Filed electronically with the Securities and Exchange Commission
on December 13, 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. 47
--- / X /
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 47
--- / 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)
It is proposed that this filing will become effective (check
appropriate box):
<TABLE>
<S> <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 )
/ X / On January 1, 2000 pursuant to paragraph ( a ) ( 1 ) / / On ( date ) pursuant to paragraph ( a ) ( 3 ) of
Rule 485.
</TABLE>
If Appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
Part A of this Post-Effective Amendment No. 47 to the Registration Statement is
incorporated by reference in its entirety to Kemper National Tax-Free Income
Series on Form N-1A filed on October 20, 1999.
<PAGE>
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")
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 OF CONTENTS
INVESTMENT RESTRICTIONS........................................................2
INVESTMENTS....................................................................3
INVESTMENT POLICIES AND TECHNIQUES.............................................9
DIVIDENDS AND TAXES...........................................................15
PERFORMANCE...................................................................19
INVESTMENT MANAGER AND UNDERWRITER............................................26
BROKERAGE COMMISSIONS.........................................................34
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES.................................35
PURCHASE OF SHARES............................................................35
REDEMPTION OR REPURCHASE OF SHARES............................................39
OFFICERS AND TRUSTEES.........................................................46
CAPITAL STRUCTURE.............................................................48
APPENDIX -- RATINGS OF INVESTMENTS............................................50
The financial statements appearing in the Trusts' 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.
<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 the 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. 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
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<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. 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. 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. 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.
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. 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
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<PAGE>
the obligation and rating of the issue. The ratings of Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Fitch
Investors Services, Inc. ("Fitch") and Duff & Phelps Credit Rating Co. ("Duff")
represent their opinions as to the quality of the Municipal Securities which
they undertake to rate. It should be emphasized, however, that ratings are
relative and subjective and are not absolute standards of quality. Consequently,
Municipal Securities with the same maturity, coupon and rating may have
different yields while Municipal Securities of the same maturity and coupon with
different ratings may have the same yield.
The Funds may invest in tax-exempt leases. A tax-exempt lease is an obligation,
often a lease purchase or installment contract, pursuant to which a governmental
user of a capital asset, such as an item of equipment, agrees to make payments
of the purchase price plus interest over a period of years, normally with the
right to purchase the asset at the termination of the lease for a nominal
amount. Tax-exempt leases normally have a term of only two to seven years, a
relatively short period of time, and often have a higher interest rate than
tax-exempt investments of a comparable term. Currently, it is anticipated that
not more than 5% of the net assets of a Fund will be invested in tax-exempt
leases during the coming year.
Provisions of the federal bankruptcy statutes relating to the adjustment of
debts of political subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivisions or authorities.
The National Funds do not intend to invest more than 25% of their total assets
in any one state.
Litigation challenging the validity under state constitutions of present systems
of financing public education has been initiated or adjudicated in a number of
states, and legislation has been introduced to effect changes in public school
finances in some states. In other instances there has been litigation
challenging the issuance of pollution control revenue bonds or the validity of
their issuance under state or federal law which litigation could ultimately
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
SPECIAL RISK FACTORS. The following information as to certain risk factors is
given to investors because each State Fund concentrates its investments in
Municipal Securities (as defined in the prospectus) of a particular state. Such
information constitutes only a summary, does not purport to be a complete
description and is based upon information from official statements relating to
securities offerings of state issuers. Investors should remember that rating
agencies do change ratings periodically so that ratings mentioned here may have
changed.
California Fund. TO BE UPDATED 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 State of California's economy continues to improve. As one of the last
states to emerge from the recession, California is now leading the country in
job growth. The State's employment make-up shift from defense and aerospace
industries to technology, multimedia, and trade has lead the State through this
recovery. The unemployment rate is trending down; personal income continues to
increase; deficit borrowing has ceased; and the State is attempting to replenish
its thin reserves.
On an unaudited basis, California finished FY98 with an operating surplus in its
General Fund of approximately $2.2 billion, 4% of General Fund revenues. Some of
this surplus has been added to the State's Special Fund for Economic
Uncertainties (SFEU), bringing the balance of that fund to $1.8 billion as of
June 30, 1998, 3.2% of General Fund revenues. This marks the third year in a row
in which the SFEU had a positive balance and the State did not have to rely on
deficit borrowing.
After much debate and many revisions, the State adopted its FY99 budget on
August 21, 1998, one and a half months late. The favorable financial position of
the State created a budget stalemate over the issue of how to spend the large
surplus. The adopted FY99 budget reflects General Fund revenues totaling $57.0
billion, a 4.2% increase over FY98, and expenditures totaling $57.3 billion, up
7.3% over FY98. The projected short fall in revenues will be covered by a draw
down of the SFEU. The State projects to end FY99 with a SFEU balance of $1.25
billion, 2% of General Fund revenues. Expenditure increases are focused on
education and incarceration spending. Governor Wilson also signed State
legislation which provides for over $1.4 billion in tax cuts. The central
element is the phasing in of a 75% reduction in the State's motor vehicle
license fee; this will eventually amount to $1 billion annual savings for
taxpayers.
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California continues to lead the nation in terms of job growth. The State added
377,500 nonfarm jobs in the last twelve months. In September, 1998, the State
added 35,500 jobs, 51% of the 69,000 jobs added nationwide. The growth in jobs
is concentrated in high technology industries, specifically: computer software,
electronics manufacturing, and motion picture production. This growth has
brought the State's unemployment rate down to the 1997 average of 6.3% versus
4.9% for the national average. In September, 1998, the State's unemployment rate
was 5.8%; the national average was 4.5%. Personal income grew by 7% in 1998 over
1997.
California's per capita personal income for 1997 was $26,570, 104% of the
national average. California's per capita income, as a percent of the national
average, declined from 115% in 1985 to a low of 103% in 1994. In 1995 the ratio
increased to 104%, where it remained in 1996 and 1997.
International trade is a strong part of the State's economy. Recent economic
turmoil in Asia has led to decreases in trade with these countries, however,
California has experienced trade increases with Europe and NAFTA countries.
These offsetting measures have led to no change in Made-In-California exports
during the first six months of 1998 over the same period in 1997.
California is one of the largest issuers of municipal debt with $25 billion of
debt outstanding. The size of the State and its wealth levels lessen the impact
that debt of that magnitude could have. The State's debt per capita is $773,
122% of the national average. Debt service as a percent of per capita income is
3%, 110% of the national average. In FY97, annual debt service as a percent of
General Fund expenditures was a manageable 4%. California currently has $15.2
billion of authorized but unissued debt for infrastructure needs in schools and
for transportation projects. This backlog reflects the recent proposal for $9.2
billion of bonds that passed in the November 3, 1998 election.
The State's cash flow position has improved dramatically in the last year.
California has ceased its practice of relying on interfund borrowing to offset
cash flow volatility between fiscal years. As of June 30, 1998 the State had no
outstanding loans from internal borrowable resources. This compares to the $1.2
billion that the State had outstanding as of June 30, 1997. Improving financial
conditions allow the State to rely less on this source of temporary cash flow
relief; this is also evidenced by the decrease in borrowing in the note market.
California issued $1.7 billion of Revenue Anticipation Notes in September, 1998
for FY99. This represents a 57% decrease in cash flow borrowing from FY98.
California is benefiting from a strong economy which has lead to improved
finances, specifically an improved cash flow position.
As of December 29, 1998, all outstanding general obligation bonds of the State
of California were rated Aa3 by Moody's and A+ by S&P.
In recent years, California voters have approved a number of changes to the
State constitution that have limited the ability of State and local issuers to
raise revenues and adjust appropriations.
In 1978, California voters approved Proposition 13 which added Article XIII A to
the California Constitution. Article XIII A changed the definition of assessed
property value and placed restrictions on a taxing entity's ability to increase
real property taxes. In 1979, voters also approved Proposition 4, the so-called
Gann Initiative, which added Article XIII B to the California Constitution. The
purpose of Article XIII B was to limit the annual appropriations of the State
and any local government unit to the level of appropriations for the prior year,
as adjusted for changes in cost of living, population and services required.
Article XIII B also specified that debt service obligations incurred prior to
January 1, 1979 were excluded from the appropriations limits.
In the general elections of 1986, 1988, 1990 and 1996, California voters
approved various measures that amended Article XIII A and XIII B and added
Article XIII C and XIII D to the State Constitution. Propositions 58 and 60
clarified the definitions of "purchased property" and "change of ownership"
found in Article XIII A. Proposition 98, in addition to guaranteeing a percent
of State funding for public schools, modified Article XIII B to permit excess
State revenues to be transferred to public schools and community colleges rather
than returned to taxpayers. Proposition 111 amended Article XIII B to ease
restrictions on certain expenditure categories in calculating the annual
appropriation ceiling. Article XIII C and XIII D place additional requirements
on revenue raising abilities of local government units. Finally, on November 5,
1996, California voters approved Proposition 218, called the "Right to Vote on
Taxes Act." This constitutional amendment restricts local governments' ability
to raise or extend taxes without voter consent, places restrictions on the
ability to charge certain fees and assessments, and makes it easier for voters
to use the initiative process to reduce or repeal existing taxes.
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Future voter initiatives, if proposed and adopted, could further modify Articles
XIII A, XIII B, XIII C, and XIII D and place increased pressures on the State
and local entities' ability to raise revenue and adjust appropriations.
Florida Fund. TO BE UPDATED As described in the Florida Fund's prospectus, the
Fund will invest in bonds 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 has
slowed recently but still remains at about twice the national growth rate of 1%
annually. 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. 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 Economic Consensus Estimating Conference forecast
(February 28, 1997) shows that the Florida economy, as measured by the size of
its labor force, is expected to grow at a moderate pace. The labor force is
projected to gradually increase, with projected growth of 2.7% for the full year
1998 and 1999. Thereafter, the growth rate is expected to decline to 2.4% in
2000. Growth in nonagricultural payrolls was up 4.0% to a level of 6.51 million
jobs in 1997 and service industry payrolls continued to grow and are projected
to increase by 99,100 jobs, or 4.4% for the full year 1998. The growth for 1999
is projected to slow to 3.3%, with payrolls expanding by 77,400 jobs. In 2000
the growth rate is expected to increase slightly to 3.4%. Service sector
businesses are expected to add another 83,500 jobs to their payrolls. The trade
sector is second only to the service industry in terms of the number of jobs
added to payrolls. In total, it is expected that 500,000 jobs will be added to
Florida's payrolls between 1998 and 2000, with the trade and services industries
expected to account for 372 -- of these jobs or about 74% of all new jobs.
Overall, the growth in the 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 5.2% during 1996, surpassing the 43 million visitor count for the
first time. 1997 estimates projected an increase of 1.7% or 720,000 visitors
over 1996's record level. 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. Although
Florida does not currently impose an individual income tax, it does impose a
corporate income tax that is allocable to the State, in addition to an ad
valorem tax on intangible personal property and sales and use taxes. These taxes
are a major source of funds to meet Florida expenses, including repayment of,
and interest on, obligations backed solely by the full faith and credit of the
State, without recourse to any specific project.
The greatest single source of state tax receipts is the sales and use tax. This
is projected to amount to $11.0 billion for fiscal year 1997-8. The sales and
use tax is 6%. Approximately 10% of the sales tax is designated for local
governments and is
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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, 1997 is $534.25 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 1998, the State's general obligation debt was rated Aa2 by
Moody's and AA+ by S&P.
New York Fund. TO BE UPDATED 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.
The State of New York passed its FY99 budget by May 1, 1998, the State's
fourteenth consecutive late budget. Despite this lack of fiscal responsibility,
we believe the State has improved, benefiting from the strength of the economy,
locally and nationally. The major obstacle for this year's budget was allocating
the $2 billion FY98 General Fund surplus. Although politics in New York State
prove to be an obstacle in the budget process, the State has limited expenditure
growth while income tax and sales tax collections have led to repeated operating
surpluses.
The State's FY98 General Fund surplus of $2 billion, on a cash accounting basis,
was 6% of revenues. Higher than expected income tax revenues and lower than
expected social service costs accounted for the surplus. New York used almost
$1.1 billion of the surplus to finance expenditures in the FY99 budget. Of the
remaining balance, $68 million was transferred to the Tax Stabilization Fund,
currently valued at an all-time high of $400 million, 1.2% of revenues. The
State also transferred $30 million to the Contingency Reserve Fund, bringing
that balance to $100 million. The remaining $800 million is currently in a
general reserve which has yet to be allocated. The Budget Office anticipates
this reserve will be used to fund the Governor's plan to increase the State's
share of education expenses for local schools in outlying years.
The State's FY99 budget projects General Fund expenditures to total $37 billion,
a 7% increase over FY98. Nearly one-half of the annual increase in expenditures
is going to education, while Medicaid and other social service areas share in
the remaining increase. Average growth in appropriations over the last three
years has averaged less than 2.4%. New York's ability to limit expenditure
growth to less than the inflation rate has helped to reign in the projected
budget gaps. The State is projecting a gap of $1.3 billion in FY00. This figure
is down from the level of previously anticipated gaps for FY96, FY97, and FY98
of $5 billion, 3.9 billion, and $2.3 billion, respectively.
New York State's economy continues to grow at a modest rate. The State's
unemployment rate was 6.4% in 1997, 130% of the national average. The State's
unemployment rate in August, 1998, was 5.1%; the national average in this period
was 4.5%. Job growth in the service and trade sectors accounts for the largest
share of the drop in the unemployment rate. Business services specifically have
been leading the growth, however recent turmoil in the financial markets will
have an impact on this sector. Job growth has led to increases in the State's
wealth levels; personal income was up 5.7% in 1997. In 1997 the State's per
capita income was $30,752, 120% of the national average.
The State's debt burden is high, but manageable given the State's size. It
currently has $57 billion in direct and appropriation debt outstanding. The
State's annual debt service obligation was $2.7 billion in FY98, 4.5% of
Government Fund expenditures. Debt per capita in the State is $3,146, 475% of
the Moody's average. For each of the next five years, the State anticipates that
new debt issuance will exceed scheduled debt retirement in excess of $1.5
billion. Due to the size of the State's budget and its high wealth levels, we
believe that the current and proposed debt burden is high but within the means
of the State.
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In 1975, New York City (the "City") suffered several financial crises. To help
the City out of its financial difficulties, the State legislature created the
Municipal Assistance Corporation ("MAC") in 1975. MAC has the authority to issue
bonds and notes and pay or lend the proceeds to the City. MAC also has the
authority to exchange its obligations for City obligations. MAC bonds are
payable out of certain State sales and use taxes imposed within the City, State
stock transfer taxes and per capita State aid to the City. The State is not,
however, obligated to continue these taxes, nor to continue appropriating
revenues from these taxes, nor to continue the appropriation of per capita State
aid to pay MAC obligations. MAC does not have taxing powers, and its bonds are
not obligations enforceable against either the City or the State.
Since 1975, the City's financial condition has been subject to oversight and
review by the New York State Financial Control Board (the "Control Board") and
since 1978 its financial statements have been audited by independent accounting
firms. To be eligible for guarantees and assistance, the City was required to
submit annually to the Control Board a financial plan for the next four fiscal
years covering the City and certain agencies showing balanced budgets determined
in accordance with generally accepted accounting principles. Although the
Control Board's powers of prior approval were suspended effective June 30, 1986
because the City had satisfied certain statutory conditions, the City continues
to submit four year plans to the Control Board for its review. The City
completed fiscal year 1995 with a balanced budget.
As of December 29, 1998, all outstanding general obligation bonds o the State of
New York were rated A2 by Moody's and A by S&P.
Ohio Fund. TO BE UPDATED As described in the Ohio Fund's prospectus, the Fund
will invest in bonds issued by the State of Ohio or its political subdivisions.
The Fund is therefore subject to various statutory, political and economic
factors unique to the State of Ohio. Discussed below are some of the more
significant factors that could affect the ability of the bond issuers to repay
interest and principal on Ohio 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 State of Ohio enjoyed stronger than expected economic growth in the last
twelve months. The State's General Fund benefited from a surge in income tax
receipts as a result of the strong economy and its record low unemployment
levels. The General Revenue Fund finished FY98 with its fifth consecutive budget
surplus.
The State finished FY98 with an unencumbered fund balance in its General Revenue
Fund (GRF) of $1.1 billion, 6% of revenues. The performance of the GRF was
primarily achieved by personal income tax receipts exceeding projections and
lower than projected disbursements, particularly for Medicaid and welfare
programs. The State allocated $701 million of the fund balance to offset a cut
in the personal income tax for tax year 1998. It pledged $200 million from the
fund balance to increased support for schools. The State also transferred $44
million to the Budget Stabilization Fund (BSF), bringing the balance of the BSF
to $907 million, 5% of GRF. The remaining fund balance, approximately $140
million, remained in the State's GRF as a revenue source for FY99.
Ohio is one-third of the way through FY99 and is experiencing mixed performances
in its finances. Year-to-date FY99 GRF revenues are below estimates by $70
million, 2% of revenue estimates. However, year-to-date disbursements are $173
million below estimates, 3% of estimates. Sales tax receipts and personal income
tax receipts are below projections; federal grants are below estimates, as well,
due to a 26% drop in welfare caseloads over the last twelve months. On the
expenditure side, the drop in welfare caseloads caused service spending to drop
below projected levels.
Pursuant to its constitution, Ohio is precluded from ending a fiscal year or
biennium in a deficit position. In fact, the Governor has the power to issue
orders to state agencies to reduce expenditures, if necessary, to avoid
encumbering a deficit.
Ohio's debt burden is low. Direct debt per capita in FY97 was $538, 81% of the
national average. Debt service as a percentage of Governmental Fund expenditures
was 4% in FY97. The projected capital plan for FY99 and FY00 calls for capital
spending to be maintained at current levels, approximately $1.6 billion of debt
financing. The plan will finance various projects throughout the State, with
specific attention to the areas of primary and secondary education and
corrections. Although future debt issuance is large, the debt burden will still
be manageable given scheduled debt retirement. Ohio's scheduled amortization
plan calls for 77% of current debt to be retired in ten years.
At one time, manufacturing dominated Ohio's economy. This concentration left the
State vulnerable to cyclical economic fluctuation. Ohio's economy has been
growing and diversifying as employment has shifted into services, trade,
finance, insurance, and real estate. The strength of Ohio's economy has been
supported by employment growth in the service and trade sectors as well as by
product diversification in the manufacturing sector. These sectors of the
non-agricultural work force employ 27%, 25%, and 21% of the total work force,
respectively. While the services sector is increasingly gaining
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more market share, the decline in manufacturing jobs has stabilized. Although
manufacturing accounts for 21% of the State's non-agricultural jobs, a smaller
percentage than the service and trade sector, this is 135% of the national
average. Unemployment rates continue to be lower than the national averages. The
unemployment rate in 1997 was 4.6%; the national average in 1997 was 4.9%. As of
August, 1998 the unemployment rate was 4.3%; the national average in August was
4.5%.
The State is in the midst of a lawsuit that challenges the adequacy and equity
of school funding. Since education is financed primarily with property tax
revenues, administered at the local level, there is a disparity between wealthy
and poor districts. In May, 1998, residents of Ohio soundly defeated an attempt
to raise the sales tax in order to finance an increase in per pupil spending.
After the sales tax vote the Supreme Court of Ohio ordered the local Circuit
Court to review the case again. Although the State has been increasing spending
on education, it is likely that the Circuit Court will rule against the State. A
decision is expected in early January, 1999. If the Court rules that school
funding in Ohio is unconstitutional, the State will appeal the decision in the
Supreme Court.
As of December 29, 1998, all outstanding general obligation bonds of the State
of Ohio were rated Aa1 by Moody's and AA+ by S&P.
INVESTMENT POLICIES AND TECHNIQUES
GENERAL. Each Fund may engage in futures, options and other derivatives
transactions such as delayed delivery transactions in accordance with its
investment objective and policies. Each Fund intends to engage in such
transactions if it appears advantageous to the investment manager to do so, in
order to pursue its investment objective and also to hedge against the effects
of market risks but not for speculative purposes. The use of futures and
options, and possible benefits and attendant risks, are discussed below, along
with information concerning certain other investment policies and techniques.
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
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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 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.
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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.
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
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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 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
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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 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.
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CERTIFICATES OF PARTICIPATION. A Fund may purchase Certificates of Participation
in trusts that hold Municipal Securities. A Certificate of Participation gives a
Fund an undivided interest in the Municipal Security in the proportion that the
Fund's interest bears to the total principal amount of the Municipal Security.
Certificates of Participation may be variable rate or fixed rate. Because
Certificates of Participation are interests in Municipal Securities that are
generally funded through government appropriations, they are subject to the risk
that sufficient appropriations as to the timely payment of principal and
interest on the underlying Municipal Securities may not be made. A Certificate
of Participation may be backed by a guarantee of a financial institution that
satisfies rating agencies as to the credit quality of the Municipal Security
supporting the payment of principal and interest on the Certificate of
Participation. Payments of principal and interest would be dependent upon the
underlying Municipal Security and may be guaranteed under a letter of credit to
the extent of such credit. The quality rating by a rating service of an issue of
Certificates of Participation is based primarily upon the rating of the
Municipal Security held by the trust and the credit rating of the issuer of any
letter of credit and of any other guarantor providing credit support to the
issue. The Funds' investment manager considers these factors as well as others,
such as any quality ratings issued by the rating services identified above, in
reviewing the credit risk presented by a Certificate of Participation and in
determining whether the Certificate of Participation is appropriate for
investment by a Fund. It is anticipated by the Funds' investment manager that,
for most publicly offered Certificates of Participation, there will be a liquid
secondary market or there may be demand features enabling a Fund to readily sell
its Certificates of Participation prior to maturity to the issuer or a third
party.
ADVANCE REFUNDED BONDS. A Fund may purchase Municipal Securities that are
subsequently refunded by the issuance and delivery of a new issue of bonds prior
to the date on which the outstanding issue of bonds can be redeemed or paid. The
proceeds from the new issue of bonds are typically placed in an escrow fund
consisting of U.S. Government obligations that are used to pay the interest,
principal and call premium on the issue being refunded. A Fund may also purchase
Municipal Securities that have been refunded prior to purchase by a Fund.
DELAYED DELIVERY TRANSACTIONS. A Fund may purchase or sell portfolio securities
on a when-issued or delayed delivery basis. When-issued or delayed delivery
transactions involve a commitment by a Fund to purchase or sell securities with
payment and delivery to take place in the future in order to secure what is
considered to be an advantageous price or yield to the Fund at the time of
entering into the transaction. The value of fixed income securities to be
delivered in the future will fluctuate as interest rates vary. Because a Fund is
required to set aside cash or liquid securities to satisfy its commitments to
purchase when-issued or delayed delivery securities, 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 investment
manager. After a Fund has bought a security, its quality level may
14
<PAGE>
fall below the minimum required for purchase by the Fund. That would not require
the Fund to sell the security, but the investment manager will consider such an
event in determining whether a Fund should continue to hold the security in its
portfolio.
These lower rated and non-rated fixed income securities are commonly referred to
as "junk bonds" and are considered, on balance, to be predominantly speculative
as to the issuer's capacity to pay interest and repay principal in accordance
with the terms of the obligation, and they generally involve more credit risk
than securities in the higher rating categories. The market values of such
securities tend to reflect individual issuer developments to a greater extent
than do those of higher rated securities, which react primarily to fluctuations
in the general level of interest rates. Lower rated securities also are more
sensitive to economic conditions than are higher rated securities. Adverse
publicity and investor perceptions regarding lower rated bonds, whether or not
based on fundamental analysis, may depress the prices for such securities. A
Fund may have difficulty disposing of certain high yield securities because
there may be a thin trading market for such securities. The lack of a liquid
secondary market may have an adverse effect on market price and the Fund's
ability to dispose of particular issues and may also make it more difficult for
the Fund to obtain accurate market quotations for purposes of valuing these
assets. The characteristics of the rating categories are described under
"Appendix -- Ratings of Investments."
ADDITIONAL INVESTMENT INFORMATION. A Fund, other than the Intermediate Municipal
Fund, may take full advantage of the entire range of maturities of Municipal
Securities and may adjust the average maturity of its investments from time to
time, depending on the investment manager's assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates. However, it is anticipated that, under normal market
conditions, each such Fund will invest primarily in long-term Municipal
Securities (generally, maturities of ten years or more), except that the
Intermediate Municipal Fund, under normal market conditions, will maintain a
dollar weighted average portfolio maturity between 3 and 10 years.
A Fund will not normally engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, a Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities in anticipation
of a decline in interest rates. In addition, a security may be sold and another
of comparable quality purchased at approximately the same time to take advantage
of what the Fund believes to be a temporary disparity in the normal yield
relationship between the two securities. Yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, such as changes in the overall demand for or
supply of various types of Municipal Securities or changes in the investment
objectives of some investors. Frequency of portfolio turnover will not be a
limiting factor should a Fund deem it desirable to purchase or sell securities.
The difference in portfolio turnover rates between fiscal years 1994 and 1995
for the Florida and New York Funds was primarily due to two portfolio
restructurings for each Fund in order to lengthen their durations in response to
the interest rate environment. It is anticipated that, under normal
circumstances, the portfolio turnover rate for the New York Fund will not exceed
100%.
REGULATORY RESTRICTIONS. To the extent required to comply with applicable
regulation, when purchasing a futures contract, writing a put option or entering
into a delayed delivery purchase, a Fund will maintain eligible securities in a
segregated account. A Fund will use cover in connection with selling a futures
contract.
A Fund will not engage in transactions in financial futures contracts or options
thereon for speculation, but only to attempt to hedge against changes in market
conditions affecting the values of securities that the Fund holds or intends to
purchase.
TRUSTEES' POWER TO CHANGE OBJECTIVES AND POLICIES. Except as specifically stated
to the contrary, the objectives and policies of the Funds may be changed by the
Trustees without a vote of the shareholders.
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
15
<PAGE>
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 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
16
<PAGE>
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.
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 1998 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
$2.00 per $1,000 of taxable value of certain securities and other intangible
assets owned by Florida residents. U.S. Government securities and Florida
Municipal Securities are exempt from this intangibles tax. The Florida Fund has
received a technical assistance advisement from the State of Florida Department
of Revenue that if, on December 31 of any year, the Florida Fund's portfolio
17
<PAGE>
consists of both exempt and non-exempt assets, then only the portion of the
value of the Florida Fund's shares attributable to U.S. Government securities
will be exempt from the Florida intangibles tax payable in the following year.
Thus, in order to take full advantage of the exemption from the intangibles tax
in any year, the Florida Fund would be required to sell all non-exempt assets
held in its portfolio and reinvest the proceeds in exempt assets prior to
December 31. Transaction costs involved in restructuring the portfolio in this
fashion would likely reduce the Florida Fund's investment return and might
exceed any increased investment return the Florida Fund achieved by investing in
non-exempt assets during the year. On December 31, 1997, the Florida Fund's
portfolio consisted solely of assets exempt from the intangibles tax.
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 Municipal
Securities (as defined in the Prospectus) are not subject to the Ohio personal
income tax, Ohio school district income taxes or Ohio municipal income taxes,
and are not includable in the net income base of the Ohio corporate franchise
tax. For the fiscal period ended August 31, 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 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.
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<PAGE>
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.
Scudder Kemper has waived or reduced its management fee and, in certain cases,
absorbed certain operating expenses for some of the Funds for the periods and to
the extent specified in the prospectus and this Statement of Additional
Information. See "Investment Manager and Underwriter." Because of these waivers
and expense absorptions, the performance results for such Funds may be shown
with and without the effect of these waivers and expense absorptions.
Performance results not giving effect to waivers and expense absorptions will be
lower. Certain performance information set forth in this section for the New
York Fund are for the predecessor of the New York Fund, also named "Kemper New
York Tax-Free Income Fund." .
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
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<PAGE>
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:
YIELD = 2 [ (a - b +1 )^6 - 1]
-----
cd
Where:
A = dividends and interest earned during the period.
B = expenses accrued for the period (net of reimbursements).
C = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
D = the maximum offering price per share
on the last day of the period (which is net asset value
for Class B and Class C shares).
In computing the foregoing yield, each Trust follows certain standardized
accounting practices specified by Securities and Exchange Commission rules.
These practices are not necessarily consistent with those that each Trust uses
to prepare its annual and interim financial statements in conformity with
generally accepted accounting principles.
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
<S> <C> <C> <C> <C>
Municipal -- Federal (x.xx%) x.xx% x.xx% x.xx% x.xx%
Intermediate Municipal Fund -- Federal (x.xx%) x.xx% x.xx% x.xx% x.xx%
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% n/a
</TABLE>
20
<PAGE>
A Fund's average annual total return quotation is computed in accordance with a
standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the Fund's shares on the first day of the period, adjusting to deduct the
maximum sales charge (in the case of Class A shares), and computing the
"redeemable value" of that investment at the end of the period. The redeemable
value in the case of Class B shares includes the effect of the applicable
contingent deferred sales charge that may be imposed at the end of the period.
The redeemable value is then divided by the initial investment, and this
quotient is taken to the Nth root (N representing the number of years in the
period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value on the reinvestment
dates during the period. Average annual total return figures for various periods
are set forth in the table below.
Calculation of a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the Fund's "Financial Highlights" table
in the Fund's financial statements and prospectus. Total return performance for
a specific period is calculated by first taking a hypothetical investment
("initial investment") in the Fund's shares on the first day of the period,
either adjusting or not adjusting to deduct the maximum sales charge (in the
case of Class A shares), and computing the "ending value" of that investment at
the end of the period. The total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The ending value in the case of Class B shares may or may not include the effect
of the applicable contingent deferred sales charge that 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.
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
21
<PAGE>
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.
MUNICIPAL FUND -- SEPTEMBER 30, 1999
AVERAGE ANNUAL Fund Fund Fund
TOTAL Class A Class B Class C
RETURN TABLE Shares Shares Shares
- ------------ ------ ------ ------
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%
- -------------------
+ Since April 20, 1976.
++ Since May 31, 1994 for Classes B and C.
INTERMEDIATE MUNICIPAL FUND -- SEPTEMBER 30, 1999
AVERAGE ANNUAL Fund Fund Fund
TOTAL Class A Class B Class C
RETURN TABLE Shares Shares Shares
- ------------ ------ ------ ------
Life of Fund(+) x.xx% x.xx% x.xx%
One Year x.xx% x.xx% x.xx%
- -------------------
+ Since November 1, 1994 for all classes.
CALIFORNIA FUND -- AUGUST 31, 1999
AVERAGE ANNUAL Fund Fund Fund
TOTAL Class A Class B Class C
RETURN TABLE Shares Shares Shares
- ------------ ------ ------ ------
Life of Fund(+) x.xx%
Life of Fund(++) x.xx% x.xx%
Ten Year x.xx% N/A N/A
22
<PAGE>
Five Year x.xx% x.xx% x.xx%
One Year x.xx% x.xx% x.xx%
- -----------------
+ Since February 17, 1983 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
FLORIDA FUND -- AUGUST 31, 1999
AVERAGE ANNUAL Fund Fund Fund
TOTAL Class A Class B Class C
RETURN TABLE Shares Shares Shares
- ------------ ------ ------ ------
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%
- -------------------
+ Since April 25, 1991 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
NEW YORK FUND -- AUGUST 31, 1999
AVERAGE ANNUAL Fund Fund Fund
TOTAL Class A Class B Class C
RETURN TABLE Shares Shares Shares
- ------------ ------ ------ ------
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%
- -------------------
+ Since December 31, 1985 for Class A shares.
++ Since May 31, 1994 for Class B & C shares.
OHIO FUND -- AUGUST 31, 1999
AVERAGE ANNUAL Fund Fund Fund
TOTAL Class A Class B Class C
RETURN TABLE Shares Shares Shares
- ------------ ------ ------ ------
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%
- -------------------
+ 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.
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
23
<PAGE>
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 [1 minus your marginal tax rate]. The tables below are
provided for your convenience in making this calculation for selected tax-exempt
yields and taxable income levels. These yields are presented for purposes of
illustration only and are not representative of any yield that any class of
shares of a Fund may generate. The tables are based upon the 1998 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
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:
------ ----- ---------------- -----------------------------------------------
$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)
<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 - $102,300 36.1% 6.26 7.82 9.39 10.95 12.52 14.08
Over $61,400 Over $102,300 38.8% 6.54 8.17 9.80 11.44 13.07 14.78
24
<PAGE>
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:
------ ----- ---------------- -----------------------------------------------
$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 - $155,950 31.9% 5.87 7.34 8.81 10.28 11.75 13.25
$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
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
------ ----- ---------------- -----------------------------------
$61,400 - $128,100 $102,300 - $155,950 38.2% 6.74 8.09 9.71 11.33 12.94 14.56
$128,100 - $278,450 $155,950 - $278,450 42.9% 7.01 8.76 10.51 12.26 14.01 15.76
Over $278,000 Over $278,450 46.3% 7.59 9.49 11.39 13.28 15.18 17.08
</TABLE>
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 - $155,950 39.6% 6.65 8.28 9.93 11.59 13.25 14.90
$128,100 - $278,450 $155,950 - $278,450 44.2% 7.17 8.96 10.75 12.54 14.34 16.13
Over $278,450 Over $278,450 47.5% 7.62 9.52 11.43 13.33 15.24 17.14
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
------ ----- ---------------- -----------------------------------
$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 - $278,450 41.4% 6.83 8.53 10.24 11.95 13.65 15.36
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.
25
<PAGE>
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Scudder Kemper Investments, Inc. ("Scudder Kemper" or "the
Advisor"), 345 Park Avenue, New York, New York, is the Trusts' investment
manager. 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, while Kemper Distributors, Inc. ("KDI"), as principal
underwriter, pays the cost of qualifying and maintaining the qualification of
the Trust's shares for sale under the securities laws of the various states.
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.
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 investment manager 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.
26
<PAGE>
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.
<TABLE>
<CAPTION>
Fund Fiscal 1998 Fiscal 1997 Fiscal 1996
- ---- ----------- ----------- -----------
<S> <C> <C> <C>
Municipal $ $xx,xxx,xxx $xx,xxx,xxx
Intermediate Municipal $xxx,xxx $ xxx,xxx $xx,xxx
California $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx
Florida $xxx,xxx $xxx,xxx $xxx,xxx
New York $x,xxx,xxx x,xxx,xxx $x,xxx,xxx
Ohio $xxx,xxx $xxx,xxx $xxx,xxx
</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.
27
<PAGE>
<TABLE>
<CAPTION>
Commissions Paid
Commissions Retained Commissions 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>
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".
28
<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
29
<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
30
<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.
31
<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 Trust, including the
payment of service fees. For the services under the administrative agreement,
each Fund pays KDI an administrative services fee, payable monthly, at the
annual rate of up to 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. 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:
32
<PAGE>
<TABLE>
<CAPTION>
Total Service Fees Service Fees Paid
Paid by by Administrator
Administrative Administrator to Kemper
Service Fees Paid by Fund to Firms Affiliated Firms
------------------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal
Fund Year Class A Class B Class 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
Total Service Fees Service Fees Paid
Paid by by Administrator
Administrative Administrator to Kemper
Service Fees Paid by Fund to Firms Affiliated Firms
------------------------- -------- ----------------
Fiscal
Fund Year Class A Class B Class 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
Total Service Fees Service Fees Paid
Paid by by Administrator
Administrative Administrator to Kemper
Service Fees Paid by Fund to Firms Affiliated Firms
------------------------- -------- ----------------
Fiscal
Fund Year Class A Class B Class 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.
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. Investors Fiduciary Trust Company
("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105, as custodian,
and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of the Trusts. They attend to the collection of principal and income, and
payment for and collection of proceeds of securities bought and sold by the
Trusts. IFTC is also the Trusts' transfer agent and dividend-paying agent.
Pursuant to a services agreement with IFTC, Kemper Service Company ("KSvC"), an
affiliate of Scudder Kemper, serves as "Shareholder Service Agent" of each
33
<PAGE>
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 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.
34
<PAGE>
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 1998 Fiscal 1998 Fiscal 1997 Fiscal 1996
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Municipal $3,048,000 0% $5,069,000 4,987,000
Intermediate $13,000 0% $ 32,000 37,000
California $1,464,000 0% $1,463,000 1,430,000
Florida $146,000 0% $ 204,000 269,000
New York $701,000 1% $ 594,000 546,000
Ohio $49,000 0% $ 48,000 79,000
</TABLE>
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>
35
<PAGE>
The minimum initial investment for each Fund is $1,000 and the minimum
subsequent investment is $100. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion. The Trusts allocate net investment
income for each Fund to those shares for which the Trust has received payment.
To begin accruing dividends as soon as possible, purchasers may wire payment to
the Trust's sub-custodian, United Missouri Bank of Kansas City, N.A., 10th and
Grand Avenue, Kansas City, Missouri 64106.
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).
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.
Sales Charge
Allowed to
Dealers as a
Percentage
As a Percentage Percentage of
of Offering Net Asset Offering
Amount of Purchase Price Value* Price
All Funds except Intermediate
Municipal Fund
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over 0.00** 0.00** ***
Intermediate Municipal Fund Only
Less than $100,000 2.75 2.83 2.25
$100,000 but less than $250,000 2.50 2.56 2.00
$250,000 but less than $500,000 2.00 2.04 1.75
$500,000 but less than $1 million 1.50 1.52 1.25
$1 million and over 0.00** 0.00** ***
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales
charge as discussed below.
*** Commissions payable by KDI as discussed below.
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
36
<PAGE>
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. 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 and the concession continues until terminated by KDI. The
privilege of purchasing Class A shares of a Fund at net asset value under this
privilege is not available if another net asset value purchase privilege also
applies.
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of .50% of the
amount of Class A shares purchased.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
each Trust, its investment manager, its principal underwriter or certain
affiliated companies, for themselves or members of their families; (b)
registered representatives and employees of broker-dealers having selling group
agreements with KDI and officers, directors and employees of service agents of
the Trusts, for themselves or their spouses or dependent children; (c)
shareholders who owned shares of Kemper 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
37
<PAGE>
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 Manager and Underwriter."
Class B shares of a Fund will automatically convert to Class A shares of the
same Fund six years after issuance on the basis of the relative net asset value
per share. 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 Manager and Underwriter."
PURCHASE OF CLASS I SHARES. Class I shares are offered for the Municipal Fund
and the Intermediate Municipal Fund at net asset value without an initial sales
charge and are not subject to a contingent deferred sales charge or a Rule 12b-1
distribution fee. Also, there is no administration services fee charged to Class
I shares. As a result of the relatively lower expenses for Class I shares, the
level of income dividends per share (as a percentage of net asset value) and,
therefore, the overall investment value, will typically be higher for Class I
shares than for Class A, Class B, or Class C 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-
38
<PAGE>
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.
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 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
39
<PAGE>
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 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
40
<PAGE>
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. 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.
- ---------------------------------------------------------------
Year of Redemption After Contingent Deferred
Purchase Sales Charge
- ---------------------------------------------------------------
First 4%
- ---------------------------------------------------------------
Second 3%
- ---------------------------------------------------------------
Third 3%
- ---------------------------------------------------------------
Fourth 2%
- ---------------------------------------------------------------
Fifth 2%
- ---------------------------------------------------------------
Sixth 1%
- ---------------------------------------------------------------
Class B shareholders who originally acquired their shares as Initial Shares of
Kemper Portfolios, formerly known as Kemper Investment Portfolios ("KIP"), hold
them subject to the same CDSC schedule that applied when those shares were
purchased, as follows:
41
<PAGE>
Contingent Deferred Sales Charge
Shares Purchased Shares Purchased on or after
Year of Redemption on or after February 1, 1991 and
After Purchase March 1, 1993 Before March 1, 1993
First 4% 3%
Second 3% 3%
Third 3% 2%
Fourth 2% 2%
Fifth 2% 1%
Sixth 1% 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner) and (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features-Systematic Withdrawal Plan" below).
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner) and (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features-Systematic Withdrawal Plan").
CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of a Fund's Class B shares and that 16 months
later the value of the shares has grown by $1,000 through reinvested dividends
and by an additional $1,000 in appreciation to a total of $12,000. If the
investor were then to redeem the entire $12,000 in share value, the contingent
deferred sales charge would be payable only with respect to $10,000 because
neither the $1,000 of reinvested dividends nor the $1,000 of share appreciation
is subject to the charge. The charge would be at the rate of 3% ($300) because
it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 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
42
<PAGE>
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 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
Retirement Fund -- Series I, 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
("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.
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<PAGE>
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.
Class C Shares. Class C shares of a Fund and Class C shares of any other Kemper
Mutual Fund listed under "Special Features-Class A Shares-Combined Purchases"
may be exchanged for each other at their relative net asset value. Class C
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For determining whether there is a contingent deferred
sales charge that may be imposed upon the redemption of the Class C shares
received by exchange, they retain the cost and purchase date of the shares that
were originally purchased and exchanged.
General. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15-Day Hold Policy"). For purposes of
determining whether the 15-Day Hold Policy applies to a particular exchange, the
value of the shares to be exchanged shall be computed by aggregating the value
of shares being exchanged for all accounts under common control, direction or
advice, including without limitation accounts administered by a financial
services firm offering market timing, asset allocation or similar services. The
total value of shares being exchanged must at least equal the minimum investment
requirement of the fund into which they are being exchanged. Exchanges are made
based on relative dollar values of the shares involved in the exchange. There is
no service fee for an exchange; however, dealers or other firms may charge for
their services in effecting exchange transactions. Exchanges will be effected by
redemption of shares of the fund held and purchase of shares of the other fund.
For federal income tax purposes, any such exchange constitutes a sale upon which
a gain or loss will be realized, depending upon whether the value of the shares
being exchanged is more or less than the shareholder's adjusted cost basis of
such shares. Shareholders interested in exercising the exchange privilege may
obtain prospectuses of the other funds from dealers, other firms or KDI.
Exchanges may be accomplished by a written request to Kemper Service Company,
Attention: Exchange Department, P.O. Box 419557, Kansas City, Missouri
64141-6557, or by telephone if the shareholder has given authorization. Once the
authorization is on file, the Shareholder Service Agent will honor requests by
telephone at 1-800-621-1048 or in writing, subject to the limitations on
liability 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.
44
<PAGE>
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 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.
45
<PAGE>
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.
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'
investment manager and KDI, the Trusts' principal underwriter, are as follows:
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, 800 North Lindbergh Boulevard, St. Louis,
Missouri; 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).
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<PAGE>
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, 333 Ravenswood Avenue, Menlo Park,
California; 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 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.
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:
ASHTON P. GOODFIELD (10/3/63), Senior Vice President, Two International Place,
Boston, Massachusetts; Vice President, Adviser.
Kemper State Tax-Free Income Series:
***ELEANOR R. BRENNAN, ( 3/3/64 ),Vice President, Two International Place,
Boston, Massachusetts; Vice President, Adviser.
***PHILIP G. CONDON, (8/15/50), Vice President, Two International Place, Boston,
Massachusetts; Managing Director, Adviser.
* 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 1999.
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<PAGE>
<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
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 current fees deferred and interest pursuant to deferred
compensation agreements with the Funds. Deferred amounts accrue interest
monthly at a rate equal to the yield of Zurich Money Funds -- Zurich Money
Market Fund. Total deferred fees (including interest thereon) payable from
the Funds are $47,500 and $32,700 for Mr. Dunaway 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.
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.
48
<PAGE>
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
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.
49
<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.
50
<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.
51
<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 to be filed by
subsequent amendment.
(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 to be filed by subsequent
amendment.
(j) Consent of Independent Accountants to be filed by subsequent amendment.
(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
3
<PAGE>
Kemper 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.
(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>
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 9th 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 9, 1999 on behalf of
the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Thomas W. Littauer December 9, 1999
- --------------------------------------
Thomas W. Littauer* Chairman and Trustee
/s/ John W. Ballantine December 9, 1999
- --------------------------------------
John W. Ballantine* Trustee
/s/ Lewis A. Burnham December 9, 1999
- --------------------------------------
Lewis A. Burnham* Trustee
/s/ Donald L. Dunaway December 9, 1999
- --------------------------------------
Donald L. Dunaway* Trustee
/s/ Robert B. Hoffman December 9, 1999
- --------------------------------------
Robert B. Hoffman* Trustee
/s/ Donald R. Jones December 9, 1999
- --------------------------------------
Donald R. Jones* Trustee
/s/ Shirley D. Peterson December 9, 1999
- --------------------------------------
Shirley D. Peterson* Trustee
/s/ Cornelia Small December 9, 1999
- --------------------------------------
Cornelia Small* Trustee
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ William P. Sommers December 9, 1999
- --------------------------------------
William P. Sommers* Trustee
/s/ John R. Hebble December 9, 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.
44 and Post-Effective Amendment No. 46 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. 47
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 47
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
9
