<PAGE> 1
Kemper State Tax-Free Income Series
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED AUGUST 31, 1995
"WE CORRECTLY IDENTIFIED THE VALUE THAT LONG-TERM INTEREST RATES HAD ACHIEVED
AND BEGAN TO LENGTHEN THE PORTFOLIOS' AVERAGE DURATIONS. . ."
CALIFORNIA TAX-FREE
INCOME FUND
MICHIGAN TAX-FREE
INCOME FUND
OHIO TAX-FREE
INCOME FUND
TEXAS TAX-FREE
INCOME FUND
[KEMPER LOGO]
<PAGE> 2
CALIFORNIA TAX-FREE
INCOME FUND
MICHIGAN TAX-FREE
INCOME FUND
OHIO TAX-FREE
INCOME FUND
TEXAS TAX-FREE
INCOME FUND
<PAGE> 3
Table of
Contents
4
Terms to Know
5
General
Economic Overview
7
Performance Update
9
California's
Performance Update
Portfolio Statistics and
Portfolio of Investments
17
Michigan's
Performance Update
Portfolio Statistics and
Portfolio of Investments
21
Ohio's
Performance Update
Portfolio Statistics and
Portfolio of Investments
25
Texas'
Performance Update
Portfolio Statistics and
Portfolio of Investments
29
Report of
Independent Auditors
30
Financial Statements
33
Notes to
Financial Statements
39
Financial Highlights
At A Glance
KEMPER STATE TAX-FREE INCOME FUNDS TOTAL RETURNS
(UNADJUSTED FOR SALES CHARGE)
* California, Ohio and Texas returns are for the year ended August 31, 1995.
* Michigan returns are for the period from March 31, 1995 through August 31,
1995.
CALIFORNIA
<TABLE>
<S> <C>
CLASS A 8.13%
CLASS B 7.17%
CLASS C 7.08%
LIPPER
TAX-FREE INCOME
FUNDS CATEGORY
AVERAGE* 7.07%
</TABLE>
MICHIGAN
<TABLE>
<S> <C>
CLASS A 4.74%
CLASS B 4.30%
CLASS C 4.31%
LIPPER
TAX-FREE INCOME
FUNDS CATEGORY
AVERAGE* 3.45%
</TABLE>
OHIO
<TABLE>
<S> <C>
CLASS A 8.20%
CLASS B 7.57%
CLASS C 7.56%
LIPPER
TAX-FREE INCOME
FUNDS CATEGORY
AVERAGE* 7.32%
</TABLE>
TEXAS
<TABLE>
<S> <C>
CLASS A 9.28%
CLASS B 8.16%
CLASS C 8.27%
LIPPER
TAX-FREE INCOME
FUNDS CATEGORY
AVERAGE* 7.92%
</TABLE>
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
NET ASSET VALUE
CALIFORNIA
<TABLE>
<CAPTION>
AS OF AS OF
8/31/95 8/31/94
- -------------------------------------------------------------------
<S> <C> <C>
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS A $7.35 $7.22
- -------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS B $7.35 $7.22
- -------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS C $7.34 $7.22
- -------------------------------------------------------------------
</TABLE>
MICHIGAN
<TABLE>
<CAPTION>
AS OF AS OF
8/31/95 8/31/94
- -------------------------------------------------------------------
<S> <C> <C>
KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS A $9.76 N/A
- -------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS B $9.77 N/A
- -------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS C $9.76 N/A
- -------------------------------------------------------------------
</TABLE>
OHIO
<TABLE>
<CAPTION>
AS OF AS OF
8/31/95 8/31/94
- -------------------------------------------------------------------
<S> <C> <C>
KEMPER OHIO TAX-FREE
INCOME FUND CLASS A $9.81 $9.56
- -------------------------------------------------------------------
KEMPER OHIO TAX-FREE
INCOME FUND CLASS B $9.81 $9.56
- -------------------------------------------------------------------
KEMPER OHIO TAX-FREE
INCOME FUND CLASS C $9.81 $9.56
- -------------------------------------------------------------------
</TABLE>
TEXAS
<TABLE>
<CAPTION>
AS OF AS OF
8/31/95 8/31/94
- -------------------------------------------------------------------
<S> <C> <C>
KEMPER TEXAS TAX-FREE
INCOME FUND CLASS A $10.42 $10.14
- -------------------------------------------------------------------
KEMPER TEXAS TAX-FREE
INCOME FUND CLASS B $10.42 $10.15
- -------------------------------------------------------------------
KEMPER TEXAS TAX-FREE
INCOME FUND CLASS C $10.42 $10.15
- -------------------------------------------------------------------
</TABLE>
<PAGE> 4
At A Glance
KEMPER TAX-FREE INCOME FUNDS LIPPER RANKINGS
Compared to all other funds in their respective Lipper category*
CALIFORNIA
<TABLE>
<CAPTION>
1-YEAR 5-YEAR
<S> <C> <C>
CLASS A #9 OF 91 FUNDS #11 OF 47 FUNDS
CLASS B #46 OF 91 FUNDS N/A
CLASS C #50 OF 91 FUNDS N/A
</TABLE>
OHIO TEXAS
<TABLE>
<CAPTION>
1-YEAR 1-YEAR
<S> <C> <C>
CLASS A #3 OF 43 FUNDS #3 OF 23 FUNDS
CLASS B #18 OF 43 FUNDS #9 OF 23 FUNDS
CLASS C #16 OF 43 FUNDS #7 OF 23 FUNDS
</TABLE>
* Lipper Analytical Services, Inc. returns and rankings are based upon
changes in net asset value with all dividends reinvested and do not include the
effect of sales charges and, if they had, results may have been less favorable.
Returns and rankings are historical and do not reflect future performance.
Lipper rankings are not available for Kemper Michigan Tax-Free Income Fund.
DIVIDEND REVIEW
The following tables show per share dividend and yield information for the
funds as of August 31, 1995.
CALIFORNIA
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
1 YEAR INCOME: $0.3944 $0.3306 $0.3338
AUGUST DIVIDEND: $0.0338 $0.0285 $0.0278
ANNUALIZED
DISTRIBUTION RATE(+): 5.52% 4.65% 4.54%
SEC YIELD(+): 5.00% 4.34% 4.29%
TAX EQUIVALENT YIELD: 8.76% 7.60% 7.51%
</TABLE>
BASED ON A MARGINAL TAX RATE OF 42.9% (COMBINED CALIFORNIA STATE AND FEDERAL
INCOME TAX RATE)
MICHIGAN
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
5 MONTHS INCOME: $0.2202 $0.1824 $0.1835
AUGUST DIVIDEND: $0.0384 $0.0322 $0.0303
ANNUALIZED
DISTRIBUTION RATE(+): 4.72% 3.95% 3.73%
SEC YIELD(+):
(AFTER EXPENSE WAIVER) 4.60% 3.95% 4.00%
SEC YIELD(+):
(BEFORE EXPENSE WAIVER) 4.23% 3.53% 3.60%
TAX EQUIVALENT YIELD: 7.65% 6.57% 6.66%
</TABLE>
BASED ON A MARGINAL TAX RATE OF 39.9% (COMBINED MICHIGAN STATE AND FEDERAL
INCOME TAX RATE)
OHIO
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
1 YEAR INCOME: $0.5019 $0.4447 $0.4450
AUGUST DIVIDEND: $0.0415 $0.0348 $0.0342
ANNUALIZED
DISTRIBUTION RATE(+): 5.08% 4.26% 4.18%
SEC YIELD(+): 4.79% 4.09% 4.17%
TAX EQUIVALENT YIELD: 8.17% 6.98% 7.12%
</TABLE>
BASED ON A MARGINAL TAX RATE OF 41.4% (COMBINED OHIO STATE AND FEDERAL INCOME
TAX RATE)
TEXAS
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
1 YEAR INCOME: $0.5422 $0.4492 $0.4582
AUGUST DIVIDEND: $0.0440 $0.0370 $0.0360
ANNUALIZED
DISTRIBUTION RATE(+): 5.07% 4.26% 4.15%
SEC YIELD(+): 4.50% 3.89% 3.77%
TAX EQUIVALENT YIELD: 7.15% 6.18% 5.99%
</TABLE>
BASED ON A 37.1% MARGINAL FEDERAL INCOME TAX RATE
(+) Current annualized distribution rate is the latest monthly dividend shown
as an annualized percentage of net asset value on August 31, 1995. Distribution
rate simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended August 31, 1995 shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with the
standardized method prescribed by the Securities and Exchange Commission.
The exemption for federal and a particular state or local income tax purposes
may not result in an exemption under the tax laws of any other state or local
taxing authority. There is no Texas income tax for individuals. A portion of
income may be subject to the alternative minimum tax for certain investors.
3
<PAGE> 5
About Your Report
SHAREHOLDER REPORTS REVISED
Your fund's annual report is your best source for tracking the progress of your
investment. This report includes several changes that have been made in an
effort to provide additional information to you as well as explain significant
changes to the fund over the last fiscal year. In addition, the performance
update includes commentary from your fund's portfolio manager or management
team on what might be expected in the coming months. Specifically, your report
now includes:
* Terms you'd need to know related to your fund
* A look at your fund's portfolio composition and how it has changed
* The quality and years to maturity of the fund's underlying investments
If you have any comments about the revised format or if you have
suggestions for additional changes, please write to:
Kemper Mutual Funds
Shareholder Communications
120 South LaSalle Street
Chicago, IL 60603
Terms To Know
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period, assuming the
reinvestment of all dividends. It represents the aggregate percentage or
dollar value change over the period.
YIELD A fund's yield is a measure of the net investment income per share
earned over a specific one month or 30-day period expressed as a percentage of
the maximum offering price of the fund's shares at the end of the period.
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income portfolio incorporating time to maturity and coupon size. The
longer the duration, the greater the interest rate risk.
DERIVATIVE SECURITIES Instruments that derive their value from an underlying
security. Financial futures and option contracts, long recognized as
risk-managing tools, fall under this category. In recent years a number of
exotic derivatives were created as a means of enhancing returns in a declining
interest rate environment. Certain of such products can entail a high degree
of risk and can be prone to significant price volatility.
INSURED PAPER Bonds for which an insurer has agreed to pay all interest and
principal if, for any reason, the issuer fails to pay these costs.
REVENUE BOND INDEX ("RBI") The average yield on 25 revenue bonds with 30-year
maturities, compiled by The Bond Buyer, the newspaper of the municipal bond
industry.
4
<PAGE> 6
General Economic Overview
[PHOTO] Stephen B. Timbers is chief executive and chief investment
officer of Kemper Financial Services, Inc. (KFS). KFS and its
affiliates manage approximately $63 billion in assets, including
$44 billion in retail mutual funds. Timbers is a graduate of
Yale University and holds an M.B.A. from Harvard University.
DEAR SHAREHOLDER,
Investors enjoyed generally positive performance in both the fixed income and
stock markets in the first several months of 1995. At this point in the year,
the returns of most leading securities markets are significantly higher than
they were at the same time in 1994.
This is an excellent environment for financial assets. After several
quarters of robust growth, the United States economy seems to be slowing down
at a comfortable pace.
Through a series of interest rate adjustments, the Federal Reserve Board
has played a critical role in controlling the pace of economic growth. Its most
recent adjustment was in July when the Fed acknowledged that economic growth
had slowed so much that a recession was a threat. In response, the Federal
Reserve eased short-term interest rates by a small but symbolic 25 basis
points. This action was significant because, since February 1994, the Fed had
been raising interest rates to slow down what was considered high enough growth
to rekindle troublesome inflation.
After the interest rate cut, the government announced that the real gross
domestic product (GDP) -- the value of goods and services produced in the United
States -- grew at a 1.1% annual rate in the second quarter. This was a revised
number, representing more than twice the growth that was originally reported,
and it virtually assured that the economy was not in jeopardy of recession. At
the same time, economic growth at that level did not require an immediate
response, in the form of additional rate cuts, from the Fed. The absence of
inflation is also very encouraging. Although we are well along in the economic
cycle and at a point when prices often start hiking up, price increases are
modest. In fact, plunging energy prices during the summer offset slight
increases in food prices. Consumer prices through July 1995 rose at an annual
rate of 3.1% -- higher than last year but still not a concern, and the GDP
deflator is running at only about 2%.
We anticipate 2% to 3% real GDP growth for the next few quarters, with the
momentum likely to come from housing and foreign trade. Will the Federal
Reserve Board adjust interest rates again? Additional action by the Fed at
least once more in 1995 would not surprise us.
MARKET OUTLOOK
Slow growth and low inflation is the optimal combination for investors in the
fixed income markets, and we expect them to continue to perform well.
We believe that the opportunities for common stock investors will be
increasingly concentrated in higher quality investments. After hitting new
highs and showing considerable strength for most of the year, the stock market
showed some vulnerability when it took a tumble in July. The market recovered
after a brief period and has started to move up again. But such a sudden,
severe mini-correction served to remind investors that the current bull market
will inevitably come to an end someday and that some sectors may even be
overextended today.
As we view the remainder of the year, companies cannot necessarily count
on the economy to provide above-average earnings support. Rather, stocks that
have proven themselves with a pattern of consistent earnings are likely to
attract investor support. Specifically, sectors that produce more consistent
earnings, such as health care, consumer nondurables, selected technology and
selected capital goods can be expected to do well. Picking the right sectors to
invest in will be the key challenge for equity investors during the next few
quarters.
International investing continues to be quite complex. After sinking to
its post-World War II low in April, the value of the U.S. dollar is gaining
strength against most foreign currencies. While a stronger dollar favors the
U.S. economy because it
5
<PAGE> 7
General Economic Overview
ECONOMIC GUIDEPOSTS
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund
performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The 10-year
Treasury rate and the prime rate are prevailing interest rates. The other data
report year-over-year percentage changes.
<TABLE>
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.2 7.06 7.74 5.33
PRIME RATE(2) 8.75 9 7.75 6
INFLATION RATE(3)* 2.9 2.86 2.9 2.84
THE U.S. DOLLAR(4) (1.17) (11.46) (5.28) 4.03
CAPITAL GOODS ORDERS(5)* 7.08 15.06 21.719999 16.98
INDUSTRIAL PRODUCTION(6)* 2.6 5.6 6.18 3.87
EMPLOYMENT GROWTH(7) 1.91 2.6 3.03 2.34
</TABLE>
*Data as of July 31, 1995
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. The low, moderate inflation of the last
few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on corporate profits and equity performance.
(7) An influence on family income and retail sales.
Source: Economics Department, Kemper Financial Services, Inc.
reduces the cost of American imports and attracts foreign capital, a strong
dollar in relation to a local currency has the effect of devaluing a foreign
investment. The value of the dollar and the attractiveness of U.S. investments
to foreign investors will be key factors in the next few months.
We are in the midst of a global recovery, and the same fundamentals that
have driven markets higher in the U.S. can be found in many foreign countries
currently. However, leading international economies continue to lag the U.S.
Japan and Germany, whose economies typically follow U.S. growth, are not as
robust as in past cycles. Moreover, conditions in emerging market countries
underline the importance of careful research and experience in understanding
how these markets work.
Political leadership also has some bearing on the progress of the economy
and the state of the financial markets. In the months preceding a presidential
election year, it has been common for incumbents to attempt to stimulate
growth. Given our Republican Congress and Democratic President, however, we do
not consider this as likely this time.
With the rest of the country, we are closely following political
initiatives to produce a balanced federal budget. This is a political wild
card, but we would expect both the stock and fixed-income markets to react with
enthusiasm if progress can be made.
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including a question-and-answer interview with
your fund's portfolio manager. Thank you for your continued support. We
appreciate the opportunity to serve your investment needs.
Sincerely,
Stephen B. Timbers
Stephen B. Timbers
Chief Investment and Executive Officer
October 11, 1995
6
<PAGE> 8
Performance Update
[PHOTO] Chris Mier joined Kemper Financial Services, Inc. in 1986 and is
now Senior Vice President and Portfolio Manager of the
Kemper State Tax-Free Income Series. Mier received his B.A.
degree in Economics from the University of Michigan and went on
to receive his M.M. in Finance from the Kellogg Graduate School
of Management at Northwestern University.
CHRIS MIER, PORTFOLIO MANAGER OF THE KEMPER STATE TAX-FREE INCOME SERIES,
DISCUSSES THE IMPACT OF CHANGING INTEREST RATES ON THE BOND MARKETS AND
PRECAUTIONS HE'S TAKEN IN RESPONSE TO INCREASING DISCUSSIONS OF TAX REFORM.
Q: During the funds' fiscal year we saw interest rates increase and then
decline. How did these movements influence the municipal bond market?
A: The Fed consistently raised short-term interest rates through 1994 in an
effort to slow economic growth and offset perceived inflationary pressures. The
result was the worst year for the bond markets in decades. The Bond Buyers
Revenue Bond Index (RBI) peaked at 7.37% on November 17. At that point, the
market began to rally on the belief that the Fed's actions were effectively
bringing economic growth down to its target rate of 2.5%, and that the
tightening process was near completion. The rally continued from mid-November
to early June, perpetuated by first quarter 1995 data that verified positive
but slower growth and continued low inflation. By June 8, the RBI had declined
to 5.94% -- 143 basis points below November's peak.
From June through August, economic data -- fairly strong auto sales, an
increase in consumer spending and a general leveling of inventories -- suggested
that the economy was poised to pick up again. This prompted interest rates to
rise again, reaching 6.44% in mid-August. Since then, yields have traded at a
fairly narrow range as the market has attempted to discern just how strong the
economy is and how well inflation has been contained.
With this as a backdrop, we saw municipal bonds outperform Treasuries
during the first quarter of 1995. This reflected a low level of new issues
coming to market relative to expectations and the anticipation of a high number
of bonds being called or scheduled to mature. During the second quarter,
however, Treasuries outperformed municipals due to increasing dealer
inventories and, in part, as a reaction to the outperformance of municipals in
the previous quarter and an increase in the level of discussion of tax reform.
This also reflected the cumulative effect of a lack of cash flow into the
market in late 1994 and early 1995.
Q: How did this environment affect your investment strategy?
A: We correctly identified the value that long-term interest rates had
achieved in November of 1994 and began to lengthen the portfolios' average
durations. First, we reduced the hedges we had on the portfolios and then
reduced our cash positions with purchases of long-term bonds. These moves
allowed the funds to participate to a reasonable degree in the market rally
early in 1995. Through 1995 we've increased our exposure to A- and BBB- rated
bonds and increased our level of diversification.
7
<PAGE> 9
Q: What other factors influenced the market?
A: Among the more significant factors were:
- - Reduced supply. This has been a peak year in terms of bonds reaching
maturity and being called. Meanwhile, the volume of new issues coming to
market in 1995 has been well below that of 1994, and those figures were
significantly down from 1993. So we have more bonds leaving the market than
there are bonds being issued. However, demand has slowed. This is one
reason why we're seeing a higher yield ratio between municipal and Treasury
yields.
- - Derivatives. The use of derivative securities became a big concern as
certain units of government suffered losses on derivatives in their
portfolios. Kemper has not used exotic derivative securities to enhance
yield. However, this issue had a definite impact throughout the municipal
bond market.
- - Increased scrutiny of new issues. The Securities and Exchange
Commission increased its level of scrutiny with regard to new bond issues.
In my opinion, this is a generally positive development because, in the
long run, we should see more thorough disclosure about the practices of the
various government units that issue municipal bonds.
- - Tax reform. Discussion of tax reform raised questions as to the future
relative tax advantage of municipal bonds.
Q: Tax reform -- including a possible flat tax -- has been getting a lot of
attention in Washington and in the media. Did this have a significant impact on
the funds, and do you expect this to be an ongoing issue?
A: This became a concern in April and May and continued periodically
throughout the summer. During that time, municipal bond prices adjusted by
about 10 percentage points relative to Treasuries. So the market has already
discounted much of the potential impact of tax reform.
This issue is probably going to dog the market through the 1996 election
and, quite possibly, beyond. It's a very uncertain issue, subject to a lot of
variables. Obviously, we can't see into the future so there's really no way to
predict what kind of reform, if any, will take place or when it might be
enacted. But it's probably safe to expect that any kind of reform won't be
implemented until 1997 at the earliest. Nevertheless, it will continue to
generate media interest.
We've taken a few precautions with regard to this issue and the management
of the Kemper Tax-Free Income Funds. We've reduced the funds' average maturity
somewhat recently and slightly increased our cash positions. In addition, we
sold some shorter-maturity bonds which are richer relative to Treasuries than
bonds on the longer end and, therefore, potentially more vulnerable to price
adjustments.
Q: How did the Kemper State Tax-Free Income Funds perform during the period?
A: We achieved some very competitive rates of return relative to our peers.
Looking back, we probably could have gained a bit more by extending our
durations earlier in the year. But the returns we posted for the period are
certainly competitive and, if we err, we'd prefer to err on the side of
caution.
The fund introduced last March (Kemper Michigan Tax-Free Income Fund) has
been a bit more volatile on a month-to-month basis than the older funds. This
is due to the fact that it holds a higher percentage of insured paper which, in
fact, has helped in recent months. As the portfolio evolves over time and the
weightings in insured paper decrease, that volatility should smooth out to some
degree.
Q: What is your outlook for the coming months?
A: Generally very constructive. We anticipate continued slow but positive
economic growth with inflation remaining in control. That's a good environment
for the bond markets. We also expect some positive action in Congress with
regard to deficit reduction. For the municipal bond market in particular, we
expect continued low levels of new supply. Although the number of bonds
maturing and being called should decline in 1996, new issue volume should
continue to be relatively moderate.
As I said, we think the market has substantially discounted the potential
threat of tax reform, at least on the long-end. Should the market overreact or
over-discount events as they unfold, we may well see some attractive buying
opportunities.
8
<PAGE> 10
Performance Update
Kemper California Tax-Free Income Fund
CALIFORNIA AVERAGE ANNUAL TOTAL RETURNS*
For periods ended August 31, 1995 (adjusted for the maximum sales charge)
KEMPER CALIFORNIA TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEAR CLASS
<S> <C> <C> <C> <C> <C>
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS A 3.26% 7.48% 8.58% 8.98% (Since 2/17/83)
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS B 4.17 N/A N/A 4.22 (Since 5/31/94)
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS C 7.08 N/A N/A 6.43 (Since 5/31/94)
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
KEMPER CALIFORNIA TAX-FREE INCOME FUND CLASS A
FROM 2/17/83 THROUGH 8/31/95
<TABLE>
<CAPTION>
2/17/83 12/31/86 12/31/89 12/31/92 8/31/95
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER CALIFORNIA TAX-FREE INCOME FUND CLASS A(1) $10,000 $15,419 $19,252 $24,773 $29,422
- -----------------------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX(+) 10,000 16,216 20,089 26,301 31,391
- -----------------------------------------------------------------------------------------------------------------------------------
CONSUMER PRICE INDEX(++) 10,000 11,287 12,880 14,494 15,618
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
KEMPER CALIFORNIA TAX-FREE INCOME FUND CLASS B
FROM 5/31/94 THROUGH 8/31/95
<TABLE>
<CAPTION>
5/31/94 9/30/94 12/31/94 3/31/95 6/30/95 8/31/95
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER CALIFORNIA TAX-FREE INCOME FUND CLASS B(1) $10,000 $ 9,961 $ 9,759 $10,486 $10,852 $10,529
- -----------------------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX(+) 10,000 10,007 9,864 10,561 10,816 11,057
- -----------------------------------------------------------------------------------------------------------------------------------
CONSUMER PRICE INDEX(++) 10,000 10,129 10,149 10,264 10,339 10,366
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
KEMPER CALIFORNIA TAX-FREE INCOME FUND CLASS C
FROM 5/31/94 THROUGH 8/31/95
<TABLE>
<CAPTION>
5/31/94 9/30/94 12/31/94 3/31/95 6/30/95 8/31/95
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER CALIFORNIA TAX-FREE INCOME FUND CLASS C(1) $10,000 $ 9,938 $ 9,754 $10,481 $10,658 $10,811
- -----------------------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX(+) 10,000 10,007 9,864 10,561 10,816 11,057
- -----------------------------------------------------------------------------------------------------------------------------------
CONSUMER PRICE INDEX(++) 10,000 10,129 10,149 10,264 10,339 10,366
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Past performance is not predictive of future performance. Returns and net asset
value fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
* Average annual total return measures net investment income and capital
gain or loss from portfolio investments, assuming reinvestment of all dividends
and for A Shares adjustment for the maximum sales charge of 4.5% and for B
Shares adjustment for the applicable contingent deferred sales charge as
follows: 1-year, 3%; since inception, 3%. There is no sales charge for C
Shares. Average annual total return reflects annualized change. During the
periods noted, securities prices fluctuated. For additional information, see
the Prospectus and Statement of Additional Information and the Financial
Highlights at the end of this report.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for A Shares and the contingent deferred sales charge in
effect at the end of the period for B Shares. In comparing the Kemper State
Tax-Free Income Funds to the Lehman Brothers Municipal Bond Index, you should
note that the funds' performance reflects the maximum sales charge, while no
such charges are reflected in the performance of the index.
(+) The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the following
criteria: a minimum credit rating of BBB, have been issued as a part of an
issue of at least $50 million, have been issued within the last 5 years, and
have a maturity of at least 2 years. Bond subject to AMT, variable rate bonds
and zero coupon bonds are excluded from the index. Source is Towers Data
Systems.
(++) The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source is
Towers Data Systems.
9
<PAGE> 11
Portfolio Statistics
KEMPER CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION ON 8/31/95 ON 8/31/94
<S> <C> <C>
REVENUE BONDS 93% 92%
GENERAL OBLIGATION BONDS 5 4
CASH AND EQUIVALENTS 2 4
100% 100%
</TABLE>
<TABLE>
<CAPTION>
QUALITY ON 8/31/95 ON 8/31/94
<S> <C> <C>
AAA 52% 35%
AA 17 24
A 18 27
BBB 10 11
NR (NOT RATED) 3 3
100% 100%
</TABLE>
<TABLE>
<CAPTION>
YEARS TO MATURITY ON 8/31/95 ON 8/31/94
<S> <C> <C>
1-10 YEARS 6% 12%
10-20 YEARS 38 45
20+ YEARS 56 43
100% 100%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE MATURITY ON 8/31/95 ON 8/31/94
<S> <C> <C>
20.5 YEARS 17.6 YEARS
</TABLE>
10
<PAGE> 12
Portfolio of Investments
CALIFORNIA TAX-FREE INCOME FUND
August 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADVANCE REFUNDED
OBLIGATIONS SECURED
AS TO PRINCIPAL AND
INTEREST BY OBLIGATIONS
OF THE UNITED STATES
GOVERNMENT
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Bakersfield County Waste Water Treatment Plant,
Certificates of Participation, Rev., 8.00%,
to be called 01-01-98 @ 101 $ 1,750 $ 1,917
- --------------------------------------------------------------------------------------
Brea Public Financing Auth., Orange County,
Redev. Proj. AB, Rev., 6.75%, to be called
08-01-01 @ 102 3,885 4,414
- --------------------------------------------------------------------------------------
City of Los Angeles Convention and Exhibit Center,
Certificates of Participation, Rev., 9.00%,
to be called 12-01-05 @ 100 1,000 1,334
- --------------------------------------------------------------------------------------
City of Los Angeles Harbor Department,
Rev., 8.70%, to be called 09-01-99 @ 100 2,500 2,715
- --------------------------------------------------------------------------------------
Foothill-DeAnza Community College District,
Santa Clara, Rev., 7.875%,
to be called 06-01-01 @ 102 4,055 4,748
- --------------------------------------------------------------------------------------
Fullerton Redev. Agcy., Local Government
Finance Auth., Rev., 7.70%, to be called 2-01-99 @ 102 4,360 4,902
- --------------------------------------------------------------------------------------
Health Facilities Financing Auth.:
Daughters Of Charity National Health System,
Rev., 9.25%, to be called 05-1-96 @ 102 2,500 2,640
Eskaton Properties, Inc., Rev., 7.45%,
to be called 05-01-00 @ 102 4,800 5,481
Unihealth America, Rev., 7.625%,
to be called 10-01-98 @ 102 90 101
- --------------------------------------------------------------------------------------
Kaweah Delta Hospital District, Rev., 7.25%,
to be called 11-01-96 @ 102 5,750 6,080
- --------------------------------------------------------------------------------------
Northern California Power Agcy., Hydroelectric
Number One, Rev., 7.00%,
to be called 1-01-16 @ 100 210 245
- --------------------------------------------------------------------------------------
Orange Unified School District, Certificates of
Participation, Rev., 6.875%,
to be called 06-01-99 @ 102 2,620 2,897
- --------------------------------------------------------------------------------------
San Bernardino County:
Capital Facilities Proj.,
Certificates of Participation, Rev., 6.80%,
to be called 08-01-01 @ 102 4,300 4,894
Municipal Water District, Rev., 6.75%,
to be called 7-01-00 @ 102 1,000 1,115
- --------------------------------------------------------------------------------------
San Jose Redev. Agcy., Rev., 7.80%,
to be called 08-01-96 @ 102 6,500 6,868
- --------------------------------------------------------------------------------------
Santa Margarita Water District, Gen. Oblg.,
7.30%, to be called 06-01-97 @ 102 1,080 1,160
- --------------------------------------------------------------------------------------
Tulare County Public Facilities Corp.,
Certificates of Participation, Rev., 8.10%,
to be called 11-01-97 @ 102 1,000 1,107
======================================================================================
TOTAL ADVANCE REFUNDED OBLIGATIONS--4.8% 52,618
OTHER
MUNICIPAL
OBLIGATIONS
Antioch Area Public Facilities Financing Agcy.,
Special Tax Bonds, 5.00% and 5.375%,
2013 and 2018 25,695 23,462
- --------------------------------------------------------------------------------------
Bellflower Certificate of Participation,
Civic Center and Capital Improvement,
Rev., 7.20%, 2019 1,880 2,069
- --------------------------------------------------------------------------------------
Calleguas--Las Virgines, Public Financing Auth.,
Water District Installment, Purchase
Rev., 5.125%, 2014 9,635 8,792
- --------------------------------------------------------------------------------------
Central Valley Financing Auth., Carson Ice-Gen
Proj., Rev., 6.00% to 6.20%, 2009 through 2020 14,700 14,265
- --------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 13
Portfolio of Investments
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cerritos Public Financing Auth., Los Cerritos
Redev. Proj., Rev., 6.00% to 6.05%,
2013 through 2020 $15,455 $14,830
- --------------------------------------------------------------------------------------
City of Carson Redev. Agcy., Proj. Number One,
Tax Allocation, Rev., 5.625% and 6.00%,
2008 and 2016 4,600 4,325
- --------------------------------------------------------------------------------------
City of Concord Redev. Agcy., Central Concord Proj.,
Tax Allocation, Rev., 5.25% and 8.00%,
2013 and 2018 2,520 2,360
- --------------------------------------------------------------------------------------
City of Costa Mesa Redev. Agcy., Downtown
Redev. Proj., Tax Allocation, Rev., 5.625%, 2017 3,750 3,308
- --------------------------------------------------------------------------------------
City of Culver Redev. Financing Auth.,
Tax Allocation, Rev., 4.60% and 5.50%,
2014 and 2020 12,240 11,060
- --------------------------------------------------------------------------------------
City of Industry, Gen. Oblg., 5.25%, 2020 6,000 5,429
- --------------------------------------------------------------------------------------
City of Los Angeles:
Department of Water and Power, Rev.,
4.50% to 5.25%, 2013 through 2026 40,095 34,476
Gen. Oblg., 5.25%, 2011 6,175 5,721
Convention and Exhibition Center Auth.,
Lease Rev., 5.125%. 2021 7,000 6,157
Wastewater System, Rev., 4.70% to 6.625%,
2012 through 2019 17,610 15,522
- --------------------------------------------------------------------------------------
City of Mountain View Los Altos School District,
Gen. Oblg., 5.75%, 2015 1,200 1,172
- --------------------------------------------------------------------------------------
City of Oakland:
Housing Finance Rev., 7.10%, 2010 2,055 2,176
Pension Financing Rev., 7.60%, 2021 26,075 28,968
Unified School District, Gen. Oblg., 5.625%, 2019 4,655 4,492
- --------------------------------------------------------------------------------------
City of Pasadena, Waterworks Rev., 5.00%, 2018 3,500 3,087
- --------------------------------------------------------------------------------------
City of Riverside:
Community College District, Certificates of
Participation, Rev. 5.80%, 2017 9,940 9,306
Electric, Rev., 5.00%, 2013 8,885 8,012
- --------------------------------------------------------------------------------------
City of Sacramento:
Finance Auth., Lease Rev.,
5.00% to 5.40%, 2014 through 2020 21,000 19,263
Cogeneration Auth., Procter & Gamble
Proj., Rev., 6.50%, 2014 and 2021 11,000 10,974
Municipal Utility District, Electric Rev.,
5.25% to 6.75%, 2006 though 2020 10,020 10,324
- --------------------------------------------------------------------------------------
City of San Bernardino, Sisters of Charity
Health Care System, Rev., 6.50% to 7.00%,
2011 through 2021 18,750 20,068
- --------------------------------------------------------------------------------------
City and County of San Francisco:
Bay Area Rapid Transit District,
Sales Tax, Rev., 5.50%, 2020 20,360 19,303
Gen. Oblg., 6.50%, 2010 1,000 1,042
Moscone Convention Center, Rev.,
6.75%, 2015 2,200 2,364
Redev. Agcy., Hotel Tax, Rev., 6.75%, 2015 3,705 3,985
Redev. Financing Auth., Tax Allocation,
Rev., zero coupon to 5.25%, 2013 through 2021 9,300 7,810
- --------------------------------------------------------------------------------------
Contra Costa County
County Public Facilities Corp.,
Certificates of Participation, Rev., 7.80%, 2005 1,250 1,410
Water District Rev., 5.00%, 2020 10,000 8,746
Home Mortgage, Rev., 7.75%, 2022 2,715 3,518
- --------------------------------------------------------------------------------------
Liberty Union High School District,
Gen. Oblg., 5.50%, 2020 4,565 4,288
- --------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 14
Portfolio of Investments
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Coronado Community Dev. Agcy., Tax Allocation,
Rev., 7.25%, 2012 $ 4,500 $ 4,923
- --------------------------------------------------------------------------------------
Davis State Unified School District Community
Facilities, Rev., 6.10% 2023 2,150 1,983
- --------------------------------------------------------------------------------------
Department of Water Resources,
Central Valley Proj., Water System Rev.,
5.00% to 5.50%, 2012 through 2023 16,585 14,870
- --------------------------------------------------------------------------------------
Duarte, City of Hope National Medical Center,
Certificates of Participation, Rev.,
6.125% and 6.25%, 2013 and 2023 27,000 25,262
- --------------------------------------------------------------------------------------
East Bay Municipal Utility District
Special Rev., 5.00%, 2015 2,600 2,297
Water System, Subordinate Rev., 5.00%, 2014 10,700 9,672
- --------------------------------------------------------------------------------------
Educational Facilities Auth., Mills College, Rev.,
6.875%, 2022 1,775 1,838
- --------------------------------------------------------------------------------------
Emeryville, Public Financing Auth.,
Redev. Proj., Rev., 6.50%,2011 10,255 10,344
- --------------------------------------------------------------------------------------
Encina Financing Joint Powers Auth.,
Wastewater, Rev., 6.875%, 2011 3,000 3,237
- --------------------------------------------------------------------------------------
Fontana Public Financing Auth., Tax Allocation,
Rev., 7.00%, 2021 3,900 3,984
- --------------------------------------------------------------------------------------
Foothill-DeAnza Community College District,
DeAnza Campus Center Proj., Certificates of
Participation, Rev., 7.35%, 2007 1,700 1,867
- --------------------------------------------------------------------------------------
Fresno Health Facilities, Holy Cross Health
System, St. Agnes Medical Center, Rev.,
6.50% and 6.625%, 2011 and 2021 3,500 3,617
- --------------------------------------------------------------------------------------
Garden Grove:
Agcy. Community Dev., Community Proj.,
Tax Allocation, Rev., 5.875%, 2023 8,865 8,229
Public Financing Auth., Water Services Capital
Improvement, Rev., 5.25%, 2015 4,390 4,074
- --------------------------------------------------------------------------------------
State, Gen. Oblg., 4.75% to 6.00%, 2013 through 2019 27,870 25,654
- --------------------------------------------------------------------------------------
Hawthorne Community Redev. Agcy.,
Tax Allocation, Rev., 6.625%, 2014 2,000 2,013
- --------------------------------------------------------------------------------------
Health Facilities Financing Auth.:
Adventist Health System/West, Rev., 6.50%,
2007 and 2011 5,750 6,129
America Baptist Homes West, Rev., 7.65%, 2014 4,000 4,343
Catholic Healthcare West, Rev., 5.00%,
2014 and 2021 23,280 20,604
Children's Hospital, Rev., 7.50%, 2020 3,600 4,054
Evangelical Lutheran Good Samaritan Society,
Rev., 5.30%, 2015 6,695 6,171
Kaiser Permanante, Rev., 5.60% and 7.00%,
2010 and 2033 11,050 10,574
Marshall Hospital Health System, Rev.,
5.125%, 2012 3,770 3,378
Small Facilities Loan, Insured Health Facility,
Rev., 6.70%, 2011 1,200 1,240
Southern California Presbyterian Homes,
Rev., 6.70%, 2011 2,000 2,087
Unihealth America, Rev., 7.625%, 2015 745 832
- --------------------------------------------------------------------------------------
Hollister Joint Powers Financing Auth.,
Sewer System Improvement Proj., Rev.,
5.75% and 5.90%, 2011 and 2023 13,470 12,339
- --------------------------------------------------------------------------------------
Housing Finance Agcy.:
Home Mortgage, Rev., 6.875% to 9.20%,
2010 through 2030 28,615 30,199
Single Family Mortgage, Rev., 6.45%, 2025 4,400 4,468
- --------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 15
Portfolio of Investments
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Inglewood:
Civic Center Improvement Proj., Certificates
of Participation, Rev., 6.50% to 7.00%,
2011 through 2021 $ 7,025 $ 7,224
Public Financing Auth., Manchester and
North Inglewood Industrial Park Redev.
Proj., Rev., 7.00%, 2022 9,625 9,884
- ----------------------------------------------------------------------------------------
Irvine Ranch, Water District Joint
Powers Agcy., Rev., 7.875%, 2023 5,000 5,372
- ----------------------------------------------------------------------------------------
Lemon Grove Community Dev. Agcy.,
Tax Allocation, Rev., 6.65% and 6.90%,
2006 and 2020 1,500 1,541
- ----------------------------------------------------------------------------------------
Loma Linda, University Medical Center, Rev.,
5.00% to 7.00%, 2013 through 2022 15,795 14,770
- ----------------------------------------------------------------------------------------
Long Beach:
Certificates of Participation, Airport Proj.,
Rev., 5.00%, 2016 4,750 4,216
Harbor Department, Rev., 7.25%, 2019 8,000 8,491
Health Care Systems, Sisters of Charity, Rev.,
6.50%, 2015 4,000 4,108
- ----------------------------------------------------------------------------------------
Los Angeles County:
Metropolitan Transportation Auth., Sales Tax
Rev., 4.75% and 5.00%, 2018 and 2021 22,075 19,138
Multiple Capital Facilities Project, Lease Rev.,
4.75%, 2013 10,000 8,634
Public Works Financing Auth., County
Flood Control District, Capital Construction
Rev., 5.00%, 2011 27,835 25,525
Sanitation Districts Financing Auth., Capital Proj.,
Rev., 5.25%, 2019 10,610 9,653
Transportation Commission, Sales Tax Rev.,
6.50% to 7.40%, 2003 though 2019 20,455 22,217
- ----------------------------------------------------------------------------------------
Los Banos, Certificates of Participation, Rev.,
6.00%, 2019 2,250 2,008
- ----------------------------------------------------------------------------------------
Martinez, Multiple Lenders, Home Mortgage,
Rev., 10.375%, 2002 35 45
- ----------------------------------------------------------------------------------------
Metropolitan Water District of Southern California,
Waterworks Rev., 5.75% to 6.625%,
2012 through 2021 3,500 3,563
- ----------------------------------------------------------------------------------------
Modesto Irrigation District Financing Auth.,
Domestic Water Proj., Rev., 5.75%, 2022 3,455 3,367
- ----------------------------------------------------------------------------------------
Montebello Community Redev. Agcy., Montebello
Hills Redev., Tax Allocation, Rev., 7.50%, 2010 3,750 4,164
- ----------------------------------------------------------------------------------------
Moreno Valley, Towngate Community Facilities:
District 87-1, Improvement Area No. 1,
Special Tax Rev., 7.125%, 2023 2,810 2,838
Special Tax, Rev., 6.50%, 2009 3,670 3,723
- ----------------------------------------------------------------------------------------
Morgan Hill Redev. Agcy., Ojo de Agua Community
Dev. Proj., Tax Allocation, Rev., 5.50%, 1999 3,725 3,818
- ----------------------------------------------------------------------------------------
Northern California Power Agcy.:
Geothermal Proj., Number 3, Rev., 7.00%, 2007 8,000 8,255
Hydroelectric Number One, Rev., 7.15%, 2024 8,940 9,600
- ----------------------------------------------------------------------------------------
Orange County, Civic Center, Certificates of
Participation, Rev., 6.625%, 2010 2,000 2,102
- ----------------------------------------------------------------------------------------
Pinole Redev. Agcy., Pinole Vista Redev. Proj.,
Tax Allocation, Rev., 5.60%, 2017 2,000 1,815
- ----------------------------------------------------------------------------------------
Pittsburg ReDev. Agcy. Los Medanos Proj.,
Tax Allocation, Rev., 5.00%, 2013 4,470 4,033
- ----------------------------------------------------------------------------------------
Port of Oakland, Rev., 7.60%, 2016 8,520 9,121
========================================================================================
</TABLE>
14
<PAGE> 16
Portfolio of Investments
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Public Works Board:
Department of Corrections, Rev.,
5.375% to 7.40%, 2010 through 2018 $15,580 $15,629
Department of Justice Building,
Rev., 5.625%, 2020 2,825 2,700
Various Universities, Rev., 5.50%, 2021 6,300 5,683
- ----------------------------------------------------------------------------------------
Rancho Water District Financing
Auth., Rev., 4.875%, 2015 2,100 1,834
- ----------------------------------------------------------------------------------------
Redbud Hospital District, Insured
Health Facility, Rev., 7.90%, 2011 1,000 1,044
- ----------------------------------------------------------------------------------------
Reedley, Sierra View Homes, Inc., Insured
Certificates of Participation, Rev., 7.60%, 2021 4,145 4,477
- ----------------------------------------------------------------------------------------
Riverside County, Public Facilities Financing,
Certificates of Participation, Rev.,
6.875% and 7.875%, 2009 and 2015 7,250 7,657
- ----------------------------------------------------------------------------------------
Rohnert Park Public Safety Facilities Proj.,
Certificates of Participation, 4.75%, 2017 1,880 1,590
- ----------------------------------------------------------------------------------------
Sacramento County, Sanitation Districts
Financing Auth., Rev., 5.00%, 2016 12,000 10,594
- ----------------------------------------------------------------------------------------
San Bernardino County, West Valley Detention
Center, Certificates of Participation,
Rev., 6.50%, 2012 8,000 8,416
- ----------------------------------------------------------------------------------------
San Bernardino Joint Powers Financing Auth.,
Lease Rev., 7.15%, 2013 4,250 4,673
- ----------------------------------------------------------------------------------------
San Diego, Misdemeanor Pre-Arraignment
Detention Facility, Certificates of Participation,
Rev., 8.00%, 2002 6,175 6,515
- ----------------------------------------------------------------------------------------
San Jose Redev. Agcy., Merged Area Redev.
Proj., Tax Allocation, 5.00% and 5.75%,
2011 and 2020 16,555 15,277
- ----------------------------------------------------------------------------------------
San Pablo Redev. Agcy., Merged Area Proj.,
Tax Allocation, Rev., 5.25%, 2016 3,720 3,437
- ----------------------------------------------------------------------------------------
Santa Barbara County, Rev., Montecito Retirement,
Certificates of Participation, Rev., 5.75%
and 5.80%, 2013 and 2018 5,650 5,347
- ----------------------------------------------------------------------------------------
Santa Clarita Public Financing Auth., Local Agcy.
Rev., 6.70% and 6.75%, 2011 and 2021 4,250 4,469
- ----------------------------------------------------------------------------------------
Santa Cruz County Housing Auth.:
Housing Financing Auth., Public Facilities Proj.,
Lease Rev., 5.50%, 2020 4,570 4,287
Multi-Family Housing, Rev., 7.75%, 2023 2,000 2,150
- ----------------------------------------------------------------------------------------
Santa Maria, Redev. Agcy. Rev., Town Center and
West Side Parking Facility, Rev., 5.00%, 2016 7,180 6,428
- ----------------------------------------------------------------------------------------
Snowline Joint Unified School District, 1993
Family Proj., Certificates of Participation, Rev.,
6.30% and 6.40%, 2011 and 2018 3,695 3,699
- ----------------------------------------------------------------------------------------
South San Francisco, Capital Improvement
Financing Auth., Conference Center Proj., Rev.,
6.125%, 2018 3,925 3,684
- ----------------------------------------------------------------------------------------
Southern California Home Financing Auth.,
Single Family Mortgage, Rev., 6.75% and 7.35%,
2022 and 2024 1,565 1,630
- ----------------------------------------------------------------------------------------
Southern California Public Power Auth.:
Mead Adelanto Proj., Rev., 4.75%, 2016 8,000 6,794
Power Proj. Rev., 5.00%, 2015 19,150 17,253
========================================================================================
</TABLE>
15
<PAGE> 17
Performance Update
Kemper Michigan Tax-Free Income Fund
MICHIGAN TOTAL RETURNS*
For period ended August 31, 1995 (adjusted for the maximum sales charge)
KEMPER MICHIGAN TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
LIFE OF
CLASS
- ---------------------------------------------------------------------------
<S> <C> <C>
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS A 0.26% (Since 3/15/95)
- ---------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS B 0.72% (Since 3/15/95)
- ---------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS C 4.63% (Since 3/15/95)
- ---------------------------------------------------------------------------
</TABLE>
Past performance is not predictive of future performance. Returns and net asset
value fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
* Total return measures net investment income and capital gain or loss
from portfolio investments, assuming reinvestment of all dividends and for A
Shares adjustment for the maximum sales charge of 4.5% and for B Shares
adjustment for the maximum contingent deferred sales charge of 4%. There is no
sales charge for C Shares. Total return reflects aggregate charge. During the
periods noted, securities prices fluctuated. For additional information, see
the Prospectus and Statement of Additional Information and the Financial
Highlights at the end of this report.
KEMPER MICHIGAN TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION ON 8/31/95
- ------------------------------------------
<S> <C>
REVENUE BONDS 60%
- ------------------------------------------
GENERAL OBLIGATION BONDS 36
- ------------------------------------------
CASH AND EQUIVALENTS 4
- ------------------------------------------
100%
</TABLE>
16
<PAGE> 18
Portfolio of Investments
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Statewide Communities Dev. Auth.:
Cedars-Sinai Medical Center, 5.80% to 6.50%,
2000 through 2012 $22,205 $23,064
Certificates of Participation
Catholic Healthcare West, 5.50%, 2023 2,475 2,296
Eskaton Properties, Inc., Insured Health
Facilities, 5.80%, 2013 4,000 3,850
Oakland Convention Center, Lease Rev.,
6.00%, 2005 2,500 2,664
Sutter Health Obligated Group, 5.50%, 2023 7,075 6,562
United Western Medical Centers, Insured,
Rev., 6.80%, 2009 4,245 4,468
- --------------------------------------------------------------------------------------
Torrance Memorial Hospital Medical Center,
Rev., 6.75%, 2012 5,000 5,176
- --------------------------------------------------------------------------------------
University of California:
Housing Systems, Rev., 5.50% and 6.75%,
2018 and 2009 4,725 4,658
Multiple Purpose Proj., Rev., 4.75% to 5.25%,
2012 through 2023 33,025 28,571
- --------------------------------------------------------------------------------------
University of Puerto Rico, Rev., 5.25%, 2025 3,100 2,847
- --------------------------------------------------------------------------------------
Victor Valley Community College District,
Certificates of Participation, Rev., 6.875%, 2023 8,705 8,921
- --------------------------------------------------------------------------------------
Western Placer Unified School District,
Election of 1993, Gen. Oblg., zero coupon, 2011 1,590 625
- --------------------------------------------------------------------------------------
Westminster Redev. Agcy., Westminster Commercial
Redev. Proj., Tax Allocation, Rev., 7.30%, 2021 2,500 2,566
- --------------------------------------------------------------------------------------
Yorba Linda, Redev. Agcy. Tax Allocation,
Rev., 5.25%, 2013 2,825 2,638
- --------------------------------------------------------------------------------------
Yosemite Community College District,
Certificates of Participation, Rev., 7.75%, 2011 1,665 1,792
- --------------------------------------------------------------------------------------
Puerto Rico Commonwealth, Gen. Oblg.,
5.375%, 2022 5,535 5,195
- --------------------------------------------------------------------------------------
Puerto Rico Housing Bank and Financing Agcy.,
Single Family Mortgage, Rev., 6.25%, 2029 12,145 12,214
======================================================================================
TOTAL OTHER MUNICIPAL OBLIGATIONS--93.4% 1,014,965
======================================================================================
TOTAL OBLIGATIONS--98.2%
(COST: $1,028,044) 1,067,583
======================================================================================
MONEY MARKET INSTRUMENTS--.1%
YIELD--3.35%
DUE--SEPTEMBER 1995
(COST: $1,480) 1,480 1,480
======================================================================================
TOTAL INVESTMENTS--98.3%
(COST: $1,029,524) 1,069,063
======================================================================================
CASH AND OTHER ASSETS, LESS LIABILITIES--1.7% 18,169
======================================================================================
NET ASSETS--100% $1,087,232
======================================================================================
NOTE TO PORTFOLIO OF INVESTMENTS
</TABLE>
Based on the cost of investments of $1,028,890,000 for federal income tax
purposes at August 31, 1995, the aggregate gross unrealized appreciation was
$48,978,000, the aggregate gross unrealized depreciation was $8,805,000 and the
net unrealized appreciation of investments was $40,173,000.
See accompanying Notes to Financial Statements.
17
<PAGE> 19
Portfolio Statistics
<TABLE>
<CAPTION>
QUALITY On 8/31/95
- --------------------------
<S> <C>
AAA 64%
- --------------------------
AA 24
- --------------------------
A 4
- --------------------------
BBB 4
- --------------------------
NR 4
- --------------------------
100%
</TABLE>
<TABLE>
<CAPTION>
YEARS TO MATURITY ON 8/31/95
- ------------------------------------
<S> <C>
10-20 YEARS 21%
- ------------------------------------
20+ YEARS 79
- ------------------------------------
100%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE MATURITY ON 8/31/95
- ------------------------------------
<S> <C>
22.8 YEARS
- ------------------------------------
</TABLE>
18
<PAGE> 20
Portfolio of Investments
MICHIGAN TAX-FREE INCOME FUND
August 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
MUNICIPAL OBLIGATIONS
- -------------------------------------------------------------------
<S> <C> <C>
Anchor Bay School District,
Gen. Oblg., 5.25%, 2014 $ 20 $ 19
- -------------------------------------------------------------------
Birmingham Public Schools,
Gen. Oblg., 5.75%, 2011 15 15
- -------------------------------------------------------------------
Board of Trustees of State University,
Rev., 5.50%, 2022 20 19
- -------------------------------------------------------------------
Breifung Township School District,
Gen. Oblg., 5.50%, 2012 20 20
- -------------------------------------------------------------------
Cedar Springs Public Schools,
Gen. Oblg., 5.875%, 2013 and 2014 95 95
- -------------------------------------------------------------------
Chelsea School District,
Gen. Oblg., 6.00%, 2019 100 100
- -------------------------------------------------------------------
Clarkston Community Schools,
Gen. Oblg., 5.90%, 2016 95 95
- -------------------------------------------------------------------
Dearborn Economic Dev. Corp., Hospital
Rev., 5.875%, 2025 100 99
- -------------------------------------------------------------------
Detroit:
Gen. Oblg., 6.80%, 2015 50 52
Water Rev., 4.75%, 2019 15 13
- -------------------------------------------------------------------
Dickinson County Economic Dev. Corp.,
Pollution Control Rev., Champion
International Corp. Proj.,
5.85%, 2018 75 71
- -------------------------------------------------------------------
Environmental Protection Program,
Gen. Oblg., 5.40%, 2019 100 93
- -------------------------------------------------------------------
Fitzgerald Public Schools,
Gen. Oblg., 5.125%, 2016 20 18
- -------------------------------------------------------------------
Genesee School District,
Gen. Oblg., 5.75%, 2017 120 117
- -------------------------------------------------------------------
Grand Haven, Electric System Rev.,
5.25%, 2013 and 2016 90 83
- -------------------------------------------------------------------
Greenville Public Schools, Gen. Oblg.,
5.75%, 2013 and 2024 105 103
- -------------------------------------------------------------------
Gull Lake Community Schools,
Gen. Oblg., 5.25%, 2021 5 5
- -------------------------------------------------------------------
Hanover-Horton School District,
Gen. Oblg., 5.50%, 2020 100 96
- -------------------------------------------------------------------
Housing Dev. Auth., Limited Oblg. Rev.,
Green Hill Project, 5.45%, 2011 20 19
- -------------------------------------------------------------------
Kalamazoo Hospital Finance Auth.,
Hospital Rev., Borgess Medical
Center, 5.25%, 2017 85 78
- -------------------------------------------------------------------
L'Anse Creuse Public Schools,
Gen. Oblg., 5.50%, 2014 20 19
- -------------------------------------------------------------------
Lansing, Sewage Disposal System
Rev., 5.85%, 2014 100 100
- -------------------------------------------------------------------
Marquette Area Public Schools,
Gen. Oblg., 5.25%, 2014 20 19
- -------------------------------------------------------------------
Michigan Trunk Line, Rev., 5.50%, 2021 110 102
- -------------------------------------------------------------------
Monroe County, Pollution Control
Rev., 6.55%, 2024 100 104
- -------------------------------------------------------------------
Municipal Bond Auth.:
Local Government Bond Auth.,
Rev., 6.00%, 2013 10 10
Local Government Loan Program,
Rev., 5.75%, 2014 70 69
State Revolving Fund,
Rev., 6.50%, 2014 15 16
- -------------------------------------------------------------------
North Branch Area Schools,
Gen. Oblg., 5.375%, 2021 5 5
- -------------------------------------------------------------------
Oakland County, Drainage District,
Rev., 6.40%, 2016 15 16
- -------------------------------------------------------------------
Portage Public Schools,
Gen. Oblg., 5.625%, 2019 40 39
- -------------------------------------------------------------------
Public Power Agency, Belle River Project,
Rev., 5.00%, 2019 100 87
- -------------------------------------------------------------------
Reeths Puffer School District,
Gen. Oblg., 6.00%, 2025 100 101
- -------------------------------------------------------------------
</TABLE>
19
<PAGE> 21
Portfolio of Investments
<TABLE>
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------
<S> <C> <C>
Regents of the University of Michigan:
Hospital Rev., 5.50%, 2021 $ 15 $ 14
Major Capital Projects
Student Fee Bonds, 5.50%, 2013 10 10
- ----------------------------------------------------------------
Rockford Public Schools,
Gen. Oblg., 5.875%, 2019 25 24
- ----------------------------------------------------------------
St. Clair County, Water Supply
System No. VII, Ira Township
Bonds, Gen. Oblg., 5.25%, 2018 15 14
- ----------------------------------------------------------------
St. Clair Shores, Health Care Rev.,
Bon Secours Health
System Proj., 6.00%, 2027 15 15
- ----------------------------------------------------------------
State Building Auth., Rev., 6.25%, 2020 95 96
- ----------------------------------------------------------------
State Hospital Finance Auth.:
Hospital Rev., Oakwood Hospital
Obligated Group, 5.50% and
5.625%, 2013 and 2018 115 109
Hospital Rev., St. John Hospital,
5.75%, 2016 100 98
- ----------------------------------------------------------------
State Housing Dev. Auth., Rental Housing
Rev., 5.75%, 2014 15 15
- ----------------------------------------------------------------
Strategic Fund, Limited Oblg., Rev.,
Detroit Edison Company
Pollution Control Project,
6.20%, 2025 100 101
- ----------------------------------------------------------------
University of Puerto Rico,
University System
Rev., 5.25%, 2025 80 73
- ----------------------------------------------------------------
Wayne County, Airport Rev.,
Detroit Metropolitan Wayne
County Airport, 6.125%, 2024 20 20
- ----------------------------------------------------------------
Wayne State University Board of
Governors, Gen. Rev.,
5.65%, 2015 100 98
- ----------------------------------------------------------------
West Ottawa Public Schools,
Gen. Oblg., 6.00%, 2020 25 25
- ----------------------------------------------------------------
Western Michigan University,
Board of Trustees,
Gen. Rev., 6.125%, 2022 30 30
- ----------------------------------------------------------------
Wyandotte, Electric Rev., 6.250%, 2017 45 46
- ----------------------------------------------------------------
Puerto Rico Commonwealth:
Electric Power Auth.,
Rev., 6.125%, 2021 100 101
Gen. Oblg., 5.50%, 2009 15 15
Housing Rev., 6.25%, 2029 30 30
- ----------------------------------------------------------------
Virgin Islands Public Finance Auth.,
Government Dev. Program,
Rev., 7.25%, 2018 100 106
- ----------------------------------------------------------------
TOTAL INVESTMENTS--95.4%
(COST: $2,896) 2,937
- ----------------------------------------------------------------
CASH AND OTHER ASSETS,
LESS LIABILITIES--4.6% 142
- ----------------------------------------------------------------
NET ASSETS--100% $3,079
</TABLE>
Note to Portfolio of Investments
Based on the cost of investments of $2,896,000 for federal income tax purposes
at August 31, 1995, the aggregate gross unrealized appreciation was $49,000,
the aggregate gross unrealized depreciation was $8,000 and the net unrealized
appreciation of investments was $41,000.
See accompanying Notes to Financial Statements.
20
<PAGE> 22
Performance Update
Kemper Ohio Tax-Free Income Fund
OHIO AVERAGE ANNUAL TOTAL RETURNS*
For Periods Ended August 31, 1995 (adjusted for the maximum sales charge)
KEMPER OHIO TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
LIFE OF
1-YEAR CLASS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER OHIO TAX-FREE
INCOME FUND CLASS A 3.33% 4.91% (Since 3/22/93)
- --------------------------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE
INCOME FUND CLASS B 4.57 4.96 (Since 5/31/94)
- --------------------------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE
INCOME FUND CLASS C 7.56 7.32 (Since 5/31/94)
- --------------------------------------------------------------------------------------------------
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
KEMPER OHIO TAX-FREE INCOME FUND CLASS A
FROM 3/22/93 THROUGH 8/31/95
<TABLE>
<CAPTION>
3/22/93 12/31/93 12/31/94 8/31/95
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER OHIO TAX-FREE INCOME FUND CLASS A(1) $10,000 $10,509 $10,124 $11,246
- ----------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX(+) 10,000 10,826 10,267 11,508
- ----------------------------------------------------------------------------------------------------------------
CONSUMER PRICE INDEX(++) 10,000 10,153 10,425 10,648
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
KEMPER OHIO TAX-FREE INCOME FUND CLASS B
FROM 5/31/94 THROUGH 8/31/95
<TABLE>
<CAPTION>
5/31/94 9/30/94 12/31/94 3/31/95 6/30/95 8/31/95
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER OHIO TAX-FREE INCOME FUND CLASS B(1) $10,000 $ 9,974 $ 9,881 $10,582 $10,945 $10,624
- ---------------------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX(+) 10,000 10,007 9,864 10,561 10,816 11,057
- ---------------------------------------------------------------------------------------------------------------------------------
CONSUMER PRICE INDEX(++) 10,000 10,129 10,149 10,264 10,339 10,336
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
KEMPER OHIO TAX-FREE INCOME FUND CLASS C
FROM 5/31/94 THROUGH 8/31/95
<TABLE>
<CAPTION>
5/31/94 9/30/94 12/31/94 3/31/95 6/30/95 8/31/95
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER OHIO TAX-FREE INCOME FUND CLASS C(1) $10,000 $ 9,952 $ 9,880 $10,593 $10,758 $10,923
- ---------------------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX(+) 10,000 10,007 9,864 10,561 10,816 11,057
- ---------------------------------------------------------------------------------------------------------------------------------
CONSUMER PRICE INDEX(++) 10,000 10,129 10,149 10,264 10,339 10,336
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Past performance is not predictive of future performance. Returns and net asset
value fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
* Average annual total return measures net investment income and capital
gain or loss from portfolio investments, assuming reinvestment of all dividends
and for A Shares adjustment for the maximum sales charge of 4.5% and for B
Shares adjustment for the applicable contingent deferred sales charge as
follows: 1-year, 3%; since inception, 3%. There is no sales charge for C
Shares. Average annual total return reflects annualized change. During the
periods noted, securities prices fluctuated. For additional information, see
the Prospectus and Statement of Additional Information and the Financial
Highlights at the end of this report.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for A Shares and the contingent deferred sales charge in
effect at the end of the period for B Shares. In comparing the Kemper State
Tax-Free Income Funds to the Lehman Brothers Municipal Bond Index, you should
note that the funds' performance reflects the maximum sales charge, while no
such charges are reflected in the performance of the index.
(+) The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the following
criteria: a minimum credit rating of BBB, have been issued as a part of an
issue of at least $50 million, have been issued within the last 5 years, and
have a maturity of at least 2 years. Bond subject to AMT, variable rate bonds
and zero coupon bonds are excluded from the index. Source is Towers Data
Systems.
(++) The Consumer Price Index is a statistical measure of change, over
time, in the prices of goods and services in major expenditure groups for all
urban consumers. It is generally considered to be a measure of inflation.
Source is Towers Data Systems.
21
<PAGE> 23
Portfolio Statistics
KEMPER OHIO TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION ON 8/31/95 ON 8/31/94
- --------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 71% 66%
- --------------------------------------------------------------------
GENERAL OBLIGATION BONDS 27 27
- --------------------------------------------------------------------
CASH AND EQUIVALENTS 2 7
- --------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
QUALITY ON 8/31/95 ON 8/31/94
- --------------------------------------------------------------------
<S> <C> <C>
AAA 69% 70%
- --------------------------------------------------------------------
AA 13 10
- --------------------------------------------------------------------
A 9 12
- --------------------------------------------------------------------
BBB 8 8
- --------------------------------------------------------------------
NR 1 --
- --------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEARS TO MATURITY ON 8/31/95 ON 8/31/94
- --------------------------------------------------------------------
<S> <C> <C>
10-20 YEARS 48% 50%
- --------------------------------------------------------------------
20+ YEARS 52 50
- --------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE MATURITY ON 8/31/95 ON 8/31/94
- -------------------------------------------------------------------------------
<S> <C> <C>
21.2 YEARS 17.9 YEARS
- -------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 24
Portfolio of Investments
OHIO TAX-FREE INCOME FUND
August 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL Batavia Local School District,
OBLIGATIONS Gen. Oblg., 7.00%, 2014 $ 500 $ 566
-------------------------------------------------------------------------------------------------------------------
Building Auth.:
Administrative Building Funds Proj.,
Rev., 5.50% and 6.30%, 2012 and 2011 265 268
Adult Correctional Building Fund Proj.,
Rev., 6.125%, 2012 310 317
James A. Rhodes State Office Tower,
Rev., 6.25%, 2011 215 221
Juvenile Correctional Building Proj.,
Rev., 6.60%, 2014 200 215
-------------------------------------------------------------------------------------------------------------------
Cambridge, Water System Rev., 5.50%, 2015 550 532
-------------------------------------------------------------------------------------------------------------------
Canton Waterworks, Gen. Oblg., 5.85%, 2015 300 303
-------------------------------------------------------------------------------------------------------------------
Cleveland, Airport System Improvement,
Rev., 5.75%, 2015 750 739
-------------------------------------------------------------------------------------------------------------------
Cleveland Public Power, First Mortgage,
Rev., 7.00%, 2017 750 830
-------------------------------------------------------------------------------------------------------------------
Cleveland, Waterworks Improvement,
First Mortgage, Rev., 5.50% and 6.25%,
2013 and 2015 895 911
-------------------------------------------------------------------------------------------------------------------
Columbus Municipal Airport Auth., Rev.,
6.00%, 2014 750 755
-------------------------------------------------------------------------------------------------------------------
Crawford County, Gen. Oblg., 6.75%, 2019 700 768
-------------------------------------------------------------------------------------------------------------------
Cuyahoga County:
Fairview General Hospital, Rev., 5.50%, 2014 500 461
Merida Health System, Rev., 6.25%, 2014 950 967
Multi-Family Housing, Rev., 6.50%, 2020 1,000 1,000
-------------------------------------------------------------------------------------------------------------------
Delaware County:
Gen. Oblg., 5.25%, 2015 320 298
School District, Gen. Oblg., 5.20%, 2016 1,000 931
-------------------------------------------------------------------------------------------------------------------
Fayette County, Gen. Oblg., 5.90%, 2013 200 193
-------------------------------------------------------------------------------------------------------------------
Franklin County:
Convention Facilities Auth., Tax and Lease
Rev., 5.85%, 2019 150 150
Riverside United Methodist Hospital Proj.,
Rev., 5.75%, 2012 and 2020 900 874
-------------------------------------------------------------------------------------------------------------------
Green Springs, Health Care Facility,
St. Francis Healthcare, Rev., 7.00%, 2014 400 403
-------------------------------------------------------------------------------------------------------------------
Higher Educational Facility:
Dayton University, Rev., 6.60%, 2017 430 459
Dominican College, Rev., 6.625%, 2014 600 621
Oberlin College Proj., Rev., 5.375%, 2015 750 704
-------------------------------------------------------------------------------------------------------------------
Highland Heights, Gen. Oblg., 6.15%, 2012 145 148
-------------------------------------------------------------------------------------------------------------------
Housing Finance Agcy., Single Family Mortgage,
Rev., 7.85%, 2021 365 388
-------------------------------------------------------------------------------------------------------------------
Lake County, Hospital Facility, Rev., 5.375%, 2010 850 827
-------------------------------------------------------------------------------------------------------------------
Lakeview Local School District,
Gen. Oblg., 6.90%, 2014 700 777
-------------------------------------------------------------------------------------------------------------------
Lorrain, Gen. Oblg., 5.65%, 2015 175 171
-------------------------------------------------------------------------------------------------------------------
Lucas County:
Public Improvement Water Utility,
Rev., 6.05%, 2013 130 133
St. Vincent Medical Center, Rev., 5.375% and 5.45%,
2017 and 2014 800 758
-------------------------------------------------------------------------------------------------------------------
Marion County Health Care Facilities Refunding and
Improvement, United Church Homes Proj.,
Rev., 6.30% and 6.375%, 2015 and 2010 700 666
-------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 25
Portfolio of Investments
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Muskingum County, Franciscan Health
Advisory Services, Inc., Rev., 7.50%, 2012 $ 30 $ 31
-------------------------------------------------------------------------------------------------------------------
Napoleon, Health Care Facility, Lutheran
Orphans' and Old Folks' Home Society,
Rev., 6.875%, 2023 495 521
-------------------------------------------------------------------------------------------------------------------
North Royalton City School District,
Gen. Oblg., 6.10%, 2019 500 513
-------------------------------------------------------------------------------------------------------------------
Northeast Ohio Regional Sewer District,
Wastewater Improvement, Rev., 6.50%, 2016 800 837
-------------------------------------------------------------------------------------------------------------------
Olentangy Local School District,
Gen. Oblg., 5.85% and 6.35%, 2007 and 2017 550 576
-------------------------------------------------------------------------------------------------------------------
Olmstead Falls Schoool District,
Gen Oblg., 6.85%, 2011 250 281
-------------------------------------------------------------------------------------------------------------------
St. Henry Consolidated Local School District,
Gen. Oblg., 5.25%, 2019 400 371
-------------------------------------------------------------------------------------------------------------------
State Turnpike, Rev., 5.45%, 2011 750 739
-------------------------------------------------------------------------------------------------------------------
State Water Dev. Auth., Rev., 6.15%, 2023 1,000 1,024
-------------------------------------------------------------------------------------------------------------------
Sandusky County, Gen. Oblg., 6.20%, 2013 500 522
-------------------------------------------------------------------------------------------------------------------
Shawnee State University, General Receipts,
Rev., 6.00%, 2014 200 204
-------------------------------------------------------------------------------------------------------------------
City of Springdale, Hospital Facilities First
Mortgage, Southwestern Ohio Seniors
Services, Rev., 6.00%, 2018 750 669
-------------------------------------------------------------------------------------------------------------------
Toledo, Gen. Oblg., 6.10% and 6.35%,
2014 and 2025 1,250 1,280
-------------------------------------------------------------------------------------------------------------------
Trumbull County Sewer Improvement,
Gen. Oblg., 6.20%, 2014 500 519
-------------------------------------------------------------------------------------------------------------------
Tuscarawas Valley Local School District,
Gen. Oblg., 6.60%, 2015 365 396
-------------------------------------------------------------------------------------------------------------------
University, General Receipt, Rev., 5.00%
2013 and 2018 1,500 1,357
-------------------------------------------------------------------------------------------------------------------
University of Cincinnati, General Receipt,
Rev., 5.15%, 2014 455 414
-------------------------------------------------------------------------------------------------------------------
Warren County, Sewer District, Rev., 5.45%, 2015 175 169
-------------------------------------------------------------------------------------------------------------------
Youngstown, Gen. Oblg., 6.125%, 2014 110 113
-------------------------------------------------------------------------------------------------------------------
Puerto Rico:
Electric Power Auth., Rev., 5.50%, 2025 750 697
Finance Agcy., Rev., 6.00%, 2014 750 763
Housing and Finance Agcy., Rev., 6.25%, 2029 1,000 1,006
Medical and Environmental Control Facilities,
Rev., 6.25%, 2032 400 405
-------------------------------------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth.,
Rev., 7.25%, 2018 225 238
===================================================================================================================
TOTAL OBLIGATIONS -- 98.6%
(COST: $30,007) 30,999
===================================================================================================================
MONEY MARKET INSTRUMENTS -- 1.2%
YIELD -- 3.40%
DUE -- SEPTEMBER 1995
(COST: $400) 400 400
===================================================================================================================
TOTAL INVESTMENT -- 99.8%
(COST: $30,407) 31,399
===================================================================================================================
CASH AND OTHER ASSETS, LESS LIABILITIES -- .2% 51
===================================================================================================================
NET ASSETS -- 100% $31,450
===================================================================================================================
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $30,407,000 for federal income tax purposes
at August 31, 1995, the aggregate gross unrealized appreciation was $1,137,000,
the aggregate gross unrealized depreciation was $145,000 and the net unrealized
appreciation of investments was $992,000.
See accompanying Notes to Financial Statements.
24
<PAGE> 26
KEMPER TEXAS TAX-FREE INCOME FUND
PERFORMANCE UPDATE
TEXAS AVERAGE ANNUAL TOTAL RETURNS*
For Periods Ended August 31, 1995 (Adjusted For The Maximum Sales
Charge)
KEMPER TEXAS TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
LIFE OF
1-YEAR CLASS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER TEXAS TAX-FREE
INCOME FUND CLASS A 4.34% 7.62% (Since 11/1/91)
- -----------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE
INCOME FUND CLASS B 5.16 4.89 (Since 5/31/94)
- -----------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE
INCOME FUND CLASS C 8.27 7.32 (Since 5/31/94)
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
KEMPER TEXAS TAX-FREE INCOME FUND CLASS A
FROM 11/1/91 THROUGH 8/31/95
<TABLE>
<CAPTION>
KEMPER TEXAS LEHMAN BROTHERS
TAX-FREE INCOME MUNICIPAL BOND CONSUMER
FUND CLASS A(1) INDEX+ PRICE INDEX++
CLASS A
<S> <C> <C> <C>
11/1/91 10000 10000 10000
12/31/91 9785 10243 10036
12/31/92 10752 11146 10328
12/31/93 12271 12515 10611
12/31/94 11952 11868 10895
8/31/95 13256 13303 11128
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
KEMPER TEXAS TAX-FREE INCOME FUND CLASS B
FROM 5/31/94 THROUGH 8/31/95
<TABLE>
<CAPTION>
KEMPER TEXAS LEHMAN BROTHERS
TAX-FREE INCOME MUNICIPAL BOND CONSUMER
FUND CLASS B(1) INDEX+ PRICE INDEX++
CLASS B
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9/30/04 9951.90 10007 10129
12/31/94 9906.20 9864 10149
3/31/95 10537.1 10561 10264
6/30/95 10921.6 10816 10339
8/31/95 10615.4 11057 10366
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
KEMPER TEXAS TAX-FREE INCOME FUND CLASS C
FROM 5/31/94 THROUGH 8/31/95
<TABLE>
<CAPTION>
KEMPER TEXAS LEHMAN BROTHERS
TAX-FREE INCOME MUNICIPAL BOND CONSUMER
FUND CLASS C(1) INDEX+ PRICE INDEX++
CLASS C
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9/30/94 9928 10007 10129
12/31/94 9913 9864 10149
3/31/95 10546 10561 10264
6/30/95 10753 10816 10339
8/31/95 10923 11057 10366
</TABLE>
Past performance is not predictive of future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value,
which may be more or less than original cost.
* Average annual total return measures net investment income and capital gain
or loss from portfolio investments, assuming reinvestment of all
dividends and for A Shares adjustment for the maximum sales charge of
4.5% and for B Shares adjustment for the applicable contingent deferred sales
charge as follows: 1-year, 3%; since inception, 3%. There is no sales charge
for C Shares. Average annual total return reflects annualized change. During
the periods noted, securities prices fluctuated. For additional information,
see the Prospectus and Statement of Additional Information and the
Financial Highlights at the end of this report.
(1) Performance includes reinvestment of dividends and adjustment for
the maximum sales charge for A Shares and the contingent deferred sales
charges in effect at the end of the period for B Shares. In comparing
the Kemper State Tax-Free Income Funds to the Lehman Brothers Municipal
Bond Index, you should note that the funds' performance reflects the
maximum sales charge, while no such charges are reflected in the
performance of the index.
+The Lehman Brothers Municipal Bond Index includes approximately 15,000 bonds.
To be included in the index, a municipal bond must meet the following
criteria; a minimum credit rating of BBB, have been issued as a part of an
issue of at least $50 million, have been issued within the last 5 years, and
have a maturity of at least 2 years. Bond subject to AMT, variable rate bonds
and zero coupon bonds are excluded from the index. Source is Towers Data
Systems.
++The Consumer Price Index is a statistical measure of change, over
time, in the prices of goods and services in major expenditure groups for
all urban consumers. It is generally considered to be a measure of
inflation. Source is Towers Data Systems.
25
<PAGE> 27
PORTFOLIO STATISTICS
KEMPER TEXAS TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION ON 8/31/95 ON 8/31/94
- -------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 79% 78%
- -------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 19 19
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 3
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
On 8/31/95 On 8/31/94
- Revenue bonds
- General Obligation bonds
- Cash and equivalents
<TABLE>
<CAPTION>
QUALITY ON 8/31/95 ON 8/31/94
- -------------------------------------------------------------------------------
<S> <C> <C>
AAA 64% 57%
- -------------------------------------------------------------------------------
AA 16 22
- -------------------------------------------------------------------------------
A 8 13
- -------------------------------------------------------------------------------
BBB 10 6
- -------------------------------------------------------------------------------
NR 2 2
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/95 ON 8/31/94
- AAA
- AA
- A
- BBB
- NR
<TABLE>
<CAPTION>
YEARS TO MATURITY ON 8/31/95 ON 8/31/94
- -------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 1% 9%
- -------------------------------------------------------------------------------
10-20 YEARS 62 67
- -------------------------------------------------------------------------------
20+ YEARS 37 24
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
On 8/31/95 On 8/31/94
1-10 years
10-20 years
20+ years
<TABLE>
<CAPTION>
AVERAGE MATURITY ON 8/31/95 ON 8/31/94
- -------------------------------------------------------------------------------
<S> <C>
19.0 YEARS 17.9 YEARS
- -------------------------------------------------------------------------------
26
</TABLE>
<PAGE> 28
PORTFOLIO OF INVESTMENTS
TEXAS TAX-FREE INCOME FUND
August 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL
OBLIGATIONS Abilene Higher Education Facilities Corp.,
Abilene Christian University Proj.,
Rev., 6.25%, 2011 $ 300 $ 303
---------------------------------------------------------------
Aldine Independent School District,
Harris County, Gen. Oblg., 5.50%, 2016 300 283
---------------------------------------------------------------
Amarillo, Gen. Oblg., 5.125%, 2015 350 322
---------------------------------------------------------------
Austin Airport, Rev., 6.20%, 2015 585 590
---------------------------------------------------------------
Austin Combined Utility Systems,
Rev., zero coupon, 2010 1,200 500
---------------------------------------------------------------
Bexar County Housing Finance Dev. Corp.,
Multi-Family Housing, Rev., 6.875%, 2012 250 263
---------------------------------------------------------------
Bexar Metro Water District, Rev., 5.875%, 2022 350 345
---------------------------------------------------------------
Brazos River Auth., Texas Utilities
Electric Company Proj., Rev., 8.125%, 2020 350 388
---------------------------------------------------------------
Cameron County Housing Finance Corp.,
Single Family Mortgage, Rev., 6.75%, 2025 500 523
---------------------------------------------------------------
Circle C, Utility System, District
Number Three, Rev., 6.50%, 2009 250 264
---------------------------------------------------------------
Clear Lake City Water Auth., Waterworks
and Sewer Combination, Rev. 5.00%, 2013 500 452
---------------------------------------------------------------
Collin County, Jail Facility Financial
Corp., Rev., 5.00%, 2013 400 361
---------------------------------------------------------------
Corpus Christi, Utility System, Rev.,
5.25%, 2013 300 280
---------------------------------------------------------------
Dallas-Fort Worth International Airport,
Rev., 5.625%, 2015 500 483
---------------------------------------------------------------
Dallas, Waterworks and Sewer System,
Rev., 5.25%, 2013 and 2014 460 428
---------------------------------------------------------------
Denton County, Gen. Oblg., 5.00%, 2012 405 374
---------------------------------------------------------------
Denton, Utility System, Rev., 6.50%, 2009 150 160
---------------------------------------------------------------
Ector County Hospital District, Rev.,
7.30%, 2012 450 479
---------------------------------------------------------------
Fort Bend County Levee Improvement District
Number 2, Unlimited Tax Levee Improvement,
Gen. Oblg., 6.625%, 2008 200 212
---------------------------------------------------------------
Georgetown Higher Education Finance Corp.,
Southwestern University Proj., Rev.,
6.30%, 2014 500 508
---------------------------------------------------------------
Harris County:
Health Facilities Dev. Corp., St. Luke's
Episcopal Hospital Proj., Rev.,
6.75%, 2021 120 125
Hospital District Mortgage, Rev.,
7.40%, 2010 60 70
Road And Permanent Improvement,
Rev., 5.125%, 2011 200 188
Toll Road Senior Lien, Rev., 5.00%, 2016 350 315
---------------------------------------------------------------
Housing Agcy., Single Family Mortgage,
Rev., 7.15%, 2012 85 90
---------------------------------------------------------------
Houston, Higher Education Finance Corp.,
University of St. Thomas Proj., Rev.,
7.25%, 2007 300 317
---------------------------------------------------------------
Lockhart Correctional Facilities Financing
Corp., Rev., 6.625%, 2012 200 211
---------------------------------------------------------------
Lower Colorado River Auth., Junior Lien,
Rev., 5.25%, 2015 150 141
---------------------------------------------------------------
Lower Neches Valley, Industrial Dev. Corp.,
Mobil Oil, Rev., 6.40%, 2030 250 251
---------------------------------------------------------------
Lubbock, Gen. Oblg., 4.00%, 2011 300 243
---------------------------------------------------------------
Lubbock Health Facilities Dev. Corp.,
Methodist Hospital, Rev., 5.25%, 2019 600 546
---------------------------------------------------------------
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
Matagorda County, Navigation District:
Number 1, Pollution Control, Rev.,
Central Power and Light, 7.875%, 2016 $ 110 $ 116
Houston Power and Light, 7.875%, 2016 100 104
-------------------------------------------------------------------
North Central Health Facilities Dev. Corp.,
Presbyterian Healthcare Systems,
Rev., 6.625%, 2011 100 104
-------------------------------------------------------------------
Port Arthur, Gen. Oblg., 5.50%, 2014 150 144
-------------------------------------------------------------------
Public Financing Auth., Gen. Oblg.,
zero coupon and 7.00%, 2009 and 2012 1,243 725
-------------------------------------------------------------------
San Antonio, Electric and Gas, Rev., 5.00%,
2014 250 224
-------------------------------------------------------------------
Socorro Independent School District,
Gen. Oblg., 6.625%, 2013 90 94
-------------------------------------------------------------------
Southern University, Board of Regents,
Consolidated Rev., 5.00%, 2013 200 180
-------------------------------------------------------------------
Spring Independent School District,
Gen. Oblg., 6.375%, 2016 400 414
-------------------------------------------------------------------
Titus County Hospital District, Improvement,
Rev., 6.125%, 2013 500 479
-------------------------------------------------------------------
Travis County Housing Finance Corp.:
Gen. Oblg., 6.75%, 2009 75 84
Residential Mortgage, Senior Rev.,
7.00%, 2011 275 296
Single Family Mortgage, Rev., 6.75%, 2014 130 137
-------------------------------------------------------------------
Trinity River Auth., Denton Creek
Wastewater System, Rev., 6.45%, 2015 390 407
-------------------------------------------------------------------
Turnpike Auth., Dallas North Tollway,
Rev., 5.00%, 2020 515 457
-------------------------------------------------------------------
Waco Health Facilities Dev. Corp.,
Hillcrest Baptist Medical Center Proj.,
Rev., 7.125%, 2014 90 100
-------------------------------------------------------------------
Water Dev., Gen. Oblg., 5.25%, 2020 500 452
-------------------------------------------------------------------
TOTAL INVESTMENTS--97.7%
(COST: $14,122) 14,532
-------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--2.3% 345
-------------------------------------------------------------------
NET ASSETS--100% $14,877
-------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $14,122,000 for federal income
tax purposes at August 31, 1995, the aggregate gross unrealized
appreciation was $461,000, the aggregate gross unrealized depreciation
was $51,000 and the net unrealized appreciation of investments was
$410,000.
See accompanying Notes to Financial Statements.
28
<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER STATE TAX-FREE INCOME SERIES
We have audited the accompanying statement of assets and liabilities,
including the portfolios of investments, of Kemper California Tax-Free Income
Fund (California Fund), Kemper Michigan Tax-Free Income Fund (Michigan Fund),
Kemper Ohio Tax-Free Income Fund (Ohio Fund), and Kemper Texas Tax-Free Income
Fund (Texas Fund), four of the eight investment portfolios comprising Kemper
State Tax-Free Income Series (the Trust), as of August 31, 1995, the related
statements of operations for the year then ended and changes in net assets for
each of the two years in the period ended August 31, 1995 for the California
Fund, Ohio Fund, and Texas Fund and for the period from March 15, 1995 (initial
public offering) to August 31, 1995 for the Michigan Fund, and the financial
highlights for the fiscal periods since 1991. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
August 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and finan-cial highlights referred
to above present fairly, in all material respects, the financial position of
each of the above mentioned Funds of Kemper State Tax-Free Income Series at
August 31, 1995, and the results of their operations, the changes in their net
assets and financial highlights for the periods referred to above, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 13, 1995
29
<PAGE> 31
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1995
(In Thousands)
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
==================================================================================================================
<S> <C> <C> <C> <C>
Assets
- ------------------------------------------------------------------------------------------------------------------
Investments, at value (Cost: $1,029,524, $2,896,
$30,407 and $14,122, respectively) $1,069,063 2,937 31,399 14,532
- ------------------------------------------------------------------------------------------------------------------
Cash 391 258 986 1,102
- ------------------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 717 30 6 1
- ------------------------------------------------------------------------------------------------------------------
Investments sold 10,116 -- 998 1
- ------------------------------------------------------------------------------------------------------------------
Interest 17,327 53 415 186
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,097,614 3,278 33,804 15,822
==================================================================================================================
Liabilities and net assets
- ------------------------------------------------------------------------------------------------------------------
Payable for:
Dividends 1,112 3 24 12
- ------------------------------------------------------------------------------------------------------------------
Fund shares redeemed 2,026 -- 71 --
- ------------------------------------------------------------------------------------------------------------------
Investments purchased 6,446 196 2,225 915
- ------------------------------------------------------------------------------------------------------------------
Management fee 469 -- 14 7
- ------------------------------------------------------------------------------------------------------------------
Other 329 -- 20 11
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 10,382 199 2,354 945
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,087,232 3,079 31,450 14,877
==================================================================================================================
Analysis of net assets
- ------------------------------------------------------------------------------------------------------------------
Paid-in capital $1,053,403 3,061 30,912 14,210
- ------------------------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss)
on investments (5,710) (23) (454) 257
- ------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 39,539 41 992 410
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $1,087,232 3,079 31,450 14,877
==================================================================================================================
The pricing of shares
- ------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $1,075,264.615 1,693.680 26,150.862 14,312.417
- ------------------------------------------------------------------------------------------------------------------
Shares outstanding, no par value 146,331.232 173.483 2,666.549 1,373.538
- ------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per
share (net assets/shares outstanding) $7.35 9.76 9.81 10.42
- ------------------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset
value or 4.50% of offering price) $7.70 10.22 10.27 10.91
==================================================================================================================
CLASS B SHARES
Net assets applicable to shares outstanding $11,673.132 849.213 5,135.407 361.659
- ------------------------------------------------------------------------------------------------------------------
Shares outstanding, no par value 1,587.117 86.950 523.589 34.723
- ------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price (subject
to contingent deferred sales charge) per share
(net assets/shares outstanding) $7.35 9.77 9.81 10.42
==================================================================================================================
CLASS C SHARES
Net assets applicable to shares outstanding $294.083 535.632 163.221 203.168
- ------------------------------------------------------------------------------------------------------------------
Shares outstanding, no par value 40.040 54.871 16.642 19.496
- ------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per
share (net assets/shares outstanding) $7.34 9.76 9.81 10.42
==================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
30
<PAGE> 32
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended August 31, 1995
(In Thousands)
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN(A) OHIO TEXAS
==========================================================================================================================
<S> <C> <C> <C> <C>
Net Investment Income
Interest income $68,859 49 1,669 918
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Management fee 5,765 5 155 83
- --------------------------------------------------------------------------------------------------------------------------
Administrative services fee 1,501 2 36 25
- --------------------------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 407 1 18 9
- --------------------------------------------------------------------------------------------------------------------------
Distribution services fee 59 2 27 5
- --------------------------------------------------------------------------------------------------------------------------
Professional fees 97 -- 1 1
- --------------------------------------------------------------------------------------------------------------------------
Reports to shareholders 258 -- 7 5
- --------------------------------------------------------------------------------------------------------------------------
Registration fees -- 1 5 1
- --------------------------------------------------------------------------------------------------------------------------
Trustees' fees and other 79 -- 19 11
- --------------------------------------------------------------------------------------------------------------------------
Total expenses before expense waiver 8,166 11 268 140
- --------------------------------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment manager -- 5 64 29
Total expenses after waiver 8,166 6 204 111
- --------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 60,693 43 1,465 807
==========================================================================================================================
Net realized and unrealized gain (loss) on investments
- --------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on sales of investments
(including options purchased) 6,642 (23) (89) 285
- --------------------------------------------------------------------------------------------------------------------------
Net realized gain from futures transactions 738 -- 27 10
- --------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) 7,380 (23) (62) 295
- --------------------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 14,140 41 957 208
- --------------------------------------------------------------------------------------------------------------------------
Net gain on investments 21,520 18 895 503
- --------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $82,213 61 2,360 1,310
==========================================================================================================================
</TABLE>
(a) For the period from March 15, 1995 (initial public offering)
to August 31, 1995.
See accompanying Notes to Financial Statements.
31
<PAGE> 33
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
(In Thousands)
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
YEAR ENDED MARCH 15, 1995 YEAR ENDED YEAR ENDED
AUGUST 31, TO AUGUST 31, AUGUST 31, TO AUGUST 31,
1995 1994 1995 1995 1994 1995 1994
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Operations, dividends and capital share activity
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income $60,693 66,641 43 1,465 1,051 807 761
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) 7,380 14,661 (23) (62) (392) 295 147
==================================================================================================================================
Change in net unrealized
appreciation 14,140 (90,085) 41 957 (443) 208 (725)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 82,213 (8,783) 61 2,360 216 1,310 183
==================================================================================================================================
Distribution from net
investment income (60,693) (66,641) (43) (1,465) (1,051) (807) (761)
==================================================================================================================================
Distribution from net
realized gain on investments (5,442) (57,002) -- -- (14) (114) (161)
- ----------------------------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (66,135) (123,643) (43) (1,465) (1,065) (921) (922)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from
capital share transactions (97,295) (30,502) 2,728 6,786 9,088 (921) 3,807
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS (81,217) (162,928) 2,746 7,681 8,239 (532) 3,068
==================================================================================================================================
Net assets
- ----------------------------------------------------------------------------------------------------------------------------------
Beginning of period 1,168,449 1,331,377 333 23,769 15,530 15,409 12,341
END OF PERIOD $1,087,232 1,168,449 3,079 31,450 23,769 14,877 15,409
==================================================================================================================================
</TABLE>
32
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
1 DESCRIPTION OF THE FUNDS
Kemper California Tax-Free Income Fund, Kemper Michigan
Tax-Free Income Fund, Kemper Ohio Tax-Free Income
Fund and Kemper Texas Tax-Free Income Fund (collectively
the Funds) are four of eight investment portfolios
comprising the Kemper State Tax-Free Income Series (the
Trust). The remaining portfolios are Kemper Florida,
Kemper New Jersey, Kemper New York and Kemper Pennsylvania
Tax-Free Income Funds. The Trust is an open-end management
investment company organized as a business trust under the
laws of Massachusetts.
Each Fund offers three classes of shares. Class A shares
are sold to investors subject to an initial sales
charge. Class B shares are sold without an initial sales
charge but are subject to higher ongoing expenses than
Class A shares and a contingent deferred sales charge
payable upon certain redemptions. Class B shares
automatically convert to Class A shares six years after
issuance. Class C shares are sold without an initial or a
contingent deferred sales charge but are subject to higher
ongoing expenses than Class A shares and do not convert
into another class. Each share of a Fund represents an
identical interest in the investments of the Fund and has
the same rights.
2 SIGNIFICANT
ACCOUNTING POLICIES
INVESTMENT VALUATION. Investments are stated at value.
Fixed income securities are valued by using market
quotations, or independent pricing services that use
prices provided by market makers or estimates of market
values obtained from yield data relating to instruments or
securities with similar characteristics. Exchange traded
fixed income options are valued at the last sale price
unless there is no sale price, in which event prices
provided by market makers are used. Over-the-counter
traded fixed income options are valued based upon prices
provided by market makers. Financial futures and options
thereon are valued at the settlement price established
each day by the board of trade or exchange on which they
are traded. Other securities and assets are valued at
fair value as determined in good faith by the Board of
Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Investment
transactions are accounted for on the trade date (date
the order to buy or sell is executed). Interest income is
recorded on the accrual basis and premiums and original
issue discounts on securities are amortized. Realized
gains and losses from investment transactions are reported
on an identified cost basis. Realized and unrealized gains
and losses on financial futures and options are included
in net realized and unrealized gain (loss) on investments,
as appropriate.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other Trust
expenses are allocated among the Funds in proportion to
their relative net assets.
FUND SHARE VALUATION. Fund shares are sold and redeemed on
a continuous basis at net asset value (plus an initial
sales charge on most sales of Class A shares). Proceeds
payable on redemption of Class B shares will be reduced by
the amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is open
for trading, the net asset value per share is determined
as of the earlier of 3:00 p.m. Chicago time or the close
of the Exchange. The net asset value per share is
determined separately for each class by dividing the
Fund's net assets attributable to that class by the number
of shares of the class outstanding.
33
<PAGE> 35
FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS.
Each Fund has complied with the special provisions of the
Internal Revenue Code available to investment companies
and therefore no federal income tax provision is required.
The accumulated net realized loss on sales of investments
for federal income tax purposes at August 31, 1995, is
$23,000 in the Michigan Fund, and $388,000 in the Ohio
Fund. These loss carryovers are available to offset future
taxable gains in the respective Funds, and, if not
applied, expire during the period 2002 through 2003.
Differences in dividends per share for a Fund are due
to different class expenses. Each Fund declares and
records a daily dividend equal to its net investment
income for that day, to holders of shares for which
payment has been received. Income dividends are
distributed monthly. Net realized capital gains, if any,
will be distributed at least annually.
Distributions are determined in accordance with income
tax principles which may treat certain transactions
differently than generally accepted accounting principles.
3 TRANSACTIONS
WITH AFFILIATES
MANAGEMENT AGREEMENT. The Trust has a management
agreement with Kemper Financial Services, Inc. (KFS) and
each Fund pays a management fee at an annual rate of .55%
of the first $250 million of average daily net assets
declining gradually to .40% of average daily net assets in
excess of $12.5 billion.
The California Fund paid a management fee of $5,765,000
for the year ended August 31, 1995.
KFS has agreed to waive the Michigan Fund's management
fee until September 15, 1995. Thereafter, the management
fee will be reinstated gradually. For the period ended
August 31, 1995, the Michigan Fund paid no management fee
after the waiver.
KFS waived the Ohio Fund's management fee and absorbed
all other operating expenses until June 30, 1994.
Thereafter, the management fee and operating expenses were
reinstated gradually through June 30, 1995. For the year
ended August 31, 1995, the Ohio Fund paid a management fee
of $108,000 after the waiver.
KFS waived the Texas Fund's management fee and absorbed
all other operating expenses until December 31, 1992.
Thereafter, the management fee and operating expenses were
reinstated gradually through June 30, 1995. For the year
ended August 31, 1995, the Texas Fund paid a management
fee of $54,000 after the waiver.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT. The
Trust has an underwriting and distribution services
agreement with Kemper Distributors, Inc. (KDI). The
following information concerns the underwriting
commissions paid in connection with the distribution of
each Fund's Class A shares for the period ended August 31,
1995:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS COMMISSIONS
RETAINED ALLOWED BY KDI PAID TO
BY KDI TO ALL FIRMS AFFILIATES OF KDI
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
California $140,000 958,000 265,000
Michigan 4,000 31,000 3,000
Ohio 13,000 86,000 49,000
Texas 5,000 37,000 --
</TABLE>
34
<PAGE> 36
For services under the distribution services agreement, each Fund pays KDI a
fee of .75% of average daily net assets of the Class B and Class C shares.
Pursuant to the agreement, KDI enters into related selling group agreements with
various firms at various rates for sales of Class B and Class C shares of each
Fund. The following information concerns the distribution fees, commissions and
contingent deferred sales charges paid in connection with the distribution
services for each Fund's Class B and Class C shares for the period ended August
31, 1995:
<TABLE>
<CAPTION>
COMMISSIONS
DISTRIBUTION AND AMOUNTS CONTINGENT
FEES PAID DISTRIBUTION PAID TO DEFERRED SALES
BY THE FUND FEES PAID BY AFFILIATES CHARGES RECEIVED
TO KDI KDI TO FIRMS OF KDI BY KDI
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California $59,000 350,000 158,000 35,000
Michigan 2,000 23,000 -- --
Ohio 27,000 158,000 39,000 11,000
Texas 5,000 16,000 -- --
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an administrative services
agreement with KDI. For providing information and administrative services to
shareholders, each Fund pays KDI a fee at an annual rate of up to .25% of
average daily net assets. KDI in turn has various arrangements with financial
services firms that provide these services and pays these firms based on assets
of Fund accounts the firms service. Information concerning administrative
services fees for the period ended August 31, 1995 is as follows:
<TABLE>
<CAPTION>
ADMINISTRATIVE TOTAL
SERVICES FEES SERVICES FEES SERVICES FEES
PAID BY THE PAID BY KDI PAID TO
FUND TO KDI TO ALL FIRMS AFFILIATES OF KDI
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
California $1,501,000 1,516,000 264,000
Michigan 2,000 3,000 --
Ohio 36,000 52,000 27,000
Texas 25,000 25,000 2,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a services agreement with the
Funds' custodian and transfer agent, Kemper Service Company (KSvC) is the
shareholder service agent of the Trust. For the period ended August 31, 1995,
the custodian remitted shareholder services fees as follows:
<TABLE>
<CAPTION>
SHAREHOLDER SERVICES FEES
REMITTED TO KSVC
- --------------------------------------------------------------------------------------
<S> <C>
California $429,000
Michigan 1,000
Ohio 18,000
Texas 9,000
</TABLE>
OFFICERS AND TRUSTEES. Certain officers or trustees of the Trust are also
officers or directors of KFS. For the period ended August 31, 1995, the Funds
made no payments to its officers and incurred trustees' fees aggregating $27,000
to independent trustees.
35
<PAGE> 37
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENT For the period ended August 31, 1995, (excluding
TRANSACTIONS short-term instruments) are as follows (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases $735,397 4,594 32,103 11,003
Proceeds from
sales 816,114 1,675 24,116 11,869
</TABLE>
5. CAPITAL SHARE The following tables summarize the activity in capital
TRANSACTIONS shares of the Funds (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA
YEAR ENDED AUGUST 31,
1995 1994
--------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------
SHARES SOLD
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------
Class A 12,188 $ 86,868 19,801 $161,763
-------------------------------------------------------------------------
Class B 1,538 10,921 416 3,012
-------------------------------------------------------------------------
Class C 39 286 11 82
-------------------------------------------------------------------------
<CAPTION>
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
<S> <C> <C> <C> <C>
Class A 5,347 37,817 10,566 68,651
-------------------------------------------------------------------------
Class B 31 221 2 11
-------------------------------------------------------------------------
Class C 1 4 -- --
-------------------------------------------------------------------------
<CAPTION>
SHARES REDEEMED
<S> <C> <C> <C> <C>
Class A (32,560) (230,923) (35,357) (264,021)
-------------------------------------------------------------------------
Class B (339) (2,405) -- --
-------------------------------------------------------------------------
Class C (11) (84) -- --
-------------------------------------------------------------------------
<CAPTION>
CONVERSION OF SHARES
<S> <C> <C> <C> <C>
Class A 61 418 -- --
-------------------------------------------------------------------------
Class B (61) (418) -- --
-------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
NET DECREASE
FROM CAPITAL
SHARE TRANSACTIONS $ (97,295) $(30,502)
-------------------------------------------------------------------------
</TABLE>
36
<PAGE> 38
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MICHIGAN
MARCH 15, 1995 TO
AUGUST 31, 1995
--------------------------
SHARES AMOUNT
----------------------------------------------------------------------------
<S> <C> <C>
SHARES SOLD
----------------------------------------------------------------------------
Class A 296 $ 2,868
----------------------------------------------------------------------------
Class B 87 845
----------------------------------------------------------------------------
Class C 44 421
----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
----------------------------------------------------------------------------
Class A 3 24
----------------------------------------------------------------------------
Class B 1 4
----------------------------------------------------------------------------
Class C 1 3
----------------------------------------------------------------------------
SHARES REDEEMED
----------------------------------------------------------------------------
Class A (137) (1,307)
----------------------------------------------------------------------------
Class B (12) (120)
----------------------------------------------------------------------------
Class C (1) (10)
----------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL
SHARE TRANSACTIONS $ 2,728
============================================================================
</TABLE>
<TABLE>
<CAPTION>
OHIO
YEAR ENDED AUGUST 31,
1995 1994
----------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
----------------------------------------------------------------------------
Class A 703 $ 6,633 875 $ 8,852
----------------------------------------------------------------------------
Class B 448 4,271 121 1,159
----------------------------------------------------------------------------
Class C 14 133 10 94
----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
----------------------------------------------------------------------------
Class A 87 819 96 643
----------------------------------------------------------------------------
Class B 9 85 -- --
----------------------------------------------------------------------------
Class C 1 7 -- --
----------------------------------------------------------------------------
SHARES REDEEMED
----------------------------------------------------------------------------
Class A (494) (4,704) (168) (1,611)
----------------------------------------------------------------------------
Class B (38) (379) (5) (49)
----------------------------------------------------------------------------
Class C (8) (79) -- --
----------------------------------------------------------------------------
CONVERSION OF SHARES
----------------------------------------------------------------------------
Class A 12 116 -- --
----------------------------------------------------------------------------
Class B (12) (116) -- --
----------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL
SHARE TRANSACTIONS $ 6,786 $ 9,088
============================================================================
</TABLE>
37
<PAGE> 39
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TEXAS
YEAR ENDED AUGUST 31,
1995 1994
------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
- -------------------------------------------------------------------------------
Class A 197 $ 1,968 544 $ 5,678
- -------------------------------------------------------------------------------
Class B 33 336 3 35
- -------------------------------------------------------------------------------
Class C 4 42 45 461
- -------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
- -------------------------------------------------------------------------------
Class A 56 562 56 583
- -------------------------------------------------------------------------------
Class B 1 7 -- --
- -------------------------------------------------------------------------------
Class C 1 13 -- --
- -------------------------------------------------------------------------------
SHARES REDEEMED
- -------------------------------------------------------------------------------
Class A (349) (3,496) (285) (2,950)
- -------------------------------------------------------------------------------
Class B (2) (27) -- --
- -------------------------------------------------------------------------------
Class C (31) (326) -- --
- -------------------------------------------------------------------------------
NET INCREASE
(DECREASE) FROM CAPITAL
SHARE TRANSACTIONS $ (921) $ 3,807
===============================================================================
</TABLE>
38
<PAGE> 40
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------
YEAR ENDED AUGUST 31,
CALIFORNIA 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $7.22 8.01 7.57 7.31 6.96
- ----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .39 .39 .44 .46 .46
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .17 (.44) .53 .29 .35
- ----------------------------------------------------------------------------------------------------------------------
Total from investment operations .56 (.05) .97 .75 .81
- ----------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .39 .39 .44 .46 .46
- ----------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .04 .35 .09 .03 --
- ----------------------------------------------------------------------------------------------------------------------
Total dividends .43 .74 .53 .49 .46
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.35 7.22 8.01 7.57 7.31
======================================================================================================================
TOTAL RETURN 8.13% (.74) 13.21 10.47 12.00
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
Expenses .74% .74 .63 .64 .66
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 5.53 5.30 5.68 6.11 6.43
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------- ------------------------------------
YEAR ENDED MAY 31, 1994 TO YEAR ENDED MAY 31, 1994 TO
AUGUST 31, 1995 AUGUST 31, 1994 AUGUST 31, 1995 AUGUST 31, 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.22 7.23 7.22 7.23
- ----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .33 .08 .33 .08
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .17 (.01) .16 (.01)
- ----------------------------------------------------------------------------------------------------------------------
Total from investment operations .50 .07 .49 .07
- ----------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .33 .08 .33 .08
- ----------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .04 -- .04 --
- ----------------------------------------------------------------------------------------------------------------------
Total dividends .37 .08 .37 .08
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.35 7.22 7.34 7.22
======================================================================================================================
Total return 7.17% 1.05 7.08 .96
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
Expenses 1.60% 1.60 1.56 1.56
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 4.67 4.48 4.71 4.76
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL FUND DATA
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $1,087,232 1,168,449 1,331,377 1,182,891 973,408
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 69% 37 59 15 17
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 41
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------ ------------------- ---------------------
MARCH 15, MARCH 15, MARCH 15,
1995 TO 1995 TO 1995 TO
AUGUST 31, AUGUST 31, AUGUST 31,
MICHIGAN 1995 1995 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.50 9.50 9.50
- ------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .22 .18 .18
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain .26 .27 .26
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations .48 .45 .44
- ------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .22 .18 .18
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.76 9.77 9.76
==================================================================================================================
TOTAL RETURN 5.00% 4.72 4.63
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (A)
- ------------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund .41% 1.21 1.21
- ------------------------------------------------------------------------------------------------------------------
Net investment income 4.82 4.02 4.02
- ------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (A)
- ------------------------------------------------------------------------------------------------------------------
Expenses .96% 1.76 1.76
- ------------------------------------------------------------------------------------------------------------------
Net investment income 4.27 3.47 3.47
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL FUND DATA
MARCH 15, 1995 TO
AUGUST 31,1995
- ------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $3,079
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 161%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 42
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------
MARCH 22,
1993 TO
YEAR ENDED AUGUST 31, AUGUST 31,
OHIO 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.56 9.98 9.50
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .50 .53 .24
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .25 (.41) .48
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations .75 .12 .72
- ---------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .50 .53 .24
- ---------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- .01 --
- ---------------------------------------------------------------------------------------------------------------------
Total dividends .50 .54 .24
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.81 9.56 9.98
=====================================================================================================================
TOTAL RETURN 8.20% 1.23 7.54
=====================================================================================================================
RATIOS TO AVERAGE NET ASSETS (B)
- ---------------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund .63% .02 --
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 5.27 5.44 5.21
- ---------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (B)
- ---------------------------------------------------------------------------------------------------------------------
Expenses .83% .82 .86
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 5.07 4.64 4.36
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------- -------------------------------
YEAR MAY 31, YEAR MAY 31,
ENDED 1994 TO ENDED 1994 TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1995 1994 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.56 9.54 9.56 9.54
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .44 .14 .44 .14
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain .25 .02 .25 .02
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations .69 .16 .69 .16
- ---------------------------------------------------------------------------------------------------------------------
Less distribution from net
investment income .44 .14 .44 .14
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.81 9.56 9.81 9.56
=====================================================================================================================
TOTAL RETURN 7.57% 1.55 7.56 1.55
RATIOS TO AVERAGE NET ASSETS (B)
- ---------------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.32% .22 1.27 .21
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 4.58 4.72 4.63 5.04
- ---------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (B)
- ---------------------------------------------------------------------------------------------------------------------
Expenses 1.75% 1.72 1.69 1.67
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 4.15 3.22 4.21 3.58
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL FUND DATA
<TABLE>
<CAPTION>
MARCH 22,
1993 TO
YEAR ENDED AUGUST 31, AUGUST 31,
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets at end of period (in thousands) 31,450 23,769 15,530
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 90% 103 17
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 43
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------
NOVEMBER 1,
1991 TO
YEAR ENDED AUGUST 31, AUGUST 31,
TEXAS 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.14 10.69 9.95 9.50
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .54 .56 .60 .50
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .36 (.42) .74 .45
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations .90 .14 1.34 .95
- ---------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .54 .56 .60 .50
- ---------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .08 .13 -- --
- ---------------------------------------------------------------------------------------------------------------------
Total dividends .62 .69 .60 .50
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.42 10.14 10.69 9.95
=====================================================================================================================
TOTAL RETURN 9.28% 1.28 13.89 10.15
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (C)
- ---------------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund .70% .36 .08 --
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 5.37 5.38 5.79 5.98
- ---------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (C)
- ---------------------------------------------------------------------------------------------------------------------
Expenses .89% .90 .79 .93
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 5.18 4.82 5.08 5.05
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------- --------------------------------
YEAR MAY 31, YEAR MAY 31,
ENDED 1994 TO ENDED 1994 TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1995 1994 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.15 10.17 10.15 10.17
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45 .12 .46 .12
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .35 (.02) .35 (.02)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations .80 .10 .81 .10
- ---------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .45 .12 .46 .12
- ---------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .08 -- .08 --
- ---------------------------------------------------------------------------------------------------------------------
Total dividends .53 .12 .54 .12
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.42 10.15 10.42 10.15
=====================================================================================================================
TOTAL RETURN 8.16% .92 8.27 .88
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (C)
- ---------------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.54% 1.24 1.50 1.23
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 4.53 4.44 4.57 3.96
- ---------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (C)
- ---------------------------------------------------------------------------------------------------------------------
Expenses 1.73% 1.78 1.69 1.77
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 4.34 3.90 4.38 3.42
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL FUND DATA
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 1,
1991 TO
YEAR ENDED AUGUST 31, AUGUST 31,
1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset at end of period (in thousands) $14,877 15,409 12,341 7,810
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 75% 58 47 18
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 44
FINANCIAL HIGHLIGHTS
NOTES FOR ALL FUNDS:
(a) KFS agreed to waive the management fee of the Michigan Fund from its
inception, March 15, 1995, through September 15, 1995. Thereafter, the
management fee will be gradually reinstated. "Other ratios to average net
assets" are computed without the undertaking to waive the management fee.
(b) Certain expenses of the Ohio Fund were waived or absorbed by KFS from March
22, 1993 through June 30, 1994. Thereafter, these expenses were gradually
reinstated through June 30, 1995. "Other ratios to average net assets" are
computed without the undertaking to waive such expenses.
(c) Certain expenses of the Texas Fund were waived or absorbed by KFS from
November 1, 1991 through December 31, 1992. Thereafter, expenses (excluding
the management fee) were gradually reinstated through October 1, 1993 and the
management fee was gradually reinstated through June 30, 1995. "Other ratios to
average net assets" are computed without the undertaking to waive such
expenses.
Ratios have been determined on an annualized basis. Total return is not
annualized and does not reflect the effect of sales charges.
43
<PAGE> 45
Trustees and Officers
TRUSTEES
STEPHEN B. TIMBERS
President and Trustee
DAVID W. BELIN
Trustee
LEWIS A. BURNHAM
Trustee
DONALD L. DUNAWAY
Trustee
ROBERT B. HOFFMAN
Trustee
DONALD R. JONES
Trustee
DAVID B. MATHIS
Trustee
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
OFFICERS
J. PATRICK BEIMFORD, JR.
Vice President
CHRISTOPHER J. MIER
Vice President
JOHN E. PETERS
Vice President
PHILIP J. COLLORA
Vice President and
Secretary
CHARLES F. CUSTER
Vice President and
Assistant Secretary
JEROME L. DUFFY
Treasurer
ELIZABETH C. WERTH
Assistant Secretary
- -------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- -------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
800-621-1048
- -------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 127 West 10th Street
Kansas City, MO 64105
- -------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- -------------------------------------------------------------------------
INVESTMENT MANAGER KEMPER FINANCIAL SERVICES, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street
Chicago, IL 60603
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Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper State Tax-Free Income Funds prospectus.
KSTIS - 2 (10/95)
[KEMPER MUTUAL FUND LOGO]
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1004940
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