passed the Bill on
May 16, 1996 and the California State Assembly had passed the bill on September
11, 1997. It is not clear whether the Bill, if enacted, would have been
constitutional as a non-voted amendment to Proposition 62 or as a non-voted
change to Proposition 62's operative date.
Proposition 218. On November 5, 1996, the voters of the State approved
Proposition 218, a constitutional initiative, entitled the "Right to Vote on
Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C and XIII D
to the California Constitution and contains a number of interrelated provisions
affecting the ability of local governments to levy and collect
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both existing and future taxes, assessments, fees and charges. Proposition 218
became effective on November 6, 1996. The Sponsors are unable to predict whether
and to what extent Proposition 218 may be held to be constitutional or how its
terms will be interpreted and applied by the courts. However, if upheld,
Proposition 218 could substantially restrict certain local governments' ability
to raise future revenues and could subject certain existing sources of revenue
to reduction or repeal, and increase local government costs to hold elections,
calculate fees and assessments, notify the public and defend local government
fees and assessments in court.
Article XIII C of Proposition 218 requires majority voter approval for the
imposition, extension or increase of general taxes and two-thirds voter approval
for the imposition, extension or increase of special taxes, including special
taxes deposited into a local government's general fund. Proposition 218 also
provides that any general tax imposed, extended or increased without voter
approval by any local government on or after January 1, 1995 and prior to
November 6, 1996 shall continue to be imposed only if approved by a majority
vote in an election held within two years of November 6, 1996.
Article XIII C of Proposition 218 also expressly extends the initiative power to
give voters the power to reduce or repeal local taxes, assessments, fees and
charges, regardless of the date such taxes, assessments, fees or charges were
imposed. This extension of the initiative power to some extent
constitutionalizes the March 6, 1995 State Supreme Court decision in Rossi v.
Brown, which upheld an initiative that repealed a local tax and held that the
State constitution does not preclude the repeal, including the prospective
repeal, of a tax ordinance by an initiative, as contrasted with the State
constitutional prohibition on referendum powers regarding statutes and
ordinances which impose a tax. Generally, the initiative process enables
California voters to enact legislation upon obtaining requisite voter approval
at a general election. Proposition 218 extends the authority stated in Rossi v.
Brown by expanding the initiative power to include reducing or repealing
assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the
initiative power.
The initiative power granted under Article XIII C of Proposition 218, by its
terms, applies to all local taxes, assessments, fees and charges and is not
limited to local taxes, assessments, fees and charges that are property related.
Article XIII D of Proposition 218 adds several new requirements making it
generally more difficult for local agencies to levy and maintain "assessments"
for municipal services and programs. "Assessment" is defined to mean any levy or
charge upon real property for a special benefit conferred upon the real
property.
Article XIII D of Proposition 218 also adds several provisions affecting "fees"
and "charges" which are defined as "any levy other than an ad valorem tax, a
special tax, or an assessment, imposed by a local government upon a parcel or
upon a person as an incident of property ownership, including a user fee or
charge for a property related service." All new and, after June 30, 1997,
existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenues
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or increased, written notice must be given to the record owner of
each parcel of land affected by such fee or charges. The local government must
then hold a hearing upon the proposed imposition or increase of such property
based fee, and if written protests against the proposal are presented by a
majority of the owners of the identified parcels, the local government may not
impose or increase the fee or charge. Moreover, except for fees or charges for
sewer, water and refuse collection services, no property related fee or charge
may be imposed or increased without majority approval by the property owners
subject to the fee or charge or, at the option of the local agency, two-thirds
voter approval by the electorate residing in the affected area.
Proposition 87. On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California Constitution
by authorizing the California Legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments approved by
voters on or after January 1, 1989.
>
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Florida Fund. As described in the Florida Fund's prospectus, the Fund will
invest in securities issued by the State of Florida or its political
subdivisions. The Fund is therefore subject to various statutory, political and
economic factors unique to the State of Florida. Discussed below are some of the
more significant factors that could affect the ability of the bond issuers to
repay interest and principal on Florida securities owned by the Fund. The
information is derived from various public sources, all of which are available
to investors generally, and which the Fund believes to be accurate.
Florida has experienced substantial population increases as a result of
migration to Florida from other areas of the United States and from foreign
countries. This trend is expected to continue. Florida's growth was close to
three times the national average during the 1980's. This growth rate raised
concerns about the need for resource management and conservation. The growth
rate of Florida is expected to remain well above average for the indefinite
future. According to the 1990 census report, Florida was the fourth most
populous state in the nation with a population of 12.9 million. This represented
an increase of 31% over its 1980 population of 9.7 million. Florida's population
is expected to be 15.5 million by the year 2000 and to increase another 15% to
almost 18 million persons by the year 2010. Florida's growth rate of about 1.95%
is almost twice the national average. Increases in State revenues will be
necessary to meet the increased burdens on the various public and social
services provided by the State of Florida.
Florida's ability to increase revenues and meet the needs of its population will
depend in part on its ability to foster business and economic growth as well as
to diversify its economy beyond its traditional reliance on agriculture and
tourism. The current Florida Department of Labor and Employment Security
statistics show that the State's non-farm labor force grew by 3.7% between
October 1998 and October 1999, to a total of 6.9 million jobs. The growth in
Florida's service industry, including health care and business services, adds to
the diversification of Florida's economy. Tourism continues to be an important
element of Florida's economy and the number of out-of-state visitors grew 3.7%
during 1998 to a total of 48.7 million people visiting the state that year. The
number of tourists visiting Florida is affected by such factors as the weather
in the northern states, the political and economic climate in foreign countries
from which visitors come to Florida (e.g. Canada and South America) and the
general state of the U.S. economy.
Another important element of Florida's growth is the construction industry.
After a slight decline in 1996, total construction spending in Florida rebounded
in 1997 with the total growing 9.5% (5.9% after adjustment for inflation).
Spending growth for construction is projected to growth 3.8% for the full year
1998 - an increase of 1.7% on an inflation-adjusted basis. It is then expected
to slow to a growth of 1.1% in 1999 - a decline of 0.7% after adjustment for
inflation.
In 1992, Florida voters approved a constitutional amendment referred to as "Save
Our Homes." This amendment limits ad valorem taxes on homestead properties and
restricts the ability of taxing entities to increase real property taxes. While
property taxes levied for payment of debt service are not restricted by the
limitation, the overall creditworthiness of the governmental entity may be
adversely affected. Taxing entities consisting primarily of residential areas,
particularly school districts, and those entities close to their tax rate
limitations are most likely to be adversely affected.
Under current law, the State of Florida is required to maintain a balanced
budget such that current expenses are met from current revenues. Further, in any
given fiscal year state revenues may not grow more than the average annual
growth rate in personal income over the prior five year period. Although Florida
does not currently impose an individual income tax, it does impose a corporate
income tax that is allocable to the State, in addition to an ad valorem tax on
intangible personal
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property and sales and use taxes. These taxes are a major source of funds to
meet Florida expenses, including repayment of, and interest on, obligations
backed solely by the full faith and credit of the State, without recourse to any
specific project.
The greatest single source of state tax receipts is the sales and use tax. This
is projected to amount to $13.5 billion for fiscal year 1999-2000. The sales and
use tax is 6%. Approximately 10% of the sales tax is designated for local
governments and is distributed to the respective counties in which it is
collected. In addition, local governments may (by referendum) assess a 1% sales
surtax within their county.
Despite Florida's rapid growth and recent acceleration in debt financing, the
State's debt burden remains lower than that of other large population states.
Net debt payable from state revenues as of June 30, 1998 is $577.68 per capita.
Fiscal year 1998 has benefited from a continued strong economy. The corporate
income tax and the sales tax have consistently outpaced budgeted amounts. An
additional $280 million has been added to the year's total revenues during the
month of October.
The State's economy should continue to benefit from good population growth,
economic diversification and an increase in foreign trade. These positive
economic factors combined with the State's moderate debt burden suggest a
certain level of stability in the State's credit outlook.
As of mid-December 1999, the State's general obligation debt was rated Aa2 by
Moody's and AA+ by S&P.
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New York Fund. As described in the New York Fund's prospectus, the Fund will
invest in bonds issued by the State of New York or its political subdivisions.
The Fund is therefore subject to various statutory, political and economic
factors unique to the State of New York. Discussed below are some of the more
significant factors that could affect the ability of the bond issuers to repay
interest and principal on New York securities owned by the Fund. The information
is derived from various public sources, all of which are available to investors
generally, and which the Fund believes to be accurate
Some of the significant financial considerations relating to the New York Fund's
investments in New York Municipal Obligations are summarized below. This summary
information is not intended to be a complete description and is principally
derived from the Annual Information Statement of the State of New York as
supplemented and contained in official statements relating to issues of New York
Municipal Obligations that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
The Fund's ability to achieve its investment objective is dependent upon the
ability of the issuers of New York Municipal Obligations to meet their
continuing obligations for the payment of principal and interest. New York State
and New York City face long-term economic problems that could seriously affect
their ability and that of other issuers of New York Municipal Obligations to
meet their financial obligations.
Certain substantial issuers of New York Municipal Obligations (including issuers
whose obligations may be acquired by the Fund) have experienced serious
financial difficulties in recent years. These difficulties have at times
jeopardized the credit standing and impaired the borrowing abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowings and fewer markets for their outstanding debt obligations. Although
several different issues of municipal securities of New York State and its
agencies and instrumentalities and of New York City have been downgraded by
Standard & Poor's and Moody's in recent years, Standard & Poor's and Moody's
have recently placed the debt obligations of New York State and New York City on
CreditWatch with positive implications and upgraded the debt obligations of New
York City, respectively. Strong demand for New York Municipal Obligations has
also at times had the effect of permitting New York Municipal Obligations to be
issued with yields relatively lower, and after issuance, to trade in the market
at prices relatively higher, than comparably rated municipal obligations issued
by other jurisdictions. A recurrence of the financial
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difficulties previously experienced by certain issuers of New York Municipal
Obligations could result in defaults or declines in the market values of those
issuers' existing obligations and, possibly, in the obligations of other issuers
of New York Municipal Obligations. Although as of the date of this Statement of
Additional information, no issuers of New York Municipal Obligations are in
default with respect to the payment of their Municipal Obligations, the
occurrence of any such default could affect adversely the market values and
marketability of all New York Municipal Obligations and, consequently, the net
asset value of the Fund's portfolio.
State Economy. New York is one of the most populous states in the nation and has
a relatively high level of personal wealth. The State's economy is diverse with
a comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.
State per capita personal income has historically been significantly higher than
the national average, although the ratio has varied substantially. Because New
York City (the "City") is a regional employment center for a multi-state region,
State personal income measured on a residence basis understates the relative
importance of the State to the national economy and the size of the base to
which State taxation applies.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
State Budget. The State Constitution requires the governor (the "Governor") to
submit to the State legislature (the "Legislature") a balanced executive budget
which contains a complete plan of expenditures for the ensuing fiscal year and
all moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the executive budget.
The entire plan constitutes the proposed State financial plan for that fiscal
year. The Governor is required to submit to the Legislature quarterly budget
updates which include a revised cash-basis state financial plan, and an
explanation of any changes from the previous state financial plan.
State law requires the Governor to propose a balanced budget each year. In
recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State's current fiscal year began on April 1, 1999 and
ends on March 31, 2000. On March 31, 1999, the State adopted the debt service
portion of the State budget for the 1999-2000 fiscal year; four months later, on
August 4, 1999, it enacted the remainder of the budget. The Governor approved
the budget as passed by the Legislature. Prior to passing the budget in its
entirety for the current fiscal year, the State enacted appropriations that
permitted the State to continue its operations.
In 1999-2000, General Fund disbursements, including transfer to support capital
projects, debt service and other funds, are estimated at $37.36 billion, an
increase of $868 million or 2.38 percent over 1998-99. Projected spending under
the 1999-2000 enacted budget is $215 million above the Governor's Executive
Budget recommendations, including 30-day amendments. This change is the net
result of spending actions that occurred during negotiations on the Budget. The
increase in General Fund spending is comprised of $1.1 billion in legislative
additions to the Executive Budget (primarily in education), offset by various
actions, including re-estimates of required spending based on year-to-date
results and the identification of certain other resources that offset spending,
such as $250 million from commencing the process of privatizing the Medical
Malpractice Insurance Association (MMIA), $250 million from the retention of the
Debt Reduction Reserve Fund within the General Fund and about $100 million in
excess fund balances. The MMIA was established in 1983 to provide excess
liability insurance to doctors and medical providers. Legislation enacted with
the 1999-2000 budget initiates the process of MMIA privatization and transfers
excess fund balances to the State.
The 1999-2000 enacted budget provides for $831 million in new funding for public
schools, the largest year-to-year increase in State history. The budget also
enacts several new tax cuts valued at $375 million when fully phased in by
2003-04. None of the $1.82 billion cash surplus from 1998-99 is assumed to
support spending in 1999-2000, but instead is reserved to help offset the costs
of previously enacted tax cuts that take effect after 1999-2000.
The 1999-2000 Financial Plan projects a closing balance of $2.85 billion in the
General Fund. The balance is comprised of the $1.82 billion surplus from 1998-99
that has been set aside to finance already-enacted tax cuts, $473 million in the
Tax Stabilization Reserve Fund (TSRF), $250 million in the Debt Reduction
Reserve Fund (DRRF), $107 million in the Contingency Reserve Fund (CRF), and
$200 million in the Community Projects Fund (CPF), which finances legislative
initiatives. The State expects to close 1999-2000 with cash balances in these
funds at their highest level ever.
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Preliminary analysis by Division of Budget ("DOB") indicates that the State will
have a 2000-01 budget gap of approximately $1.9 billion, or about $300 million
above the 1999-2000 Executive Budget estimate (after adjusting for the projected
costs of collective bargaining). This estimate includes an assumption for the
projected costs of new collective bargaining agreements, $500 million in assumed
operating efficiencies, as well as the planned application of approximately $615
million of the $1.82 billion tax reduction reserve. In recent years, the State
has closed projected budget gaps which DOB estimates at $5.0 billion (1995-96),
$3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1 billion
(1998-99). DOB will formally update its projections of receipts and
disbursements for future years as part of the Governor's 2000-01 Executive
Budget submission. The revised expectations for these years will reflect the
cumulative impact of tax reductions and spending commitments enacted over the
last several years as well as new 2000-01 Executive Budget recommendations.
The General Fund is the principal operating fund of the State and is used to
account for all financial transactions except those required to be accounted for
in another fund. It is the State's largest fund and received almost all State
taxes and other resources not dedicated to particular purposes. In the State's
1999-2000 fiscal year, the General Fund (exclusive of transfers) is expected to
account for approximately 47.1 percent of all Governmental Funds disbursements
and 69.3 percent of total State Funds disbursements. General Fund moneys are
also transferred to other funds, primarily to support certain capital projects
and debt service payments in other fund types.
Total receipts and transfers from other funds are projected to be $39.31 billion
in 1999-2000, an increase of $2.57 billion over 1998-99. Total General Fund
disbursements and transfers to other funds are projected to be $37.36 billion,
an increase of $868 million over 1998-99. Total General Fund receipts and
transfers in 1999-2000 are now projected to be $39.31 billion, an increase of
$2.57 billion from the $36.74 billion recorded in 1998-99. This total includes
$35.93 billion in tax receipts, $1.36 billion in miscellaneous receipts, and
$2.02 billion in transfers from other funds. The transfer of the $1.82 billion
surplus recorded in 1998-99 to the 1999-2000 fiscal period has the effect of
exaggerating the growth in State receipts from year to year by depressing
reported 1998-99 figures and inflating 1999-2000 projections.
Receipts from user taxes and fees are projected to total $7.35 billion, an
increase of $105 million from reported collections in the prior year. The sales
tax component of this category accounts for virtually all of the 1999-2000
growth. Growth in base sales tax yield, after adjusting for tax law and other
changes, is projected at 5.6 percent. Modest increases in motor fuel and auto
rental tax receipts over 1998-99 levels are also expected. However, receipts
from other user taxes and fees are estimated to decline by $177 million.
The yield of other excise taxes in this category, particularly the cigarette and
alcoholic beverage taxes, show long-term declining trends. General Fund declines
in 1999-2000 motor vehicle fee receipts, in contrast, reflect statutory fee
reductions and an increased amount of collections earmarked to the Dedicated
Highway and Bridge Trust Fund.
Significant statutory changes in this category during the 1999-2000 legislative
session include: delaying until March 1, 2000 the implementation of the
exemption from State sales tax of clothing and footwear priced under $110;
providing week-long sales tax exemptions in September 1999 and January 2000 for
clothing and footwear priced under $500; enactment of a variety of small sales
tax exemptions including certain equipment used in providing telecommunications
service for sale, property and services used in theatrical productions, computer
hardware used to design Internet web sites, and building materials used in
farming; a reduction in the beer tax rate; and an expanded exemption from the
alcoholic beverage tax for small brewers.
Following the pattern of the last two fiscal years, education programs receive
the largest share of new funding contained in the 1999-2000 Financial Plan.
School aid is expected to grow by $831 million or 8.58 percent over 1998-99
levels (on a State fiscal year basis). Outside of education, the largest growth
in spending is for State Operations ($207 million, including $100 million
reserved for possible collective bargaining costs); Debt Service ($183 million),
and mental hygiene programs, including funding for a cost of living increase for
care providers ($114 million). These increases were offset, in part, by spending
reductions or actions in health and social welfare ($280 million), and in
general State charges ($222 million).
Under the 1999-2000 enacted budget, General Fund spending on school aid is
projected at $10.52 billion on a State fiscal year basis, an increase of $831
million from the prior year. The budget provides additional funding for
operating aid, building aid, and several other targeted aid programs. It also
funds the balance of aid payable for the 1998-99 school year that is due
primarily in the first quarter of the 1999-2000 fiscal year. For all other
educational programs, disbursements are projected to grow by $78 million to
$2.99 billion.
Many complex political, social and economic forces influence the State's economy
and finances, which may in turn affect the State's Financial Plan. These forces
may affect the State unpredictably from fiscal year to fiscal year and are
influenced by governments, institutions, and organizations that are not subject
to the State's control. The State Financial Plan is also necessarily based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to
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predict accurately the timing and magnitude of changes in the national and the
State economies. The DOB believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. The projections assume no changes in
federal tax law, which could substantially alter the current receipts forecast.
In addition, these projections do not include funding for new collective
bargaining agreements after the current contracts expire. Actual results,
however, could differ materially and adversely from their projections, and those
projections may be changed materially and adversely from time to time.
Debt Limits and Outstanding Debt. There are a number of methods by which the
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes, and (ii) in anticipation of the receipt of proceeds from the
sale of duly authorized but unissued general obligation bonds, by issuing bond
anticipation notes. The State may also, pursuant to specific constitutional
authorization, directly guarantee certain obligations of the State of New York's
authorities and public benefit corporations ("Authorities"). Payments of debt
service on New York State general obligation and New York State-guaranteed bonds
and notes are legally enforceable obligations of the State of New York.
The State employs additional long-term financing mechanisms, lease-purchase and
contractual-obligation financings, which involve obligations of public
authorities or municipalities that are State-supported but are not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the LGAC to restructure the
way the State makes certain local aid payments.
Sustained growth in the State's economy could contribute to closing projected
budget gaps over the next several years, both in terms of higher-than-projected
tax receipts and in lower-than-expected entitlement spending. The State assumes
that the 2000-01 Financial Plan will achieve $500 million in savings from
initiatives by State agencies to deliver services more efficiently, workforce
management efforts, maximization of federal and non-General Fund spending
offsets, and other actions necessary to help bring projected disbursements and
receipts into balance. The projections do not assume any gap-closing benefit
from the potential settlement of State claims against the tobacco industry.
Spending from Debt Service Funds are estimated at $3.64 billion in 1999-2000, up
$370 million or 11.31 percent from 1998-99. Transportation purposes, including
debt service on bonds issued for State and local highway and bridge programs
financed through the New York State Thruway Authority and supported by the
Dedicated Highway and Bridge Trust Fund, account for $124 million of the
year-to-year growth. Debt service for educational purposes, including State and
City University programs financed through the Dormitory Authority, will increase
by $80 million. The remaining growth is for a variety of programs in mental
health and corrections, and for general obligation financings.
On January 13, 1992, S&P reduced its ratings on the State's general obligation
bonds from A to A- and, in addition, reduced its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On
August 28, 1997, S&P revised its ratings on the State's general obligation bonds
from A- to A and revised its ratings on the State's moral obligation, lease
purchase, guaranteed and contractual obligation debt. On March 5, 1999, S&P
affirmed its A rating on the State's outstanding bonds.
On January 6, 1992, Moody's reduced its ratings on outstanding limited-liability
State lease purchase and contractual obligations from A to Baa1. On February 28,
1994, Moody's reconfirmed its A rating on the State's general obligation
long-term indebtedness. On March 20, 1998, Moody's assigned the highest
commercial paper rating of P-1 to the short-term notes of the State. On March 5,
1999, Moody's affirmed its A2 rating with a stable outlook to the State's
general obligations.
New York State has never defaulted on any of its general obligation indebtedness
or its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees.
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Litigation. Certain litigation pending against New York State or its officers or
employees could have a substantial or long-term adverse effect on New York State
finances. Among the more significant of these cases are those that involve (1)
the validity of agreements and treaties by which various Indian tribes
transferred title to New York State of certain land in central and upstate New
York; (2) certain aspects of New York State's Medicaid policies, including its
rates, regulations and procedures; (3) challenges to the constitutionality of
Public Health Law 2807-d, which imposes a gross receipts tax from certain
patient care services; (4) action seeking enforcement of certain sales and
excise taxes and tobacco products and motor fuel sold to non-Indian consumers on
Indian reservations; (5) a challenge to the Governor's application of his
constitutional line item veto authority; and (6) a challenge to the enactment of
the Clean Water/Clean Air Bond Act of 1996.
Several actions challenging the constitutionality of legislation enacted during
the 1990 legislative session which changed actuarial funding methods for
determining state and local contributions to state employee retirement systems
have been decided against the State. As a result, the Comptroller developed a
plan to restore the State's retirement systems to prior funding levels. Such
funding is expected to exceed prior levels by $116 million in fiscal 1996-97,
$193 million in fiscal 1997-98, peaking at $241 million in fiscal 1998-99.
Beginning in fiscal 2001-02, State contributions required under the
Comptroller's plan are projected to be less than that required under the prior
funding method. As a result of the United States Supreme Court decision in the
case of State of Delaware v. State of New York, on January 21, 1994, the State
entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's
1994-95 fiscal year. Litigation challenging the constitutionality of the
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions were paid in 1998.
The legal proceedings noted above involve State finances, State programs and
miscellaneous cure rights, tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial, generally
in excess of $100 million. These proceedings could affect adversely the
financial condition of the State in the current fiscal year or thereafter.
Adverse developments in these proceedings, other proceedings for which there are
unanticipated, unfavorable and material judgments, or the initiation of new
proceedings could affect the ability of the State to maintain a balanced
financial plan. An adverse decision in any of these proceedings could exceed the
amount of the reserve established in the State's financial plan for the payment
of judgments and, therefore, could affect the ability of the State to maintain a
balanced financial plan.
Although other litigation is pending against New York State, except as described
herein, no current litigation involves New York State's authority, as a matter
of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
Authorities. The fiscal stability of New York State is related, in part, to the
fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations, particularly with respect to debt that is
State-supported or State-related.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for dormitory rooms and housing. In recent years, however, New York
State has provided financial assistance through appropriations, in some cases of
a recurring nature, to certain of the Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation indebtedness
or otherwise, for debt service. This operating assistance is expected to
continue to be required in future years. In addition, certain statutory
arrangements provide for State local assistance payments otherwise payable to
localities to be made under certain circumstances to certain Authorities. The
State has no obligation to provide additional assistance to localities whose
local assistance payments have been paid to Authorities under these
arrangements. However, in the event that such local assistance payments are so
diverted, the affected localities could seek additional State funds.
In February 1997, the Job Development Authority ("JDA") issued approximately $85
million of State-guaranteed bonds to refinance certain of its outstanding bonds
and notes in order to restructure and improve JDA's capital structure. Due to
concerns regarding the economic viability of its programs, JDA's loan and loan
guarantee activities had been suspended since 1995. As a result of the
structural imbalances in JDA's capital structure, and defaults in its loan
portfolio and loan guarantee
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program incurred between 1991 and 1996, JDA would have experienced a debt
service cash flow shortfall had it not completed its recent refinancing. JDA
anticipates that it will transact additional refinancings in 1999, 2000 and 2003
to complete its long-term plan of finance and further alleviate cash flow
imbalances which are likely to occur in future years. JDA recently resumed its
lending activities under a revised set of lending programs and underwriting
guidelines.
New York City and Other Localities. The fiscal health of the State may also be
impacted by the fiscal health of its localities, particularly the City, which
has required and continues to require significant financial assistance from the
State. The City depends on State aid both to enable the City to balance its
budget and to meet its cash requirements. There can be no assurance that there
will not be reductions in State aid to the City from amounts currently projected
or that State budgets will be adopted by the April 1 statutory deadline or that
any such reductions or delays will not have adverse effects on the City's cash
flow or expenditures. In addition, the Federal budget negotiation process could
result in a reduction in or a delay in the receipt of Federal grants which could
have additional adverse effects on the City's cash flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the borrowing
ability of both the City and New York State. In that year the City lost access
to the public credit markets. The City was not able to sell short-term notes to
the public again until 1979. In 1975, S&P suspended its A rating of City bonds.
This suspension remained in effect until March 1981, at which time the City
received an investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On February 3, 1998 and again on May 27, 1998, S&P
assigned a BBB+ rating to the City's general obligation debt and placed the
ratings on CreditWatch with positive implications. On March 9, 1999, S&P
assigned its A- rating to Series 1999H of New York City general obligation bonds
and affirmed the A- rating on various previously issued New York City bonds.
Moody's ratings of City bonds were revised in November 1981 from B (in effect
since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in May
1988 to A and again in February 1991 to Baa1. On February 25, 1998, Moody's
upgraded approximately $28 billion of the City's general obligations from Baa1
to A3. On June 9, 1998, Moody's affirmed its A3 rating to the City's general
obligations and stated that its outlook was stable.
On March 8, 1999, Fitch IBCA upgraded New York City's $26 billion outstanding
general obligation bonds from A- to A.
New York City is heavily dependent on New York State and federal assistance to
cover insufficiencies in its revenues. There can be no assurance that in the
future federal and State assistance will enable the City to make up its budget
deficits. To help alleviate the City's financial difficulties, the Legislature
created the Municipal Assistance Corporation ("MAC") in 1975. Since its
creation, MAC has provided, among other things, financing assistance to the City
by refunding maturing City short-term debt and transferring to the City funds
received from sales of MAC bonds and notes. MAC is authorized to issue bonds and
notes payable from certain stock transfer tax revenues, from the City's portion
of the State sales tax derived in the City and, subject to certain prior claims,
from State per capita aid otherwise payable by the State to the City. Failure by
the State to continue the imposition of such taxes, the reduction of the rate of
such taxes to rates less than those in effect on July 2, 1975, failure by the
State to pay such aid revenues and the reduction of such aid revenues below a
specified level are included among the events of default in the resolutions
authorizing MAC's long-term debt. The occurrence of an event of default may
result in the acceleration of the maturity of all or a portion of MAC's debt.
MAC bonds and notes constitute general obligations of MAC and do not constitute
an enforceable obligation or debt of either the State or the City.
Since 1975, the City's financial condition has been subject to oversight and
review by the New York State Financial Control Board (the "Control Board") and
since 1978 the City's financial statements have been audited by independent
accounting firms. To be eligible for guarantees and assistance, the City is
required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the Financial Plan
(the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal years,
relating to the City, the Board of Education ("BOE") and City University of New
York ("CUNY") and reflected the City's expense and capital budgets for the 1998
fiscal year, which were adopted on June 6, 1997. The 1998-2001 Financial Plan
projected revenues and expenditures for the 1998 fiscal year balanced in
accordance with GAAP. The 1998-99 Financial Plan initially projected General
Fund receipts (including transfers from other funds) of $36.22 billion, an
increase of $1.02 billion over the estimated 1997-1998 level. Recurring growth
in the State General Fund tax base was also
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projected to be approximately six percent during 1998-99, after adjusting for
tax law and administrative changes. This growth rate is lower than the rates for
1996-97 or 1997-98, but roughly equivalent to the rate for 1995-96.
Although the City has consistently maintained balanced budgets and is projected
to achieve balanced operating results for the current fiscal year, there can be
no assurance that the gap-closing actions proposed in the 1998-2001 Financial
Plan can be successfully implemented or that the City will maintain a balanced
budget in future years without additional State aid, revenue increases or
expenditure reductions. Additional tax increases and reductions in essential
City services could adversely affect the City's economic base.
The projections set forth in the 1998-2001 Financial Plan were based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the condition
of the regional and local economies, the impact on real estate tax revenues of
the real estate market, wage increases for City employees consistent with those
assumed in the 1998-2001 Financial Plan, employment growth, the ability to
implement proposed reductions in City personnel and other cost reduction
initiatives, the ability of the Health and Hospitals Corporation and the BOE to
take actions to offset reduced revenues, the ability to complete revenue
generating transactions, provision of State and Federal aid and mandate relief
and the impact on City revenues and expenditures of Federal and State welfare
reform and any future legislation affecting Medicare or other entitlements.
Implementation of the 1998-2001 Financial Plan is also dependent upon the City's
ability to market its securities successfully. The City's financing program for
fiscal years 1998 through 2001 contemplates the issuance of $5.7 billion of
general obligation bonds and $5.7 billion of bonds to be issued by the proposed
New York City Transitional Finance Authority (the "Finance Authority") to
finance City capital projects. The Finance Authority, was created as part of the
City's effort to assist in keeping the City's indebtedness within the forecast
level of the constitutional restrictions on the amount of debt the City is
authorized to incur. Despite this additional financing mechanism, the City
currently projects that, if no further action is taken, it will reach its debt
limit in City fiscal year 1999-2000. Indebtedness subject to the constitutional
debt limit includes liability on capital contracts that are expected to be
funded with general obligation bonds, as well as general obligation bonds. On
June 2, 1997, an action was commenced seeking a declaratory judgment declaring
the legislation establishing the Transitional Finance Authority to be
unconstitutional. If such legislation which is currently on appeal to the Court
of Appeals were voided, projected contracts for the City capital projects would
exceed the City's debt limit. Future developments concerning the City or
entities issuing debt for the benefit of the City, and public discussion of such
developments, as well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued by the City or
such entities and may also affect the market for their outstanding securities.
The City Comptroller and other agencies and public officials have issued reports
and made public statements which, among other things, state that projected
revenues and expenditures may be different from those forecast in the City's
financial plans. It is reasonable to expect that such reports and statements
will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs in the
public credit markets, repaying all short-term obligations within their fiscal
year of issuance. Although the City's 1998 fiscal year financial plan projected
$2.4 billion of seasonal financing, the City expected to undertake only
approximately $1.4 billion of seasonal financing. The City issued $2.4 billion
of short-term obligations in fiscal year 1997. The delay in the adoption of the
State's budget in certain past fiscal years has required the City to issue
short-term notes in amounts exceeding those expected early in such fiscal years.
Certain localities, in addition to the City, have experienced financial problems
and have requested and received additional New York State assistance during the
last several State fiscal years. The potential impact on the State of any future
requests by localities for additional assistance is not included in the State's
projections of its receipts and disbursements for the fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted in
the re-establishment of the Financial Control Board for the City of Yonkers (the
"Yonkers Board") by New York State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the State to
assist Yonkers could result in increased State expenditures for extraordinary
local assistance.
On June 30, 1998, the City of Yonkers satisfied the statutory conditions for
ending the supervision of its finances by a State-ordered control board.
Pursuant to State law, the control board's powers over City finances lapsed six
months after the satisfaction of these conditions, on December 31, 1998.
Beginning in 1990, the City of Troy experienced a series of budgetary deficits
that resulted in the establishment of a Supervisory Board for the City of Troy
in 1994. The Supervisory Board's powers were increased in 1995, when Troy MAC
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was created to help Troy avoid default on certain obligations. The legislation
creating Troy MAC prohibits the city of Troy from seeking federal bankruptcy
protection while Troy MAC bonds are outstanding. Troy MAC has issued bonds to
effect a restructuring of the City of Troy's obligations.
The 1998-99 budget included $29.4 million in unrestricted aid targeted to 57
municipalities across the State. Other assistance for municipalities with
special needs totals more than $25.6 million. Twelve upstate cities received
$24.2 million in one-time assistance from a cash flow acceleration of State aid.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City that are authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
From time to time, federal expenditure reductions could reduce, or in some cases
eliminate, federal funding of some local programs and accordingly might impose
substantial increased expenditure requirements on affected localities. If the
State, the City or any of the Authorities were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within the State could
be adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions and long-range
economic trends. Long-range potential problems of declining urban population,
increasing expenditures and other economic trends could adversely affect
localities and require increasing the State assistance in the future.
Year 2000 Compliance. The State is currently addressing Year 2000 ("Y2K") data
processing compliance issues. Since its inception, the computer industry has
used a two-digit date convention to represent the year. In the year 2000, the
date field will contain "00" and, as a result, many computer systems and
equipment may not be able to process dates properly or may fail since they may
not be able to distinguish between the years 1900 and 2000. The Year 2000 issue
not only affects computer programs, but also the hardware, software and networks
on which they operate. In addition, any system or equipment that is dependent on
an embedded chip, such as telecommunication equipment and security systems, may
also be adversely affected.
In April 1999 the State Comptroller released an audit on the State's Year 2000
compliance. The audit, which reviewed the State's Y2K compliance activities
through October 1998, found that the State had made progress in achieving Y2K
compliance, but needed to improve its activities in several areas, including
data interchanges and contingency planning.
The Office for Technology (OFT) will continue to monitor compliance progress for
the States mission-critical and high-priority systems and is reporting
compliance progress to the Governor's Office on a quarterly basis. The 1999-2000
enacted budget allocates $19 million for priority embedded systems and $20
million for unanticipated expenses related to bringing technology into Y2K
compliance. OFT reports that as of June 1999, the State had completed over 98
percent of the overall compliance effort for its mission-critical systems; 55 of
the 56 systems are now Year 2000 compliant. As of June 1999, the State had
completed 87 percent of the overall compliance effort on the high-priority
systems; 236 systems are now Year 2000 compliant. The State has also procured
independent validation and verification services from a qualified vendor to
perform an automated review of code that has been fixed and a testing review
process for all mission-critical systems which is scheduled to be completed by
September 1999.
While New York State is taking what it believes to be appropriate action to
address Year 2000 compliance, there can be no guarantee that all of the State's
systems and equipment will be Year 2000 compliant and that there will not be an
adverse impact upon State operations or finances as a result. Since Year 2000
compliance by outside parties is beyond the State's control to remediate, the
failure of outside parties to achieve Year 2000 compliance could have an adverse
impact on State operations or finances as well.
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Ohio Fund. As described above, the Ohio Fund will invest most of its net assets
in securities issued by or on behalf of (or in certificates of participation in
lease-purchase obligations of) the State of Ohio, political subdivisions of the
State, or agencies or instrumentalities of the State or its political
subdivisions (Ohio Obligations). The Ohio Fund is therefore susceptible to
general or particular economic, political or regulatory factors that may affect
issuers of Ohio Obligations. The following information constitutes only a brief
summary of some of the many complex factors that may have an effect. The
information does not apply to "conduit" obligations on which the public issuer
itself has no financial responsibility. This information is derived from
official statements of certain Ohio issuers published in connection with their
issuance of securities and from other publicly available information, and is
believed to be accurate. No independent verification has been made of any of the
following information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in connection with
investment in particular Ohio Obligations or in those obligations of particular
Ohio issuers. It is possible that the investment may be in particular Ohio
Obligations, or in
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those of particular issuers, as to which those factors apply. However, the
information below is intended only as a general summary, and is not intended as
a discussion of any specific factors that may affect any particular obligation
or issuer.
Ohio is the seventh most populous state. The 1990 Census count of 10,847,000
indicated a 0.5% population increase from 1980. The Census estimate for 1998 is
11,209,000.
While diversifying more into the service and other non-manufacturing areas, the
Ohio economy continues to rely in part on durable goods manufacturing largely
concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, in recent
years the annual State rates were below the national rates (4.3% versus 4.5% in
1998). The unemployment rate and its effects vary among geographic areas of the
State.
There can be no assurance that future national, regional or state-wide economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of Ohio Obligations held
in the Ohio Fund or the ability of particular obligors to make timely payments
of debt service on (or lease payments relating to) those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations and
expenditures, and is precluded by law from ending its July 1 to June 30 fiscal
year (FY) or fiscal biennium in a deficit position. Most State operations are
financed through the General Revenue Fund (GRF), for which the personal income
and sales-use taxes are the major sources. Growth and depletion of GRF ending
fund balances show a consistent pattern related to national economic conditions,
with the ending FY balance reduced during less favorable and increased during
more favorable economic periods. The State has well-established procedures for,
and has timely taken, necessary actions to ensure resource/expenditure balances
during less favorable economic periods. Those procedures included general and
selected reductions in appropriations spending.
The 1992-93 biennium presented significant challenges to State finances,
successfully addressed. To allow time to resolve certain budget differences an
interim appropriations act was enacted effective July 1, 1991; it included GRF
debt service and lease rental appropriations for the entire biennium, while
continuing most other appropriations for a month. Pursuant to the general
appropriations act for the entire biennium, passed on July 11, 1991, $200
million was transferred from the Budget Stabilization Fund (BSF, a cash and
budgetary management fund) to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in light
of a continuing uncertain nationwide economic situation, there was projected and
then timely addressed an FY 1992 imbalance in GRF resources and expenditures. In
response, the Governor ordered most State agencies to reduce GRF spending in the
last six months of FY 1992 by a total of approximately $184 million; the $100.4
million BSF balance and additional amounts from certain other funds were
transferred late in the FY to the GRF, and adjustments were made in the timing
of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected for
FY 1993. It was addressed by appropriate legislative and administrative actions,
including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to
replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for debt
service or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture. Based on
June 30, 1994 balances, an additional $260 million was deposited in the BSF. The
biennium ended June 30, 1995 with a GRF ending fund balance of $928 million, of
which $535.2 million was transferred into the BSF. The significant GRF fund
balance, after leaving in the GRF an unreserved and undesignated balance of $70
million, was transferred to the BSF and other funds including school assistance
funds and, in anticipation of possible federal program changes, a human services
stabilization fund.
From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100 million
was transferred for elementary and secondary school computer network purposes
and $30 million to a new State transportation infrastructure fund. Approximately
$400.8 million served as a basis for temporary 1996 personal income tax
reductions aggregating that amount. The 1996-97 biennium-ending GRF fund balance
was $834.9 million. Of that, $250 million went to school building construction
and renovation, $94 million to the school computer network, $44.2 million for
school textbooks and
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instructional materials and a distance learning program, and $34 million to the
BSF, and the $263 million balance to a State income tax reduction fund.
The 1998-99 biennium ending GRF balances were $1.5 billion (cash) and $976
million (fund). Of that fund balance, $325.7 million has been transferred to
school building assistance, $46.3 million to the BSF, $90 million to supply
classroom computers and for interactive video distance learning, and the
remaining amount to the State income tax reduction fund. The BSF had a December
3, 1999 balance of over $953 million.
The GRF appropriations acts for the current 2000-01 biennium (one for all
education purposes, and one for general GRF purposes) were passed on June 24 and
June 28, 1999, respectively, and promptly signed (after selective vetoes) by the
Governor. Those acts provided for total GRF biennial expenditures of over $39.8
billion. Necessary GRF debt service and lease-rental appropriations for the
entire biennium were requested in the Governor's proposed budget and
incorporated in the appropriations bills as introduced, and were included in the
bills versions as passed by the House and the Senate and in the acts as passed
and signed.
The State's incurrence or assumption of debt without a vote of the people is,
with exceptions noted below, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 16 constitutional amendments approved from 1921 to date (the latest adopted
in 1999) Ohio voters authorized the incurrence of State debt and the pledge of
taxes or excises to its payment. At December 3, 1999, over $1.2 billion
(excluding certain highway bonds payable primarily from highway use receipts) of
this debt was outstanding or awaiting delivery. The only such State debt at that
date still authorized to be incurred were portions of the highway bonds, and the
following: (a) up to $100 million of obligations for coal research and
development may be outstanding at any one time ($22.3 million outstanding); (b)
$240 million of obligations previously authorized for local infrastructure
improvements, no more than $120 million of which may be issued in any calendar
year (over $1.06 billion outstanding) and (c) up to $200 million in general
obligation bonds for parks, recreation and natural resources purposes which may
be outstanding at any one time ($112.7 million outstanding, with no more than
$50 million to be issued in any one year).
The electors in 1995 approved a constitutional amendment extending the local
infrastructure bond program (authorizing an additional $1.2 billion of State
full faith and credit obligations to be issued over 10 years for the purpose),
and authorizing additional highway bonds (expected to be payable primarily from
highway use receipts). The latter authorizes not more than $1.2 billion to be
outstanding at any time and not more than $220 million to be issued in a fiscal
year.
A constitutional amendment approved by the voters at the November 1999 general
election authorizes State general obligation debt to pay costs of facilities for
a system of common schools throughout the State and facilities for state
supported and assisted institutions of higher education. That, and other debt
represented by direct obligations of the State (including that authorized by the
Ohio Public Facilities Commission and Ohio Building Authority, and some
authorized by the Treasurer), may not be issued if future FY total debt service
on those direct obligations to be paid from the GRF or net lottery proceeds
exceeds 5% of total estimated revenues of the State for the GRF and from net
State lottery proceeds during the FY of issuance.
The Constitution also authorizes the issuance of State obligations for certain
purposes, the owners of which do not have the right to have excises or taxes
levied to pay debt service. Those special obligations include obligations issued
by the Ohio Public Facilities Commission and the Ohio Building Authority, and
certain obligations issued by the State Treasurer, over $5.5 billion of which
were outstanding at December 3, 1999.
In recent years, State agencies have participated in transportation and office
building projects that may have some local as well as State use and benefit, in
connection with which the State enters into lease purchase agreements with terms
ranging from 7 to 20 years. Certificates of participation, or special obligation
bonds of the State or a local agency, are issued that represent fractionalized
interests in or are payable from the State's anticipated payments. The State
estimates highest future FY payments under those agreements (as of December 3,
1999) to be approximately $31.9 million (of which $27 million is payable from
sources other than the GRF, such as federal highway money distributions). State
payments under all those agreements are subject to biennial appropriations, with
the lease terms being two years subject to renewal if appropriations are made.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a
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pledge of all or such portion as it authorizes of State revenues or receipts
(but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for purchase of tuition credits, for the benefit
of State residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
State and local agencies issue obligations that are payable from revenues from
or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide aggregate
approximately 47% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 126 districts (as
of November 3, 1999) on voter-authorized income taxes, for significant portions
of their budgets. Litigation, similar to that in other states, has been pending
questioning the constitutionality of Ohio's system of school funding. The Ohio
Supreme Court has concluded that aspects of the system (including basic
operating assistance and the loan program referred to below) are
unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution, staying its order to permit time for
responsive corrective actions. After a further hearing, the trial court has
decided that steps taken to date by the State to enhance school funding have not
met the requirements of the Supreme Court decision. The State has appealed to
the Supreme Court, before which oral arguments were heard on November 16, 1999.
That Court has issued a stay, pending appeal, of the implementation of the trial
court's order. A small number of the State's 612 local school districts have in
any year required special assistance to avoid year-end deficits. A now
superseded program provided for school district cash need borrowing directly
from commercial lenders, with diversion of State subsidy distributions to
repayment if needed. Recent borrowings under this program totalled $87.2 million
for 20 districts in FY 1996 (including $42.1 million for one), $113.2 million
for 12 districts in FY 1997 (including $90 million to one for restructuring its
prior loans), and $23.4 million for 10 districts in FY 1998.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State.
For those few municipalities and school districts that on occasion have faced
significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) Since inception for
municipalities in 1979, these "fiscal emergency" procedures have been applied to
27 cities and villages; for 21 of them the fiscal situation was resolved and the
procedures terminated (no municipality is currently in preliminary "fiscal
watch" status). As of December 3, 1999, a school district "fiscal emergency"
provision was applied to 10 districts, and nine were on preliminary "fiscal
watch" status.
At present the State itself does not levy ad valorem taxes on real or tangible
personal property. Those taxes are levied by political subdivisions and other
local taxing districts. The Constitution has since 1934 limited to 1% of true
value in money the amount of the aggregate levy (including a levy for unvoted
general obligations) of property taxes by all overlapping subdivisions, without
a vote of the electors or a municipal charter provision, and statutes limit the
amount of that aggregate levy to 10 mills per $1 of assessed valuation (commonly
referred to as the "ten-mill limitation"). Voted general obligations of
subdivisions are payable from property taxes that are unlimited as to amount or
rate.
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INVESTMENT POLICIES AND TECHNIQUES
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STRATEGIC TRANSACTIONS AND DERIVATIVES. Each Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of the Fund's portfolio, or enhancing potential gain. These
strategies may be executed through the use of derivative contracts.
In the course of pursuing these investment strategies, the Funds may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell futures contracts and options thereon, and enter into various transactions
such as swaps, caps, floors or collars (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (except to the
extent that 80% of the Funds' net assets are required to be invested in
tax-exempt municipal securities, and as limited by the Funds' other investment
restrictions and subject to certain limits imposed by the 1940 Act) to attempt
to protect against possible changes in the market value of securities held in or
to be purchased for the Funds' portfolio resulting from securities markets
fluctuations, to protect the Funds' unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Funds' portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of each Fund's
assets will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of the
Funds to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Funds will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter fundamental investment purposes and
characteristics of the Fund, and the Fund will segregate assets (or as provided
by applicable regulations, enter into certain offsetting positions) to cover its
obligations under options, futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to a Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation a Fund can realize on its investments or cause
a Fund to hold a security it might otherwise sell. The use of options and
futures transactions entails certain other risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of a Fund creates the possibility
that losses on the hedging instrument may be greater than gains in the value of
that Fund's position. In addition, futures and options markets may not be liquid
in all circumstances and certain over-the-counter options may have no markets.
As a result, in certain markets, a Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, a Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving a Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. A Fund's purchase of a call option on a
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security, financial future, index, currency or other instrument might be
intended to protect a Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
Each Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. A Fund
will only sell OTC options that are subject to a buy-back provision permitting a
Fund to require the Counterparty to sell the option back to a Fund at a formula
price within seven days. A Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. A Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or are determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission
("SEC") currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to a Fund's limitation on investing no
more than 15% of its net assets in illiquid securities.
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If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
Each Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices and futures contracts. All calls sold by a Fund must be "covered" (i.e.,
a Fund must own the securities or futures contract subject to the call) or must
meet the asset segregation requirements described below as long as the call is
outstanding. Even though a Fund will receive the option premium to help protect
it against loss, a call sold by a Fund exposes a Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require a Fund to hold a
security or instrument which it might otherwise have sold.
Each Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices and futures contracts
other than futures on individual corporate debt and individual equity
securities. Each Fund will not sell put options if, as a result, more than 50%
of such Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that a Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES. Each Fund may enter into futures contracts
or purchase or sell put and call options on such futures as a hedge against
anticipated interest rate or fixed-income market changes and for duration
management, and for risk management and return enhancement, purposes. Futures
are generally bought and sold on the commodities exchanges where they are
listed, with payment of initial and variation margin as described below. The
sale of a futures contract creates a firm obligation by a Fund, as seller, to
deliver to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right in return for the premium paid
to assume a position in a futures contract and obligates the seller to deliver
such position.
Each Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio management and return enhancement purposes. Typically, maintaining a
futures contract or selling an option thereon requires a Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting transaction
but there can be no assurance that the position can be offset prior to
settlement at an advantageous price, nor that delivery will occur.
Each Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of a Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is
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based exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option, which also may
be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
making up the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual securities,
as is the case with respect to options on securities.
COMBINED TRANSACTIONS. Each Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions and multiple
interest rate transactions and any combination of futures, options and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which a
Fund may enter are interest rate and index and other swaps and the purchase or
sale of related caps, floors and collars. Each Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. Each Fund will not sell interest rate caps or floors where it does
not own securities or other instruments providing the income stream a Fund may
be obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. An index swap is an agreement to swap cash flows
on a notional amount based on changes in the values of the reference indices.
The purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
Each Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Adviser and each Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. Each Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, a Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security or financial instrument.
In general, either the full amount of any obligation by the Fund to pay or
deliver securities or assets must be covered at all times by the securities,
instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid assets at least equal to the current
amount of the obligation must be segregated with the custodian. The segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a call
option written by a Fund will require that Fund to hold the securities subject
to the call (or securities convertible into the needed securities without
additional consideration) or to segregate cash or liquid assets sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Fund on an index will require that Fund to own portfolio securities which
correlate with the index or to segregate cash or liquid assets equal to the
excess of the index value over the exercise
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price on a current basis. A put option written by a Fund requires that Fund to
segregate cash or liquid assets equal to the exercise price.
OTC options entered into by a Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when a Fund sells these
instruments it will only segregate an amount of cash or liquid assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by a Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, that Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by a Fund other than those
above generally settle with physical delivery, and that Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, a Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash or liquid assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess, if any,
of its obligations over its entitlements with respect to each swap on a daily
basis and will segregate an amount of cash or liquid assets having a value equal
to the accrued excess. Caps, floors and collars require segregation of assets
with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash or
liquid assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, a Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by that Fund. Moreover, instead of segregating assets if a Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
CERTIFICATES OF PARTICIPATION. A Fund may purchase Certificates of Participation
in trusts that hold Municipal Securities. A Certificate of Participation gives a
Fund an undivided interest in the Municipal Security in the proportion that the
Fund's interest bears to the total principal amount of the Municipal Security.
Certificates of Participation may be variable rate or fixed rate. Because
Certificates of Participation are interests in Municipal Securities that are
generally funded through government appropriations, they are subject to the risk
that sufficient appropriations as to the timely payment of principal and
interest on the underlying Municipal Securities may not be made. A Certificate
of Participation may be backed by a guarantee of a financial institution that
satisfies rating agencies as to the credit quality of the Municipal Security
supporting the payment of principal and interest on the Certificate of
Participation. Payments of principal and interest would be dependent upon the
underlying Municipal Security and may be guaranteed under a letter of credit to
the extent of such credit. The quality rating by a rating service of an issue of
Certificates of Participation is based primarily upon the rating of the
Municipal Security held by the trust and the credit rating of the issuer of any
letter of credit and of any other guarantor providing credit support to the
issue. The Funds' Advisor considers these factors as well as others, such as any
quality ratings issued by the rating services identified above, in reviewing the
credit risk presented by a Certificate of Participation and in determining
whether the Certificate of Participation is appropriate for investment by a
Fund. It is anticipated by the Funds' Advisor that, for most publicly offered
Certificates of Participation, there will be a liquid secondary market or there
may be demand features enabling a Fund to readily sell its Certificates of
Participation prior to maturity to the issuer or a third party.
INVERSE FLOATERS. Each of the Funds may invest in inverse floaters. Inverse
floaters are debt instruments with a floating rate of interest that bears an
inverse relationship to changes in short-term market interest rates. Investments
in thi9s type of security involve special risks as compared to investments in,
for example, a fixed rate municipal security. The fund could lose money and its
NAV could decline if movements in interest rates are incorrectly anticipated.
Moreover, the markets for securities of this type may be less developed and may
have less liquidity than the markets for more traditional municipal securities.
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ADVANCE REFUNDED BONDS. A Fund may purchase Municipal Securities that are
subsequently refunded by the issuance and delivery of a new issue of bonds prior
to the date on which the outstanding issue of bonds can be redeemed or paid. The
proceeds from the new issue of bonds are typically placed in an escrow fund
consisting of U.S. Government obligations that are used to pay the interest,
principal and call premium on the issue being refunded. A Fund may also purchase
Municipal Securities that have been refunded prior to purchase by a Fund.
DELAYED DELIVERY TRANSACTIONS. A Fund may purchase or sell portfolio securities
on a when-issued or delayed delivery basis. When-issued or delayed delivery
transactions involve a commitment by a Fund to purchase or sell securities with
payment and delivery to take place in the future in order to secure what is
considered to be an advantageous price or yield to the Fund at the time of
entering into the transaction. The value of fixed income securities to be
delivered in the future will fluctuate as interest rates vary. Because a Fund is
required to set aside cash or liquid securities to satisfy its commitments to
purchase when-issued or delayed delivery securities, flexibility to manage the
Fund's investments may be limited if commitments to purchase when-issued or
delayed delivery securities were to exceed 25% of the value of its assets.
When a Fund enters into a delayed delivery purchase, it becomes obligated to
purchase securities and it has all the rights and risks attendant to ownership
of a security, although delivery and payment occur at a later date. The value of
fixed income securities to be delivered in the future will fluctuate as interest
rates vary. At the time a Fund makes the commitment to purchase a security on a
when-issued or delayed delivery basis, it will record the transaction and
reflect the liability for the purchase and the value of the security in
determining its net asset value. Likewise, at the time a Fund makes the
commitment to sell a security on a delayed delivery basis, it will record the
transaction and include the proceeds to be received in determining its net asset
value; accordingly, any fluctuations in the value of the security sold pursuant
to a delayed delivery commitment are ignored in calculating net asset value so
long as the commitment remains in effect. A Fund generally has the ability to
close out a purchase obligation on or before the settlement date, rather than
take delivery of the security.
In when-issued or delayed delivery transactions, delivery of the securities
occurs beyond normal settlement periods, but the Fund would not pay for such
securities or start earning interest on them until they are delivered. However,
when the Fund purchases securities on a when-issued or delayed delivery basis,
it immediately assumes the risks of ownership, including the risk of price
fluctuation. Failure to deliver a security purchased on a when-issued or delayed
delivery basis may result in a loss or missed opportunity to make an alternative
investment. Depending on market conditions, the Fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which its
total assets, including the value of when-issued and delayed delivery securities
its holds, exceed its net assets.
To the extent a Fund engages in when-issued or delayed delivery purchases, it
will do so for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies. The Fund reserves the right to sell
these securities before the settlement date if deemed advisable.
SPECIAL RISK FACTORS -- HIGH YIELD (HIGH RISK) BONDS. The Municipal Fund may
invest up to 10% of its net assets in Municipal Securities that are in the lower
rating categories (securities rated below the fourth category) or are unrated,
and the Intermediate Municipal Fund and each State Fund may invest up to 10% of
its net assets without regard to the limitation that Municipal Securities in
which it invests be rated at the time of purchase within the four highest grades
by an NRSRO or of comparable quality as determined by the Fund's Advisor. After
a Fund has bought a security, its quality level may fall below the minimum
required for purchase by the Fund. That would not require the Fund to sell the
security, but the Advisor will consider such an event in determining whether a
Fund should continue to hold the security in its portfolio.
These lower rated and non-rated fixed income securities are commonly referred to
as "junk bonds" and are considered, on balance, to be predominantly speculative
as to the issuer's capacity to pay interest and repay principal in accordance
with the terms of the obligation, and they generally involve more credit risk
than securities in the higher rating categories. The market values of such
securities tend to reflect individual issuer developments to a greater extent
than do those of higher rated securities, which react primarily to fluctuations
in the general level of interest rates. Lower rated securities also are more
sensitive to economic conditions than are higher rated securities. Adverse
publicity and investor perceptions regarding lower rated bonds, whether or not
based on fundamental analysis, may depress the prices for such securities. A
Fund may have difficulty disposing of certain high yield securities because
there may be a thin trading market for such securities. The lack of a liquid
secondary market may have an adverse effect on market price and the Fund's
ability to dispose of particular issues and may also make it more difficult for
the Fund to obtain accurate market quotations for purposes of valuing these
assets. The characteristics of the rating categories are described under
"Appendix -- Ratings of Investments."
ADDITIONAL INVESTMENT INFORMATION. A Fund, other than the Intermediate Municipal
Fund, may take full advantage of the entire range of maturities of Municipal
Securities and may adjust the average maturity of its investments from
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time to time, depending on the Advisor's assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates. However, it is anticipated that, under normal market
conditions, each such Fund will invest primarily in long-term Municipal
Securities (generally, maturities of fifteen years or more), except that the
Intermediate Municipal Fund, under normal market conditions, will maintain a
dollar weighted average portfolio maturity between 3 and 10 years.
A Fund will not normally engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, a Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities in anticipation
of a decline in interest rates. In addition, a security may be sold and another
of comparable quality purchased at approximately the same time to take advantage
of what the Fund believes to be a temporary disparity in the normal yield
relationship between the two securities. Yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, such as changes in the overall demand for or
supply of various types of Municipal Securities or changes in the investment
objectives of some investors. Frequency of portfolio turnover will not be a
limiting factor should a Fund deem it desirable to purchase or sell securities.
Taking advantage of the exemption from the Florida intangibles tax could result
in higher portfolio turnover and related transactions costs. The portfolio
turnover rates for the Funds are listed under "Financial Highlights" in the
Funds' prospectus. High portfolio turnover (over 100%) involves correspondingly
greater brokerage commissions or other transaction costs. Higher portfolio
turnover may result in the realization of greater net short-term capital gains.
DIVIDENDS AND TAXES
DIVIDENDS. All the net investment income of a Fund is declared daily as a
dividend on shares for which the Fund has received payment. Net investment
income of a Fund consists of all interest income earned on portfolio assets less
all expenses of the Fund. Income dividends will be distributed monthly and
dividends of net realized capital gains will be distributed annually.
The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C shares than for Class A and Class I shares
primarily as a result of the distribution services fee applicable to Class B and
Class C shares. Distributions of capital gains, if any, will be paid in the same
amount for each class.
A Fund may at any time vary the foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and
long-term capital gains as the Board of Trustees of the Trust determines
appropriate under the then current circumstances. In particular, and without
limiting the foregoing, a Fund may make additional distributions of net
investment income or capital gain net income in order to satisfy the minimum
distribution requirements contained in the Internal Revenue Code (the "Code").
Income and capital gain dividends, if any, for a Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
at net asset value except that, upon written request to the Shareholder Service
Agent, a shareholder may select one of the following options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset value;
or
(2) To receive both income and capital gain dividends in cash.
Any dividends of a Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have Fund dividends
invested in shares of the
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same class of another Kemper Fund at the net asset value of such class of such
other fund. See "Purchase, Repurchase, and Redemption of Shares-- Special
Features -- Class A Shares -- Combined Purchases" for a list of such other
Kemper Funds. To use this privilege of investing a Fund's dividends in shares of
another Kemper Fund, shareholders must maintain a minimum account value of
$1,000 in the Fund distributing the dividends. The Funds will reinvest dividend
checks (and future dividends) in shares of that same Fund and class if checks
are returned as undeliverable. Dividends and other distributions of a Fund in
the aggregate amount of $10 or less are automatically reinvested in shares of
the Fund unless the shareholder requests that such policy not be applied to the
shareholder's account.
TAXES. Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code and, if so qualified, will not be liable
for federal income taxes to the extent its earnings are distributed. Each Fund
intends to meet the requirements of the Code applicable to regulated investment
companies distributing tax-exempt interest dividends and, therefore, dividends
representing net interest received on Municipal Securities will not be
includable by shareholders in their gross income for federal income tax
purposes, except to the extent such interest is subject to the alternative
minimum tax as discussed below. Dividends representing taxable net investment
income (such as net interest income from temporary investments in obligations of
the U.S. Government) and net short-term capital gains, if any, are taxable to
shareholders as ordinary income and long-term capital gain dividends are taxable
to shareholders as long-term capital gains, regardless of how long the shares
have been held and whether received in cash or shares. Gains attributable to
market discount on Municipal Securities acquired after April 30, 1993 are
treated as ordinary income. Long-term capital gain dividends received by
individual shareholders are taxed at a maximum rate of 20% on gains realized by
a Fund from securities held more than 12 months. Dividends declared by a Fund in
October, November or December to shareholders of record as of a date in one of
those months and paid during the following January are treated as paid on
December 31 of the calendar year declared for federal income tax purposes.
A Fund's options and futures transactions are subject to special tax provisions
that may accelerate or defer recognition of certain gains or losses, change the
character of certain gains or losses, or alter the holding periods of certain of
a Fund's securities. For federal income tax purposes, a Fund is generally
required to recognize its unrealized gains and losses at year end on financial
futures contracts, options thereon, index options and listed options on debt
securities. Any gain or loss recognized on such financial instruments is
generally considered to be 60% long-term and 40% short-term without regard to
the holding period of the contract or option.
A shareholder who redeems shares of a Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the adjusted cost basis of the shares. The gain or loss
will be a capital gain or loss and will be long-term if the shares are held for
a period of more than one year. Any loss on shares held six months or less will
be a long-term capital loss to the extent any long-term capital gain
distribution is made with respect to such shares during the period the investor
owns the shares. In the case of shareholders holding shares of a Fund for six
months or less and subsequently selling those shares at a loss after receiving
an exempt-interest dividend, the loss will be disallowed to the extent of the
exempt-interest dividends received. However, the Secretary of the Treasury may
issue regulations to shorten the required holding period from six months to 31
days.
A shareholder who has redeemed shares of a Fund or any Kemper Mutual Fund listed
under "Purchase, Repurchase, and Redemption of Shares--Special Features -- Class
A Shares -- Combined Purchases" may reinvest the amount redeemed at net asset
value at the time of the reinvestment in shares of any Fund or in shares of the
other Kemper Mutual Funds within six months of the redemption. If the redeemed
shares were purchased after October 3, 1989 and were held less than 91 days,
then the lesser of (a) the sales charge waived on the reinvestment shares, or
(b) the sales charge incurred on the redeemed shares, is included in the basis
of the reinvestment shares and is not included in the basis of the redeemed
shares. If a shareholder realizes a loss on the redemption or exchange of a
Fund's shares and reinvests in that same Fund's shares within 30 days before or
after the redemption or exchange, the transactions may be subject to the wash
sale rules resulting in a postponement of the recognition of such loss for
federal income tax purposes. An exchange of a Fund's shares for shares of
another fund is treated as a redemption and reinvestment for federal income tax
purposes upon which gain or loss may be recognized.
Interest on indebtedness which is incurred to purchase or carry shares of a
mutual fund which distributes exempt-interest dividends during the year is not
deductible for federal income tax purposes. Further, the Funds may not be
appropriate investments for persons who are "substantial users" of facilities
financed by industrial development bonds held by the Funds or are "related
persons" to such users; such persons should consult their tax advisers before
investing in the Funds.
The "Superfund Act of 1986" (the "Superfund Act") imposes a separate tax on
corporations at a rate of 0.12% of the excess of such corporation's "modified
alternative minimum taxable income" over $2 million. A portion of tax-exempt
interest, including exempt-interest dividends from a Fund, may be includible in
modified alternative minimum taxable income. Corporate shareholders are advised
to consult their tax advisers with respect to the consequences of the Superfund
Act.
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A taxable dividend received shortly after the purchase of shares reduces the net
asset value of the shares by the amount of the dividend and, although in effect
a return of capital, will be taxable to the shareholder. If the net asset value
of shares were reduced below the shareholder's cost by dividends representing
gains realized on sales of securities, such dividends would be a return of
investment though taxable as stated above.
Net interest on certain "private activity bonds" issued on or after August 8,
1986 is treated as an item of tax preference and may, therefore, be subject to
both the individual and corporate alternative minimum tax. To the extent
provided by regulations to be issued by the Secretary of the Treasury,
exempt-interest dividends from a Fund are to be treated as interest on "private
activity bonds" in proportion to the interest the Fund receives from private
activity bonds, reduced by allowable deductions. For the 1999 calendar year,
xx%, xx%, xx%, xx%, xx% and xx% of the net interest income of the Municipal,
Intermediate Municipal, California, Florida, New York and Ohio Funds,
respectively, was derived from "private activity bonds."
Exempt-interest dividends, except to the extent of interest from "private
activity bonds", are not treated as a tax preference item. For a corporate
shareholder, however, such dividends will be included in determining such
corporate shareholder's "adjusted current earnings." Seventy-five percent of the
excess, if any, of "adjusted current earnings" over the corporate shareholder's
alternative minimum taxable income with certain adjustments will be a tax
preference item. Corporate shareholders are advised to consult their tax
advisers with respect to alternative minimum tax consequences.
Shareholders will be required to disclose on their federal income tax returns
the amount of tax-exempt interest earned during the year, including
exempt-interest dividends received from a Fund.
Individuals whose modified income exceeds a base amount will be subject to
federal income tax on up to 85% of their Social Security benefits. Modified
income includes adjusted gross income, tax-exempt interest, including
exempt-interest dividends from a Fund, and 50% of Social Security benefits.
Municipal Fund. During the fiscal year ended September 30, 1999, xxx% of the
income dividends paid by the Municipal Fund constituted tax-exempt dividends for
federal income tax purposes.
Intermediate Municipal Fund. During the fiscal year ended September 30, 1999,
xxx% of the income dividends paid by the Intermediate Municipal Fund constituted
tax-exempt dividends for federal income tax purposes.
California Fund. Dividends paid by the California Fund, to the extent of
interest received on California state and local government issues, will be
exempt from California income taxes provided at least 50% of the total assets of
the California Fund are invested in such issues at the close of each quarter in
the taxable year. Any short-term and long-term capital gain dividends will be
includable in California personal taxable income as dividend income and
long-term capital gain, respectively, and are taxed at ordinary income tax
rates. During the fiscal year ended August 31, 1999, xxx% of the income
dividends paid by the California Fund constituted tax-exempt dividends for
federal and California income tax purposes. Dividends paid by the California
Fund, including capital gain distributions, will be taxable to corporate
shareholders subject to the California corporate franchise tax.
Florida Fund. Dividends paid by the Florida Fund, including capital gain
distributions, to individual shareholders will not be subject to the Florida
income tax since Florida does not impose a personal income tax. Dividends paid
by the Florida Fund, including capital gain distributions, will be taxable to
corporate shareholders that are subject to the Florida corporate income tax.
During the fiscal year ended August 31, 1999, xxx% of the income dividends paid
by the Florida Fund constituted tax-exempt dividends for federal income tax
purposes. Additionally, Florida imposes an "intangibles tax" at the rate of
$1.50 per $1,000 of taxable value of certain securities and other intangible
assets owned by Florida residents. U.S. Government securities and Florida
Municipal Securities are exempt from this intangibles tax. Under the Florida
Intangibles Tax, If, on December 31 of any year, the Florida Fund's portfolio
contains both exempt and non-exempt assets and the non-exempt assets do not
exceed 10% of the value of the fund, then the entire fund is exempt from the
Intangible Tax. If the non-exempt assets in the Fund exceed 10% of the Fund's
value, then only the portion of the value of the Florida Fund's shares
attributable to U.S. Government securities will be exempt from the Florida
intangibles tax payable in the following year. Thus, in order to take full
advantage of the exemption from the intangibles tax in any year, the Florida
Fund would be required to sell all non-exempt assets that exceeded 10% of the
entire portfolio and reinvest the proceeds in exempt assets prior to December
31. Transaction costs involved in restructuring the portfolio in this fashion
would likely reduce the Florida Fund's investment return and might exceed any
increased investment return the Florida Fund achieved by investing in non-exempt
assets during the year. On December 31, 1998, the Florida Fund's portfolio
consisted solely of assets exempt from the intangibles tax.
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New York Fund. Dividends paid by the New York Fund representing net interest
received on New York Municipal Securities will be exempt from New York State and
New York City income taxes. Any short-term and long-term capital gain dividends
will be includable in New York State and New York City taxable income as
dividend income and long-term capital gain, respectively, and are taxed at
ordinary income tax rates. During the fiscal year ended August 31, 1999, xxx% of
the income dividends paid by the New York Fund constituted tax-exempt dividends
for federal, New York State and New York City income tax purposes. Dividends
paid by the New York Fund, including capital gain distributions, will be taxable
to corporate shareholders that are subject to New York State and New York City
corporate franchise tax.
Ohio Fund. Dividends paid by the Ohio Fund that are properly attributable to
interest on, or gain from the sale, exchange or disposition of, Ohio state and
local government obligations are not subject to the Ohio personal income tax,
school district or municipal income taxes in Ohio, and are not includable in the
net income base of the Ohio corporate franchise tax. The discussion of Ohio
taxes assumes that the Ohio Fund will continue to qualify as a regulated
investment company under the Internal Revenue Code and that at all times at
least 50% of the value of the total assets of such Fund consists of obligations
of the State of Ohio, political subdivisions thereof or agencies or
instrumentalities of Ohio or its political subdivisions, or similar obligations
of other states or their subdivisions. For the fiscal period ended August 31,
1999, xxx% of the income dividends paid by the Ohio Fund constituted tax-exempt
dividends for federal income tax purposes.
General. The tax exemption of Fund dividends for federal income tax and, if
applicable, particular state or local tax purposes does not necessarily result
in exemption under the income or other tax laws of any other state or local
taxing authority. The laws of the several states and local taxing authorities
vary with respect to the taxation of interest income and investments, and
shareholders are advised to consult their own tax advisers as to the status of
their accounts under state and local tax laws. The Funds may not be appropriate
investments for qualified retirement plans and Individual Retirement Accounts.
The Trusts are required by law to withhold 31% of taxable dividends and
redemption proceeds paid to certain shareholders who do not furnish a correct
taxpayer identification number (in the case of individuals, a social security
number) and in certain other circumstances.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving dividend reinvestment and periodic
investment and redemption programs. Information for federal income tax purposes
will be provided after the end of the calendar year. Shareholders are encouraged
to retain copies of their account confirmation statements or year-end statements
for tax reporting purposes. However, those who have incomplete records may
obtain historical account transaction information at a reasonable fee.
When more than one shareholder resides at the same address, certain reports and
communications to be delivered to such shareholders may be combined in the same
mailing package, and certain duplicate reports and communications may be
eliminated. Similarly, account statements to be sent to such shareholders may be
combined in the same mailing package or consolidated into a single statement.
However, a shareholder may request that the foregoing policies not be applied to
the shareholder's account.
NET ASSET VALUE
The net asset value per share of a Fund is the value of one share and is
determined separately for each class by dividing the value of a Fund's net
assets attributable to the class by the number of shares of that class
outstanding. The per share net asset value of each of Class B and Class C shares
of the Fund will generally be lower than that of the Class A and Class I shares
of a Fund because of the higher expenses borne by the Class B and Class C
shares. The net asset value of shares of a Fund is computed as of the close of
regular trading (the "value time") on the New York Stock Exchange (the
"Exchange") on each day the Exchange
38
<PAGE>
is open for trading. The Exchange is scheduled to be closed on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.
With respect to the Funds with securities listed primarily on foreign exchanges,
such securities may trade on days when the Fund's net asset value is not
computed; and therefore, the net asset value of a Fund may be significantly
affected on days when the investor has no access to the Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the investment manager of the particular fund may calculate the price
of that debt security, subject to limitations established by the Board.
An exchange-traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate on the
valuation date.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board of Trustees, the
value of a portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the portfolio asset, the value of
the portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner which, in the discretion of the Valuation Committee, most fairly
reflects market value of the property on the valuation date.
Following the valuations of securities or other portfolios assets in terms of
the currency in which the market quotation used is expressed ("Local Currency"),
the value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
PERFORMANCE
The Funds may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return." Performance
information will be computed separately for Class A, Class B, Class C and Class
I shares. Each of these figures is based upon historical results and is not
representative of the future performance of any class of the shares. A Fund with
fees or expenses being waived or absorbed by Scudder Kemper may also advertise
performance information before and after the effect of the fee waiver or expense
absorption.
A Fund's historical performance or return for a class of shares may be shown in
the form of "yield," "tax equivalent yield," "average annual total return" and
"total return" figures. These various measures of performance are described
below. Performance information will be computed separately for each class. In
certain cases, Scudder Kemper has waived or reduced its management fee and
absorbed certain operating expenses for some of the Funds for the periods and to
the extent specified in the prospectus and this Statement of Additional
Information. See " Investment
39
<PAGE>
Advisor and Underwriter." Because of these waivers and expense absorptions, the
performance results for such Funds may be shown with and without the effect of
these waivers and expense absorptions. Performance results not giving effect to
waivers and expense absorptions will be lower. Certain performance information
set forth in this section for the New York Fund are for the predecessor of the
New York Fund, also named "Kemper New York Tax-Free Income Fund."
Yield is a measure of the net investment income per share earned by a Fund over
a specific one-month or 30-day period expressed as a percentage of the maximum
offering price of the Fund's shares (which is net asset value for Class B, Class
C, and Class I) at the end of the period. Tax equivalent yield is the yield that
a taxable investment must generate in order to equal a Fund's yield for an
investor in a stated federal income tax bracket for the Municipal Fund, the
Intermediate Municipal Fund, or the Florida Fund, in a stated combined federal
and state income tax bracket for the California Fund, and the Ohio Fund, and in
a stated combined federal, New York State and New York City income tax bracket
for the New York Fund. The tax equivalent yield for the Florida Fund does not
include the potential effect of an exemption from the Florida intangibles tax.
Average annual total return and total return measure both the net investment
income generated by, and the effect of any realized or unrealized appreciation
or depreciation of, the underlying investments in a Fund.
A Fund's yield is computed in accordance with a standardized method prescribed
by rules of the Securities and Exchange Commission. The yields are shown below
based upon the one-month period ended September 30, 1999 for the Municipal and
Intermediate Municipal Funds and August 31, 1999 for the State Funds.
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares Class I Shares
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Municipal Fund x.xx% x.xx% x.xx% x.xx%
Intermediate Municipal Fund x.xx% x.xx% x.xx% x.xx%
California Fund x.xx% x.xx% x.xx% n/a
Florida Fund x.xx% x.xx% x.xx% n/a
New York Fund x.xx% x.xx% x.xx% n/a
Ohio Fund x.xx% x.xx% x.xx% n/a
</TABLE>
A Fund's yield is computed by dividing the net investment income per share
earned during the specified one-month or 30-day period by the maximum offering
price per share (which is net asset value for Class B and Class C shares) on the
last day of the period, according to the following formula:
<TABLE>
<CAPTION>
YIELD = 2 [ (a - b +1 )6 - 1]
-----
cd
Where:
<S> <C> <C>
A = dividends and interest earned during the period.
B = expenses accrued for the period (net of reimbursements).
C = the average daily number of shares outstanding during the period that were
entitled to receive dividends.
D = the maximum offering price per share on the last day of the period (which
is net asset value for Class B and Class C shares).
</TABLE>
In computing the foregoing yield, each Trust follows certain standardized
accounting practices specified by Securities and Exchange Commission rules.
These practices are not necessarily consistent with those that each Trust uses
to prepare its annual and interim financial statements in conformity with
generally accepted accounting principles.
Each Fund's tax equivalent yield is computed by dividing that portion of the
Fund's yield (computed as described above) that is tax-exempt by one minus the
stated federal income tax rate and adding the result to that portion, if any, of
the yield of the Fund that is not tax-exempt. The California Fund's, New York
Fund's, and Ohio Fund's Class A shares' tax equivalent yield is computed by
dividing that portion of the Fund's Class A shares' yield (computed as described
above) that is tax-exempt by one minus the stated combined federal, state and,
if applicable, city income tax rate and adding the result to that portion, if
any, of the yield of the Class A shares of the Fund that is not tax-exempt. For
additional information concerning tax-exempt yields, see "Tax-Exempt versus
Taxable Yield" below. The tax equivalent yields for the Municipal and
Intermediate Municipal Funds for the one-month period ended September 30, 1999
and for the State Funds for the one-month period ended August 31, 1999 are set
forth below.
<TABLE>
<CAPTION>
Fund-- Tax Type (Marginal Rate) Class A Shares Class B Shares Class C Shares Class I Shares
- ---- ------------------------ -------------- -------------- --------------
40
<PAGE>
<S> <C> <C> <C> <C>
x.xx%
Municipal-- Federal (x.xx%) x.xx% x.xx% x.xx% x.xx%
Intermediate Municipal Fund-- Federal (x.xx%) x.xx% x.xx% x.xx% n/a
California-- Combined (x.xx%) x.xx% x.xx% x.xx% n/a
California-- Federal only (x.xx%) x.xx% x.xx% x.xx% n/a
Florida-- Federal only (x.xx%) x.xx% x.xx% x.xx% n/a
New York-- Combined (x.xx% x.xx% x.xx% x.xx% n/a
New York-- Federal only (x.xx%) x.xx% x.xx% x.xx% n/a
Ohio-- Combined (x.xx%) x.xx% x.xx% x.xx% n/a
Ohio-- Federal only (x.xx%) x.xx% x.xx% x.xx%
</TABLE>
A Fund's average annual total return quotation is computed in accordance with a
standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the Fund's shares on the first day of the period, adjusting to deduct the
maximum sales charge (in the case of Class A shares), and computing the
"redeemable value" of that investment at the end of the period. The redeemable
value in the case of Class B shares or Class C shares includes the effect of the
applicable contingent deferred sales charge that may be imposed at the end of
the period. The redeemable value is then divided by the initial investment, and
this quotient is taken to the Nth root (N representing the number of years in
the period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value on the reinvestment
dates during the period. Average annual total return figures for various periods
are set forth in the table below.
Calculation of a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the Fund's "Financial Highlights" table
in the Fund's financial statements and prospectus. Total return performance for
a specific period is calculated by first taking a hypothetical investment
("initial investment") in the Fund's shares on the first day of the period,
either adjusting or not adjusting to deduct the maximum sales charge (in the
case of Class A shares), and computing the "ending value" of that investment at
the end of the period. The total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The ending value in the case of Class B shares and Class C shares may or may not
include the effect of the applicable contingent deferred sales charge that may
be imposed at the end of the period. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Total return may also be shown as
the increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge for Class
A shares or the contingent deferred sales charge for Class B shares would be
reduced if such charge were included. Total return figures for various periods
are set forth in the table below.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund for the
period in question, assuming the reinvestment of all dividends. Thus, these
figures reflect the change in the value of an investment in a Fund during a
specified period. Average annual total return will be quoted for at least the
one-, five- and ten-year periods ending on a recent calendar quarter (or if such
periods have not yet elapsed, at the end of a shorter period corresponding to
the life of a Fund for performance purposes). Average annual total return
figures represent the average annual percentage change over the period in
question. Total return figures represent the aggregate percentage or dollar
value change over the period in question.
A Fund's performance figures are based upon historical results and are not
necessarily representative of future performance. A Fund's Class A shares are
sold at net asset value plus a maximum sales charge of 4.5% (2.75% for the
Intermediate Municipal Fund) of the offering price. Class B, Class C, and Class
I shares are sold at net asset value. Redemptions of Class B shares may be
subject to a contingent deferred sales charge that is 4% in the first year
following the purchase, declines by a specified percentage each year thereafter
and becomes zero after six years. Redemption of Class C shares may be subject to
a 1% contingent deferred sales charge in the first year following purchase.
Average annual total return figures do, and total return figures may, include
the effect of the contingent deferred sales charge for the Class B shares and
Class C shares that may be imposed at the end of the period in question.
Performance figures for the Class B shares and Class C shares not including the
effect of the applicable contingent deferred sales charge would be reduced if it
were included. Returns and net asset value will fluctuate. Factors affecting a
Fund's performance include general market conditions, operating expenses and
investment management. Any additional fees charged by a dealer or other
financial services firm would reduce the returns described in this section.
Shares of a Fund are redeemable at the then current net asset value of the Fund,
which may be more or less than original cost.
41
<PAGE>
A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged bond indexes such as the Lehman Brothers Municipal Bond Index
and the Salomon Brothers High Grade Bond Index, and may also be compared to the
performance of other fixed income, state municipal bond funds (as applicable) or
general municipal bond mutual funds or mutual fund indexes as reported by
independent mutual fund reporting services such as Lipper Analytical Services,
Inc. ("Lipper"). Lipper performance calculations are based upon changes in net
asset value with all dividends reinvested and do not include the effect of any
sales charges.
Information may be quoted from publications such as Morningstar Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit, money market funds and U.S. Treasury
obligations. Bank product performance may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) or various certificate of deposit indexes.
Money market fund performance may be based upon, among other things, IBC'sMoney
Fund Report(R) or Money Market Insight(R), reporting services on money market
funds. Performance of U.S. Treasury obligations may be based upon, among other
things, various U.S. Treasury bill indexes. Certain of these alternative
investments may offer fixed rates of return, and guaranteed principal and may be
insured.
A Fund may depict the historical performance of the securities in which the Fund
may invest over periods reflecting a variety of market or economic conditions
either alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A Fund may also describe its
portfolio holdings and depict its size or relative size compared to other mutual
funds, the number and make-up of its shareholder base and other descriptive
factors concerning the Fund.
A Fund may include in its sales literature and shareholder reports a quotation
of the current "distribution rate" for a class of a Fund. Distribution rate is
simply a measure of the level of dividends distributed for a specified period.
It differs from yield, which is a measure of the income actually earned by the
Fund's investments, and from total return, which is a measure of the income
actually earned by, plus the effect of any realized and unrealized appreciation
or depreciation of such investments during the period. Distribution rate is,
therefore, not intended to be a complete measure of performance. Distribution
rate may sometimes be greater than yield since, for instance, it may include
gains from the sale of options or other short-term and possibly long-term gains
(which may be non-recurring) and may not include the effect of amortization of
bond premiums. As reflected under "Investment Policies and Techniques --
Additional Investment Information," option writing can limit the potential for
capital appreciation.
42
<PAGE>
MUNICIPAL FUND -- SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL Fund Fund Fund
RETURN TABLE Class A Class B Class C
- ------------ Shares Shares Shares
------- ------- -------
<S> <C> <C>
Life of Fund(+) 7.33%
Life of Fund(++) 4.71% 4.95%
Ten Year 6.66% N/A N/A
Five Year 5.39 5.29 5.51%
One Year 7.14% 6.19% 3.47%
</TABLE>
- --------
+ Since April 20, 1976.
++ Since May 31, 1994 for Classes B and C.
INTERMEDIATE MUNICIPAL FUND -- SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL Fund Fund Fund
RETURN TABLE Class A Class B Class C
- ------------ Shares Shares Shares
------- ------- -------
<S> <C> <C> <C>
Life of Fund(+) x.xx% x.xx% x.xx%
One Year x.xx% x.xx% x.xx%
</TABLE>
- --------
+ Since November 1, 1994 for all classes.
CALIFORNIA FUND -- AUGUST 31, 1999
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL Fund Fund Fund
RETURN TABLE Class A Class B Class C
- ------------ Shares Shares Shares
------- ------- -------
<S> <C> <C> <C>
Life of Fund(+) x.xx%
Life of Fund(++) x.xx% x.xx%
Ten Year x.xx% N/A N/A
Five Year x.xx% x.xx% x.xx%
One Year x.xx% x.xx% x.xx%
</TABLE>
- ----------
+ Since February 17, 1983 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
43
<PAGE>
FLORIDA FUND -- AUGUST 31, 1999
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL Fund Fund Fund
RETURN TABLE Class A Class B Class C
- ------------ Shares Shares Shares
------ ------ ------
<S> <C> <C> <C>
Life of Fund (+) x.xx%
Life of Fund (++) x.xx% x.xx%
Five Years x.xx% x.xx% x.xx%
One Year x.xx% x.xx% x.xx%
</TABLE>
- --------
+ Since April 25, 1991 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
NEW YORK FUND -- AUGUST 31, 1999
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL Fund Fund Fund
RETURN TABLE Class A Class B Class C
- ------------ Shares Shares Shares
------- ------- -------
<S> <C> <C> <C>
Life of Fund (+) x.xx%
Life of Fund (++) x.xx% x.xx%
Ten Years x.xx% N/A N/A
Five Years x.xx% x.xx% x.xx%
One Year x.xx% x.xx% x.xx%
</TABLE>
- --------
+ Since December 31, 1985 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
OHIO FUND -- AUGUST 31, 1999
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL Fund Fund Fund
RETURN TABLE Class A Class B Class C
- ------------ Shares Shares Shares
------- ------- -------
<S> <C> <C> <C>
Life of Fund (+) x.xx%
Life of Fund (++) x.xx% x.xx%
Five Years x.xx% x.xx% x.xx%
One Year x.xx% x.xx% x.xx%
</TABLE>
- --------
+ Since March 22, 1993 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
There may be quarterly periods following the periods reflected in the
performance bar chart in the fund's prospectus which may be higher or lower than
those included in the bar chart.
44
<PAGE>
45
<PAGE>
46
<PAGE>
47
<PAGE>
48
<PAGE>
49
<PAGE>
Investors may want to compare a Fund's performance to that of certificates of
deposit offered by banks and other depository institutions. Certificates of
deposit represent an alternative (taxable) income producing product.
Certificates of deposit may offer fixed or variable interest rates and principal
is guaranteed and may be insured. Withdrawal of the deposits prior to maturity
normally will be subject to a penalty. Rates offered by banks and other
depository institutions are subject to change at any time specified by the
issuing institution. The shares of a Fund are not insured and net asset value as
well as yield will fluctuate. Shares of a Fund are redeemable at net asset value
which may be more or less than original cost. Redemption of Class B and Class C
shares may be subject to a contingent deferred sales charge. The bonds held by a
Fund are generally of longer term than most certificates of deposit and may
reflect longer term market interest rate fluctuations.
Investors also may want to compare the performance of a Fund to that of U.S.
Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. The net asset value of a Fund will fluctuate. Shares of a Fund are
redeemable at net asset value which may be more or less than original cost.
Redemption of Class B and Class C shares may be subject to a contingent deferred
sales charge. Each Fund's yield will also fluctuate.
Investors may also want to compare performance of a Fund to that of money market
funds. Money market fund yields will fluctuate and shares are not insured, but
share values usually remain stable.
From time to time, a Fund may compare its after-tax total return to that of
taxable investments, including but not limited to certificates of deposit,
taxable money market funds or U.S. Treasury bills. Tax equivalent total return
represents the total return that would be generated by a taxable investment that
produced the same amount of after-tax income and change in net asset value as
the Fund in each period.
TAX-EXEMPT VERSUS TAXABLE YIELD. You may want to determine which investment --
tax-exempt or taxable -- will provide you with a higher after-tax return. To
determine the taxable equivalent yield, simply divide the yield from the
tax-exempt investment by 1minus your marginal tax rate. The tables below are
provided for your convenience in making this calculation for selected tax-exempt
yields and taxable income levels. These yields are presented for purposes of
illustration only and are not representative of any yield that any class of
shares of a Fund may generate. The tables are based upon the 1999 federal and
state tax rates and brackets.
TO BE UPDATED
Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Under
$124,500
<TABLE>
<CAPTION>
A Tax-Exempt Yield of:
Taxable Income Your Marginal 4% 5% 6% 7% 8% 9%
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of
------ ----- ---------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$25,350-$61,400 $42,350-$102,300 28.0% 5.56 6.94 8.33 9.72 11.11 12.50
Over $61,400 Over $102,300 31.0% 5.80 7.25 8.70 10.14 11.59 13.04
</TABLE>
<TABLE>
<CAPTION>
Combined A Tax-Exempt Yield of:
Taxable Income California and 4% 5% 6% 7% 8% 9%
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of:
------ ----- ---------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$25,350 - $26,644 $42,350 - $53,288 32.3% 5.91 7.39 8.86 10.34 11.82 13.29
$26,644 - $33,673 $53,288 - $67,376 33.8% 6.04 7.55 9.06 10.57 12.08 13.60
$53,673 - $61,400 $67,376 - $102,300 34.7% 6.13 7.66 9.19 10.72 12.25 13.78
Over $61,400 Over $102,300 37.4% 6.39 7.99 9.58 11.18 12.78 14.38
</TABLE>
Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Under
$124,500 (continued)
50
<PAGE>
<TABLE>
<CAPTION>
Combined A Tax-Exempt Yield of:
N.Y. City, N.Y. 4% 5% 6% 7% 8% 9%
Taxable Income State and
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of:
------ ----- ---------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$25,350 - $61,400 $42,350 - 36.1% 6.26 7.82 9.39 10.95 12.52 14.08
$102,300
Over $61,400 Over $102,300 38.8% 6.54 8.17 9.80 11.44 13.07 14.78
</TABLE>
<TABLE>
<CAPTION>
Combined A Tax-Exempt Yield of:
Taxable Income Ohio and 4% 5% 6% 7% 8% 9%
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of:
------ ----- ---------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$25,350 - $40,000 30.9% 5.79 7.24 8.68 10.13 11.58 13.02
$40,000 - $61,400 $42,350 - $80,000 31.4% 5.83 7.29 8.75 10.20 11.66 13.12
$80,000 - 31.9% 5.87 7.34 8.81 10.28 11.75 13.22
$100,000
$100,000 - 32.5% 5.93 7.41 8.89 10.37 11.85 13.33
$102,300
$61,400 - $80,000 34.2% 6.08 7.60 9.12 10.64 12.16 13.68
$80,000 - $100,000 34.7% 6.13 7.66 9.19 10.72 12.25 13.78
Over $100,000 Over $102,000 35.4% 6.19 7.74 9.29 10.84 12.38 13.93
</TABLE>
Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Over
$124,500 *
<TABLE>
<CAPTION>
A Tax-Exempt Yield of:
Taxable Income Your Marginal 4% 5% 6% 7% 8% 9%
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of:
------ ----- ---------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$61,400 - $128,100 $102,300 - 31.9% 5.87 7.34 8.81 10.28 11.75 13.25
$155,950
$128,100 - $278,450 $155,950 - $278,450 37.1% 6.36 7.95 9.54 11.13 12.72 14.31
Over $278,450 Over $278,450 40.8% 6.76 8.45 10.14 11.82 13.51 15.21
</TABLE>
<TABLE>
<CAPTION>
A Tax-Exempt Yield of:
Taxable Income Your California and 4% 5% 6% 7% 8% 9%
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of:
------ ----- ---------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$61,400 - $128,100 $102,300 - 38.2% 6.74 8.09 9.71 11.33 12.94 14.56
$155,950
$128,100 - $278,450 $155,950 - 42.9% 7.01 8.76 10.51 12.26 14.01 15.76
$278,450
Over $278,000 Over $278,450 46.3% 7.59 9.49 11.39 13.28 15.18 17.08
</TABLE>
51
<PAGE>
Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Over
$124,500 (continued)*
<TABLE>
<CAPTION>
Combined A Tax-Exempt Yield of:
N.Y. City, N.Y. 4% 5% 6% 7% 8% 9%
Taxable Income State and
Single Joint Federal Tax Rate** Is Equivalent to a Taxable Yield of:
------ ----- ---------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$61,400 - $128.100 $102,300 - 39.6% 6.65 8.28 9.93 11.59 13.25 14.90
$155,950
$128,100 - $278,450 $155,950 - 44.2% 7.17 8.96 10.75 12.54 14.34 16.13
$278,450
Over $278,450 Over $278,450 47.5% 7.62 9.52 11.43 13.33 15.24 17.14
</TABLE>
<TABLE>
<CAPTION>
Combined A Tax-Exempt Yield of:
Taxable Income Ohio and 4% 5% 6% 7% 8% 9%
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of:
------ ----- ---------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$100,000 - $128,100 $102,300 - $155,950 36.2% 6.27 7.84 9.40 10.97 12.54 14.11
$128,100 - $200,000 $155,950 - $200,000 41.1% 6.79 8.49 10.19 11.88 13.58 15.28
$200,000 - $278,000 $200,000 - 41.4% 6.83 8.53 10.24 11.95 13.65 15.36
$278,450
Over $278,450 Over $278,450 44.8% 7.25 9.06 10.87 12.68 14.49 16.30
</TABLE>
* This table assumes a decrease of $3.00 of itemized deductions for each $100
of adjusted gross income over $121,200. For a married couple with an
adjusted gross income between $181,800 and $304,300 (single between
$121,200 and $243,700), add 0.7% to the above Marginal Federal Tax Rate for
each personal and dependency exemption. The taxable equivalent yield is the
tax-exempt yield divided by: 100% minus the adjusted tax rate. For example,
if the table tax rate is 37.1% and you are married with no dependents, the
adjusted tax rate is 38.5% (37.1% + 0.7% + 0.7%). For a tax-exempt yield of
6%, the taxable equivalent yield is about 9.8% (6% / (100% - 38.5%)).
** The tables do not reflect the impact of the New York State Tax Table
Benefit Recapture that is intended to eliminate the benefit of the
graduated rate structure and applies to taxable income between $100,000 and
$150,000.
INVESTMENT ADVISOR AND UNDERWRITER
INVESTMENT ADVISOR. Scudder Kemper Investments, Inc. ("Scudder Kemper" or "the
Advisor"), 345 Park Avenue, New York, New York, is the Trusts' investment
Advisor. Scudder Kemper is approximately 70% owned by Zurich Financial Services,
a newly formed global insurance and financial services company. The balance of
the Advisor is owned by its officers and employees. There is one investment
management agreement for the Municipal Fund, one for the Intermediate Municipal
Fund and a separate investment management agreement for each of the State Funds.
The agreements are substantially the same. Pursuant to the investment management
agreements, Scudder Kemper acts as each Fund's investment adviser, manages its
investments, administers its business affairs, furnishes office facilities and
equipment, provides clerical and administrative services and permits any of its
officers or employees to serve without compensation as trustees or officers of
the Trust if elected to such positions. The agreements provide that the Trust
pays the charges and expenses of its operations including the fees and expenses
of the trustees (except those who are officers or employees of Scudder Kemper),
independent auditors, counsel, custodian and transfer agent and the cost of
share certificates, reports and notices to shareholders, brokerage commissions
or transaction costs, costs of calculating net asset value and maintaining all
accounting records thereto, taxes and membership dues.
Each Trust bears the expenses of registration of its shares with the Securities
and Exchange Commission and, effective January 1, 2000, pays the cost of
qualifying and maintaining the qualification of the Trusts' shares for sale
under the securities laws of the various states ("Blue Sky expenses"). Prior to
January 1, 2000, Kemper Distributors, Inc. ("KDI"), as principal underwriter,
paid the Blue Sky expenses.
Scudder Kemper has agreed to reimburse the Municipal Fund should all operating
expenses of that Fund, including the compensation of Scudder Kemper, but
excluding interest, taxes, distribution fees, extraordinary expenses and
brokerage commissions or transaction costs, exceed 1% of average net assets of
the Municipal Fund on an annual basis.
Scudder Kemper has agreed to reimburse the California Fund should all operating
expenses of the California Fund, including the compensation of Scudder Kemper,
but excluding taxes, interest, distribution services fees, extraordinary
expenses, and brokerage commissions or transaction costs, exceed 1 1/2% of the
first $30 million of average daily net assets and 1% of average daily net assets
over $30 million on an annual basis.
52
<PAGE>
The agreements provide that Scudder Kemper shall not be liable for any error of
judgment or of law, or for any loss suffered by the Trusts in connection with
the matters to which the agreements relate, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Scudder Kemper in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreements.
Each of the investment management agreements continues in effect from year to
year so long as its continuation is approved at least annually by a majority of
the trustees of the applicable Trust who are not parties to such agreement or
interested persons of any such party except in their capacity as trustees of the
Trust and by the shareholders of the Fund subject thereto or the Board of
Trustees. Each agreement may be terminated at any time upon 60 days' notice by
either party, or by a majority vote of the outstanding shares of the Fund
subject thereto, and will terminate automatically upon assignment. If additional
Funds become subject to the investment management agreements, the provisions
concerning continuation, amendment and termination shall be on a Fund by Fund
basis. Additional Funds may be subject to a different agreement.
Responsibility for overall management of each Trust rests with its Board of
Trustees and officers. Professional investment supervision is provided by
Scudder Kemper. The investment management agreement for a Fund provides that
Scudder Kemper shall act as the Fund's investment adviser, manage its
investments and provide the Fund with various services and facilities.
On December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder") and Zurich Insurance Company ("Zurich") formed a new
global organization by combining Scudder with Zurich Kemper Investments, Inc., a
former subsidiary of Zurich and the former Advisor to each Fund, and Scudder
changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owned approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees. In certain cases the investments
for the Fund are managed by the same individuals who manage one or more other
mutual funds advised by the Adviser that have similar names, objectives and
investment styles as the Fund. You should be aware that the Fund is likely to
differ from these other mutual funds in size, cash flow pattern and tax matters.
Accordingly, the holdings and performance of the Fund can be expected to vary
from those of the other mutual funds.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in Scudder Kemper) and the financial services businesses of B.A.T Industries
p.l.c. ("B.A.T") were combined to form a new global insurance and financial
services company known as Zurich Financial Services, Inc. By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, each Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement with Scudder Kemper, which is substantially identical to the current
investment management agreement, except for the date of execution and
termination. This agreement became effective upon the termination of the then
current investment management agreement and was approved by shareholders at a
special meeting in December 1998.
The current investment management fee rates paid by the Funds are as follows:
The Municipal Fund pays Scudder Kemper an investment management fee, payable
monthly, at the annual rate of 0.45% of the first $250 million of average daily
net assets, 0.43% of average daily net assets between $250 million and $1
billion, 0.41% of average daily net assets between $1 billion and $2.5 billion,
0.40% of average daily net assets between $2.5 billion and $5 billion, 0.38% of
average daily net assets between $5 billion and $7.5 billion, 0.36% of average
daily net assets between $7.5 billion and $10 billion, 0.34% of average daily
net assets between $10 billion and $12.5 billion and 0.32% of average daily net
assets over $12.5 billion.
Each State Fund and the Intermediate Municipal Fund pay Scudder Kemper an
investment management fee, payable monthly, at the annual rate (computed
separately for each State Fund and for the Intermediate Municipal Fund) of 0.55%
of the first $250 million of average daily net assets, 0.52% of average daily
net assets between $250 million and $1 billion, 0.50% of average daily net
assets between $1 billion and $2.5 billion, 0.48% of average daily net assets
between $2.5 billion and $5 billion, 0.45% of average daily net assets between
$5 billion and $7.5 billion, 0.43% of average daily net assets between $7.5
billion and $10 billion, 0.41% of average daily net assets between $10 billion
and $12.5 billion and 0.40% of average daily net assets over $12.5 billion.
The investment management fees paid by each Fund for its last three fiscal years
are shown in the table below.
53
<PAGE>
<TABLE>
<CAPTION>
Fund Fiscal 1999 Fiscal 1998 Fiscal 1997
- ---- ----------- ----------- -----------
<S> <C> <C> <C>
Municipal $12,538,000 $13,233,000 $13,507,000
Intermediate Municipal $150,000 $127,000 $117,000
California $5,174,000 $5,352,000 $5,417,000
Florida $563,000 $576,000 $587,000
New York $1,505,000 $1,543,000 $1,604,000
Ohio $252,000 $226,000 $212,000
</TABLE>
The Adviser agreed to waive its full investment management fee for the
Intermediate Municipal Fund from November 1, 1994 (commencement of operations)
through April 30, 1995. Thereafter the full management fee was gradually
reinstated under a schedule determined by the Adviser and fully reinstated by
April 30, 1996. If the fee waiver had not been in effect, the Adviser would have
received an investment management fees from the Intermediate Municipal Fund of
$xxx,xxx for the fiscal period ended September 30, 1999.
FUND ACCOUNTING AGENT. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts, 02110, a subsidiary of Scudder
Kemper, is responsible for determining the daily net asset value per share of
the Funds and maintaining all accounting records related thereto. Currently,
SFAC receives no fee for its services to the Funds.
PRINCIPAL UNDERWRITER. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois, 60606, an affiliate of
Scudder Kemper, is the principal underwriter and distributor for the shares of
each Trust and acts as agent of each Trust in the continuous offering of its
shares. KDI bears all its expenses of providing services pursuant to the
distribution agreement, including the payment of any commissions. Each Trust
pays the cost for the prospectus and shareholder reports to be set in type and
printed for existing shareholders, and KDI pays for the printing and
distribution of copies thereof used in connection with the offering of shares to
prospective investors. KDI also pays for supplementary sales literature and
advertising costs.
Class A Shares. KDI receives no compensation from the Trusts as principal
underwriter for Class A shares and pays all expenses of distribution of each
Fund's Class A shares under the distribution agreement not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays or
allows concessions or discounts to firms for the sale of each Fund's shares. The
following information concerns the underwriting commissions paid in connection
with the distribution of each Fund's Class A Shares for the fiscal years noted.
<TABLE>
<CAPTION>
Commissions Commissions Paid
Commissions Retained Underwriter to Kemper
Class A Shares Fiscal Year Ended by Underwriter Paid to All Firms Affiliated Firms
- -------------- ----------------- -------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Municipal Fund 9/30/99 $xxx,xxx $xxx,xxx $xxx,xxx
9/30/98 $xxx,xxx $xxx,xxx $xxx,xxx
9/30/97 $xxx,xxx $xxx,xxx $xxx,xxx
Intermediate $xxx,xxx $xxx,xxx $xxx,xxx
Municipal Fund 9/30/99
$xxx,xxx $xxx,xxx $xxx,xxx
9/30/98
9/30/97 $xxx,xxx $xxx,xxx $xxx,xxx
California Fund 8/31/99 $xxx,xxx $xxx,xxx $xxx,xxx
8/31/98 $xxx,xxx $xxx,xxx $xxx,xxx
8/31/97 $xxx,xxx $xxx,xxx $xxx,xxx
Florida Fund 8/31/99 $xxx,xxx $xxx,xxx $xxx,xxx
8/31/98 $xxx,xxx $xxx,xxx $xxx,xxx
8/31/97 $xxx,xxx $xxx,xxx $xxx,xxx
Ohio Fund 8/31/99 $xxx,xxx $xxx,xxx $xxx,xxx
8/31/98 $xxx,xxx $xxx,xxx $xxx,xxx
8/31/97 $xxx,xxx $xxx,xxx $xxx,xxx
New York Fund 8/31/99 $xxx,xxx $xxx,xxx $xxx,xxx
8/31/98 $xxx,xxx $xxx,xxx $xxx,xxx
8/31/97 $xxx,xxx $xxx,xxx $xxx,xxx
</TABLE>
54
<PAGE>
Class B and C Shares. Each Fund has adopted a plan under Rule 12b-1 (the "Rule
12b-1 Plan") that provides for fees payable as an expense of the Class B shares
and Class C shares that are used by KDI to pay for distribution and services for
those classes. Because 12b-1 fees are paid out of fund assets on an ongoing
basis they will, over time, increase the cost of an investment and cost more
than other types of sales charges.
Expenses of the Funds and of KDI in connection with the Rule 12b-1 plans for the
Class B and Class C Shares are set forth below. A portion of the marketing,
sales and operating expenses shown below could be considered overhead expense.
For its services under the distribution agreement, KDI receives a fee from each
Trust, payable monthly, at the annual rate of 0.75% of average daily net assets
of each Fund attributable to Class B shares. This fee, pursuant to the Rule
12-b1 Plan. is accrued daily as an expense of Class B shares. KDI also receives
any contingent deferred sales charges. See "Purchase, Repurchase and Redemption
of Shares -- Contingent Deferred Sales Charge Class B Shares." KDI currently
compensates firms for sales of Class B shares at a commission rate of 3.75%.
For its services under the distribution agreement, KDI receives a fee from each
Trust pursuant to the Rule 12b-1 Plan, payable monthly, at the annual rate of
0.75% of average daily net assets of each Fund attributable to Class C shares.
This fee is accrued daily as an expense of Class C shares. KDI currently
advances to firms the first year distribution fee at a rate of 0.75% of the
purchase price of Class C shares. For periods after the first year, KDI
currently pays firms for sales of Class C shares a distribution fee, payable
quarterly, at an annual rate of 0.75% of net assets attributable to Class C
shares maintained and serviced by the firm and the fee continues until
terminated by KDI or a Trust. KDI also receives any contingent deferred sales
charges. See "Purchase, Repurchase and Redemption of Shares Contingent Deferred
Sales Charges Class C Shares".
55
<PAGE>
Contingent Commissions
Distribution Deferred Total Paid By
Fees Paid Sales Commissions KDI to KDI
Class B Fiscal by Fund Charges Paid by KDI Affiliated
Shares Year to KDI Paid to KDI to Firms Firms
- ------ ---- ------ ----------- -------- -----
Municipal 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Intermediate 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Municipal
Fund
California 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Florida Fund 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
New York 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Ohio Fund 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Other Distribution Expenses Paid by KDI
---------------------------------------
Advertising Marketing Misc.
and Prospectus and Sales Operating Interest
Literature Printing Expenses Expenses Expenses
---------- -------- -------- -------- --------
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Contingent Commissions
Distribution Deferred Total Paid By
Fees Paid Sales Commissions KDI to KDI
Class B Fiscal by Fund Charges Paid by KDI Affiliated
Shares Year to KDI Paid to KDI to Firms Firms
- ------ ---- ------ ----------- -------- -----
Municipal 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Intermediate 1998 $xxx,xxx $xxx,xxx v $xxx,xxx
Municipal
Fund
California 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Florida Fund 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
New York 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Ohio Fund 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Other Distribution Expenses Paid by KDI
---------------------------------------
Advertising Marketing Misc.
and Prospectus and Sales Operating Interest
Literature Printing Expenses Expenses Expenses
---------- -------- -------- -------- --------
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Contingent Commissions
Distribution Deferred Total Paid By
Fees Paid Sales Commissions KDI to KDI
Class B Fiscal by Fund Charges Paid by KDI Affiliated
Shares Year to KDI Paid to KDI to Firms Firms
- ------ ---- ------ ----------- -------- -----
Municipal 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Intermediate 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Municipal
Fund
California 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Other Distribution Expenses Paid by KDI
---------------------------------------
Advertising Marketing Misc.
and Prospectus and Sales Operating Interest
Literature Printing Expenses Expenses Expenses
---------- -------- -------- -------- --------
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
56
<PAGE>
Contingent Commissions
Distribution Deferred Total Paid By
Fees Paid Sales Commissions KDI to KDI
Class B Fiscal by Fund Charges Paid by KDI Affiliated
Shares Year to KDI Paid to KDI to Firms Firms
- ------ ---- ------ ----------- -------- -----
Florida Fund 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
New York 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Ohio Fund 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Other Distribution Expenses Paid by KDI
---------------------------------------
Advertising Marketing Misc.
and Prospectus and Sales Operating Interest
Literature Printing Expenses Expenses Expenses
---------- -------- -------- -------- --------
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Contingent Distribution
Distribution Deferred Total Fees Paid By
Fees Paid Sales Distribution KDI to KDI
Class C Fiscal by Fund Charges Fees Paid by KDI Affiliated
Shares Year to KDI Paid to KDI to Firms Firms
- ------ ---- ------ ----------- -------- -----
Municipal 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Intermediate 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Municipal
Fund
California 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Florida Fund 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
New York 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Ohio Fund 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Other Distribution Expenses Paid by KDI
---------------------------------------
Advertising Marketing Misc.
and Prospectus and Sales Operating Interest
Literature Printing Expenses Expenses Expenses
---------- -------- -------- -------- --------
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Contingent Distribution
Distribution Deferred Total Fees Paid By
Fees Paid Sales Distribution KDI to KDI
Class C Fiscal by Fund Charges Fees Paid by KDI Affiliated
Shares Year to KDI Paid to KDI to Firms Firms
- ------ ---- ------ ----------- -------- -----
Municipal 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Intermediate 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Municipal
Fund
California 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Florida Fund 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
New York 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Other Distribution Expenses Paid by KDI
---------------------------------------
Advertising Marketing Misc.
and Prospectus and Sales Operating Interest
Literature Printing Expenses Expenses Expenses
---------- -------- -------- -------- --------
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx v
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
57
<PAGE>
Contingent Distribution
Distribution Deferred Total Fees Paid By
Fees Paid Sales Distribution KDI to KDI
Class C Fiscal by Fund Charges Fees Paid by KDI Affiliated
Shares Year to KDI Paid to KDI to Firms Firms
- ------ ---- ------ ----------- -------- -----
Ohio Fund 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Other Distribution Expenses Paid by KDI
---------------------------------------
Advertising Marketing Misc.
and Prospectus and Sales Operating Interest
Literature Printing Expenses Expenses Expenses
---------- -------- -------- -------- --------
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Contingent Distribution
Distribution Deferred Total Fees Paid By
Fees Paid Sales Distribution KDI to KDI
Class C Fiscal by Fund Charges Fees Paid by KDI Affiliated
Shares Year to KDI Paid to KDI to Firms Firms
- ------ ---- ------ ----------- -------- -----
Municipal 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Intermediate 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Municipal
Fund
California 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Florida Fund 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
New York 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
Ohio Fund 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Other Distribution Expenses Paid by KDI
---------------------------------------
Advertising Marketing Misc.
and Prospectus and Sales Operating Interest
Literature Printing Expenses Expenses Expenses
---------- -------- -------- -------- --------
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx v
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
- -------------------
* From 11/1/94 to 9/30/95.
** From 3/15/95 to 8/31/95.
58
<PAGE>
Rule 12b-1 Plan.
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of a Fund to make payments to KDI pursuant to the Plan will cease
and the Fund will not be required to make any payments past the termination
date. Thus, there is no legal obligation for the Fund to pay any expenses
incurred by KDI in excess of its fees under a Plan, if for any reason the Plan
is terminated in accordance with its terms. Future fees under a Plan may or may
not be sufficient to reimburse KDI for its expenses incurred.
Each distribution agreement and Rule 12-b1 Plan continues in effect from year to
year so long as such continuance is approved for each class at least annually by
a vote of the Board of Trustees of the Trust, including the Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the agreement or Plan. Each agreement automatically terminates in
the event of its assignment and may be terminated for a class at any time
without penalty by a Trust or by KDI upon 60 days notice. Termination by a Fund
with respect to a class may be by vote of a majority of the Board of Trustees,
or a majority of the Trustees who are not interested persons of the Trust and
who have no direct or indirect financial interest in the agreement, or a
"majority of the outstanding voting securities" of the class of the Fund, as
defined under the Investment Company Act of 1940. The Rule 12b-1 Plan may not be
amended for a class to increase the fee to be paid by a Fund with respect to
such class without approval by a majority of the outstanding voting securities
of such class of the Fund and all material amendments must in any event be
approved by the Board of Trustees in the manner described above with respect to
the continuation of the agreement. The provisions concerning the continuation,
amendment and termination of the distribution agreement are on a Fund by Fund
basis and for each Fund on a class by class basis.
ADMINISTRATIVE SERVICES. Administrative services are provided to each Trust
under an administrative services agreement ("administrative agreement") with
KDI. KDI bears all its expenses of providing services pursuant to the
administrative agreement between Scudder Kemper and the Trusts, including the
payment of service fees. For the services under the administrative agreement,
each Fund pays KDI an administrative services fee, payable monthly, at the
annual rate of up to 0.25% of average daily net assets of each class of the
Fund.
KDI enters into related arrangements with various broker-dealer firms and other
service or administrative firms ("firms"), that provide services and facilities
for their customers or clients who are investors of a Trust. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Trust, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation. With respect to
Class A shares, KDI pays each firm a service fee, normally payable quarterly, at
an annual rate of (a) up to 0.10% of the net assets in Trust accounts that it
maintains and services attributable to Class A shares acquired prior to October
1, 1993, and (b) up to 0.25% of the net assets in Trust accounts that it
maintains and services attributable to Class A shares acquired on or after
October 1, 1993, in each case commencing with the month after investment. The
Fund and KDI further agree that the administrative service fee will be computed
at an annual rate of 0.15 of 1% based upon the assets with respect to which KDI
provides administrative services. Notwithstanding the foregoing, the
administrative service fee with respect to Class A Shares shall be paid at an
annual rate of (a) 0.10 of 1% of net assets of those accounts in the Fund
attributable to such shares acquired prior to October 1, 1993, and (b) 0.15 of
1% of net assets of those accounts in the Fund attributable to such shares
acquired on or after October 1, 1993.With respect to Class B and Class C shares,
KDI currently advances to firms the first-year service fee at a rate of up to
0.25% of the purchase price of such shares. For periods after the first year,
KDI currently intends to pay firms a service fee at an annual rate of up to
0.25% (calculated monthly and normally paid quarterly) of the net assets
attributable to Class B and Class C shares maintained and serviced by the firm
and the fee continues until terminated by KDI or the Trust. Firms to which
service fees may be paid include broker-dealers affiliated with KDI. The
administrative services fee may be increased to an annual rate of 0.25% of
average daily net assets of any class of the Trust in the discretion of the
Board of Trustees and without shareholder approval.
The following information concerns the administrative services fee paid by each
Fund for the fiscal years ended 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Service Fees Paid
Total Service Fees by Administrator
Administrative Paid by Administrator to Kemper
Service Fees Paid by Fund to Firms Affiliated Firms
------------------------- -------- ----------------
<PAGE>
59
Fiscal
Fund Year Class A Class B Class C
- ---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Municipal 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Intermediate $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Municipal 1999
California 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Florida 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
New York 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Ohio 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
</TABLE>
<TABLE>
<CAPTION>
Service Fees Paid
Total Service Fees by Administrator
Administrative Paid by Administrator to Kemper
Service Fees Paid by Fund to Firms Affiliated Firms
------------------------- -------- ----------------
Fiscal
Fund Year Class A Class B Class C
- ---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Municipal 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Intermediate $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Municipal 1998
California 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Florida 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
New York 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Ohio 1998 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Service Fees Paid
Total Service Fees by Administrator
Administrative Paid by Administrator to Kemper
Service Fees Paid by Fund to Firms Affiliated Firms
------------------------- -------- ----------------
Fiscal
Fund Year Class A Class B Class C
- ---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Municipal 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Intermediate $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Municipal 1997
California 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Florida 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
New York 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Ohio 1997 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
</TABLE>
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for a Trust. Currently, the
administrative services fee payable to KDI is based only upon Trust assets in
accounts for which a firm provides administrative services and it is intended
that KDI will pay all the administrative services fees that it receives from the
Fund to firms in the form of service fees. The effective administrative services
fee rate to be charged against all assets of the Trust while this procedure is
in effect will depend upon the proportion of Trust assets that is in accounts
for which there is a firm of record, as well as, with respect to Class A shares,
the date when shares representing such assets were purchased. The Board of
Trustees of a Trust, in its discretion, may approve basing the fee to KDI on all
Trust assets in the future. In addition, KDI may, from time to time, from its
own resources pay certain firms additional amounts for ongoing administrative
services and assistance provided to their customers and clients who are
shareholders of the Funds.
Certain trustees or officers of the Trusts are also directors or officers of
Scudder Kemper or KDI as indicated under "Officers and Trustees."
CUSTODIAN AND SHAREHOLDER SERVICE AGENT. State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02110, as custodian, has custody of
all securities and cash of the Trusts. It attends to the collection of principal
and income, and payment for and collection of proceeds of securities bought and
sold by the Trusts. Investors Fiduciary Trust Company ("IFTC"), 801 Pennsylvania
Avenue, Kansas City, Missouri 64105 is the Trusts' transfer agent and
dividend-paying agent. Pursuant to a services agreement with IFTC, Kemper
Service Company ("KSvC"), an affiliate of Scudder Kemper, serves as "Shareholder
Service Agent" of each Trust and, as such, performs all of IFTC's duties as
transfer agent and dividend paying agent. IFTC receives as transfer agent, and
pays to KSvC as follows: annual account fees of $14.00 ($23.00 for retirement
accounts) plus account set up charges, annual fees associated with the
contingent deferred sales charges (Class B shares only), an asset based fee of
0.02% and out-of-pocket expense reimbursement. IFTC's fee is reduced by certain
earnings credits in favor of each Trust. For the National Trust for the fiscal
year ended September 30, 1999, IFTC remitted shareholder service fees in the
amount of $xxx,xxx __ to KSvC as Shareholder Service Agent. For the State Trust
for the fiscal year ended August 31, 1999, IFTC remitted shareholder service
fees in the amount of $xxx,xxx to KSvC as Shareholder Service Agent.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. Each Trust's independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on such Trust's annual financial statements, review certain
regulatory reports and such Trust's federal income tax returns, and perform
other professional accounting, auditing, tax and advisory services when engaged
to do so by the Trust. Shareholders will receive annual audited financial
statements and semi-annual unaudited financial statements.
LEGAL COUNSEL Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street,
Chicago, Illinois 60601, serves as legal counsel to each Fund.
BROKERAGE COMMISSIONS
Allocation of brokerage is supervised by the Advisor.
The primary objective of the Advisor in placing orders for the purchase and sale
of securities for a Fund is to obtain the most favorable net results, taking
into account such factors as price, commission where applicable, size of order,
difficulty of
61
<PAGE>
execution and skill required of the executing broker/dealer. The Advisor seeks
to evaluate the overall reasonableness of brokerage commissions paid (to the
extent applicable) through the familiarity of the Distributor with commissions
charged on comparable transactions, as well as by comparing commissions paid by
a Fund to reported commissions paid by others. The Advisor reviews on a routine
basis commission rates, execution and settlement services performed, making
internal and external comparisons.
The Funds' purchases and sales of fixed income securities are generally placed
by the Advisor with primary market makers for these securities on a net basis,
without any brokerage commission being paid by a Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Advisor's practice to place such orders with
broker/dealers who supply research, market and statistical information to a
Fund. The term "research and market statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchases or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Advisor is authorized when placing portfolio transactions for a Fund to pay
a brokerage commission in excess of that which another broker might charge for
executing the same transaction on account of execution services and the receipt
of research, market or statistical information. The Advisor may place orders
with broker/dealers on the basis that the broker/dealer has or has not sold
shares of a Fund. In effecting transactions in over-the-counter securities,
orders are placed with the principal market makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available elsewhere.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Advisor, the
Distributor will place orders on behalf of the Funds with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Funds for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to a Fund and to the Advisor, it is the opinion of
the Advisor that such information only supplements the Advisor's own research
effort since the information must still be analyzed, weighed, and reviewed by
the Advisor's staff. Such information may be useful to the Advisor in providing
services to clients other than a Fund, and not all such information is used by
the Advisor in connection with a Fund. Conversely, such information provided to
the Advisor by broker/dealers through whom other clients of the Advisor effect
securities transactions may be useful to the Advisor in providing services to a
Fund.
The Trustees review from time to time whether the recapture for the benefit of a
Fund of some portion of the brokerage commissions or similar fees paid by a Fund
on portfolio transactions is legally permissible and advisable.
The table below shows total brokerage commissions paid by each Fund then
existing for the last three fiscal years and for the most recent fiscal year,
the percentage thereof that was allocated to firms based upon research
information provided.
<TABLE>
<CAPTION>
Allocated to
Firms Based on
Research in
Fund Fiscal 1999 Fiscal 1999 Fiscal 1998
- ---- ----------- ----------- -----------
<S> <C> <C> <C>
Municipal 0% $3,048,000 $5,069,000
Intermediate $13,000 0% $13,000 $ 32,000
California $1,464,000 0% $1,464,000 $1,463,000
Florida $146,000 0% $146,000 $ 204,000
New York $701,000 1% $701,000 $ 594,000
Ohio $49,000 0% $49,000 $ 48,000
</TABLE>
62
<PAGE>
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of each Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. Class I shares are
offered at net asset value without an initial sales charge and are not subject
to a contingent deferred sales charge or a Rule 12b-1 distribution fee. When
placing purchase orders, investors must specify whether the order is for Class
A, Class B, Class C or Class I shares.
The primary distinctions among the classes of each Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. Each
class has distinct advantages and disadvantages for different investors, and
investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Annual 12b-1 Fees
(as a % of average daily
Sales Charge net assets) Other Information
------------ ----------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales None Initial sales charge
Charge of 4.5% (2.75% waived or reduced for
Intermediate Municipal certain purchases
Fund only) of the public
Offering price
Class B Maximum contingent deferred 0.75% Shares convert to Class
Sales charge of 4% of A shares six years
Redemption proceeds; after issuance
Declines to zero after
six years
Class C Contingent deferred sales 0.75% No conversion feature
Charge of 1% of redemption
Proceeds for redemptions
Made during first year
After purchase
Class I None None
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The minimum initial investment for each Fund is $1,000 and the minimum
subsequent investment is $100. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion. The Trusts allocate net investment
income for each Fund to those shares for which the Trust has received payment.
To begin accruing dividends as soon as possible, purchasers may wire payment to
the Trust's custodian, State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110.
Share certificates are issued only on request to the Fund and may not be
available for certain types of accounts. It is recommended that investors not
request share certificates unless needed for a specific purpose. You cannot
redeem shares by telephone or wire transfer or use the telephone exchange
privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
63
<PAGE>
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
Allowed to
Dealers as a
As Percentage
As a Percentage Percentage of of
of Offering Net Asset Offering
Amount of Purchase Price Value* Price
All Funds except Intermediate Municipal Fund
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over 0.00** 0.00** ***
Intermediate Municipal Fund Only
Less than $100,000 2.75 2.83 2.25
$100,000 but less than $250,000 2.50 2.56 2.00
$250,000 but less than $500,000 2.00 2.04 1.75
$500,000 but less than $1 million 1.50 1.52 1.25
$1 million and over 0.00** 0.00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales
charge as discussed below.
*** Commissions payable by KDI as discussed below.
Class A shares of a fund may be purchased at net asset value by:
o shareholders in connection with the investment or reinvestment of incomeand
capital gain dividends
o any purchaser with Kemper Funds investment totals of at least $1,000,000
o unitholders of unit investment trusts sponsored by Ranson & Associates,
Inc. or its predecessors through reinvestment programs described in the
prospectuses of such trusts that have such programs
o officers, trustees, directors, employees (including retirees) and sales
representatives of a fund, its investment manager, its principal
underwriter or certain affiliated companies, for themselves or members of
their families or any trust, pension, profit-sharing or other benefit plan
for such persons
o persons who purchase shares through bank trust departments that process
such trades through an automated, integrated mutual fund clearing program
provided by a third party clearing firm
o registered representatives and employees of broker-dealers having selling
group agreements with Kemper Distributors or any trust, pension,
profit-sharing or other benefit plan for such persons
o officers, directors, and employees of service agents of the funds
o members of the plaintiff class in the proceeding known as Howard and Audrey
Tabankin, et al. v. Kemper Short-Term Global Income Fund, et. al., Case No.
93 C 5231 (N.D.IL)
o selected employees (including their spouses and dependent children) of
banks and other financial services firms that provide administrative
services related to the funds pursuant to an agreement with Kemper
Distributors or one of its affiliates
o certain professionals who assist in the promotion of Kemper Funds pursuant
to personal services contracts with Kemper Distributors, for themselves or
members of their families
o in connection with the acquisition of the assets of or merger or
consolidation with another investment company
64
<PAGE>
o shareholders who owned shares of Kemper Value Series, Inc. ("KVS") on
September 8, 1995, and have continuously owned shares of KVS (or a Kemper
Fund acquired by exchange of KVS shares) since that date, for themselves or
members of their families or any trust, pension, profit-sharing or other
benefit plan for such persons
o persons who purchase shares of the fund through Kemper Distributors as part
of an automated billing and wage deduction program administered by
RewardsPlus of America
o through certain investment advisers registered under the Investment
Advisers Act of 1940 and other financial services firms, acting solely as
agent for their clients, that adhere to certain standards established by
Kemper Distributors, including a requirement that such shares be sold for
the benefit of their clients participating in an investment advisory
program or agency commission program under which such clients pay a fee to
the investment adviser or other firm for portfolio management or agency
brokerage services.
The Trusts receive the entire net asset value of all Class A shares sold. KDI,
the Trusts' principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has sales
agreements, KDI may reallow up to the full applicable sales charge, as shown in
the above table, during periods and for transactions specified in such notice
and such reallowances may be based upon attainment of minimum sales levels.
During periods when 90% or more of the sales charge is reallowed, such dealers
may be deemed to be underwriters as that term is defined in the Securities Act
of 1933.
Class A shares of a Fund may be purchased at net asset value by any purchaser
provided that the amount invested in such Fund or other Kemper Mutual Funds
listed under "Special Features -- Class A Shares -- Combined Purchases" totals
at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features" (the "Large Order NAV Purchase Privilege").
The Large Order NAV Purchase Privilege for certain Kemper Mutual Funds other
than the Funds also applies to purchases by certain participant-directed
retirement plans as described in the prospectuses for those Kemper Mutual Funds.
Redemption within two years of shares purchased under the Large Order NAV
Purchase Privilege may be subject to a contingent deferred sales charge. See
"Purchase, Repurchase and Redemption of Shares -- Contingent Deferred Sales
Charge -- Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of each Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and .25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount record keeping system made available
through KSvC. For purposes of determining the appropriate commission percentage
to be applied to a particular sale, KDI will consider the cumulative amount
invested by the purchaser in a Fund and other Kemper Mutual Funds listed under
"Special Features -- Class A Shares -- Combined Purchases," including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features referred to above and including Class R shares of certain
Scudder Funds. No compensation will be paid pursuant to this paragraph with
respect to plans within the KemStar(TM) program. The privilege of purchasing
Class A shares of a Fund at net asset value under the Large Order NAV Purchase
Privilege is not available if another net asset value purchase privilege is also
applicable (including the purchase of Class A shares of the Cash Reserves Fund).
Effective on February 1, 1996, Class A shares of a Fund or any other Kemper
Mutual Fund listed under "Special Features -- Class A Shares Combined Purchases"
may be purchased at net asset value in any amount by members of the plaintiff
class in the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper
Short-Term Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This
privilege is generally non-transferable and continues for the lifetime of
individual class members and for a ten year period for non-individual class
members. To make a purchase at net asset value under this privilege, the
investor must, at the time of purchase, submit a written request that the
purchase be processed at net asset value pursuant to this privilege specifically
identifying the purchaser as a member of the "Tabankin Class." Shares purchased
under this privilege will be maintained in a separate account that includes only
shares purchased under this privilege. For more details concerning this
privilege, class members should refer to the Notice of (1) Proposed Settlement
with Defendants; and (2) Hearing to Determine Fairness of Proposed Settlement,
dated August 31, 1995, issued in connection with the aforementioned court
proceeding. For sales of Fund shares at net asset value pursuant to this
privilege, KDI may at its discretion pay investment dealers and other financial
services firms a concession, payable quarterly, at an annual rate of up to .25%
of net assets attributable to such shares maintained and serviced by the firm. A
firm becomes eligible for the concession based upon assets in accounts
attributable to shares purchased under this privilege in the month after the
month of purchase
65
<PAGE>
and the concession continues until terminated by KDI. The privilege of
purchasing Class A shares of a Fund at net asset value under this privilege is
not available if another net asset value purchase privilege also applies.
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of .50% of the
amount of Class A shares purchased.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
each Trust, its Advisor, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Trusts,
for themselves or their spouses or dependent children; (c) shareholders who
owned shares of Kemper Value Series, Inc. ("KVS") on September 8, 1995, and have
continuously owned shares of KVS (or a Kemper Fund acquired by exchange of KVS
shares) since that date, for themselves or members of their families, and (d)
any trust or pension, profit sharing or other benefit plan for only such
persons. Class A shares may be sold at net asset value in any amount to selected
employees (including their spouses and dependent children) of banks and other
financial services firms that provide administrative services related to order
placement and payment to facilitate transactions in shares of each Fund for
their clients pursuant to an agreement with KDI or one of its affiliates. Only
those employees of such banks and other firms who as part of their usual duties
provide services related to transactions in Fund shares may purchase Fund Class
A shares at net asset value hereunder. Class A shares may be sold at net asset
value in any amount to unit investment trusts sponsored by Ranson & Associates,
Inc. In addition, unitholders of unit investment trusts sponsored by Ranson &
Associates, Inc. or its predecessors may purchase Fund Class A shares at net
asset value through reinvestment programs described in the prospectuses of such
trusts that have such programs. Class A shares of a Fund may be sold at net
asset value through certain investment advisers registered under the Investment
Advisers Act of 1940 and other financial services firms, acting solely as agent
for their clients, that adhere to certain standards established by KDI,
including a requirement that such shares be sold for the benefit of their
clients participating in an investment advisory program or agency commission
program under which such clients pay a fee to the investment adviser or other
firm for portfolio management or agency brokerage. Such shares are sold for
investment purposes and on the condition that they will not be resold except
through redemption or repurchase by the Trusts. The Trusts may also issue Class
A shares at net asset value in connection with the acquisition of the assets of
or merger or consolidation with another investment company, or to shareholders
in connection with the investment or reinvestment of income and capital gains
dividends.
Class A shares of the Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of the Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or other organized group of persons
whether incorporated or not, provided the organization has been in existence for
at least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B SHARES. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Purchase, Repurchase and Redemption of Shares -- Contingent
Deferred Sales Charge -- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class B shares. See " Investment Advisor and Underwriter."
66
Class B shares of a Fund will automatically convert to Class A shares of the
same Fund six years after issuance on the basis of the relative net asset value
per share. The purpose of the conversion feature is to relieve holders of Class
B shares from the distribution services fee when they have been outstanding long
enough for KDI to have been compensated for distribution related expenses. For
purposes of conversion to Class A shares, shares purchased through the
reinvestment of dividends and other distributions paid with respect to Class B
shares in a shareholder's account will be converted to Class A shares on a pro
rata basis.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of a
Fund is the next determined net asset value. No initial sales charge is imposed.
Since Class C shares are sold without an initial sales charge, the full amount
of the investor's purchase payment will be invested in Class C shares for his or
her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Purchase, Repurchase or Redemption of Shares -- Contingent Deferred Sales
Charge -- Class C Shares." KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of such shares. For
periods after the first year, KDI currently intends to pay firms for sales of
Class C shares a distribution fee, payable quarterly, at an annual rate of 0.75%
of net assets attributable to Class C shares maintained and serviced by the
firm. KDI is compensated by each Fund for services as distributor and principal
underwriter for Class C shares. See " Investment Advisor and Underwriter."
rized by KDI. Share certificates are not available for Class I shares.
GENERAL. As described herein, shares of a Fund are sold at their public offering
price, which is the net asset value per share of the Fund next determined after
an order is received in proper form plus, with respect to Class A shares, an
initial sales charge. The minimum initial investment is $1,000 and the minimum
subsequent investment is $100 but such minimum amounts may be changed at any
time. An order for the purchase of shares that is accompanied by a check drawn
on a foreign bank (other than a check drawn on a Canadian bank in U.S. Dollars)
will not be considered in proper form and will not be processed unless and until
the Trust determines that it has received payment of the proceeds of the check.
The time required for such a determination will vary and cannot be determined in
advance. The amount received by a shareholder upon redemption or repurchase may
be more or less than the amount paid for such shares depending on the market
value of a Trust's portfolio securities at the time.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by the Trust at the applicable net asset value
per share of such Fund as described herein.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B shares or Class C shares by certain classes of persons or
through certain types of transactions are provided because of anticipated
economies in sales and sales related efforts.
A Trust may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange ("Exchange") is
closed other than customary weekend and holiday closings or during any period in
which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of a Trust's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the
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value of its net assets, or (c) for such other periods as the Securities and
Exchange Commission may by order permit for the protection of a Trust's
shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to each Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date.
The Funds have authorized certain members of the National Association of
Securities Dealers, Inc. ("NASD"), other than Kemper Distributors, Inc. ("KDI")
to accept purchase and redemption orders for the Fund's shares. Those brokers
may also designate other parties to accept purchase and redemption orders on a
Fund's behalf. Orders for purchase or redemption will be deemed to have been
received by a Fund when such brokers or their authorized designees accept the
orders. Subject to the terms of the contract between a Fund and the broker,
ordinarily orders will be priced as the Fund's net asset value next computed
after acceptance by such brokers or their authorized designees. Further, if
purchases or redemptions of the Funds' shares are arranged and settlement is
made at an investor's election through any other authorized NASD member, that
member may, at its discretion, charge a fee for that service. The Board of each
Fund and KDI each has the right to limit the amount of purchases by, and to
refuse to sell to, any person. The Board and KDI may suspend or terminate the
offering of shares of the Funds at any time for any reason.
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require a Trust to redeem his or her shares. When
shares are held for the account of a shareholder by the Trusts' transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Funds, Attention: Redemption Department, P.O. Box 419557,
Kansas City, Missouri 64141-6557. When certificates for shares have been issued,
they must be mailed to or deposited with the Shareholder Service Agent, along
with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
The redemption price for shares of a Fund will be the net asset value per share
of that Fund next determined following receipt by the Shareholder Service Agent
of a properly executed request with any required documents as described above.
Payment for shares redeemed will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed requested
accompanied by any outstanding share certificates in proper form for transfer.
When a Trust is asked to redeem shares for which it may not have yet received
good payment (i.e., purchases by check, Express-Transfer or Bank Direct
Deposit), it may delay transmittal of redemption proceeds until it has
determined that collected funds have been received for the purchase of such
shares, which will be up to 10 days from receipt by a Trust of the purchase
amount. The redemption within two years of Class A shares purchased at net asset
value under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge (see "Purchase of Shares Initial Sales Charge
Alternative-Class A Shares") and the redemption of Class B shares within six
years may be subject to a contingent deferred sales charge (see "Contingent
Deferred Sales Charge-Class B Shares" above), and the redemption of Class C
Shares within the first year following purchase may be subject to a contingent
deferred sales charge (See "Contingent Deferred Sales Charge-Class C Shares"
below).
Because of the high cost of maintaining small accounts, a Fund may assess a
quarterly fee of $9 on an account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount record keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account
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application or by contacting the Shareholder Service Agent for appropriate
instructions. Please note that the telephone exchange privilege is automatic
unless the shareholder refuses it on the account application. A Trust or its
agents may be liable for any losses, expenses or costs arising out of fraudulent
or unauthorized telephone requests pursuant to these privileges unless the Trust
or its agents reasonably believe, based upon reasonable verification procedures,
that the telephonic instructions are genuine. The shareholder will bear the risk
of loss, including loss resulting from fraudulent or unauthorized transactions,
as long as the reasonable verification procedures are followed. Verification
procedures include recording instructions, requiring certain identifying
information before acting upon instructions and sending written confirmations.
TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor guardian and custodial account
holders, provided the trustee, executor guardian or custodian is named in the
account registration. Other institutional account holders may exercise this
special privilege of redeeming shares by telephone request or written request
without signature guarantee subject to the same conditions as individual account
holders and subject to the limitations on liability described under "General"
above, provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming of shares by telephone request or
by written request without a signature guarantee may not be used to redeem
shares held in certificated form and may not be used if the shareholder's
account has had an address change within 30 days of the redemption request.
During periods when it is difficult to contact the Shareholder Service Agent by
telephone, it may be difficult to use the telephone redemption privilege,
although investors can still redeem by mail. The Trusts reserve the right to
terminate or modify this privilege at any time.
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which a Trust has authorized to act as its agent. There is
no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of a Fund can be redeemed and proceeds sent by federal wire
transfer to a single previously designated account. Requests received by the
Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value of the Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption request of $250,000 or more may be delayed by the Fund for up to
seven days if Scudder Kemper deems it appropriate under then current market
conditions. Once authorization is on file, the Shareholder Service Agent will
honor requests by telephone at 1-800-621-1048 or in writing, subject to the
limitations on liability described under "General" above. The Trusts are not
responsible for the efficiency of the federal wire system or the account
holder's financial services firm or bank. The Trusts currently do not charge the
account holder for wire transfers. The account holder is responsible for any
charges imposed by the account holder's firm or bank. There is a $1,000 wire
redemption minimum (including any contingent deferred sales charge). To change
the designated account to receive wire redemption proceeds, send a written
request to the Shareholder Service Agent with signatures guaranteed as described
above or contact the firm through which shares of the Fund were purchased.
Shares purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may
not be redeemed by wire transfer until such shares have been owned for at least
10 days. Account holders may not use this privilege to redeem shares held in
certificated form. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the expedited
wire or wire transfer or this redemption privilege. The Trusts reserve the right
to terminate or modify this privilege at any time.
CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and .50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation.
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The charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemption of shares of a shareholder (including a registered
joint owner) who has died; (b) redemption of shares of a shareholder (including
a registered joint owner) who after purchase of the shares being redeemed
becomes totally disabled (as evidenced by a determination by the federal Social
Security Administration); (c) redemptions under a Fund's Systematic Withdrawal
Plan at a maximum of 10% per year of the net asset value of the account; and (d)
redemptions of shares whose dealer of record at the time of the investment
notifies KDI that the dealer waives the discretionary commission applicable to
such Large Order NAV Purchase.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
<TABLE>
<CAPTION>
- ---------------------------------- ---------------------------------------
Year of Redemption After Purchase Contingent Deferred
Sales Charge
- ---------------------------------- ---------------------------------------
<S> <C>
First Up to 4%
- ---------------------------------- ---------------------------------------
Second Up to 3%
- ---------------------------------- ---------------------------------------
Third Up to 3%
- ---------------------------------- ---------------------------------------
Fourth Up to 2%
- ---------------------------------- ---------------------------------------
Fifth Up to 2%
- ---------------------------------- ---------------------------------------
Sixth Up to 1%
- ---------------------------------- ---------------------------------------
</TABLE>
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner) and (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features-Systematic Withdrawal Plan" below).
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner) and (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features-Systematic Withdrawal Plan").
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CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of a Fund's Class B shares and that 16 months
later the value of the shares has grown by $1,000 through reinvested dividends
and by an additional $1,000 in appreciation to a total of $12,000. If the
investor were then to redeem the entire $12,000 in share value, the contingent
deferred sales charge would be payable only with respect to $10,000 because
neither the $1,000 of reinvested dividends nor the $1,000 of share appreciation
is subject to the charge. The charge would be at the rate of 3% ($300) because
it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 1998 will be eligible for the second year's charge if redeemed on or
after December 1, 1999. In the event no specific order is requested when
redeeming shares subject to a contingent deferred sales charge, the redemption
will be made first from shares representing reinvested dividends and then from
the earliest purchase of shares. KDI receives any contingent deferred sales
charge directly.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of the
Trusts or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
the Trusts or of the other listed Kemper Mutual Funds. A shareholder of a Fund
or any other Kemper Mutual Fund who redeems Class A shares purchased under the
Large Order NAV Purchase Privilege (see "Purchase of Shares--Initial Sales
Charge Alternative--Class A Shares") or Class B shares or Class C shares and
incurs a contingent deferred sales charge may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares,
Class B shares or Class C shares, as the case may be, of a Fund or of other
Kemper Mutual Funds. The amount of any contingent deferred sales charge also
will be reinvested. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares of the Trusts or of the other Kemper Mutual Funds listed under
"Special Features--Class A Shares--Combined Purchases." Purchases through the
reinvestment privilege are subject to the minimum investment requirements
applicable to the shares being purchased and may only be made for Kemper Mutual
Funds available for sale in the shareholder's state of residence as listed under
"Special Features--Exchange Privilege." The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the redemption. If a loss is realized on the redemption of a Fund's
shares, the reinvestment in the same Fund may be subject to the "wash sale"
rules if made within 30 days of the redemption, resulting in a postponement of
the recognition of such loss for federal income tax purposes. The reinvestment
privilege may be terminated or modified at any time.
SPECIAL FEATURES
CLASS A SHARES--COMBINED PURCHASES. Class A shares of any Fund may be purchased
at the rate applicable to the discount bracket attained by combining concurrent
investments in Class A shares of any of the following funds: Kemper Adjustable
Rate U.S. Government Fund, Kemper Aggressive Growth Fund, Kemper Asian Growth
Fund, Kemper Blue Chip Fund, Kemper California Tax-Free Income Fund, Kemper Cash
Reserves Fund, Kemper Contrarian Fund, Kemper Diversified Income Fund, Kemper
Emerging Markets Growth Fund, Kemper Emerging Markets Income Fund, Kemper New
Europe Fund, Kemper Florida Tax-Free Income Fund, Kemper Global Blue Chip Fund,
Kemper Global Income Fund, Kemper Growth Fund, Kemper High Yield Fund, Kemper
High Yield Opportunity, Kemper Horizon 10+ Portfolio, Kemper Horizon 20+
Portfolio, Kemper Horizon 5 Portfolio, Kemper Income And Capital Preservation
Fund, Kemper Intermediate Municipal Bond, Kemper International Fund, Kemper
International Growth and Income Fund, Kemper Large Company Growth Fund
(currently available only to employees of Scudder Kemper Investments, Inc.; not
available in all states), Kemper Latin America Fund, Kemper Municipal Bond Fund,
Kemper New York Tax-Free Income Fund, Kemper Ohio Tax-Free Income Fund, Kemper
Quantitative Equity Fund, Kemper Research Fund (currently available only to
employees of Scudder Kemper Investments, Inc.; not available in all states),
Kemper Target 2010 Fund, Kemper Retirement Fund -- Series II, Kemper Retirement
Fund -- Series III, Kemper Retirement Fund -- Series IV, Kemper Retirement Fund
- -- Series V, Kemper Retirement Fund -- Series VI, Kemper Retirement Fund --
Series VII, Kemper Short-Intermediate Government Fund, Kemper Small Cap Value
Fund, Kemper Small Cap Value+Growth Fund (currently available only to employees
of Scudder Kemper Investments, Inc.; not available in all states), Kemper Small
Capitalization Equity Fund, Kemper Small Cap Relative Value Fund, Kemper
Technology Fund, Kemper Total Return Fund, Kemper U.S. Government Securities
Fund, Kemper U.S. Growth and Income Fund, Kemper U.S. Mortgage Fund, Kemper
Value+Growth Fund, Kemper Worldwide 2004 Fund, Kemper-Dreman High Return Equity
Fund, Kemper-Dreman Financial Services Fund
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("Kemper Mutual Funds"). Except as noted below, there is no combined purchase
credit for direct purchases of shares of Zurich Money Funds, Cash Equivalent
Fund, Tax-Exempt California Money Market Fund, Cash Account Trust, Investors
Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"), which are
not considered "Kemper Mutual Funds" for purposes hereof. For purposes of the
Combined Purchases feature described above as well as for the Letter of Intent
and Cumulative Discount features described below, employer sponsored employee
benefit plans using the subaccount record keeping system made available through
the Shareholder Service Agent or its affiliates may include: (a) Money Market
Funds as "Kemper Mutual Funds," (b) all classes of shares of any Kemper Mutual
Fund and (c) the value of any other plan investments, such as guaranteed
investment contracts and employer stock, maintained on such sub-account record
keeping system.
CLASS A SHARES--LETTER OF INTENT. The same reduced sales charges for Class A
shares, as above, also apply to the aggregate amount of purchases of such Kemper
Mutual Funds listed above made by any purchaser within a 24-month period under a
written Letter of Intent ("Letter") provided by KDI. The Letter, which imposes
no obligation to purchase or sell additional Class A shares, provides for a
price adjustment depending upon the actual amount purchased within such period.
The Letter provides that the first purchase following execution of the Letter
must be at least 5% of the amount of the intended purchase, and that 5% of the
amount of the intended purchase normally will be held in escrow in the form of
shares pending completion of the intended purchase. If the total investments
under the Letter are less than the intended amount and thereby qualify only for
a higher sales charge than actually paid, the appropriate number of escrowed
shares are redeemed and the proceeds used toward satisfaction of the obligation
to pay the increased sales charge. The Letter for an employer sponsored employee
benefit plan maintained on the subaccount record keeping system available
through KDI may have special provisions regarding payment of any increased sales
charge resulting from a failure to satisfy the intended purchase under the
Letter. A shareholder may include the value (at the maximum offering price) of
all shares of such Kemper Mutual Funds held of record as of the initial purchase
date under the Letter as an "accumulation credit" toward the completion of the
Letter, but no price adjustment will be made on such shares. Only investments in
Class A shares of a Fund are included for this privilege.
CLASS A SHARES--CUMULATIVE DISCOUNT. Class A shares of any Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of a Fund's shares being purchased the value of all Class A shares of
the Kemper Mutual Funds (computed at the maximum offering price at the time of
the purchase for which the discount is applicable) already owned by the
investor.
CLASS A SHARES--AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI.
Class A shares of a Fund purchased under the Large Order NAV Purchase Privilege
may be exchanged for Class A shares of another Kemper Mutual Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of the contingent deferred sales charge.
Class B Shares. Class B shares of a Fund and Class B shares of any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset value. Class B
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For purposes of the contingent deferred sales charge
that may be imposed upon the redemption of the Class B shares received on
exchange, amounts exchanged retain their original cost and purchase date.
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<PAGE>
Class C Shares. Class C shares of a Fund and Class C shares of any other Kemper
Mutual Fund listed under "Special Features-Class A Shares-Combined Purchases"
may be exchanged for each other at their relative net asset value. Class C
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For determining whether there is a contingent deferred
sales charge that may be imposed upon the redemption of the Class C shares
received by exchange, they retain the cost and purchase date of the shares that
were originally purchased and exchanged.
General. Effective June 1, 1999, in addition to the current limits on exchanges
of shares with a value over $1,000,000, shares of a Kemper Fund with a value of
$1,000,000 or less (except Kemper Cash Reserves Fund) acquired by exchange from
another Kemper Fund, or from a Money Market Fund, may not be exchanged
thereafter until they have been owned for 15 days if, in the Advisor's
judgement, the exchange activity may have an adverse effect on the fund. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Fund and therefore may be subject tothe 15-Day
Hold Policy. For purposes of determining whether the 15-Day Hold Policy applies
to a particular exchange, the value of the shares to be exchanged shall be
computed by aggregating the value of shares being exchanged for all accounts
under common control, direction or advice, including without limitation accounts
administered by a financial services firm offering market timing, asset
allocation or similar services. The total value of shares being exchanged must
at least equal the minimum investment requirement of the fund into which they
are being exchanged. Exchanges are made based on relative dollar values of the
shares involved in the exchange. There is no service fee for an exchange;
however, dealers or other firms may charge for their services in effecting
exchange transactions. Exchanges will be effected by redemption of shares of the
fund held and purchase of shares of the other fund. For federal income tax
purposes, any such exchange constitutes a sale upon which a gain or loss will be
realized, depending upon whether the value of the shares being exchanged is more
or less than the shareholder's adjusted cost basis of such shares. Shareholders
interested in exercising the exchange privilege may obtain prospectuses of the
other funds from dealers, other firms or KDI. Exchanges may be accomplished by a
written request to Kemper Service Company, Attention: Exchange Department, P.O.
Box 419557, Kansas City, Missouri 64141-6557, or by telephone if the shareholder
has given authorization. Once the authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability under "Purchase, Repurchase and
Redemption of Shares--General." Any share certificates must be deposited prior
to any exchange of such shares. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
telephone exchange privilege. The exchange privilege is not a right and may be
suspended, terminated or modified at any time. Except as otherwise permitted by
applicable regulations, 60 days' prior written notice of any termination or
material change will be provided. Exchanges may only be made for funds that are
available for sale in the shareholder's state of residence. Currently,
Tax-Exempt California Money Market Fund is available for sale only in California
and Investors Municipal Cash Fund is available for sale only in certain states.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the other
Kemper Fund. Exchanges are subject to the terms and conditions described above
under "Exchange Privilege," except that the $1,000 minimum investment
requirement for the Kemper Fund acquired on exchange is not applicable. This
privilege may not be used for the exchange of shares held in certificated form.
EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in a Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Purchase, Repurchase and Redemption of Shares--General." Once
enrolled in EXPRESS-Transfer, a shareholder can initiate a transaction by
calling Kemper Shareholder Services toll free at 1-800-621-1048 Monday through
Friday, 8:00 a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this
privilege by sending written notice to Kemper Service Company, P.O. Box 419415,
Kansas City, Missouri 64141-6415. Termination will become effective as soon as
the Shareholder Service Agent has had a reasonable time to act upon the request.
EXPRESS-Transfer cannot be used with passbook savings accounts.
BANK DIRECT DEPOSIT. A shareholder may purchase additional Fund shares through
an automatic investment program. With the Bank Direct Deposit Purchase Plan,
investments are made automatically (minimum $50, maximum $50,000) from
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the shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder
authorizes the Trust and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to Kemper Service Company, P.O. Box 419415, Kansas
City, Missouri 64141-6415. Termination by a shareholder will become effective
within thirty days after the Shareholder Service Agent has received the request.
A Trust may immediately terminate a shareholder's Plan in the event that any
item is unpaid by the shareholder's financial institution. A Trust may terminate
or modify this privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in a Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in a Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) A Trust is not responsible for the efficiency of the
employer or government agency making the payment or any financial institution
transmitting payment.
SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of a Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The minimum periodic payment
is $100. The maximum annual rate at which Class B shares may be redeemed (and
Class A shares purchased under the Large Order NAV Purchase Privilege and Class
C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. Any income and capital gain dividends will be automatically reinvested at
net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested and fluctuations in the net asset value of the shares redeemed,
redemptions for the purpose of making such payments may reduce or even exhaust
the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, the Trusts will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B and Class C shares made pursuant to a systematic withdrawal plan. The right is
reserved to amend the systematic withdrawal plan on 30 days' notice. The plan
may be terminated at any time by the investor or the Trusts.
ADDITIONAL TRANSACTION INFORMATION
GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Fund for their clients, and KDI may pay them a transaction fee up to
the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. Management does not believe that termination of a
relationship with a bank would result in any material adverse consequences to a
Fund.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of a Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms who sell or are expected to sell during specified time periods
certain minimum amounts of shares of a Fund, or other funds underwritten by KDI.
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of such Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value of such Fund effective on that
day ("trade date"). The Trusts reserve the right to determine the net asset
value more frequently than once a day if deemed desirable. Dealers and other
financial services firms are obligated to transmit orders promptly. Collection
may take significantly longer for a check drawn on a foreign bank than for a
check drawn on a domestic bank. Therefore, if an order is accompanied by a check
drawn on a foreign bank, funds must normally be collected before shares will be
purchased.
74
<PAGE>
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem Fund shares. Some may establish higher minimum
investment requirements than set forth above. Firms may arrange with their
clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
Fund shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Trusts' transfer agent will have no
information with respect to or control over accounts of specific shareholders.
Such shareholders may obtain access to their accounts and information about
their accounts only from their firm. Certain of these firms may receive
compensation from the Trusts through the Shareholder Service Agent for
recordkeeping and other expenses relating to these nominee accounts. In
addition, certain privileges with respect to the purchase and redemption of
shares or the reinvestment of dividends may not be available through such firms.
Some firms may participate in a program allowing them access to their clients'
accounts for servicing including, without limitation, transfers of registration
and dividend payee changes; and may perform functions such as generation of
confirmation statements and disbursement of cash dividends. Such firms,
including affiliates of KDI, may receive compensation from the Trusts through
the Shareholder Service Agent for these services.
The Trusts reserve the right to withdraw all or any part of the offering made
herein and to reject purchase orders. Also, from time to time, the Trusts may
temporarily suspend the offering of any class of the shares of a Fund to new
investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this Statement of Additional Information.
OFFICERS AND TRUSTEES
The officers and trustees of the Trusts, their birthdates, their principal
occupations and their affiliations, if any, with Scudder Kemper, the Trusts'
Advisor and KDI, the Trusts' principal underwriter, are as follows:
JOHN W. BALLANTINE (2/16/46), Trustee, 1500 North Lake Shore Drive, Chicago,
Illinois; First Chicago NBD Corporation/The First National Bank of Chicago:
1996-1998 Executive Vice President and Chief Risk Management Officer; 1995-1996
Executive Vice President and Head of International Banking; 1992-1995 Executive
Vice President, Chief Credit and Market Risk Officer.
LEWIS A. BURNHAM (1/8/33), Trustee, 16410 Avila Boulevard, Tampa, Florida;
Retired; formerly, Partner, Business Resources Group; formerly, Executive Vice
President, Anchor Glass Container Corporation.
DONALD L. DUNAWAY (3/8/37), Trustee, 7515 Pelican Bay Boulevard, Naples,
Florida; Retired; formerly, Executive Vice President, A.O. Smith Corporation
(diversified manufacturer).
ROBERT B. HOFFMAN (12/11/36), Trustee, 1530 North State Parkway, Chicago,
Illinois; Chairman, Harnischfeger Industries, Inc. (machinery for the mining and
paper industries); formerly Vice Chairman and Chief Financial Officer, Monsanto
Company (agricultural, pharmaceutical and nutritional/food products); formerly,
Vice President, Head of International Operations, FMC Corporation (manufacturer
of machinery and chemicals).
DONALD R. JONES (1/17/30), Trustee, 182 Old Wick Lane, Inverness, Illinois;
Retired; Director, Motorola, Inc. (manufacturer of electronic equipment and
components); formerly, Executive Vice President and Chief Financial Officer,
Motorola, Inc.
SHIRLEY D. PETERSON (9/3/41), Trustee, 401 Rosemont Avenue, Frederick, Maryland;
President, Hood College; formerly, Partner, Steptoe & Johnson (attorneys); prior
thereto, Commissioner, Internal Revenue Service; prior thereto, Assistant
Attorney General, U.S. Department of Justice; Director, Bethlehem Steel Corp.
WILLIAM P. SOMMERS (7/22/33), Trustee, 24717 Harbour View Drive, Ponte Vedra
Beach, Florida; Consultant and Director, SRI Consulting; formerly President and
Chief Executive Officer, SRI International (research and development); formerly,
Executive Vice President, Iameter (medical information and educational service
provider); prior thereto, Senior Vice President and Director, Booz, Allen &
Hamilton Inc. (management consulting firm)(retired); Director, Rohr, Inc.,
Therapeutic Discovery Corp. and Litton Industries.
THOMAS W. LITTAUER (4/26/55), Trustee, Chairman and Vice President*, Two
International Place, Boston, Massachusetts; Managing Director, Adviser;
formerly, Head of Broker Dealer Division of an unaffiliated investment
management firm during 1997; prior thereto, President of Client Management
Services of an unaffiliated investment management firm from 1991 to 1996.
75
<PAGE>
MARK S. CASADY (9/21/60), President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser; formerly, Institutional Sales Manager of an
unaffiliated mutual fund distributor.
PHILIP J. COLLORA (11/15/45), Vice President and Secretary*, 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President and Assistant Secretary,
Adviser.
ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser.
ROBERT C. PECK, JR. (10/1/46), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser; formerly, Executive Vice
President and Chief Investment Officer with an unaffiliated investment
management firm from 1988 to June 1997.
KATHRYN L. QUIRK (12/3/52), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Adviser.
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
JOHN R. HEBBLE (6/27/58), Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
BRENDA LYONS (2/21/63), Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Senior Vice President, Adviser; formerly, Associate,
Dechert Price & Rhoads (law firm) 1989 to 1997.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Adviser; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior thereto,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
Kemper National Tax-Free Income Series:
ROBERT C. PECK, JR. (10/1/46), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser; formerly, Executive Vice
President and Chief Investment Officer with an unaffiliated investment
management firm from 1988 to June 1997.
ASHTON P. GOODFIELD (10/3/63), Senior Vice President, Two International Place,
Boston, Massachusetts; Vice President, Adviser.
Kemper State Tax-Free Income Series:
ROBERT C. PECK, JR. (10/1/46), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser; formerly, Executive Vice
President and Chief Investment Officer with an unaffiliated investment
management firm from 1988 to June 1997.
* Interested persons as defined in the Investment Company Act of 1940.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Funds. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during
each Trust's 1999 fiscal year except that the information in the last column is
for calendar year 1998.
<TABLE>
<CAPTION>
Aggregate
Compensation from Funds Pension or Total
-----------------------
Retirement Compensation
Benefits Accrued from Trusts
Name of Trustee National Trust State Trust As Part of Fund Expenses Paid to Trustees**
- --------------- -------------- ----------- ------------------------ ------------------
<S> <C> <C> <C> <C>
John W. Ballantine $x,xxx $x,xxx $0 $xxx,xxx
Lewis A. Burnham $x,xxx $x,xxx $0 $xxx,xxx
Donald L. Dunaway* $x,xxx $x,xxx $0 $xxx,xxx
76
<PAGE>
Aggregate
Compensation from Funds Pension or Total
-----------------------
Retirement Compensation
Benefits Accrued from Trusts
Name of Trustee National Trust State Trust As Part of Fund Expenses Paid to Trustees**
- --------------- -------------- ----------- ------------------------ ------------------
Robert B. Hoffman $x,xxx $x,xxx $0 $xxx,xxx
Donald R. Jones $x,xxx $x,xxx $0 $xxx,xxx
Shirley D. Peterson $x,xxx $x,xxx $0 $xxx,xxx
William P. Sommers $x,xxx $x,xxx $0 $xxx,xxx
</TABLE>
- --------
* Includes deferred fees. Pursuant to deferred compensation agreements with
the Funds, deferred amounts accrue interest monthly at a rate approximate
to the yield of Zurich Money Funds -- Zurich Money Market Fund. Total
deferred fees (including interest thereon) payable from the Funds to Mr.
Dunaway are $47,500 and $32,700 from National and State Trusts,
respectively.
** Includes compensation for service on the boards of 25 Kemper funds with 41
fund portfolios. Each trustee currently serves as a trustee of 27 Kemper
funds with 46 fund portfolios.
As of November 30, 1999, the officers and trustees of the Funds, as a group,
owned less than 1% of the then outstanding shares of each Fund. No person owned
of record 5% or more of the outstanding shares of any class of any Fund, except
that the following owned of record shares of the following Funds:
<TABLE>
<CAPTION>
Kemper Intermediate Municipal Bond
- ------------------------------------- ----------------------------------- -----------------------------------
NAME CLASS PERCENTAGE
- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
National Financial Services Corp. A 6.22
FBO William Twaddell
200 Liberty Street
New York, NY 10281
- ------------------------------------- ----------------------------------- -----------------------------------
Donaldson, Lufkin & Jenrette A 13.50
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303
- ------------------------------------- ----------------------------------- -----------------------------------
First Union Securities A 6.61
Commission Accounting
77 W. Wacker Drive
Chicago, IL 60601
- ------------------------------------- ----------------------------------- -----------------------------------
GKEnterprises A 6.23
15700 Lathrop Avenue
Harvey, IL 60426
- ------------------------------------- ----------------------------------- -----------------------------------
Woodstock A Partnership A 6.73
C/o Wood County Trust
P.O. Box 8000
Wisconsin Rapids, WI 54495
- ------------------------------------- ----------------------------------- -----------------------------------
Brian & Joan Johnson, JTWROS A 6.67
P.O. Box 400
Spooner, WI 54801
- ------------------------------------- ----------------------------------- -----------------------------------
77
<PAGE>
Elsie Viles B 6.25
P.O. Box 319
Augusta, ME 04332
- ------------------------------------- ----------------------------------- -----------------------------------
National Financial Services Corp. B 15.69
FBO Stan Daniel
200 Liberty Street
New York, NY 10281
- ------------------------------------- ----------------------------------- -----------------------------------
Jacqueline Burnett B 5.22
24611 87th Avenue
Bellerose, NY 11426
- ------------------------------------- ----------------------------------- -----------------------------------
Donaldson, Lufkin & Jenrette B 8.32
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303
- ------------------------------------- ----------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner & B 14.14
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL 07303
- ------------------------------------- ----------------------------------- -----------------------------------
Donaldson, Lufkin & Jenrette C 9.84
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303
- ------------------------------------- ----------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner & C 13.18
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL 07303
- ------------------------------------- ----------------------------------- -----------------------------------
Karen West C 6.41
15 Emerson Road
Severena Park, MD 21446
- ------------------------------------- ----------------------------------- -----------------------------------
Gregory, Kevin & Mark Fox, TTEE'S C 5.30
FBO Eugene & Mary Fox
709 Laurel Lane
Severena Park, MD 21146
- ------------------------------------- ----------------------------------- -----------------------------------
Dean Witter Reynolds C 35.25
Mutual Funds Operations
5 World Trade Center
New York, NY 10048
- ------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
78
<PAGE>
Kemper Municipal Bond
<TABLE>
<CAPTION>
- ------------------------------------- ----------------------------------- -----------------------------------
NAME CLASS PERCENTAGE
- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
First Union Securities A 7.13
Commission Accounting
77 W. Wacker Drive
Chicago, IL 60601
- ------------------------------------- ----------------------------------- -----------------------------------
National Financial Services Corp. B 8.77
FBO Joseph & Sharon Reel
200 Liberty Street
New York, NY 10281
- ------------------------------------- ----------------------------------- -----------------------------------
Donaldson, Lufkin & Jenrette B 7.84
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303
- ------------------------------------- ----------------------------------- -----------------------------------
First Union Securities B 5.57
Commission Accounting
77 W. Wacker Drive
Chicago, IL 60601
- ------------------------------------- ----------------------------------- -----------------------------------
National Financial Services Corp. C 11.47
FBO Joseph & Maria Checrallah
200 Liberty Street
New York, NY 10281
- ------------------------------------- ----------------------------------- -----------------------------------
Donaldson, Lufkin & Jenrette C 12.93
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303
- ------------------------------------- ----------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner & C 6.54
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL 07303
- ------------------------------------- ----------------------------------- -----------------------------------
Dean Witter Reynolds C 10.36
Mutual Funds Operations
5 World Trade Center
New York, NY 10048
- ------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
79
<PAGE>
Kemper California Tax-Free Income
<TABLE>
<CAPTION>
- ------------------------------------- ----------------------------------- -----------------------------------
NAME CLASS PERCENTAGE
- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Smith Barney Inc. A 7.20
Mutual Fund/Comm. Dept.
333 W. 34th Street
New York, NY 10001
- ------------------------------------- ----------------------------------- -----------------------------------
BHC Securities, Inc. A 9.30
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
- ------------------------------------- ----------------------------------- -----------------------------------
First Union Securities A 6.76
Commission Accounting
77 W. Wacker Drive
Chicago, IL 60601
- ------------------------------------- ----------------------------------- -----------------------------------
Dean Witter Reynolds A 7.82
Mutual Funds Operations
5 World Trade Center
New York, NY 10048
- ------------------------------------- ----------------------------------- -----------------------------------
National Financial Services Corp. B 12.00
200 Liberty Street
New York, NY 10281
- ------------------------------------- ----------------------------------- -----------------------------------
Donaldson, Lufkin & Jenrette B 6.88
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303
- ------------------------------------- ----------------------------------- -----------------------------------
BHC Securities, Inc. B 7.63
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
- ------------------------------------- ----------------------------------- -----------------------------------
First Union Securities B 9.65
Commission Accounting
77 W. Wacker Drive
Chicago, IL 60601
- ------------------------------------- ----------------------------------- -----------------------------------
Dean Witter Reynolds B 8.74
Mutual Funds Operations
5 World Trade Center
New York, NY 10048
- ------------------------------------- ----------------------------------- -----------------------------------
Helena G. Hale, TTEE C 9.79
803 Paseo Alicante
Santa Barbara, CA 93103
- ------------------------------------- ----------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner & C 5.71
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL 07303
- ------------------------------------- ----------------------------------- -----------------------------------
80
<PAGE>
Dean Witter C 5.32
FBO Don & Julie Marchman, TTEE
P.O. Box 250 Church Street Station
New York, NY 10008
- ------------------------------------- ----------------------------------- -----------------------------------
Alfred & Dolores DeFrancesco C 7.48
Attn: Neil Woodruff
P.O. Box 605
Gilroy, CA 95021
- ------------------------------------- ----------------------------------- -----------------------------------
Wedbush Morgan Securities C 11.98
Accounting Department
P.O. Box 30014
Los Angeles, CA 90030
- ------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
Kemper Florida Tax-Free Income
<TABLE>
<CAPTION>
- ------------------------------------- ----------------------------------- -----------------------------------
NAME CLASS PERCENTAGE
- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
National Financial Services Corp. A 6.89
FBO George and Keng Yoke Olsen
200 Liberty Street
New York, NY 10281
- ------------------------------------- ----------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner & A 9.59
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL 07303
- ------------------------------------- ----------------------------------- -----------------------------------
National Financial Services Corp. B 11.74
FBO Jane Gilbert
200 Liberty Street
New York, NY 10281
- ------------------------------------- ----------------------------------- -----------------------------------
Donaldson, Lufkin & Jenrette B 11.24
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303
- ------------------------------------- ----------------------------------- -----------------------------------
Albert & Fern Thompson, JTWROS B 5.28
526 Pendleton Drive
Venice, FL 34292
- ------------------------------------- ----------------------------------- -----------------------------------
81
<PAGE>
National Financial Services Corp. C 15.58
FBO Jane Gilbert
200 Liberty Street
New York, NY 10281
- ------------------------------------- ----------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner & C 29.14
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL 07303
- ------------------------------------- ----------------------------------- -----------------------------------
BHC Securities, Inc. C 10.75
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
- ------------------------------------- ----------------------------------- -----------------------------------
Southwest Securities, Inc. C 30.43
FBO Patricia Kaighin
Box 509002
Dallas, TX 75270
- ------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
Kemper New York Tax-Free Income
<TABLE>
<CAPTION>
- ------------------------------------- ----------------------------------- -----------------------------------
NAME CLASS PERCENTAGE
- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
ABN Amro Chicago Corp. A 9.64
Mutual Funds Admin.
208 LaSalle Street
Chicago, IL 60604
- ------------------------------------- ----------------------------------- -----------------------------------
National Financial Services Corp. B 21.66
FBO Carmel & Pauline Grech
200 Liberty Street
New York, NY 10281
- ------------------------------------- ----------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner & B 5.06
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL 07303
- ------------------------------------- ----------------------------------- -----------------------------------
National Financial Services Corp. C 6.34
FBO Augustino and Luciana Biondi
200 Liberty Street
New York, NY 10281
- ------------------------------------- ----------------------------------- -----------------------------------
PaineWebber C 17.35
FBO Diana Riklis
1020 Park Avenue
New York, NY 10028
- ------------------------------------- ----------------------------------- -----------------------------------
82
<PAGE>
Advest Inc. C 13.99
90 State House Square
Hartford, CT 06103
- ------------------------------------- ----------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner & C 19.51
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL 07303
- ------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
Kemper Ohio Tax-Free Income
<TABLE>
<CAPTION>
- ------------------------------------- ----------------------------------- -----------------------------------
NAME CLASS PERCENTAGE
- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
National Financial Services Corp. A 8.20
FBO Nancy Young
200 Liberty Street
New York, NY 10281
- ------------------------------------- ----------------------------------- -----------------------------------
First Union Securities A 27.91
Commission Accounting
77 W. Wacker Drive
Chicago, IL 60601
- ------------------------------------- ----------------------------------- -----------------------------------
National Financial Services Corp. B 9.35
FBO Patricia Winkler
200 Liberty Street
New York, NY 10281
- ------------------------------------- ----------------------------------- -----------------------------------
Donaldson, Lufkin & Jenrette B 8.36
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303
- ------------------------------------- ----------------------------------- -----------------------------------
BHC Securities, Inc. B 44.04
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
- ------------------------------------- ----------------------------------- -----------------------------------
First Union Securities B 5.68
Commission Accounting
77 W. Wacker Drive
Chicago, IL 60601
- ------------------------------------- ----------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner & C 18.69
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL 07303
- ------------------------------------- ----------------------------------- -----------------------------------
83
<PAGE>
BHC Securities, Inc. C 42.10
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
- ------------------------------------- ----------------------------------- -----------------------------------
First Union Securities C 20.68
Commission Accounting
77 W. Wacker Drive
Chicago, IL 60601
- ------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
84
<PAGE>
CAPITAL STRUCTURE
The National Trust was organized under the name "Kemper Municipal Bond Fund" as
a business trust under the laws of Massachusetts on October 24, 1985 with a
single investment portfolio. Effective January 31, 1986 the Municipal Trust,
pursuant to a reorganization, succeeded to the assets and liabilities of Kemper
Municipal Bond Fund, Inc., a Maryland corporation organized in 1977 as a
successor to Kemper Municipal Bond Fund, Ltd., a Nebraska limited partnership
organized in April 1976. Effective November 1, 1994, the Trust changed its name
to "Kemper National Tax-Free Income Series." Each National Fund is an open-end,
diversified Fund.
The State Trust was organized under the name "Kemper California Tax-Free Income
Fund" as a business trust under the laws of Massachusetts on October 24, 1985
with a single investment portfolio. Effective January 31, 1986, the Trust
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
California Tax-Free Income Fund, Inc., a Maryland corporation organized in 1983.
On July 27, 1990, the Trust changed its name to "Kemper State Tax-Free Income
Series" and changed the name of its initial portfolio to "Kemper California
Tax-Free Income Fund." The predecessor to the New York Fund, also named "Kemper
New York Tax-Free Income Fund," was organized as a business trust under the laws
of Massachusetts on August 9, 1985. Prior to May 28, 1988, that investment
company was known as "Tax-Free Income Portfolios" and it offered two series of
shares, the National Portfolio and the New York Portfolio. Pursuant to a
reorganization on May 27, 1988, the National Portfolio was terminated and the
New York Portfolio continued as the sole remaining series of Kemper New York
Tax-Free Income Fund, which was reorganized into the New York Fund as a series
of the State Trust on July 27, 1990. Each State Fund is an open-end,
non-diversified Fund.
Each Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Funds," all having no par value, which may be divided by the
Board of Trustees into classes of shares. Currently, the National Trust has two
Funds that offer four classes of shares and the State Trust has eight Funds that
offer three classes of shares. These are Class A, Class B and Class C shares, as
well as (for the National Trust only) Class I shares, which have different
expenses, which may affect performance, and that are available for purchase
exclusively by the following investors: (1) tax-exempt retirement plans (Profit
Sharing, 401(k), Money Purchase Pension and Defined Benefit Plans)of Scudder
Kemper and its affiliates and rollover accounts from those plans; (2) the
following investment advisory clients of Scudder Kemper and its investment
advisory affiliates that invest at least $1 million in the National Funds:
unaffiliated benefit plans, such as qualified retirement plans (other than
individual retirement accounts and self-directed retirement plans); unaffiliated
banks and insurance companies purchasing for their own accounts; and endowment
funds of unaffiliated non-profit organizations; (3) investment-only accounts for
large qualified plans, with at least $50 million in total plan assets or at
least 1,000 participants; (4) trust and fiduciary accounts of trust companies
and bank trust departments providing fee based advisory services that invest at
least $1 million in a Fund; (5) policy holders under Zurich-American Insurance
Group's collateral investment program investing at least $200,000 in a Fund; and
(6) investment companies managed by Scudder Kemper that invest primarily in
other investment companies. The Board of Trustees of either Trust may authorize
the issuance of additional classes and additional Funds if deemed desirable,
each with its own investment objective, policies and restrictions.
Since the Trusts may offer multiple Funds, each is known as a "series company."
Shares of each Fund of a Trust have equal noncumulative voting rights except
that Class B and Class C shares have separate and exclusive voting rights with
respect to each Fund's Rule 12b-1 Plan. Shares of each class also have equal
rights with respect to dividends, assets and liquidation of such Fund subject to
any preferences (such as resulting from different Rule 12b-1 distribution fees),
rights or privileges of any classes of shares of a Fund. Shares of each Trust
are fully paid and nonassessable when issued, are transferable without
restriction and have no preemptive or conversion rights. The Trusts are not
required to hold annual shareholder meetings and do not intend to do so.
However, they will hold special meetings as required or deemed desirable for
such purposes as electing trustees, changing fundamental policies or approving
an investment management agreement. Subject to the Agreement and Declaration of
Trust of each Trust, shareholders may remove trustees. Shareholders will vote by
Fund and not in the aggregate or by class except when voting in the aggregate is
required under the 1940 Act, such as for the election of trustees, or when
voting by class is appropriate.
Each Trust generally is not required to hold meetings of its shareholders. Under
the Agreement and Declaration of Trust of each Trust ("Declaration of Trust"),
however, shareholder meetings will be held in connection with the following
matters: (a) the election or removal of trustees if a meeting is called for such
purpose; (b) the adoption of any contract for which shareholder approval is
required by the 1940 Act; (c) any termination of the Trust, a Fund or a class to
the extent and as provided in the Declaration of Trust; (d) any amendment of the
Declaration of Trust (other than amendments changing the name of the Trust,
supplying any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision thereof); and (e) such
additional matters as may be required by law, the Declaration of Trust, the
85
<PAGE>
By-laws of the Trust, or any registration of the Trust with the Securities and
Exchange Commission or any state, or as the trustees may consider necessary or
desirable. The shareholders also would vote upon changes in fundamental
investment objectives, policies or restrictions.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) a Trust will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of a Trust stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, the
Trust has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
The Declaration of Trust of each Trust provides that the presence at a
shareholder meeting in person or by proxy of at least 30% of the shares entitled
to vote on a matter shall constitute a quorum. Thus, a meeting of shareholders
of a Trust could take place even if less than a majority of the shareholders
were represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
independent auditors. Some matters requiring a larger vote under the Declaration
of Trust of a Trust, such as termination or reorganization of the Trust and
certain amendments of the Declaration of Trust, would not be affected by this
provision; nor would matters which under the 1940 Act require the vote of a
"majority of the outstanding voting securities" as defined in the 1940 Act.
The Declaration of Trust of each Trust specifically authorizes the Board of
Trustees to terminate the Trust or any Fund or class by notice to the
shareholders without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of a
Trust. The Declaration of Trust of each Trust, however, disclaims shareholder
liability for acts or obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into or
executed by the Trust or the trustees. Moreover, the Declaration of Trust of
each Trust provides for indemnification out of Trust property for all losses and
expenses of any shareholder held personally liable for the obligations of the
Trust and the Trust will be covered by insurance which the trustees consider
adequate to cover foreseeable tort claims. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is considered by
Scudder Kemper remote and not material, since it is limited to circumstances in
which a disclaimer is inoperative and the Trust itself is unable to meet its
obligations.
86
<PAGE>
APPENDIX -- RATINGS OF INVESTMENTS
The four highest ratings of Moody's Investors Service, Inc. ("Moody's") for
municipal bonds are Aaa, Aa, A and Baa. Municipal bonds rated Aaa are judged to
be of the "best quality." The rating of Aa is assigned to municipal bonds which
are of "high quality by all standards," but as to which margins of protection or
other elements make long-term risks appear somewhat larger than Aaa rated
municipal bonds. The Aaa and Aa rated municipal bonds comprise what are
generally known as "high grade bonds." Municipal bonds which are rated A by
Moody's possess many favorable investment attributes and are considered "upper
medium grade obligations." Factors giving security to principal and interest of
A rated municipal bonds are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. Municipal
bonds which are rated Baa are considered as medium grade obligations; i.e., they
are neither highly protected nor poorly secured. Interest coverage and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Municipal bonds which are rated Ba are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Municipal
bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Municipal
bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Municipal bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings. Municipal bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
The four highest ratings of Standard & Poor's Corporation ("S&P") for municipal
bonds are AAA, AA, A and BBB. Municipal bonds rated AAA have the highest rating
assigned by S&P to a debt obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only in
small degree. Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories. Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this capacity than for bonds in higher rated categories. Municipal
bonds rated BB, B, CCC, CC or C are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. The rating CI is
reserved for income bonds on which no interest is being paid. Bonds rated D are
in default and payment of interest and/or repayment of principal is in arrears.
The four highest ratings of Fitch Investors Service, Inc. ("Fitch") for
municipal bonds are AAA, AA, A and BBB. Municipal bonds rated AAA are considered
to be investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events. Bonds rated AA are
considered to be investment grade and of very high credit quality. The obligor's
ability to pay interest and repay principal is very strong, although not quite
as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories
are not significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F-1+. Bonds rated A are considered to
be investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings. Bonds rated BBB are considered to be investment grade
and of satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. Bonds rated BB are considered
speculative. The obligor's ability to pay interest and repay principal may be
affected over time by adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in satisfying its
debt service requirements. Bonds rated B are considered highly speculative.
While bonds in this class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the issue. Bonds rated CCC have certain
identifiable characteristics which, if not remedied, may lead to default. The
ability to meet obligations requires an advantageous business and economic
environment.
87
<PAGE>
Bonds rated CC are minimally protected. Default in payment of interest and/or
principal seems probable over time. Bonds rated C are in imminent default in
payment of interest or principal. Bonds rated DDD, DD and D are in default on
interest and/or principal payments. Such bonds are extremely speculative and
should be valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
on these bonds, and D represents the lowest potential for recovery.
The four highest ratings of Duff & Phelps Credit Rating Co. ("Duff") for
municipal bonds are AAA, AA, A and BBB. Bonds rated AAA have the highest rating
assigned by Duff to a debt obligation. They are of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt. Bonds rated AA are of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions. Bonds rated A have protection factors that are
average but adequate. However, risk factors are more variable and greater in
periods of economic stress. Bonds rated BBB have below average protection
factors but are still considered sufficient for prudent investment. They have
considerable volatility in risk during economic cycles. Bonds rated BB are below
investment grade but deemed likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according to industry
conditions or company fortunes. Overall quality may move up or down frequently
within this category. Bonds rated B are below investment grade and possessing
risk that obligations will not be met when due. Financial protection factors
will fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade. Bonds rated CCC are well
below investment grade securities. Considerable uncertainty exists as to timely
payment of principal or interest. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or with
unfavorable company developments. Bonds rated D are in default. The issuer
failed to meet scheduled principal and/or interest payments.
The "debt securities" included in the discussions of temporary investments are
corporate (as opposed to municipal) debt obligations rated AAA, AA or A by S&P
or Aaa, Aa or A by Moody's. Corporate debt obligations rated AAA by S&P are
"highest grade obligations." Obligations bearing the rating of AA also qualify
as "high grade obligations" and "in the majority of instances differ from AAA
issues only in small degree." Corporate debt obligations rated A by S&P are
regarded as "upper medium grade" and have "considerable investment strength, but
are not entirely free from adverse effects of changes in economic and trade
conditions." The Moody's corporate debt ratings of Aaa, Aa and A do not differ
materially from those set forth above for municipal bonds.
Taxable or tax-exempt commercial paper ratings of A-1 or A-2 by S&P and P-1 or
P-2 by Moody's are the highest paper ratings of the respective agencies. The
issuer's earnings, quality of long-term debt, management and industry position
are among the factors considered in assigning such ratings.
Subsequent to its purchase by a Fund, an issue of Municipal Securities or a
temporary investment may cease to be rated or its rating may be reduced below
the minimum required for purchase by the Fund. Neither event requires the
elimination of such obligation from the Fund's portfolio, but KFS will consider
such an event in its determination of whether the Fund should continue to hold
such obligation in its portfolio. To the extent that the ratings accorded by
S&P, Moody's, Fitch or Duff for municipal bonds or temporary investments may
change as a result of changes in such organizations, or changes in their rating
systems, the Fund will attempt to use comparable ratings as standards for its
investments in municipal bonds or temporary investments in accordance with the
investment policies contained herein.
88
<PAGE>
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
-------- --------
<S> <C> <C> <C>
(a) (a)(1) Amended and Restated Agreement and Declaration of Trust is incorporated
by reference to Post-Effective Amendment No. 39 to the Registration
Statement.
(a)(2) Written Instrument amending the Agreement and Declaration of Trust is
incorporated by reference to Post-Effective Amendment No. 39 to the
Registration Statement.
(b) By-laws is incorporated by reference to Post-Effective Amendment No. 40
to the Registration Statement.
(c) (c)(1) Written Instrument Establishing and Designating Separate Classes of
Shares is incorporated by reference to Post-Effective Amendment No. 39
to the Registration Statement.
(c)(2) Amended and Restated Written Instrument Establishing and Designating
Separate Classes of Shares is incorporated by reference to
Post-Effective Amendment No. 39 to the Registration Statement.
(d) (d)(1) Investment Management Agreement between the Registrant, on behalf of
Kemper Municipal Bond Fund, and Scudder Kemper Investments, Inc., dated
September 7, 1998 is incorporated by reference to Post-Effective
Amendment No. 45 to the Registration Statement.
(d)(2) Investment Management Agreement between the Registrant, on behalf of
Kemper Intermediate Municipal Bond Fund, and Scudder Kemper
Investments, Inc., dated September 7, 1998 is incorporated by reference
to Post-Effective Amendment No. 45 to the Registration Statement.
(e) (e)(1) Underwriting and Distribution Services Agreement between the Registrant
and Kemper Distributors, Inc., dated September 7, 1998 is incorporated
by reference to Post-Effective Amendment No. 45 to the Registration
Statement.
(e)(2) Selling Group Agreement is incorporated by reference to Post-Effective
Amendment No. 39 to the Registration Statement.
(e)(3) Addendum--Selling Group Agreement is incorporated by reference to
Post-Effective Amendment No. 42 to the Registration Statement.
(f) Inapplicable.
(g) (g)(1) Custody Agreement is incorporated by reference to Post-Effective
Amendment No. 40 to the Registration Statement.
(g)(2) Amendment to Custody Agreement dated March 31, 1999 is filed herein.
(h) (h)(1) Agency Agreement is incorporated by reference to Post-Effective
Amendment No. 39 to the Registration Statement.
2
<PAGE>
(h)(2) Supplement to Agency Agreement is incorporated by reference to
Post-Effective Amendment No. 42 to the Registration Statement.
(h)(3) Administrative Services Agreement is incorporated by reference to
Post-Effective Amendment No. 39 to the Registration Statement.
(h)(4) Amendment to Administrative Services Agreement is incorporated by
reference to Post-Effective Amendment No. 39 to the Registration
Statement.
(h)(5) Assignment and Assumption Agreement is incorporated by reference to
Post-Effective Amendment No. 39 to the Registration Statement.
(h)(6) Fund Accounting Services Agreement between the Registrant, on behalf of
Kemper Municipal Bond Fund, and Scudder Fund Accounting Corp., dated
December 31, 1997 is incorporated by reference to Post-Effective
Amendment No. 45 to the Registration Statement.
(h)(7) Fund Accounting Services Agreement between the Registrant, on behalf of
Kemper Intermediate Municipal Bond Fund, and Scudder Fund Accounting
Corp., dated December 31, 1997 is incorporated by reference to
Post-Effective Amendment No. 45 to the Registration Statement.
(i) Legal Opinion and Consent of Counsel is filed herein.
(j) Consent of Independent Accountants is filed herein.
(k) Inapplicable.
(l) Inapplicable.
(m) (m)(1) Amended and Restated 12b-1 Plan between the Registrant, on behalf of
Kemper Intermediate Municipal Bond Fund (Class B shares), and Kemper
Distributors, Inc., dated August 1, 1998 is incorporated by reference
to Post-Effective Amendment No. 44 to the Registration Statement.
(m)(2) Amended and Restated 12b-1 Plan between the Registrant, on behalf of
Kemper Intermediate Municipal Bond Fund (Class C shares), and Kemper
Distributors, Inc., dated August 1, 1998 is incorporated by reference
to Post-Effective Amendment No. 44 to the Registration Statement.
(m)(3) Amended and Restated 12b-1 Plan between the Registrant, on behalf of
Kemper Municipal Bond Fund (Class B shares), and Kemper Distributors,
Inc., dated August 1, 1998 is incorporated by reference to
Post-Effective Amendment No. 44 to the Registration Statement.
(m)(4) Amended and Restated 12b-1 Plan between the Registrant, on behalf of
Kemper Municipal Bond Fund (Class C shares), and Kemper Distributors,
Inc., dated August 1, 1998 is incorporated by reference to
3
<PAGE>
Post-Effective Amendment No. 44 to the Registration Statement.
(n) Inapplicable.
(o) Multi-Distribution System Plan is incorporated by reference to
Post-Effective Amendment No. 42 to the Registration Statement.
</TABLE>
Item 24. Persons Controlled By or Under Common Control With Registrant
- -------- -------------------------------------------------------------
Inapplicable.
Item 25. Indemnification
- -------- ---------------
Article VIII of the Registrant's Agreement and Declaration of Trust
(Exhibit 1 hereto, which is incorporated herein by reference) provides in effect
that the Registrant will indemnify its officers and trustees under certain
circumstances. However, in accordance with Section 17(h) and 17(I) of the
Investment Company Act of 1940 and its own terms, said Article of the Agreement
and Declaration of Trust does not protect any person against any liability to
the Registrant or its shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question as to whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
On June 26, 1997, Zurich Insurance Company ("Zurich"), ZKI Holding
Corp. ("ZKIH"), Zurich Kemper Investments, Inc. ("ZKI"), Scudder, Stevens &
Clark, Inc. ("Scudder") and the representatives of the beneficial owners of the
capital stock of Scudder ("Scudder Representatives") entered into a transaction
agreement ("Transaction Agreement") pursuant to which Zurich became the majority
stockholder in Scudder with an approximately 70% interest, and ZKI was combined
with Scudder ("Transaction"). In connection with the trustees' evaluation of the
Transaction, Zurich agreed to indemnify the Registrant and the trustees who were
not interested persons of ZKI or Scudder (the "Independent Trustees") for and
against any liability and expenses based upon any action or omission by the
Independent Trustees in connection with their consideration of and action with
respect to the Transaction. In addition, Scudder has agreed to indemnify the
Registrant and the Independent Trustees for and against any liability and
expenses based upon any misstatements or omissions by Scudder to the Independent
Trustees in connection with their consideration of the Transaction.
4
<PAGE>
Item 26. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name Of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member, Group Executive Board, Zurich Financial Services, Inc.##
Chairman, Zurich-American Insurance Company o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO and Member, Group Executive Board, Zurich Financial Services, Inc.##
CEO/Branch Offices, Zurich Life Insurance Company##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
5
<PAGE>
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
</TABLE>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Item 27. Principal Underwriters.
- -------- -----------------------
(a) Kemper Distributors, Inc. acts as principal
underwriter of the Registrant's shares and acts as
principal underwriter of the Kemper Funds.
(b) Information on the officers and directors of Kemper
Distributors, Inc., principal underwriter for the
Registrant is set forth below. The principal business
address is 222 South Riverside Plaza, Chicago,
Illinois 60606.
<TABLE>
<CAPTION>
(1) (2) (3)
Position and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
<S> <C> <C> <C>
James L. Greenawalt President None
Thomas W. Littauer Director, Chief Executive Officer Vice President
6
<PAGE>
Position and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
Kathryn L. Quirk Director, Secretary, Chief Legal Vice President
Officer & Vice President
James J. McGovern Chief Financial Officer & Vice None
President
Linda J. Wondrack Vice President & Chief Compliance None
Officer
Paula Gaccione Vice President None
Michael E. Harrington Vice President None
Robert A. Rudell Vice President None
William M. Thomas Vice President None
Todd N. Gierke Assistant Treasurer None
Philip J. Collora Assistant Secretary Vice President and
Secretary
Paul J. Elmlinger Assistant Secretary None
Diane E. Ratekin Assistant Secretary None
Mark S. Casady Director, Vice Chairman President
Stephen R. Beckwith Director None
</TABLE>
(c) Not applicable
Item 28. Location of Accounts and Records
- -------- --------------------------------
Accounts, books and other documents are maintained at the offices of
the Registrant, the offices of Registrant's investment adviser, Scudder Kemper
Investments, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, at the
offices of the Registrant's principal underwriter, Kemper Distributors, Inc.,
222 South Riverside Plaza, Chicago, Illinois 60606 or, in the case of records
concerning custodial functions, at the offices of the custodian, Investors
Fiduciary Trust Company "IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri
64105 or, in the case of records concerning transfer agency functions, at the
offices of IFTC and of the shareholder service agent, Kemper Service Company,
811 Main Street, Kansas City, Missouri 64105.
Item 29. Management Services
- -------- -------------------
Not applicable.
Item 30. Undertakings
- -------- ------------
Not applicable.
7
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(a) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chicago and State of Illinois, on the 28th day
of December, 1999.
KEMPER NATIONAL TAX-FREE INCOME SERIES.
By /s/ Mark S. Casady
------------------
Mark S. Casady, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on December 28, 1999 on behalf of
the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Thomas W. Littauer December 28, 1999
- --------------------------------------
Thomas W. Littauer* Chairman and Trustee
December 28, 1999
/s/ John W. Ballantine
- --------------------------------------
John W. Ballantine* Trustee
December 28, 1999
/s/ Lewis A. Burnham
- --------------------------------------
Lewis A. Burnham* Trustee
/s/ Donald L. Dunaway December 28, 1999
- --------------------------------------
Donald L. Dunaway* Trustee
/s/ Robert B. Hoffman December 28, 1999
- --------------------------------------
Robert B. Hoffman* Trustee
/s/ Donald R. Jones December 28, 1999
- --------------------------------------
Donald R. Jones* Trustee
/s/ Shirley D. Peterson December 28, 1999
- --------------------------------------
Shirley D. Peterson* Trustee
/s/ Cornelia Small December 28, 1999
- --------------------------------------
Cornelia Small* Trustee
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ William P. Sommers December 28, 1999
- --------------------------------------
William P. Sommers* Trustee
/s/ John R. Hebble December 28, 1999
- --------------------------------------
John R. Hebble Treasurer (Principal Financial and
Accounting Officer)
</TABLE>
*By: /s/ Philip J. Collora
---------------------
Philip J. Collora**
** Attorney-in-fact pursuant to powers
of attorney included with the
signature pages of Post-Effective
Amendment No. 27 and Post-Effective
Amendment No. 29 to the Registration
Statement
2
<PAGE>
File No. 2-47008
File No. 811-2353
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 48
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 48
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
KEMPER NATIONAL TAX-FREE INCOME SERIES
8
<PAGE>
Kemper National Tax-Free Income Series
EXHIBIT INDEX
(g)(2)
(i)
(j)
9
Exhibit (g) (2)
AMENDMENT TO CUSTODY CONTRACT
Amendment dated March 31, 1999 by and between State Street Bank and
Trust Company (the "Bank") and the Kemper Funds listed on Attachment I hereto
(each a "Fund") to the custody contract (the "Custody Contract") between the
Bank and each Fund.
WHEREAS the Bank serves as the custodian of the Fund's assets pursuant
to the Custody Contract;
WHEREAS the Fund may appoint one or more banks identified on Schedule A
attached hereto, as amended from time to time, to serve as an additional
custodian for the Fund (each, a "Repo Custodian") for the limited purpose of
engaging in tri-party repurchase agreement transactions ("Tri-party Repos");
WHEREAS the Fund may direct the Bank to make "free delivery" to one or
more Repo Custodians of cash or other assets maintained in custody by the Bank
for the Fund pursuant to the Custody Contract for purposes of engaging in
Tri-party Repos; and
WHEREAS the Bank and the Fund desire to amend the Custody Contract to
permit the Bank to make "free delivery" of cash and other assets of the Fund to
Repo Custodians from time to time;
NOW THEREFORE, the Bank and the Fund hereby agree to amend the Custody
Contract as follows:
1. Notwithstanding anything to the contrary in the Custody Contract, upon
receipt of Proper Instructions (as defined in the Custody Contract), the Bank
shall deliver cash and/or other assets of the Fund to any account identified on
Schedule A attached hereto, as amended from time to time, maintained for the
Fund by a Repo Custodian, which delivery may be made without contemporaneous
receipt by the Bank of cash or other assets in exchange therefor. Upon such
delivery of cash or other assets in accordance with such Proper Instructions,
the Bank shall have no further responsibility or obligation to the Fund as a
custodian of the Fund with respect to the cash or assets so delivered.
2. The Fund may amend Schedule A from time to time to add or delete a Repo
Custodian or change the identification of the account maintained by a Repo
Custodian for the Fund by delivering Special Instructions (as defined herein) to
the Bank. The term Special Instructions shall mean written instructions executed
by at least two officers of the Fund holding the office of Vice President or
higher. In all other respects, the Custody Contract shall remain in full force
and effect and the Bank and the Fund shall perform their respective obligations
in accordance with the terms thereof.
<PAGE>
EXECUTED to be effective as of the date set forth above.
KEMPER FUNDS listed on Attachment I
By: /s/ Mark S. Casady
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STATE STREET BANK AND TRUST COMPANY
By: /s/ Ronald E. Logue
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2
<PAGE>
SCHEDULE A
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Repo Custodian Banks Accounts
- -------------------- --------
Chase Manhattan Bank CHASE NYC/D644755022
Bank of New York Account #111569
Authorized Signatures:
By: /s/ Daniel Pierce By: /s/ Kathryn L. Quirk
----------------- --------------------
Title: Managing Director Title: Managing Director
----------------- -----------------
Date: March 30, 1999 Date: March 30, 1999
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*This schedule was created solely to meet the requirements under the amendment
to the custody contract relating to tri-party repurchase agreements.
3
<PAGE>
Attachment I
------------
Cash Equivalent Fund- Government Securities Amendment Effective 4/19/99
Cash Equivalent Fund- Money Market Amendment Effective 4/19/99
Cash Equivalent Fund- Tax Exempt Amendment Effective 5/3/99
Growth Fund of Spain
Kemper California Tax-Free Income
Kemper Strategic Income Fund
Kemper Contrarian
Kemper-Dreman Financial Services
Kemper-Dreman High Return Equity
Kemper Small Cap Value
Kemper Emerging Markets Growth
Kemper Emerging Markets Income
Kemper Europe
Kemper Florida Tax-Free Income
Kemper Growth
Kemper High Income Trust Amendment Effective 4/5/99
Kemper High Yield Amendment Effective 4/5/99
Kemper High Yield Opportunity Amendment Effective 4/5/99
Kemper Income and Capital Preservation
Kemper Intermediate Government Trust Amendment Effective 4/5/99
KemperInternational
Kemper International Growth and Income
Kemper Latin America
Kemper Multi-Market Income Trust
Kemper Municipal Income Trust
Kemper New York Tax-Free
Income Kemper Ohio Tax-Free Income
Kemper Retirement Series I
Kemper Retirement Series II
4
<PAGE>
Attachment I
------------
Kemper Retirement Series III
Kemper Retirement Series IV
Kemper Retirement Series V
Kemper Retirement Series VI
Kemper Retirement Series VII
Kemper Small Cap Relative Value
Kemper Strategic Income Trust Amendment Effective 4/5/99
Kemper Strategic Municipal Income Trust
Kemper U.S. Government Securities Amendment Effective 4/5/99
Kemper Value and Growth Amendment Effective 4/19/99
Kemper Worldwide 2004
Tax-Exempt California Money Market Amendment Effective 5/3/99
Tax-Exempt New York Money Market Amendment Effective 5/3/99
Cash Account Trust-Government Amendment Effective 4/19/99
Cash Account Trust-Money Market Amendment Effective 4/19/99
Cash Account Trust-Tax-Exempt Amendment Effective 5/3/99
Investors Cash Trust-Government Amendment Effective 4/19/99
Investors Cash Trust-treasury Amendment Effective 4/19/99
Investors Florida Municipal Cash Amendment Effective 5/3/99
Investors Fund Series:
Kemper Blue Chip
Kemper Dreman Financial Services
Kemper Global Blue Chip
Kemper Global Income
Kemper Government Securities Amendment Effective 4/5/99
Kemper Growth
Kemper High Yield Amendment Effective 4/5/99
Kemper Horizon 5
Kemper Horizon 10
5
<PAGE>
Attachment I
------------
Kemper Horizon 20
Kemper International
Kemper International Growth and Income
Kemper Investment Grade Bond
Kemper Money Market Amendment Effective 4/19/99
Kemper Small Cap Growth Amendment Effective 4/19/99
Kemper Small Cap Value
Kemper Total Return
Kemper Value and Growth Amendment Effective 4/19/99
Kemper Value
Dreman High Return Equity
Investors Michigan Municipal Cash Amendment Effective 5/3/99
Investors New Jersey Municipal Cash Amendment Effective 5/3/99
Investors Pennsylvania Municipal Cash Amendment Effective 5/3/99
Kemper Aggressive Growth Fund
Kemper Asian Growth
Kemper Blue Chip
Kemper Cash Reserves Amendment Effective 5/3/99
Kemper Global Blue Chip
Kemper Global Income
Kemper Horizon 5
Kemper Horizon 10
Kemper Horizon 20
Kemper Intermediate Municipal Bond
Kemper Municipal Bond
Kemper Short Term U.S. Government Amendment Effective 4/5/99
Kemper Small Capitalization Equity Amendment Effective 4/19/99
Kemper Technology
Kemper Total Return
6
<PAGE>
Attachment I
------------
Kemper U.S. Growth and Income
Kemper U.S. Mortgage Amendment Effective 4/5/99
Zurich Government Money Amendment Effective 4/19/99
Zurich Money Market Amendment Effective 4/19/99
Zurich Tax-Free Money Amendment Effective 5/3/99
Zurich YieldWise Money Amendment Effective 4/19/99
Zurich YieldWise Municipal Money Fund
Zurich YieldWise Government Money Fund
Kemper Research
Kemper Large Company Growth
Kemper High Yield II Fund
Kemper Small Cap Value & Growth
7
[VEDDERPRICE LETTERHEAD]
December 23, 1999
Kemper National Tax-Free Income Series
222 South Riverside Plaza
Chicago, Illinois 60606
Ladies and Gentlemen:
Reference is made to Post-Effective Amendment No. 48 to the
Registration Statement on Form N-1A under the Securities Act of 1933
being filed by Kemper National Tax-Free Income Series (the "Fund") in
connection with the public offering from time to time of units of
beneficial interest, no par value ("Shares"), in the Kemper Municipal
Bond Fund and Kemper Intermediate Municipal Bond Fund (each, a
"Portfolio" and collectively, the "Portfolios").
We have acted as counsel to the Fund, and in such capacity are
familiar with the Fund's organization and have counseled the Fund
regarding various legal matters. We have examined such Fund records and
other documents and certificates as we have considered necessary or
appropriate for the purposes of this opinion. In our examination of
such materials, we have assumed the genuineness of all signatures and
the conformity to original documents of all copies submitted to us.
Based upon the foregoing and assuming that the Fund's Amended
and Restated Agreement and Declaration of Trust dated May 27, 1994, the
Written Instrument Establishing and Designating Separate Classes of
Shares dated May 27, 1994, the Written Instrument Establishing and
Designating Kemper Intermediate Municipal Bond Fund dated October 13,
1994, the Written Instrument Changing the Name of a Series dated
November 1, 1994, the Written Instrument Amending the Agreement and
Declaration of Trust dated November 1, 1994, and the Amended and
Restated Written Instrument Establishing and Designating Separate
Classes of Shares dated March 9, 1996 and the By-Laws of the Fund
adopted January 28, 1986, are presently in full force and effect and
have not been amended in any respect and that the resolutions adopted
by the Board of Trustees of the Fund on January 28, 1986, January 14,
1994, March 4 and 5, 1994, July 13, 1994, and March 8 and 9, 1996,
relating to organizational matters, securities matters and the issuance
of shares are presently in full force and effect and have not been
amended in any respect, we advise you and opine that (a) the Fund is a
validly existing voluntary association with transferrable shares under
the laws
<PAGE>
Kemper National Tax-Free Income Series
December 23, 1999
Page 2
of the Commonwealth of Massachusetts and is authorized to issue an
unlimited number of Shares in the Portfolios; and (b) presently and
upon such further issuance of the Shares in accordance with the Fund's
Agreement and Declaration of Trust and the receipt by the Fund of a
purchase price not less than the net asset value per Share and when
the pertinent provisions of the Securities Act of 1933 and such
"blue-sky" and securities laws as may be applicable have been complied
with, and assuming that the Fund continues to validly exist as
provided in (a) above, the Shares are and will be legally issued and
outstanding, fully paid and nonassessable.
The Fund is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders
could, under certain circumstances, be held personally liable for the
obligations of the Fund or a Portfolio. However, the Agreement and
Declaration of Trust disclaims shareholder liability for acts and
obligations of the Fund or a Portfolio and requires that notice of such
disclaimer be given in each note, bond, contract, instrument,
certificate share or undertaking made or issued by the Trustees or
officers of the Fund. The Agreement and Declaration of Trust provides
for indemnification out of the property of a Portfolio for all loss and
expense of any shareholder of that Portfolio held personally liable for
the obligations of such Portfolio. Thus, the risk of liability is
limited to circumstances in which a Portfolio would be unable to meet
its obligations.
This opinion is solely for the benefit of the Fund, the Fund's
Board of Trustees and the Fund's officers and may not be relied upon by
any other person without our prior written consent. We hereby consent
to the use of this opinion in connection with said Post-Effective
Amendment.
Very truly yours,
/s/VEDDER, PRICE, KAUFMAN & KAMMHOLZ
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
DAS/COK
2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors and Reports to Shareholders" and to the
use of our report on the financial statements of the Kemper National Tax-Free
Income Series - Kemper Municipal Bond Fund and Kemper Intermediate Municipal
Bond Fund dated November 15, 1999 in the Registration Statement (Form N-1A) of
Kemper National Tax-Free Income Series and its incorporation by reference in the
related Prospectus and Statement of Additional Information of Kemper Tax-Free
Income Funds, filed with the Securities and Exchange Commission in this
Post-Effective Amendement No. 48 to the Registration Statement under the
Securities Act of 1933 (Registration No. 2-47008) and in this Amendment No. 48
to the Registration Statement under the Investment Company Act of 1940
(Registration No. 811-2353).
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Chicago, Illinois
December 22, 1999
