<PAGE> 1
KEMPER STATE TAX-FREE INCOME SERIES
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED AUGUST 31, 1996
California Tax-Free
Income Fund
Michigan Tax-Free
Income Fund
Ohio Tax-Free
Income Fund
Texas Tax-Free
Income Fund
" . . . Our primary course of action was to shorten the durations of the
funds as it became apparent that rates were on the rise . . ."
[KEMPER FUNDS LOGO]
<PAGE> 2
Table of
Contents
4
Economic Overview
6
Performance Update
8
Terms to Know
10
Portfolio Statistics
11
Portfolio of
Investments
28
Report of
Independent Auditors
29
Financial Statements
32
Notes to
Financial Statements
38
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME FUNDS TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 31, 1996 (UNADJUSTED FOR SALES CHARGE)
CALIFORNIA
[BAR GRAPH]
<TABLE>
<CAPTION>
LIPPER
CALIFORNIA
TAX-FREE INCOME
FUNDS CATEGORY
CLASS A CLASS B CLASS C AVERAGE*
- -----------------------------------------------------------
<S> <C> <C> <C>
5.92% 5.16% 5.15% 5.67%
</TABLE>
MICHIGAN
[BAR GRAPH]
<TABLE>
<CAPTION>
LIPPER
MICHIGAN
TAX-FREE INCOME
FUNDS CATEGORY
CLASS A CLASS B CLASS C AVERAGE*
- -----------------------------------------------------------
<S> <C> <C> <C>
6.19% 5.19% 5.36% 4.95%
</TABLE>
OHIO
[BAR GRAPH]
<TABLE>
<CAPTION>
LIPPER OHIO
TAX-FREE INCOME
FUNDS CATEGORY
CLASS A CLASS B CLASS C AVERAGE*
- -----------------------------------------------------------
<S> <C> <C> <C>
6.16% 5.30% 5.28% 4.81%
</TABLE>
TEXAS
[BAR GRAPH]
<TABLE>
<CAPTION>
LIPPER TEXAS
TAX-FREE INCOME
FUNDS CATEGORY
CLASS A CLASS B CLASS C AVERAGE*
- -----------------------------------------------------------
<S> <C> <C> <C>
7.04% 6.11% 6.13% 5.39%
</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
8/31/96 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS A $7.31 $7.35
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS B $7.32 $7.35
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS C $7.31 $7.34
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
MICHIGAN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/96 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER MICHIGAN TAX-FREE INCOME
FUND CLASS A $9.92 $9.76
- --------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME
FUND CLASS B $9.91 $9.77
- --------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME
FUND CLASS C $9.91 $9.76
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/96 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER OHIO TAX-FREE INCOME
FUND CLASS A $9.93 $9.81
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME
FUND CLASS B $9.93 $9.81
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME
FUND CLASS C $9.93 $9.81
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TEXAS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/96 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER TEXAS TAX-FREE INCOME
FUND CLASS A $10.36 $10.42
- --------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME
FUND CLASS B $10.36 $10.42
- --------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME
FUND CLASS C $10.36 $10.42
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER TAX-FREE INCOME FUND LIPPER RANKINGS*
Compared to all other funds in their respective Lipper categories
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
1-YEAR #41 OF #67 OF #68 OF
96 FUNDS 96 FUNDS 96 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #15 OF N/A N/A
47 FUNDS
- --------------------------------------------------------------------------------
10-YEAR #1 OF 25 N/A N/A
FUNDS
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MICHIGAN
- --------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
1-YEAR #2 OF #17 OF #13 OF
48 FUNDS 48 FUNDS 48 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
1-YEAR #1 OF #18 OF #19 OF
56 FUNDS 56 FUNDS 56 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TEXAS
- --------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
1-YEAR #2 OF #4 OF #3 OF
23 FUNDS 23 FUNDS 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. The funds are
compared to their respective Lipper categories as follows: California Municipal
Debt, Michigan Municipal Debt, Ohio Municipal Debt and Texas Municipal Debt.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
The following tables show per share dividend and yield information for the funds
as of August 31, 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------------
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.3863 $0.3234 $0.3220
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0309 $0.0258 $0.0257
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE+: 5.07% 4.23% 4.22%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.68% 4.01% 4.01%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD+: 8.20% 7.02% 6.93%
BASED ON A MARGINAL TAX RATE OF 42.9% (COMBINED CALIFORNIA STATE AND
FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MICHIGAN
- --------------------------------------------------------------------------------
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4382 $0.3640 $0.3729
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0296 $0.0240 $0.0261
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE+: 3.58% 2.91% 3.16%
- --------------------------------------------------------------------------------
SEC YIELD+:
(AFTER EXPENSE WAIVER) 3.85% 3.30% 3.48%
- --------------------------------------------------------------------------------
SEC YIELD+:
(BEFORE EXPENSE WAIVER) 3.79% 3.24% 3.42%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD+: 6.41% 5.49% 5.79%
- --------------------------------------------------------------------------------
BASED ON A MARGINAL TAX RATE OF 39.9% (COMBINED MICHIGAN STATE AND
FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------------
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4773 $0.3946 $0.3936
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0391 $0.0323 $0.0328
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE+: 4.73% 3.90% 3.96%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.62% 3.99% 3.98%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD+: 7.88% 6.81% 6.79%
BASED ON A MARGINAL INCOME TAX RATE OF 41.4% (COMBINED OHIO STATE AND
FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TEXAS
- --------------------------------------------------------------------------------
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.5101 $0.4189 $0.4217
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0408 $0.0339 $0.0347
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE+: 4.73% 3.93% 4.02%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.56% 3.88% 3.91%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD+: 7.25% 6.17% 6.22%
BASED ON A 37.1% MARGINAL FEDERAL INCOME TAX RATE
- --------------------------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as an
annualized percentage of net asset value on August 31, 1996. 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, 1996 shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with the
standardized method prescribed by the Securities and Exchange Commission. Tax
equivalent yield is based on the fund's yield and the applicable federal and
state marginal tax rate. Income may be subject to state and local taxes and, for
some investors, a portion may be subject to the alternative minimum tax.
3
<PAGE> 4
ECONOMIC OVERVIEW
[STEPHEN B. TIMBERS PH0T0]
Stephen B. Timbers is president, chief investment and executive officer of
Zurich Kemper Investments, Inc. (ZKI). ZKI and its affiliates manage
approximately $79 billion in assets, including $45 billion in retail
mutual funds. Timbers is a graduate of Yale University and holds an M.B.A. from
Harvard University.
DEAR SHAREHOLDER,
Concerns about rising interest rates, the possibility of higher price inflation
and Federal Reserve tightening of credit continue to contribute to considerable
market volatility. But while the professional traders tend to debate over every
economic release, individuals who invest in mutual funds for the long term have
been wise to stay the course. Indeed, several recent economic measures are quite
reassuring and argue in favor of a continued healthy economy with low inflation.
The economy expanded at a 4.2% annual rate in the second quarter, the
fastest pace since the second quarter of 1994. This robust growth is welcome in
general but has tended to roil markets, which fear strong growth will lead to
overheating and inflationary pressures. So far, however, such fears have been
largely unwarranted. With the exception of food prices, whose increases were
weather-related, there have been no significant signs of inflationary
pressures. As it has so often recently, the economy is in the process of
slowing itself down. While the Federal Reserve Board stands by ready to attempt
to moderate economic growth with either interest rate cuts or
ECONOMIC GUIDEPOSTS
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund
performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The 10-year
Treasury rate and the prime rate are prevailing interest rates. The other data
report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (9/30/96) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10-year Teasury rate(1) 6.83 6.51 6.04 7.74
Prime rate(2) 8.25 8.25 8.75 7.75
Inflation rate(3) 3 2.9 2.81 2.61
The U.S. dollar(4) 3.32 8.94 -1.05 -5.28
Capital goods orders(5) 6.12 3.98 13.61 15.74
Industrial production(5) 3.5 2.56 1.92 6.77
Employment growth(6) 2.01 1.76 2.16 3.3
</TABLE>
(1) Falling interest rates in recent years have been a big plus for
financial assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces 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 family income and retail sales.
* Data as of August 31, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
4
<PAGE> 5
ECONOMIC OVERVIEW
increases, such intervention can run the risk of going too far in one direction.
It appears that our economy today is self-regulating.
Based on these snapshots of the economy, then, we look for a relatively calmer
remainder of the year. Our forecast calls for growth to slow down in the fourth
quarter, to result in an advance of about 2.5% for the entire year. Assuming
that bond and stock market investors concur that there is no chance of an
overheating economy or significantly rising interest rates, the markets should
relax, as well.
Our market forecast 10 months into the year is not much different from what we
forecasted in January. The bond market, which is climbing back from a decline
this year, may produce a 5% total return in 1996. The stock market, after the
correction is completed, may advance 10% to 15% for the year. Naturally, future
market conditions cannot be predicted with assurance.
In addition, we are projecting that long-term (30-year) interest rates will
hover in the 6.5% to 7.0% range. Short-term interest rates may drop below their
current levels. Finally, we would be surprised if the Federal Reserve Board
moved to adjust interest rates more than 25 basis points either way for the
remainder of the year.
Given the economic environment, we do not look for an upset in the upcoming
presidential election. Much more interesting will be which party wins the most
congressional seats. If the Democrats regain control of Congress, a bond market
sell-off could occur.
While U.S. markets are expected to provide modest returns, we continue to
advocate the benefits of diversification into alternate markets. Many overseas
markets are forecasted to grow at a rate well above our 2.5% growth expectation
for the U.S., and there are many equity and fixed-income opportunities abroad.
The value of the U.S. dollar, always a concern to international investors, will
probably not strengthen much against other currencies for the foreseeable
future.
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including an interview with your fund's portfolio
management. Thank you for your continued support. We appreciate the opportunity
to serve your investment needs.
Sincerely,
Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
October 15, 1996
5
<PAGE> 6
PERFORMANCE UPDATE
[MIER PHOTO]
CHRIS MIER JOINED ZURICH KEMPER INVESTMENTS, INC. IN 1986 AND IS NOW SENIOR VICE
PRESIDENT AND PORTFOLIO MANAGER OF THE KEMPER STATE TAX-FREE INCOME SERIES. MIER
RECEIVED A B.A. DEGREE IN ECONOMICS FROM THE UNIVERSITY OF MICHIGAN AND WENT ON
TO RECEIVE AN M.M. IN FINANCE FROM THE KELLOGG GRADUATE SCHOOL OF MANAGEMENT AT
NORTHWESTERN UNIVERSITY. HE IS A CHARTERED FINANCIAL ANALYST.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED
ON MARKET AND OTHER CONDITIONS.
FOR THE YEAR ENDED AUGUST 31, 1996, A PERIOD OF SHIFTING INTEREST RATES AND
POLITICAL RHETORIC, KEMPER STATE TAX-FREE INCOME SERIES FUNDS WERE ABLE TO
OUTPERFORM THEIR RESPECTIVE LIPPER CATEGORY AVERAGES (CLASS A SHARES, UNADJUSTED
FOR SALES CHARGE). PORTFOLIO MANAGER CHRIS MIER EXPLAINS HOW THE STRUCTURE OF
THE PORTFOLIO WAS USED TO BUOY PERFORMANCE DURING A RELATIVELY DIFFICULT PERIOD
FOR MUNICIPAL BONDS.
Q. DURING THE LAST YEAR, MUNICIPAL BOND YIELDS HAVE FLUCTUATED QUITE A BIT.
WHAT WAS BEHIND THE STEADY DECLINE IN YIELDS AND THEN THEIR SHARP RISE?
A. Expectations of slow economic growth pushed rates lower during the first
four months of the period. Conversely, signs of a resurgence in economic growth
pulled rates back up in 1996. Here's what occurred during the fiscal year,
September 1995 through August 1996.
During the first four months of the period, there was optimism that a
federal budget resolution would occur and inflation would remain low. In
addition, economic indicators suggested that the economy, while growing, was
slowing down somewhat. This created a favorable climate for the municipal
market, and bond yields fell (prices appreciated). THE BOND BUYER 25-Bond Index
(RBI) -- a gauge of municipal bond interest rates -- began the fiscal year at
6.26 percent on August 31, 1995, and then fell to a low of 5.63 percent on
January 4, 1996.
Later in January, however, data was released that indicated the economic
slowdown may have been related mostly to the impact of severe weather as opposed
to any fundamental weakness. Moreover, with the start of the Republican party
presidential primaries, focus moved away from the federal budget and deficit
reduction proposals toward other issues. As optimism about deficit reduction
began to fade, yields began to rise.
This rise in yields was propelled in early March, when the U.S. Department
of Labor announced an unanticipated and dramatic increase in employment growth.
Many bond investors saw this data as evidence that the economy was
re-establishing a firm footing. The news caused a sell-off in the market because
more rapid growth is often associated with higher inflation, which erodes the
value of fixed-income investments. Yields jumped from 5.88 percent on March 7,
to 6.13 percent on March 11, as measured by the RBI.
The municipal market traded in an irregular pattern during the remainder of
the period as economic indicators gave mixed signals about the pace of economic
growth. The RBI yield was 6.09 percent at the close of the fiscal year.
6
<PAGE> 7
PERFORMANCE UPDATE
Q. HOW WAS PERFORMANCE IMPACTED BY THE CHANGES IN INTEREST RATES?
A. The municipal market, along with the overall bond market, was adversely
affected by the upward tick in interest rates that began occurring in January
1996. When interest rates rise, the prices of bonds fall. However, the good news
for Kemper shareholders is that all Class A shares of the Kemper State Tax-Free
Income Series still outperformed the average returns of their individual Lipper
peer groups for the fiscal year period (unadjusted for sales charge).
Q. HOW DID YOU ALTER YOUR MANAGEMENT OF THE FUNDS AS RATES SHIFTED DIRECTION
IN EARLY 1996?
A. Our primary course of action was to shorten the durations of the funds as
it became apparent that rates were on the rise. Remember, the shorter a fund's
duration, the less sensitive it is to interest rate changes. We shortened
durations by reducing the average maturities of the portfolios, using futures
and increasing cash reserves. We attempted to keep the funds' durations
approximately equal to, or at certain times shorter than, their peer group
competitors.
Q. WHAT TYPES OF PORTFOLIO ADJUSTMENTS DID YOU MAKE DURING THE PERIOD?
A. In addition to our continual adjustment of the funds' durations, we focused
on three areas. First, we continued to selectively add A and BBB rated bonds
throughout the period. These bonds tended to perform marginally better than
higher quality and insured issues as interest rates rose and provided higher
levels of income.
We also focused on maintaining or improving the call protection of the
portfolios and in some cases favored non-callable issues. As interest rates
fall, issuers will generally call back bonds and refinance the debt at lower
interest rates. When this occurs the funds must reinvest the proceeds at lower
prevailing market rates. But better call protection or non-callable bonds can
preclude that from happening.
Finally, we increased the level of issue diversification within the funds.
We did this by adding a variety of issues that mature at different points in
time and have a somewhat wider range of coupon rates. We also looked for bonds
with shorter maturities that offered attractive yields relative to those of
longer maturity issues.
Combined, these portfolio adjustments were consistent with our goal to
create portfolios that can perform well.
Q. WERE THERE ANY SIGNIFICANT TRENDS THAT AFFECTED INDIVIDUAL STATES WITHIN
KEMPER'S STATE TAX-FREE INCOME SERIES?
A. The California economy improved during the period but the general fund
balance and cash position of the state remained somewhat weak. However, the
state's general obligation bond rating was upgraded to an A+ by Standard &
Poor's Corporation on July 30, 1996. New issuance in California during fiscal
year 1996 was 28 percent higher than fiscal year 1995. The two major issues that
contributed to this increase in volume was Orange County and Los Angeles County.
A falling unemployment rate, prospering automobile industry and continued
fiscal discipline by the state government all contributed to Michigan's growing
economy during the 12-month reporting period. Because of the state's exceptional
financial performance a 2 percent income tax refund was passed in 1996. The
state's rainy-day fund exceeded $1 billion. All of these factors should be
positive for the state's municipal issues.
The credit quality for general obligation bonds of the State of Ohio was
upgraded during the period and is now rated Aa1 by Moody's Investors Services,
Inc. and AA+ by Standard & Poor's. Ohio's economy continued to expand and
unemployment fell in 1996. State revenues exceeded expectations and the governor
signed into law a two-year tax cut.
The Texas economy continued to grow and its diversification has contributed
to the stability in the general credit quality of Texas issuers. And, for the
eighth year in a row, the state has ended its fiscal year with a positive
balance, exceeding budgetary forecasts. We continued to own bonds of the
Permanent School Fund Guarantee Program, a state program established to assist
the funding of public education. Bonds backed by the program have received the
highest rating from the three major rating services and we are optimistic about
the issues' ongoing performance.
7
<PAGE> 8
PERFORMANCE UPDATE
Q. WHAT CAN YOU TELL US ABOUT THE LEVEL OF MUNICIPAL SUPPLY?
A. Supply and demand within the municipal bond market has been about in
equilibrium during the year. At this point in 1996, supply is mirroring the
lower levels of 1995 and demand has remained firm and at times very strong. As a
result, municipal bonds have outperformed Treasuries. This outperformance is
documented by the decline in the municipal to Treasury yield ratio from about 94
percent at the start of the period to approximately 87 percent at the close of
the fiscal year.
Q. ARE MUNICIPAL BOND FUNDS A GOOD INVESTMENT IN THE CURRENT ECONOMIC
ENVIRONMENT?
A. Municipal bonds can play an important role in rounding out a
well-diversified portfolio of investments. The tax-exempt income that municipal
bond funds provide may be especially helpful now as many investors are
underinvested in tax-exempt assets. Municipal bonds and equities are both
important components of a balanced portfolio. If your exposure to municipals has
declined on a relative basis, now may be the right time to review your long-term
goals and rebalance your portfolio of investments.
Q. WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET GIVEN THE UPCOMING U.S.
PRESIDENTIAL ELECTION?
A. If President Clinton is re-elected, the chance of any severe tax reform is
unlikely, which would be positive for the municipal market. If Robert Dole is
elected, a flatter tax structure may be proposed. And, if it passed, it could
impact municipal performance. However, over the last 20 years, municipals have
shown the ability to perform well despite marginal tax-rate changes.
TERMS TO KNOW
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income investment or portfolio. The longer the duration, the greater the
interest rate risk.
REVENUE BOND INDEX (RBI) The average yield on 25 revenue bonds with 30-year
maturities compiled by THE BOND BUYER, a newspaper that covers the municipal
bond market.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period. Total return assumes the
reinvestment of all dividends and it represents the aggregate percentage or
dollar value change over the period.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
8
<PAGE> 9
PERFORMANCE UPDATE
KEMPER CALIFORNIA TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED AUGUST 31, 1996 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND 1.10% 6.32% 7.27% 8.75%
CLASS A (SINCE 2/17/83)
- -----------------------------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND 2.17% N/A N/A 4.68%
CLASS B (SINCE 5/31/94)
- -----------------------------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND 5.15% N/A N/A 5.84%
CLASS C (SINCE 5/31/94)
- -----------------------------------------------------------------------------------------------------
</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 and total return measure 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%; 5-year, 1%; since inception, 0%.
For C shares purchased after 4/1/96 there is a 1% CDSC on certain redemptions
within the first year of purchase. Average annual total return reflects
annualized change while total return reflects aggregate 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.
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS A FROM 2/17/83 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
Kemper California Lehman Brothers Consumer
Tax-Free Income Fund Municipal Bond Index Price Index
-------------------- -------------------- -----------
<S> <C> <C> <C>
2/17/83 10,000 10,000 10,000
12/31/85 13,019 13,591 11,164
12/31/88 17,259 18,133 12,308
12/31/91 22,870 24,171 14,086
12/31/94 26,341 28,006 15,291
8/31/96 31,139 33,036 16,067
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS B FROM 5/31/94 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
Kemper California Lehman Brothers Consumer
Tax-Free Income Fund Municipal Bond Index Price Index
-------------------- -------------------- -----------
<S> <C> <C> <C>
5/31/94 10,000 10,000 10,000
12/31/94 9,759.9 9,864 10,149
12/31/95 11,575.9 11,586 10,407
8/31/96 11,088.7 11,636 10,664
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS C FROM 5/31/94 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
Kemper California Lehman Brothers Consumer
Tax-Free Income Fund Municipal Bond Index Price Index
-------------------- -------------------- -----------
<S> <C> <C> <C>
5/31/94 10,000 10,000 10,000
12/31/94 9,754 9,864 10,149
12/31/95 11,556 11,586 10,407
8/31/96 11,368 11,636 10,664
</TABLE>
KEMPER CALIFORNIA TAX-FREE INCOME FUND(1)
LEHMAN BROTHERS MUNICIPAL BOND INDEX+
CONSUMER PRICE INDEX++
(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 charges, 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. Bonds subject to Alternative Minimum
Tax (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> 10
PORTFOLIO STATISTICS
- -------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 8/31/96 ON 8/31/95
- -------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 93% 93%
- -------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 5 5
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 2
- -------------------------------------------------------------------------------
100% 100%
- -------------------------------------------------------------------------------
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
QUALITY ON 8/31/96 ON 8/31/95
- -------------------------------------------------------------------------------
<S> <C> <C>
AAA 55% 52%
- -------------------------------------------------------------------------------
AA 13 17
- -------------------------------------------------------------------------------
A 14 18
- -------------------------------------------------------------------------------
BBB 13 10
- -------------------------------------------------------------------------------
NOT RATED 5 3
- -------------------------------------------------------------------------------
100% 100%
- -------------------------------------------------------------------------------
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
YEARS TO MATURITY ON 8/31/96 ON 8/31/95
- -------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 9% 6%
- -------------------------------------------------------------------------------
11-20 YEARS 45 38
- -------------------------------------------------------------------------------
+21 YEARS 46 56
- -------------------------------------------------------------------------------
100% 100%
- -------------------------------------------------------------------------------
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE MATURITY ON 8/31/96 ON 8/31/95
- -------------------------------------------------------------------------------
<S> <C> <C>
17.8 YEARS 20.5 YEARS
- -------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADVANCE Bakersfield County Waste Water Treatment Plant, Certificates of
REFUNDED Participation, Rev., 8.00%, to be called 01-01-98 @ 101 $ 1,750 $ 1,854
OBLIGATIONS ---------------------------------------------------------------------------------------------
SECURED AS TO Brea Public Financing Auth., Orange County, Redev. Proj. AB, Rev.,
PRINCIPAL AND 6.75%, to be called 08-01-01 @ 102 3,885 4,317
INTEREST BY ---------------------------------------------------------------------------------------------
OBLIGATIONS Coronado Community Dev. Agcy., Tax Allocation, Rev., 7.25%, to be
OF THE called 09-01-99 @ 102 4,500 4,934
UNITED STATES ---------------------------------------------------------------------------------------------
GOVERNMENT City of Los Angeles:
Convention and Exhibit Center, Certificates of Participation, Rev.,
9.00%, to be called 12-01-05 @ 100 1,000 1,299
Harbor Department, Rev., 8.70%, to be called 09-01-99 @ 100 2,500 2,794
---------------------------------------------------------------------------------------------
City of San Bernardino, Sisters of Charity Health Care System, Rev.,
6.50%, to be called 01-01-97 @ 102 4,250 4,373
7.00%, to be called 07-01-01 @ 102 14,500 16,189
---------------------------------------------------------------------------------------------
Foothill-DeAnza Community College District, Santa Clara, Rev.,
7.875%, to be called 06-01-01 @ 102 4,055 4,659
---------------------------------------------------------------------------------------------
Fullerton Redev. Agcy., Local Government Finance Auth., Rev., 7.70%,
to be called 02-01-99 @ 102 4,360 4,776
---------------------------------------------------------------------------------------------
Health Facilities Financing Auth.:
Eskaton Properties, Inc., Rev., 7.45%, to be called 05-01-00 @ 102 4,800 5,345
Children's Hospital, Rev., 7.50%, to be called 10-01-00 @ 102 3,600 4,051
---------------------------------------------------------------------------------------------
Kaweah Delta Hospital District, Rev., 7.25%, to be called 11-01-96 @
102 5,750 5,897
---------------------------------------------------------------------------------------------
Long Beach Health Care Systems, Sisters of Charity, Rev., 6.50%,
01-01-97 @ 102 4,000 4,115
---------------------------------------------------------------------------------------------
Metropolitan Water District of Southern California, Rev., 6.625%, to
be called 07-01-01 @ 102 1,500 1,654
---------------------------------------------------------------------------------------------
Northern California Power Agcy., Hydroelectric Number One, Rev.,
7.00%, to be called 01-01-16 @ 100 210 243
---------------------------------------------------------------------------------------------
Orange Unified School District, Certificates of Participation, Rev.,
6.875%, to be called 06-01-99 @ 102 2,620 2,837
---------------------------------------------------------------------------------------------
Orange County, Civic Center, Certificates of Participation, Rev.,
6.625%, to be called 08-01-01 @ 102 2,000 2,213
---------------------------------------------------------------------------------------------
Santa Margarita Water District, Gen. Oblg., 7.30%, to be called
06-01-97 @ 102 1,080 1,129
---------------------------------------------------------------------------------------------
Tulare County Public Facilities Corp., Certificates of Participation,
Rev., 8.10%, to be called 11-01-97 @ 102 1,000 1,067
---------------------------------------------------------------------------------------------
Victor Valley Community College District, Certificates of
Participation, Rev., 6.875%, to be called 08-01-03 @ 102 8,705 9,799
---------------------------------------------------------------------------------------------
Yosemite Community College District, Certificates of Participation,
Rev., 7.75%, to be called 07-01-01 @ 102 1,665 1,915
---------------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--8.2% 85,460
---------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER Department of Water Resources, Central Valley Proj., Rev., 4.75%,
MUNICIPAL 2018 and 2019 $18,665 $ 15,900
OBLIGATIONS ---------------------------------------------------------------------------------------------
Educational Facilities Auth.:
Mills College, Rev., 6.875%, 2022 1,775 1,884
University of San Francisco, Rev., 5.70% and 6.00%, 2011 and 2016 6,140 6,229
---------------------------------------------------------------------------------------------
Health Facilities Financing Auth.:
Adventist Health System/West, Rev., 6.50%, 2007 and 2011 5,750 6,179
America Baptist Homes West, Rev., 7.65%, 2014 4,000 4,241
Catholic Healthcare West, Rev., 5.75% and 6.00%, 2010 and 2017 23,370 23,454
Kaiser Permanante, Rev., 7.00%, 2010 3,550 3,867
Marshall Hospital Health System, Rev., 5.125%, 2012 3,770 3,444
Small Facilities Loan, Insured Health Facility, Rev., 6.70%, 2011 1,200 1,255
Southern California Presbyterian Homes, Rev., 6.70%, 2011 2,000 2,092
Unihealth America, Rev., 7.625%, 2015 745 803
---------------------------------------------------------------------------------------------
Housing Finance Agcy. Home Mortgage Rev., 6.875% to 8.00%, 2010
through 2030 27,900 29,266
---------------------------------------------------------------------------------------------
Maritime Infrastructure Auth., Airport Proj., Rev., 5.25%, 2015 7,345 6,757
---------------------------------------------------------------------------------------------
Public Works Board:
Department of Corrections, Rev., 5.50% to 7.40%, 2010 through 2019 38,990 38,837
Various Universities, Rev., 5.50%, 2014 5,800 5,562
---------------------------------------------------------------------------------------------
State, Gen. Oblg., 5.25% to 5.60%, 2017 through 2021 21,485 20,117
---------------------------------------------------------------------------------------------
Statewide Communities Dev. Auth.:
Cedars-Sinai Medical Center, Rev., 6.50%, 2012 18,000 19,570
San Gabriel Valley Medical Center, Rev., 5.50%, 2014 6,750 6,468
Triad Healthcare, Rev., 5.80%, 2000 4,205 4,271
United Western Medical Centers, Rev., 6.80%, 2009 4,245 4,538
---------------------------------------------------------------------------------------------
University of California, Housing System Rev., 5.65% to 5.80%,
2012 through 2017 22,845 22,595
---------------------------------------------------------------------------------------------
Alameda County, Freemont Unified School District, Rev., 5.875%,
2016 and 2020 8,190 8,166
---------------------------------------------------------------------------------------------
Bellflower Certificate of Participation, Civic Center and Capital
Improvement, Rev., 7.20%, 2019 1,880 2,036
---------------------------------------------------------------------------------------------
Cabrillo Government University School District, Cap Appreciation,
Rev., zero coupon, 2017 through 2021 11,250 2,869
---------------------------------------------------------------------------------------------
Catherdral City Public Financing Auth., Redev. Proj., Rev., 5.50%,
2017 3,730 3,576
---------------------------------------------------------------------------------------------
Central Valley Financing Auth., Carson Ice-Gen. Proj., Rev., 6.10%,
2013 8,700 8,569
---------------------------------------------------------------------------------------------
City of Big Bear Lake, Department of Water and Power, Rev., 6.00%,
2015 and 2022 5,205 5,362
---------------------------------------------------------------------------------------------
City of Carson Redev. Agcy., Proj. Number One, Tax Allocation, Rev.,
6.00%, 2016 3,350 3,253
---------------------------------------------------------------------------------------------
City of Concord Redev. Agcy., Central Concord Proj., Tax Allocation,
Rev., 8.00%, 2018 40 43
---------------------------------------------------------------------------------------------
City of Culver Redev. Financing Auth., Tax Allocation, Rev., 5.50%,
2014 7,000 6,854
---------------------------------------------------------------------------------------------
City of Long Beach Harbor Department, Rev., 5.375% and 7.25%, 2020
and 2019 32,370 30,905
---------------------------------------------------------------------------------------------
City of Los Angeles:
Department of Airports, Ontario International Airport, Rev., 5.90%,
2012 3,290 3,323
Department of Water and Power, Rev., 4.50% to 4.75%,
2014 through 2019 16,660 14,156
Wastewater System, Rev., 4.70% and 6.625%, 2017 and 2012 19,910 17,780
---------------------------------------------------------------------------------------------
City of Menlo Park, Community Dev. Agcy., Las Pulgas Community Dev.
Proj., Rev., 5.375%, 2016 6,470 6,152
---------------------------------------------------------------------------------------------
City of Oakland:
Housing Finance Rev., 7.10%, 2010 1,790 1,867
Pension Financing Rev., 7.60%, 2021 26,075 28,025
---------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
City of Sacramento:
Cogeneration Auth., Rev., 5.875% and 6.00%, 2015 and 2022 $20,000 $ 19,167
Cogeneration Auth., Procter and Gamble Proj.,
Rev., 6.375% to 6.50%, 2010 through 2021 17,500 17,563
Finance Auth., Lease Rev., 5.00% and 5.40%, 2014 and 2020 32,000 30,376
Municipal Utility District, Electric Rev., 5.50% to 6.75%,
2006 through 2021 12,795 13,183
---------------------------------------------------------------------------------------------
City of San Diego, Redev. Agcy., Horton Plaza Redev. Proj.,
Rev., 6.625%, 2017 2,000 2,052
---------------------------------------------------------------------------------------------
City and County of San Francisco:
Airport Commission, San Francisco International Airport,
Rev., 5.25%, 2020 7,670 7,098
Gen. Oblg., 6.50%, 2010 1,000 1,048
Moscone Convention Center, Rev., 6.75%, 2015 2,200 2,404
Redev. Agcy., Hotel Tax, Rev., 6.75%, 2015 3,705 4,051
---------------------------------------------------------------------------------------------
Contra Costa County:
County Public Facilities Corp., Certificates of Participation,
Rev., 7.80%, 2005 1,250 1,364
Home Mortgage, Rev., 7.75%, 2022 2,715 3,293
---------------------------------------------------------------------------------------------
Corona-Norco University, Special Tax, Rev., 5.75%, 2014 2,750 2,712
---------------------------------------------------------------------------------------------
Duarte, City of Hope National Medical Center, Certificates of
Participation, Rev., 6.125% and 6.25%, 2013 and 2023 16,000 15,780
---------------------------------------------------------------------------------------------
East Bay Municipal Utility District, Water System, Rev., 4.75%, 2021 5,000 4,253
---------------------------------------------------------------------------------------------
Eldorado Public Agcy., Financial Auth., Rev., 5.50%, 2016 and 2021 11,000 10,550
---------------------------------------------------------------------------------------------
Emeryville, Public Financing Auth., Redev. Proj., Rev., 6.50%, 2021 10,255 10,492
---------------------------------------------------------------------------------------------
Encina Financing Joint Powers Auth., Wastewater, Rev., 6.875%, 2011 3,000 3,218
---------------------------------------------------------------------------------------------
Encinitas University School District Capital Appreciation, Rev., zero
coupon, 2013 through 2018 8,750 2,713
---------------------------------------------------------------------------------------------
Fontana Public Financing Auth., Tax Allocation, Rev., 7.00%, 2021 3,900 4,067
---------------------------------------------------------------------------------------------
Foothill-DeAnza Community College District, DeAnza Campus Center
Proj., Certificates of Participation, Rev., 7.35%, 2007 1,700 1,872
---------------------------------------------------------------------------------------------
Foothill/Eastern, Transit Corridor Agcy., Toll Road,
Rev., zero coupon to 6.50%, 2016 through 2032 58,500 24,988
---------------------------------------------------------------------------------------------
Fresno Health Facilities, Holy Cross Health System, St. Agnes Medical
Center, Rev., 6.50% and 6.625%, 2011 and 2021 3,500 3,632
---------------------------------------------------------------------------------------------
Hawthorne Community Redev. Agcy., Tax Allocation, Rev., 6.625%, 2014 2,000 2,060
---------------------------------------------------------------------------------------------
Hollister Joint Powers Financing Auth., Sewer System Improvement
Proj., Rev., 5.75% and 5.90%, 2011 and 2023 5,590 5,353
---------------------------------------------------------------------------------------------
Improvement District M of the Mojave Water Agcy.,
Rev., 5.60% and 5.75%, 2012 and 2015 4,000 3,963
---------------------------------------------------------------------------------------------
Inglewood:
Civic Center Improvement Proj., Certificates of Participation,
Rev., 6.50% to 7.00%, 2011 through 2021 7,025 7,357
Redev. Proj., Rev., 7.00%, 2022 9,495 9,950
---------------------------------------------------------------------------------------------
Irvine Ranch, Water District Joint Powers Agcy., Rev., 7.875%, 2023 5,000 5,216
---------------------------------------------------------------------------------------------
Kern High School District, Gen. Oblg., 6.40%, 2012 3,095 3,362
---------------------------------------------------------------------------------------------
Las Virgenes, Municipal Water District, Capital Improvement Proj.,
Rev., 6.30%, 2016 2,175 2,270
---------------------------------------------------------------------------------------------
Lemon Grove Community Dev. Agcy., Tax Allocation,
Rev., 6.65% and 6.90%, 2006 and 2020 2,500 2,589
---------------------------------------------------------------------------------------------
Lincoln Unified School, Community Facilities District No. 1, Special
Tax, Rev., 5.625%, 2021 4,285 4,162
---------------------------------------------------------------------------------------------
Loma Linda, University Medical Center, Rev., 5.00% and 7.00%,
2013 and 2015 5,500 5,422
---------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Los Angeles County:
Metropolitan Transportation Auth., Sales Tax Rev., 5.50% to 6.00%,
2015 through 2018 $19,350 $ 18,900
Public Works Financing Auth., Lease Rev., 5.25%, 2012 through 2014 11,705 11,037
Transportation Commission, Sales Tax Rev., 6.50% to 7.40%, 2003
through 2019 20,455 22,065
---------------------------------------------------------------------------------------------
Los Banos, Certificates of Participation, Rev., 6.00%, 2019 2,250 2,091
---------------------------------------------------------------------------------------------
Martinez, Multiple Lenders, Home Mortgage, Rev., 10.375%, 2002 35 43
---------------------------------------------------------------------------------------------
Metropolitan Water District of Southern California, Rev., 5.75%, 2021 2,000 2,017
---------------------------------------------------------------------------------------------
Midpeninsula Regulatory Open Space, Financial Auth., Rev., 5.75%,
2011 1,950 1,954
---------------------------------------------------------------------------------------------
Modesto Irrigation District Financing Auth., Domestic Water Proj.,
Rev., 5.65% to 6.00%, 2009 through 2015 26,765 26,974
---------------------------------------------------------------------------------------------
Montebello Community Redev. Agcy., Montebello Hills Redev., Tax
Allocation, Rev., 7.50%, 2010 3,750 4,052
---------------------------------------------------------------------------------------------
Moreno Valley, Towngate Community Facilities:
District 87-1, Improvement Area No. 1, Special Tax Rev., 7.125%,
2023 2,810 2,870
Special Tax, Rev., 6.50%, 2009 3,670 3,769
---------------------------------------------------------------------------------------------
Northern California Power Agcy., Hydroelectric Number One, Rev.,
7.15%, 2024 8,875 9,307
---------------------------------------------------------------------------------------------
Orange County Recovery, Certificates of Participation, Rev., 5.70% to
5.875%, 2010 through 2019 24,980 24,694
---------------------------------------------------------------------------------------------
Pleasanton Junction Power Finance Auth., Reassessment, Rev., 6.15%,
2012 9,725 9,742
---------------------------------------------------------------------------------------------
Port of Oakland, Rev., 6.40% and 7.60%, 2022 and 2016 20,520 21,256
---------------------------------------------------------------------------------------------
Redding Joint Powers Financing Auth., Electric System, Rev., 5.25%,
2015 2,000 1,878
---------------------------------------------------------------------------------------------
Redondo Beach Public Financing Auth., South Bay Center, Redev. Proj.,
Rev., 7.00% and 7.125%, 2016 and 2026 3,000 2,998
---------------------------------------------------------------------------------------------
Reedley, Sierra View Homes, Inc., Insured Certificates of
Participation, Rev., 7.60%, 2021 4,090 4,481
---------------------------------------------------------------------------------------------
Riverside County Public Facilities Financing, Certificates of
Participation, Rev., 6.875% and 7.875%, 2009 and 2015 7,250 7,625
---------------------------------------------------------------------------------------------
Sacramento County:
Airport System, Rev., 6.00%, 2017 5,850 5,805
Sanitation Districts Financing Auth., Rev., 5.00%, 2015 3,790 3,410
---------------------------------------------------------------------------------------------
San Bernardino County, West Valley Detention Center, Certificates of
Participation, Rev., 6.50%, 2012 8,000 8,608
---------------------------------------------------------------------------------------------
San Bernardino Joint Powers Financing Auth., Lease Rev., 7.15%, 2013 4,250 4,599
---------------------------------------------------------------------------------------------
San Diego, Misdemeanor Pre-Arraignment Detention Facility,
Certificates of Participation, Rev., 8.00%, 2002 5,575 5,945
---------------------------------------------------------------------------------------------
San Joaquin Hills Transportation Corridor Agcy., Toll Road, Rev.,
zero coupon, 2025 25,000 3,769
---------------------------------------------------------------------------------------------
San Jose Redev. Agcy., Merged Area Redev. Proj., Tax Allocation,
Rev., 5.00%, 2020 13,000 11,563
---------------------------------------------------------------------------------------------
San Pablo, Redev. Agcy., Merged Area Proj., Tax Allocation,
Rev., 5.375%, 2020 15,030 14,138
---------------------------------------------------------------------------------------------
Santa Clarita Public Financing Auth., Local Agcy., Rev., 6.70% and
6.75%, 2011 and 2021 4,250 4,481
---------------------------------------------------------------------------------------------
Santa Cruz County Housing Auth., Multi-Family Housing, Rev., 7.75%,
2023 2,000 2,125
---------------------------------------------------------------------------------------------
Santa Margarita/Dana Point Auth., Rev., 7.25%, 2012 and 2013 7,075 8,327
---------------------------------------------------------------------------------------------
Snowline Joint Unified School District, 1993 Family Proj.,
Certificates of Participation, Rev., 6.30% and 6.40%, 2011 and 2018 3,695 3,706
---------------------------------------------------------------------------------------------
South Pasadena Unified School District, Gen. Oblg., 5.55%, 2020 3,500 3,375
---------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
South San Francisco, Capital Improvement Financing Auth., Conference
Center Proj., Rev., 6.125%, 2018 $ 3,925 $ 3,809
---------------------------------------------------------------------------------------------
Southern California Home Financing Auth., Single Family Mortgage,
Rev., 6.75% and 7.35%, 2022 and 2024 1,555 1,605
---------------------------------------------------------------------------------------------
Southern California Public Power Auth.:
Mead Adelanto Proj., Rev., 4.75%, 2016 8,000 6,944
Power Proj. Rev., 5.00%, 2015 6,150 5,522
---------------------------------------------------------------------------------------------
Sunnyvale, Financing Auth., Wastewater, Refuge and Sludge, Management
Facilities, Rev., 6.30%, 2017 4,000 4,135
---------------------------------------------------------------------------------------------
Temecula Valley Unified School District, Gen. Oblg., 5.80%, 2014 2,430 2,415
---------------------------------------------------------------------------------------------
Torrance Memorial Hospital Medical Center, Rev., 6.75%, 2012 5,000 5,122
---------------------------------------------------------------------------------------------
University of California:
Rev., 5.625%, 2010 6,660 6,688
Housing System, Rev., 6.75%, 2009 1,515 1,619
Medical Center, Rev., 5.75%, 2012 and 2020 16,395 16,114
Multiple Purpose Proj., Rev, 4.75%, 2016 5,000 4,317
---------------------------------------------------------------------------------------------
Westminster Redev. Agcy., Westminster Commercial Redev. Proj., Tax
Allocation, Rev., 7.30%, 2021 2,500 2,711
---------------------------------------------------------------------------------------------
Puerto Rico Highway and Transportation Auth., Rev., 6.00%, 2018 6,000 6,204
---------------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--89.6% 932,654
---------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--97.8%
(Cost: $977,701) 1,018,114
---------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS--1.1%
Yield--3.20% to 3.65%
Due--September 1996
(Cost: $11,200) 11,200 11,200
---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.9%
(Cost: $988,901) 1,029,314
---------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.1% 11,224
---------------------------------------------------------------------------------------------
NET ASSETS--100% $1,040,538
---------------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $988,901,000 for federal income tax purposes
at August 31, 1996, the gross unrealized appreciation was $42,571,000, the gross
unrealized depreciation was $2,158,000 and the net unrealized appreciation of
investments was $40,413,000.
See accompanying Notes to Financial Statements.
15
<PAGE> 16
PERFORMANCE UPDATE
KEMPER MICHIGAN TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED AUGUST 31, 1996 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS A 1.41% 4.36% (SINCE 3/15/95)
- ------------------------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS B 2.19% 4.82% (SINCE 3/15/95)
- ------------------------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS C 5.36% 6.86% (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.
*Average annual total return and total return measure 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%; 5-year, 1%; since inception, 0%. For C shares purchased
after 4/1/96 there is a 1% CDSC on certain redemptions within the first year of
purchase. Average annual total return reflects annualized change while total
return reflects aggregate 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.
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS A FROM 3/15/95 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
Kemper Michigan Lehman Brothers Consumer
Tax-Free Income Fund Municipal Bond Index Price Index
-------------------- -------------------- -----------
<S> <C> <C> <C>
3/15/95 10,000 10,000 10,000
6/30/95 9,814 10,359 10,106
9/30/95 10,096 10,656 10,152
12/31/95 10,734 11,096 10,172
3/31/96 10,459 10,963 10,318
6/30/96 10,460 11,047 10,384
8/31/96 10,647 11,144 10,424
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS B FROM 3/15/95 TO 8/31/96
<TABLE>
<CAPTION>
Kemper Michigan Lehman Brothers Consumer
Tax-Free Income Fund Municipal Bond Index Price Index
-------------------- -------------------- -----------
<S> <C> <C> <C>
3/15/95 10,000 10,000 10,000
6/30/95 10,509.9 10,359 10,106
9/30/95 10,453 10,656 10,152
12/31/95 11,172.4 11,096 10,172
3/31/96 10,867 10,963 10,318
6/30/96 10,769 11,047 10,384
8/31/96 10,716 11,144 10,424
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS C FROM 3/15/95 TO 8/31/96
<TABLE>
<CAPTION>
Kemper Michigan Lehman Brothers Consumer
Tax-Free Income Fund Municipal Bond Index Price Index
-------------------- -------------------- -----------
<S> <C> <C> <C>
3/15/96 10,000 10,000 10,000
6/30/95 10,257 10,359 10,106
9/30/95 10,529 10,656 10,152
12/31/95 11,174 11,096 10,172
3/31/96 10,857 10,963 10,318
6/30/96 10,847 11,047 10,384
8/31/96 11,024 11,144 10,424
</TABLE>
KEMPER MICHIGAN TAX-FREE INCOME FUND(1)
LEHMAN BROTHERS MUNICIPAL BOND INDEX+
CONSUMER PRICE INDEX++
(1) Performance includes reinvestment of dividends and adjustment for
the applicable sales charge in effect at the end of the period. 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 charges, 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. Bonds subject to Alternative Minimum
Tax (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.
16
<PAGE> 17
PORTFOLIO STATISTICS
KEMPER MICHIGAN TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 8/31/96 ON 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 48% 60%
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 48 36
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 4 4
- --------------------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------------------
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY ON 8/31/96 ON 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 82% 64%
- --------------------------------------------------------------------------------
AA 7 24
- --------------------------------------------------------------------------------
A 1 4
- --------------------------------------------------------------------------------
BBB 7 4
- --------------------------------------------------------------------------------
NOT RATED 3 4
- --------------------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------------------
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY ON 8/31/96 ON 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 4% 0%
- --------------------------------------------------------------------------------
11-20 YEARS 68 21
- --------------------------------------------------------------------------------
+21 YEARS 28 79
- --------------------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------------------
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE MATURITY ON 8/31/96 ON 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
13.7 YEARS 22.8 YEARS
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
MICHIGAN TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL Building Auth., Rev., 6.25%, 2020 $ 95 $ 96
OBLIGATIONS -------------------------------------------------------------------------------------------------
Hospital Finance Auth.:
Gratiot Community Hospital, Rev., 6.10%, 2007 50 49
St. John Hospital and Medical Center, Rev., 6.00%, 2010 100 103
-------------------------------------------------------------------------------------------------
Housing Dev. Auth.:
Limited Oblg. Green Hill Proj., Rev., 5.45%, 2011 20 19
Rental Housing Rev., 5.75%, 2014 15 15
-------------------------------------------------------------------------------------------------
Municipal Bond Auth.:
Local Government Bond Rev., 6.00%, 2013 10 10
Local Government Loan Program, Rev., 5.375%, 2017 75 71
State Revolving Fund, Rev., 6.50%, 2014 15 17
-------------------------------------------------------------------------------------------------
Regents of the University of Michigan:
Construction and Renovation Proj., Student Fee Bonds, Rev., 5.50%, 2013 10 10
Housing Rev., 5.50%, 2014 100 97
-------------------------------------------------------------------------------------------------
Underground Storage Tank Financial Assurance Auth., Rev., 5.75%, 2010 100 101
-------------------------------------------------------------------------------------------------
Allegan Public Schools, Gen. Oblg., 6.50%, 2007 100 110
-------------------------------------------------------------------------------------------------
Birmingham Public Schools, Gen. Oblg., 5.75%, 2011 15 15
-------------------------------------------------------------------------------------------------
Brandon School District, Gen. Oblg., 5.60%, 2010 100 100
-------------------------------------------------------------------------------------------------
Caledonia Community Schools, Gen. Oblg., 5.75%, 2012 100 100
-------------------------------------------------------------------------------------------------
Chelsea School District, Gen. Oblg., 6.00%, 2019 100 101
-------------------------------------------------------------------------------------------------
Clintondale Community Schools, Gen. Oblg., 5.375%, 2010 100 99
-------------------------------------------------------------------------------------------------
Detroit:
Gen. Oblg., 6.80%, 2015 50 53
Water Supply System, Rev., 4.75%, 2019 15 13
--------------------------------------------------------------------------------------------------
Garden City, Sewage Disposal System, Gen. Oblg., 5.50%, 2013 100 98
--------------------------------------------------------------------------------------------------
Greater Detroit Resource Recovery Auth., Rev., 6.25%, 2008 85 91
--------------------------------------------------------------------------------------------------
Grosse ILE Township Schools, Gen. Oblg., 6.25%, 2006 100 108
--------------------------------------------------------------------------------------------------
Gull Lake Community Schools, Gen. Oblg., 5.25%, 2021 5 5
--------------------------------------------------------------------------------------------------
Huron Valley School District, Gen. Oblg., 5.70% and 5.875%, 2011 and 2016 150 150
--------------------------------------------------------------------------------------------------
Kalamazoo, Hospital Finance Auth., Rev., 6.25% and 5.75%, 2012 and 2016 135 136
--------------------------------------------------------------------------------------------------
Kent Hospital Finance Auth., Health Care, Rev., 5.75%, 2011 100 100
--------------------------------------------------------------------------------------------------
Lake Orion Community School District, Gen. Oblg., 5.50%, 2020 100 96
--------------------------------------------------------------------------------------------------
Lincoln Park School District, Gen. Oblg., 7.00%, 2020 100 111
--------------------------------------------------------------------------------------------------
Marquette City Hospital Finance Auth., Rev., 5.875%, 2011 85 86
--------------------------------------------------------------------------------------------------
Monroe County, Pollution Control Rev., 6.55%, 2024 100 105
--------------------------------------------------------------------------------------------------
Morley-Stanwood Community Schools, Gen. Oblg., 5.625%, 2015 100 98
--------------------------------------------------------------------------------------------------
North Branch Area Schools, Gen. Oblg., 5.375%, 2021 5 5
--------------------------------------------------------------------------------------------------
Oakland County:
Avondale School District, Gen. Oblg., 5.40%, 2009 100 99
Drainage District, Rev., 6.40%, 2016 15 16
--------------------------------------------------------------------------------------------------
Portage Public Schools, Gen. Oblg., 5.60%, 2011 100 99
--------------------------------------------------------------------------------------------------
Redford Union Schools, District No. 1, Gen. Oblg., 6.375%, 2010 100 109
--------------------------------------------------------------------------------------------------
St. Clair County, Water Supply System No. VII, Gen. Oblg., 5.25%, 2018 15 14
--------------------------------------------------------------------------------------------------
Wyandotte, Electric Rev., 6.25%, 2017 45 47
--------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Puerto Rico Commonwealth:
Facilities Financing Authority, Mennonite General Hospital Project, Rev.,
6.50%, 2018 $ 75 $ 74
Gen. Oblg., 5.50%, 2009 15 15
Highway and Transportation Auth., Rev., 6.25%, 2016 75 81
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%, 2026 30 30
University of Puerto Rico, System Rev., 5.50%, 2015 100 97
------------------------------------------------------------------------------------------------
Virgin Islands, Public Finance Auth., Gen. Oblg., 7.25%, 2018 100 106
------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--96.0%
(Cost: $3,115) 3,155
------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENT--3.1%
Yield--3.75%
Due--September 1996
(Cost: $100) 100 100
------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.1%
(Cost: $3,215) 3,255
------------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES--.9% 31
------------------------------------------------------------------------------------------------
NET ASSETS--100% $3,286
------------------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $3,215,000 for federal income tax purposes
at August 31, 1996, the gross unrealized appreciation was $45,000, the gross
unrealized depreciation was $5,000 and the net unrealized appreciation of
investments was $40,000.
See accompanying Notes to Financial Statements.
19
<PAGE> 20
PERFORMANCE UPDATE
KEMPER OHIO TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED AUGUST 31, 1996 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS A 1.40% 5.27% (SINCE 3/22/93)
- ------------------------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS B 2.30% 5.15% (SINCE 5/31/94)
- ------------------------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS C 5.28% 6.38% (SINCE 5/31/94)
- ------------------------------------------------------------------------------------------------
</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 and total return measure 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%; 5-year, 1%; since inception, 0%. For C shares purchased
after 4/1/96 there is a 1% CDSC on certain redemptions within the first year of
purchase. Average annual total return reflects annualized change while total
return reflects aggregate 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.
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER OHIO TAX-FREE
INCOME FUND CLASS A FROM 3/22/93 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
Kemper Ohio Lehman Brothers Consumer
Tax-Free Income Fund Municipal Bond Index Price Index
-------------------- -------------------- -----------
<S> <C> <C> <C>
3/22/93 10,000 10,000 10,000
12/31/93 10,509 10,826 10,153
12/31/94 10,124 10,267 10,425
12/31/95 11,983 12,059 10,689
8/31/96 11,939 12,111 10,954
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER OHIO TAX-FREE
INCOME FUND CLASS B FROM 5/31/94 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
Kemper Ohio Lehman Brothers Consumer
Tax-Free Income Fund Municipal Bond Index Price Index
-------------------- -------------------- -----------
<S> <C> <C> <C>
5/31/94 10,000 10,000 10,000
12/31/94 9,881 9,864 10,149
12/31/95 11,610 11,586 10,407
8/31/96 11,203 11,636 10,664
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER OHIO TAX-FREE
INCOME FUND CLASS C FROM 5/31/94 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
Kemper Ohio Lehman Brothers Consumer
Tax-Free Income Fund Municipal Bond Index Price Index
-------------------- -------------------- -----------
<S> <C> <C> <C>
5/31/94 10,000 10,000 10,000
12/31/94 9,880 9,864 10,149
12/31/95 11,608 11,586 10,407
8/31/96 11,500 11,636 10,664
</TABLE>
KEMPER OHIO TAX-FREE INCOME FUND(1)
LEHMAN BROTHERS MUNICIPAL BOND INDEX+
CONSUMER PRICE INDEX++
(1) Performance includes reinvestment of dividends and adjustment for
the applicable sales charge in effect at the end of the period. 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 charges, 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. Bonds subject to Alternative Minimum
Tax (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.
20
<PAGE> 21
PORTFOLIO STATISTICS
KEMPER OHIO TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION* ON 8/31/96 ON 8/31/95
<S> <C> <C>
REVENUE BONDS 53% 71%
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 45 27
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 2
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
<TABLE>
<CAPTION>
[PIE CHART] [PIE CHART]
ON 8/31/96 ON 8/31/95
QUALITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
AAA 73% 69%
- --------------------------------------------------------------------------------
AA 12 13
- --------------------------------------------------------------------------------
A 5 9
- --------------------------------------------------------------------------------
BBB 9 8
- --------------------------------------------------------------------------------
NOT RATED 1 1
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
<TABLE>
<CAPTION>
[PIE CHART] [PIE CHART]
ON 8/31/96 ON 8/31/95
YEARS TO MATURITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
1-10 YEARS 1% --
- --------------------------------------------------------------------------------
11-20 YEARS 58 48%
- --------------------------------------------------------------------------------
+21 YEARS 41 52
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
<TABLE>
<CAPTION>
[PIE CHART] [PIE CHART]
ON 8/31/96 ON 8/31/95
AVERAGE MATURITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
16.2 YEARS 21.2 YEARS
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
OHIO TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL Bowling Green State University, General Receipts, Rev., 5.65%, 2011 $ 445 $ 445
OBLIGATIONS
--------------------------------------------------------------------------------------------
Building Auth.:
Administrative Building Funds Proj., Rev., 6.30%, 2011 140 146
Adult Correctional Building Fund Proj., Rev., 6.125%, 2012 310 318
James A. Rhodes State Office Tower, Rev., 6.25%, 2011 215 223
Juvenile Correctional Building Proj., Rev., 6.60%, 2014 200 217
--------------------------------------------------------------------------------------------
Higher Education Facility:
Dayton University, Rev., 6.60%, 2017 430 467
Dominican College, Rev., 6.625%, 2014 600 620
--------------------------------------------------------------------------------------------
Housing Finance Agency, Single Family Mortgage, Rev., 7.85%, 2021 330 348
--------------------------------------------------------------------------------------------
Ohio State University, General Receipts, Rev., 5.00%, 2018 750 684
--------------------------------------------------------------------------------------------
State Turnpike, Rev., 6.00%, 2007 1,000 1,063
--------------------------------------------------------------------------------------------
Water Development Authority, Pollution Control, Rev., 5.50%, 2015 500 482
--------------------------------------------------------------------------------------------
Akron, Sewer System., Rev., 5.90%, 2011 385 394
--------------------------------------------------------------------------------------------
Anthony Wayne Local School District, Gen. Oblg., 5.75%, 2018 500 496
--------------------------------------------------------------------------------------------
Archbold Area Local School District, Gen. Oblg., 5.90%, 2016 500 501
--------------------------------------------------------------------------------------------
Avon Local School District, Gen. Oblg., 6.50%, 2015 940 1,032
--------------------------------------------------------------------------------------------
Batavia Local School District, Gen. Oblg., 7.00%, 2014 500 563
--------------------------------------------------------------------------------------------
Beavercreek Local School District, Gen. Oblg., 6.60%, 2015 500 555
--------------------------------------------------------------------------------------------
Butler County, Sewer System, Rev., 5.25%, 2021 1,000 931
--------------------------------------------------------------------------------------------
Canton Waterworks, Gen. Oblg., 5.85%, 2015 300 301
--------------------------------------------------------------------------------------------
Cleveland, Airport System Improvement, Rev., 5.75%, 2015 750 726
--------------------------------------------------------------------------------------------
Cleveland Public Power, First Mortgage, Rev., 7.00%, 2017 750 828
--------------------------------------------------------------------------------------------
Cleveland, Waterworks Improvement, First Mortgage, Rev., 5.50% and
6.25%, 2013 and 2015 895 921
--------------------------------------------------------------------------------------------
Columbus Municipal Airport Auth., Rev., 6.00%, 2014 750 749
--------------------------------------------------------------------------------------------
Crawford County, Gen. Oblg., 6.75%, 2019 700 773
--------------------------------------------------------------------------------------------
Cuyahoga County:
Gen. Oblg., 5.65%, 2018 1,000 986
Merida Health System, Rev., 6.25%, 2014 950 958
Multi-Family Housing, Rev., 6.50%, 2020 1,000 1,023
--------------------------------------------------------------------------------------------
Delaware County, Gen. Oblg., 5.25%, 2015 320 301
--------------------------------------------------------------------------------------------
Dublin, Gen. Oblg., 5.00%, 2018 1,000 915
--------------------------------------------------------------------------------------------
Fayette County, Gen. Oblg., 5.90%, 2013 185 179
--------------------------------------------------------------------------------------------
Franklin County:
Gen. Oblg., 5.30%, 2011 500 492
Holy Cross Health System, Rev., 5.80%, 2016 1,000 993
--------------------------------------------------------------------------------------------
Grandview Heights, Gen. Oblg., 5.55%, 2019 500 488
--------------------------------------------------------------------------------------------
Green Springs, St. Francis Healthcare, Rev., 7.00%, 2014 400 405
--------------------------------------------------------------------------------------------
Groveport Capital Facilities, Gen. Oblg., 5.60%, 2011 335 338
--------------------------------------------------------------------------------------------
Hancock County, Gen. Oblg., 5.875%, 2017 500 495
--------------------------------------------------------------------------------------------
Highland Heights, Gen. Oblg., 6.15%, 2012 145 149
--------------------------------------------------------------------------------------------
Lakeview Local School District, Gen. Oblg., 6.90%, 2014 700 782
--------------------------------------------------------------------------------------------
Lucas County:
Public Improvement Water Utility, Rev., 6.05%, 2013 130 134
St. Vincent Medical Center, Rev., 5.45%, 2014 500 476
--------------------------------------------------------------------------------------------
Marion County, United Church Homes Proj., Rev., 6.30% and 6.375%, 2015
and 2010 700 672
--------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <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 485 516
-------------------------------------------------------------------------------------------------
North Royalton City School District, Gen. Oblg., 6.10%, 2019 500 517
-------------------------------------------------------------------------------------------------
Northeast Ohio Regional Sewer District, Wastewater Improvement, Rev.,
6.50%, 2016 300 327
-------------------------------------------------------------------------------------------------
Olentangy Local School District, Gen. Oblg., 5.85% and 6.35%, 2007 and
2017 550 574
-------------------------------------------------------------------------------------------------
Olmstead Falls School District, Gen. Oblg., 6.85%, 2011 250 280
-------------------------------------------------------------------------------------------------
Ottawa County, Gen. Oblg., 5.75%, 2014 500 493
-------------------------------------------------------------------------------------------------
Sandusky County, Gen. Oblg., 6.20%, 2013 500 525
-------------------------------------------------------------------------------------------------
South Euclid-Lyndhurst City School District, Gen. Oblg., 6.40%, 2018 535 573
-------------------------------------------------------------------------------------------------
Springboro Community City School District, School Improvement, Gen.
Oblg., 6.00%, 2011 1,100 1,164
-------------------------------------------------------------------------------------------------
City of Springdale, Hospital Facilities First Mortgage, Southwestern
Ohio Seniors Services, Rev., 6.00%, 2018 750 703
-------------------------------------------------------------------------------------------------
Toledo, Gen. Oblg., 6.10% and 6.35%, 2014 and 2025 1,250 1,312
-------------------------------------------------------------------------------------------------
Trumbull County Sewer Improvement, Gen. Oblg., 6.20%, 2014 500 524
-------------------------------------------------------------------------------------------------
Tuscarawas Valley Local School District, Gen. Oblg., 6.60%, 2015 365 400
-------------------------------------------------------------------------------------------------
Upper Arlington City School District, School Building Improvement, Gen.
Oblg., 5.125%, 2019 1,000 920
-------------------------------------------------------------------------------------------------
Wayne Local School District, Gen Oblg., 6.45% and 6.60%, 2011 and 2016 355 393
-------------------------------------------------------------------------------------------------
Youngstown, Gen. Oblg., 6.125%, 2014 110 114
-------------------------------------------------------------------------------------------------
Puerto Rico:
Facilities Financing Auth., Mennonite Gen. Hospital Proj., Rev.,
6.50%, 2018 750 741
Finance Agcy., Rev., 6.00%, 2014 250 254
Highway and Transportation Auth., Rev., 6.25%, 2016 750 806
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%, 2026 360 359
University of Puerto Rico, Rev., 5.50%, 2015 1,000 974
------------------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Rev., 7.25%, 2018 225 239
------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--97.8%
(Cost: $35,351) 36,308
------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENT--1.1%
Yield--3.95%
Due--September 1996
(Cost: $400) 400 400
------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.9%
(Cost: $35,751) 36,708
------------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.1% 392
------------------------------------------------------------------------------------------------
NET ASSETS--100% $37,100
------------------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $35,751,000 for federal income tax purposes
at August 31, 1996, the gross unrealized appreciation was $1,130,000, the gross
unrealized depreciation was $173,000 and the net unrealized appreciation of
investments was $957,000.
See accompanying Notes to Financial Statements.
23
<PAGE> 24
PERFORMANCE UPDATE
KEMPER TEXAS TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED AUGUST 31, 1996 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME FUND CLASS A 2.23% 7.50% (SINCE 11/1/91)
- ------------------------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME FUND CLASS B 3.13% 5.49% (SINCE 5/31/94)
- ------------------------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME FUND CLASS C 6.13% 6.76% (SINCE 5/31/94)
- ------------------------------------------------------------------------------------------------
</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 and total return measure 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%; 5-year, 1%; since inception, 0%. For C shares purchased
after 4/1/96 there is a 1% CDSC on certain redemptions within the first year of
purchase. Average annual total return reflects annualized change while total
return reflects aggregate 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.
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER TEXAS TAX-FREE
INCOME FUND CLASS A FROM 11/1/91 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
Kemper Texas Lehman Brothers Consumer
Tax-Free Income Fund Municipal Bond Index Price Index
-------------------- -------------------- -----------
<S> <C> <C> <C>
11/1/91 10,000 10,000 10,000
12/31/92 10,752 11,146 10,328
12/31/94 11,952 11,868 10,895
8/31/96 14,188 14,000 11,448
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER TEXAS TAX-FREE
INCOME FUND CLASS B FROM 5/31/94 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
Kemper Texas Lehman Brothers Consumer
Tax-Free Income Fund Municipal Bond Index Price Index
-------------------- -------------------- -----------
<S> <C> <C> <C>
5/31/94 10,000 10,000 10,000
12/31/94 9,906 9,864 10,149
12/31/95 11,614 11,586 10,407
8/31/96 11,283 11,636 10,664
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER TEXAS TAX-FREE
INCOME FUND CLASS C FROM 5/31/94 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
Kemper Texas Lehman Brothers Consumer
Tax-Free Income Fund Municipal Bond Index Price Index
-------------------- -------------------- -----------
<S> <C> <C> <C>
5/31/94 10,000 10,000 10,000
12/31/94 9,913 9,864 10,149
12/31/95 11,634 11,586 10,407
8/31/96 11,593 11,636 10,664
</TABLE>
KEMPER TEXAS TAX-FREE INCOME FUND(1)
LEHMAN BROTHERS MUNICIPAL BOND INDEX+
CONSUMER PRICE INDEX++
(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 charges, 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. Bonds subject to
Alternative Minimum Tax (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.
24
<PAGE> 25
PORTFOLIO STATISTICS
KEMPER TEXAS TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 8/31/96 ON 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 64% 79%
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 34 19
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 2
- --------------------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------------------
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY ON 8/31/96 ON 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 74% 64%
- --------------------------------------------------------------------------------
AA 8 16
- --------------------------------------------------------------------------------
A 11 8
- --------------------------------------------------------------------------------
BBB 7 10
- --------------------------------------------------------------------------------
NOT RATED -- 2
- --------------------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------------------
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY ON 8/31/96 ON 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 1% 1%
- --------------------------------------------------------------------------------
11-20 YEARS 72 62
- --------------------------------------------------------------------------------
+21 YEARS 27 37
- --------------------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------------------
</TABLE>
LOGO
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE MATURITY ON 8/31/96 ON 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
14.4 YEARS 19.0 YEARS
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
25
<PAGE> 26
PORTFOLIO OF INVESTMENTS
TEXAS TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADVANCE Matagorda County, Central Power and Light, Pollution Control Rev.,
REFUNDED 7.875%, to be called 12-01-96 @102 $ 110 $ 113
OBLIGATIONS --------------------------------------------------------------------------------------------
SECURED AS TO Travis County Housing Finance Corp., Gen. Oblg., 6.75%,
PRINCIPAL AND to be called 09-01-01 @100 75 82
INTEREST BY --------------------------------------------------------------------------------------------
OBLIGATIONS TOTAL ADVANCE REFUNDED OBLIGATIONS--1.4% 195
OF THE --------------------------------------------------------------------------------------------
UNITED STATES
GOVERNMENT
- ---------------------------------------------------------------------------------------------------------------
OTHER Housing Agcy., Single Family Mortgage, Rev., 7.15%, 2012 70 73
MUNICIPAL
OBLIGATIONS
--------------------------------------------------------------------------------------------
Public Financing Auth., Gen. Oblg., zero coupon and 7.00%, 2009 and 2012 1,236 732
--------------------------------------------------------------------------------------------
Water Dev., Gen. Oblg., 5.40%, 2021 500 471
--------------------------------------------------------------------------------------------
Abilene Higher Education Facilities Corp., Abilene Christian University
Proj., Rev., 6.25%, 2011 300 301
--------------------------------------------------------------------------------------------
Austin:
Airport, Rev., 6.20%, 2015 585 598
Combined Utility Systems, Rev., zero coupon, 2010 1,100 490
Independent School District, Gen. Oblg., 5.75%, 2015 550 550
--------------------------------------------------------------------------------------------
Bexar County Housing Finance Dev. Corp., Multi-Family Housing, Rev.,
6.875%, 2012 250 260
--------------------------------------------------------------------------------------------
Brazosport, Independent School District, Gen. Oblg., 5.50%, 2016 350 338
--------------------------------------------------------------------------------------------
Brazos River Auth.:
Special Facilities, Rev., 5.50%, 2021 275 261
Texas Utilities Electric Company Proj., Rev., 8.125%, 2020 350 382
--------------------------------------------------------------------------------------------
Cameron County Housing Finance Corp., Single Family Mortgage, Rev.,
6.75%, 2025 500 521
--------------------------------------------------------------------------------------------
Canadian River Municipal Water Auth., Rev., 5.875%, 2016 500 500
--------------------------------------------------------------------------------------------
Circle C, Utility System, District Number Three, Rev., 6.50%, 2009 250 267
--------------------------------------------------------------------------------------------
Coastal Water Auth., Houston Proj., Rev., 5.80%, 2020 500 491
--------------------------------------------------------------------------------------------
Coppell, Independent School District, Gen. Oblg., 5.375%, 2020 250 236
--------------------------------------------------------------------------------------------
Corpus Christi, Utility System, Rev., 5.25%, 2013 300 285
--------------------------------------------------------------------------------------------
Cypress-Fairbanks, Independent School District, Gen. Oblg., 5.60%, 2016 350 341
--------------------------------------------------------------------------------------------
Denton, Utility System, Rev., 6.50% and 5.75%, 2009 and 2016 375 384
--------------------------------------------------------------------------------------------
Dripping Springs, Independent School District, Gen Oblg., 5.80%, 2013 480 482
--------------------------------------------------------------------------------------------
Ector County Hospital District, Rev., 7.30%, 2012 450 485
--------------------------------------------------------------------------------------------
Fort Bend County:
Independent School District, Gen. Oblg., 5.00%, 2018 300 266
Levee Improvement District Number 2, Gen Oblg., 6.625%, 2008 200 215
--------------------------------------------------------------------------------------------
Georgetown Higher Education Finance Corp., Southwestern University
Proj., Rev., 6.30%, 2014 500 510
--------------------------------------------------------------------------------------------
Harris County:
Health Facilities Dev. Corp., St. Luke's Episcopal Hospital Proj.,
Rev., 6.75%, 2021 120 126
Hospital District Mortgage, Rev., 7.40%, 2010 60 70
--------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Houston Higher Education Finance Corp., University of St. Thomas Proj.,
Rev., 7.25%, 2007 $ 300 $ 319
-------------------------------------------------------------------------------------------------
Ingram, Independent School District, Gen. Oblg., 5.00%, 2016 500 451
-------------------------------------------------------------------------------------------------
Laredo, Gen Oblg., 5.25%, 2010 300 291
-------------------------------------------------------------------------------------------------
Lockhart Correctional Facilities Financing Corp., Rev., 6.625%, 2012 200 213
-------------------------------------------------------------------------------------------------
Lower Colorado River Auth., Junior Lien, Rev., 5.25%, 2015 150 142
-------------------------------------------------------------------------------------------------
Lufkin, Independent School District, Gen. Oblg., 5.25%, 2017 500 465
-------------------------------------------------------------------------------------------------
Matagorda County, Houston Power and Light, Pollution Control Rev.,
7.875%, 2016 100 102
-------------------------------------------------------------------------------------------------
North Central Health Facilities Dev. Corp., Presbyterian Healthcare
System, Rev., 6.625%, 2011 100 105
-------------------------------------------------------------------------------------------------
Socorro, Independent School District, Gen. Oblg., 6.625%, 2013 90 96
-------------------------------------------------------------------------------------------------
Spring, Independent School District, Gen. Oblg., 6.375%, 2016 400 418
-------------------------------------------------------------------------------------------------
Travis County Housing Finance Corp.:
Residential Mortgage, Senior Rev., 7.00%, 2011 245 257
-------------------------------------------------------------------------------------------------
Single Family Mortgage, Rev., 6.75%, 2014 130 135
-------------------------------------------------------------------------------------------------
Trinity River Auth., Denton Creek Wastewater System, Rev., 6.45%, 2015 390 409
-------------------------------------------------------------------------------------------------
Waco Health Facilities Dev. Corp., Hillcrest Baptist Medical Center
Proj., Rev., 7.125%, 2014 90 98
------------------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--96.6% 13,136
------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--98.0%
(Cost: $12,939) 13,331
------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS
Yield--3.70% to 4.10%
Due--September 1996
-------------------------------------------------------------------------------------------------
Brazos River Authority, Pollution Control Rev. 400 400
-------------------------------------------------------------------------------------------------
Other Money Market Instruments 400 400
------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--5.9%
(Cost: $800) 800
------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--103.9%
(Cost: $13,739) 14,131
------------------------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(3.9)% (536)
------------------------------------------------------------------------------------------------
NET ASSETS--100% $13,595
------------------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $13,739,000 for federal income tax purposes
at August 31, 1996, gross unrealized appreciation was $404,000, the gross
unrealized depreciation was $12,000 and the net unrealized appreciation of
investments was $392,000.
See accompanying Notes to Financial Statements.
27
<PAGE> 28
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, Kemper Michigan Tax-Free Income Fund, Kemper Ohio Tax-Free Income Fund,
and Kemper Texas Tax-Free Income Fund, four of the eight investment portfolios
comprising Kemper State Tax-Free Income Series (the Trust), as of August 31,
1996, the related statements of operations for the year then ended and changes
in net assets for each of the two years in the period then ended, except for the
Michigan Fund which is for the period from March 15, 1995 (initial public
offering) to August 31, 1995 and for the year ended August 31, 1996, and
financial highlights for each of the fiscal periods since 1992. 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, 1996, 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 financial 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, 1996, 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 16, 1996
28
<PAGE> 29
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1996
(in thousands)
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
- ----------------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments, at value (Cost: $988,901,
$3,215, $35,751 and $13,739, respectively) $1,029,314 3,255 36,708 14,131
- ----------------------------------------------------------------------------------------------------------
Cash 346 -- 152 106
- ----------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 785 -- 94 --
- ----------------------------------------------------------------------------------------------------------
Investments sold 251 4 98 535
- ----------------------------------------------------------------------------------------------------------
Interest 15,317 48 521 170
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,046,013 3,307 37,573 14,942
==========================================================================================================
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Cash overdraft -- 14 -- --
- ----------------------------------------------------------------------------------------------------------
Payable for:
Dividends 1,027 2 34 13
- ----------------------------------------------------------------------------------------------------------
Fund shares redeemed 502 1 -- 109
- ----------------------------------------------------------------------------------------------------------
Investments purchased 2,958 -- 387 1,207
- ----------------------------------------------------------------------------------------------------------
Management fee 463 1 17 6
- ----------------------------------------------------------------------------------------------------------
Administrative services fee 141 1 7 2
- ----------------------------------------------------------------------------------------------------------
Distribution services fee 12 1 5 --
- ----------------------------------------------------------------------------------------------------------
Trustees' fees and other 372 1 23 10
- ----------------------------------------------------------------------------------------------------------
Total liabilities 5,475 21 473 1,347
- ----------------------------------------------------------------------------------------------------------
NET ASSETS $1,040,538 3,286 37,100 13,595
==========================================================================================================
- ----------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Paid-in capital $1,011,390 3,231 36,207 12,972
- ----------------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (11,265) 15 (64) 231
- ----------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 40,413 40 957 392
- ----------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $1,040,538 3,286 37,100 13,595
==========================================================================================================
- ----------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- ----------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $1,022,147 2,143 29,496 13,069
- ----------------------------------------------------------------------------------------------------------
Shares outstanding, no par value 139,739 216 2,969 1,262
- ----------------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $7.31 9.92 9.93 10.36
- ----------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $7.65 10.39 10.40 10.85
==========================================================================================================
CLASS B SHARES
Net assets applicable to shares outstanding $ 17,536 1,078 7,330 367
- ----------------------------------------------------------------------------------------------------------
Shares outstanding, no par value 2,395 109 738 35
- ----------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $7.32 9.91 9.93 10.36
==========================================================================================================
CLASS C SHARES
Net assets applicable to shares outstanding $ 855 65 274 159
- ----------------------------------------------------------------------------------------------------------
Shares outstanding, no par value 117 6 28 15
- ----------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $7.31 9.91 9.93 10.36
==========================================================================================================
</TABLE>
29
<PAGE> 30
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended August 31, 1996
(in thousands)
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
- ------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $64,128 180 1,985 819
- ------------------------------------------------------------------------------------------------------------
Expenses:
Management fee 5,661 17 192 78
- ------------------------------------------------------------------------------------------------------------
Administrative services fee 1,655 8 69 25
- ------------------------------------------------------------------------------------------------------------
Distribution services fee 113 10 50 4
- ------------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 515 6 32 13
- ------------------------------------------------------------------------------------------------------------
Professional fees 225 6 4 2
- ------------------------------------------------------------------------------------------------------------
Reports to shareholders 252 1 7 4
- ------------------------------------------------------------------------------------------------------------
Trustees' fees and other 61 10 17 9
- ------------------------------------------------------------------------------------------------------------
Total expenses before expense waiver 8,482 58 371 135
- ------------------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment manager -- 10 -- --
- ------------------------------------------------------------------------------------------------------------
Total expenses after expense waiver 8,482 48 371 135
- ------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 55,646 132 1,614 684
============================================================================================================
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on sales of investments
(including options purchased) 7,175 18 143 195
- ------------------------------------------------------------------------------------------------------------
Net realized gain from futures transactions 179 20 247 137
- ------------------------------------------------------------------------------------------------------------
Net realized gain 7,354 38 390 332
- ------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 240 (1) (35) (18)
- ------------------------------------------------------------------------------------------------------------
Net gain on investments 7,594 37 355 314
- ------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $63,240 169 1,969 998
============================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
30
<PAGE> 31
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN
--------------------------- ---------------------
YEAR ENDED AUGUST 31, YEAR ENDED AUGUST 31,
1996 1995 1996 1995(A)
- ----------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $55,646 60,693 132 43
- ----------------------------------------------------------------------------------------------------------------
Net realized gain (loss) 7,354 7,380 38 (23)
- ----------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 240 14,140 (1) 41
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 63,240 82,213 169 61
- ----------------------------------------------------------------------------------------------------------------
Distribution from net investment income (55,646) (60,693) (132) (43)
- ----------------------------------------------------------------------------------------------------------------
Distribution from net realized gain on
investments (12,275) (5,442) -- --
- ----------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (67,921) (66,135) (132) (43)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (42,013) (97,295) 170 2,728
- ----------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (46,694) (81,217) 207 2,746
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS
================================================================================================================
Beginning of period 1,087,232 1,168,449 3,079 333
- ----------------------------------------------------------------------------------------------------------------
END OF PERIOD $1,040,538 1,087,232 3,286 3,079
================================================================================================================
</TABLE>
(a) For the period from March 15, 1995 (commencement of operations) to August
31, 1995.
<TABLE>
<CAPTION>
OHIO TEXAS
--------------------------- ---------------------
YEAR ENDED AUGUST 31, YEAR ENDED AUGUST 31,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $1,614 1,465 684 807
- ----------------------------------------------------------------------------------------------------------------
Net realized gain (loss) 390 (62) 332 295
- ----------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (35) 957 (18) 208
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 1,969 2,360 998 1,310
- ----------------------------------------------------------------------------------------------------------------
Distribution from net investment income (1,614) (1,465) (684) (807)
- ----------------------------------------------------------------------------------------------------------------
Distribution from net realized gain on
investments -- -- (358) (114)
- ----------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (1,614) (1,465) (1,042) (921)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions 5,295 6,786 (1,238) (921)
- ----------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 5,650 7,681 (1,282) (532)
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
Beginning of period 31,450 23,769 14,877 15,409
================================================================================================================
END OF PERIOD $37,100 31,450 13,595 14,877
================================================================================================================
</TABLE>
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE FUND 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 sales
charge but are subject to higher ongoing expenses
than Class A shares and, for shares sold on or
after April 1, 1996, a contingent deferred sales
charge payable on certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Differences in class expenses
will result in the payment of different per share
income dividends by 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 includes premium and original
issue discount amortization on fixed income
securities. Realized gains and losses from
investment transactions are reported on an
identified cost basis.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated 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 and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
32
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
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.
FEDERAL INCOME TAXES. 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.
DIVIDENDS TO SHAREHOLDERS. Each Fund declares and
records a daily dividend equal to its net
investment income for that day, to holders of
shares for which payment has been received. Income
dividends are distributed monthly. Net realized
capital gains, if any, will be distributed at least
annually. Dividends are determined in accordance
with income tax principles which may treat certain
transactions differently than generally accepted
accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Trust has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI), and each Fund pays a management fee at an
annual rate of .55% of the first $250 million of
average daily net assets declining to .40% of
average daily net assets in excess of $12.5
billion.
The California, Ohio and Texas Funds paid
management fees of $5,661,000, $192,000 and
$78,000, respectively, for the year ended August
31, 1996.
ZKI waived the management fee of the Michigan Fund
from its inception, March 15, 1995, through
September 15, 1995. Thereafter, the management fee
was gradually reinstated. For the year ended August
31, 1996, the Michigan Fund paid a management fee
of $7,000 after the waiver.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Trust has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of each Fund's Class A shares
for the year ended August 31, 1996 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS ---------------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- --------------
<S> <C> <C> <C>
California $ 138,000 924,000 36,000
Michigan 4,000 21,000 1,000
Ohio 9,000 84,000 --
Texas 3,000 22,000 --
</TABLE>
For services under the distribution services
agreement, each Fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares of each Fund. In addition, KDI receives any
contingent deferred sales charges (CDSC) from
redemptions of Class B and Class C
33
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
shares. Distribution fees and commissions paid in
connection with the sale of each Fund's Class B and
Class C shares and the CDSC received in connection
with the redemption of such shares for the year
ended August 31, 1996 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES
DISTRIBUTION PAID BY KDI
FEES AND CDSC -----------------------------
RECEIVED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
California $ 182,000 327,000 30,000
Michigan 11,000 19,000 4,000
Ohio 66,000 106,000 --
Texas 8,000 6,000 --
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, each Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
arrangements with financial services firms that
provide these services and pays these firms based
on assets of Fund accounts that the firms service.
Administrative services fees (ASF) paid for the
year ended August 31, 1996 are as follows:
<TABLE>
<CAPTION>
ASF ASF PAID BY KDI
PAID BY THE -----------------------------
FUND TO KDI TO ALL FIRMS TO AFFILIATES
----------- ------------ -------------
<S> <C> <C> <C>
California $1,655,000 1,651,000 60,000
Michigan 8,000 7,000 --
Ohio 69,000 70,000 --
Texas 25,000 25,000 --
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds' transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Trust. Under the agreement,
for the year ended August 31, 1996, KSvC received
shareholder services fees as follows:
<TABLE>
<CAPTION>
SHAREHOLDERS SERVICES FEES
REMITTED TO KSVC
--------------------------
<S> <C>
California $395,000
Michigan 3,000
Ohio 21,000
Texas 8,000
</TABLE>
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of ZKI.
For the year ended August 31, 1996, the Funds made
no payments to its officers and incurred trustees'
fees aggregating $31,000 to independent trustees.
34
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4 INVESTMENT TRANSACTIONS For the year ended August 31, 1996, investment
transactions (excluding short-term instruments)
are as follows (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
---------- -------- ------ -------
<S> <C> <C> <C> <C>
Purchases $1,029,484 4,330 33,577 15,243
Proceeds from sales 1,086,368 4,129 28,376 16,621
</TABLE>
- --------------------------------------------------------------------------------
5 CAPITAL SHARE The following tables summarize the activity in
TRANSACTIONS capital shares of the Funds (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995
----------------------- ------------------------
CALIFORNIA SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 10,345 $ 76,744 12,188 $ 86,868
------------------------------------------------------------------------------
Class B 1,285 9,551 1,538 10,921
------------------------------------------------------------------------------
Class C 105 778 39 286
------------------------------------------------------------------------------
SHARES ISSUED IN
REINVESTMENT OF
DIVIDENDS
Class A 5,338 39,708 5,347 37,817
------------------------------------------------------------------------------
Class B 59 440 31 221
------------------------------------------------------------------------------
Class C 4 26 1 4
------------------------------------------------------------------------------
SHARES REDEEMED
Class A (22,338) (165,506) (32,560) (230,923)
------------------------------------------------------------------------------
Class B (473) (3,516) (339) (2,405)
------------------------------------------------------------------------------
Class C (32) (238) (11) (84)
------------------------------------------------------------------------------
CONVERSION OF
SHARES
Class A 63 472 61 418
------------------------------------------------------------------------------
Class B (63) (472) (61) (418)
------------------------------------------------------------------------------
NET DECREASE
FROM CAPITAL
SHARE TRANSACTIONS $ (42,013) $ (97,295)
------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 15, 1995 TO
AUGUST 31, 1996 AUGUST 31, 1995
-------------------- -------------------
MICHIGAN SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 112 $1,127 296 $2,868
- ----------------------------------------------------------------------------
Class B 40 403 87 845
- ----------------------------------------------------------------------------
Class C 12 125 44 421
- ----------------------------------------------------------------------------
SHARES ISSUED IN
REINVESTMENT OF
DIVIDENDS
Class A 7 65 3 24
- ----------------------------------------------------------------------------
Class B 3 29 1 4
- ----------------------------------------------------------------------------
Class C 1 10 1 3
- ----------------------------------------------------------------------------
SHARES REDEEMED
Class A (76) (754) (137) (1,307)
- ----------------------------------------------------------------------------
Class B (21) (210) (12) (120)
- ----------------------------------------------------------------------------
Class C (62) (625) (1) (10)
- ----------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL
SHARE TRANSACTIONS $ 170 $2,728
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995
------------------- --------------------
OHIO SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 655 $6,545 703 $6,633
- ----------------------------------------------------------------------------
Class B 292 2,917 448 4,271
- ----------------------------------------------------------------------------
Class C 15 149 14 133
- ----------------------------------------------------------------------------
SHARES ISSUED IN
REINVESTMENT OF
DIVIDENDS
Class A 86 845 87 819
- ----------------------------------------------------------------------------
Class B 16 162 9 85
- ----------------------------------------------------------------------------
Class C 1 9 1 7
- ----------------------------------------------------------------------------
SHARES REDEEMED
Class A (440) (4,363) (494) (4,704)
- ----------------------------------------------------------------------------
Class B (93) (922) (38) (379)
- ----------------------------------------------------------------------------
Class C (5) (47) (8) (79)
- ----------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 1 8 12 116
- ----------------------------------------------------------------------------
Class B (1) (8) (12) (116)
- ----------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL
SHARE TRANSACTIONS $5,295 $6,786
- ----------------------------------------------------------------------------
</TABLE>
36
<PAGE> 37
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995
-------------------- --------------------
TEXAS SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 87 $ 912 197 $1,968
- ----------------------------------------------------------------------------
Class B 14 150 33 336
- ----------------------------------------------------------------------------
Class C -- -- 4 42
- ----------------------------------------------------------------------------
SHARES ISSUED IN
REINVESTMENT OF
DIVIDENDS
Class A 64 666 56 562
- ----------------------------------------------------------------------------
Class B 1 9 1 7
- ----------------------------------------------------------------------------
Class C 1 11 1 13
- ----------------------------------------------------------------------------
SHARES REDEEMED
Class A (263) (2,779) (349) (3,496)
- ----------------------------------------------------------------------------
Class B (15) (151) (2) (27)
- ----------------------------------------------------------------------------
Class C (5) (56) (31) (326)
- ----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE
TRANSACTIONS $(1,238) $ (921)
- ----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES The Funds have entered into exchange traded futures
CONTRACTS contracts on U.S. Treasury securities in order to
help protect themselves from anticipated market
conditions and, as such, bear the risk that arises
from entering into these contracts.
At the time a Fund enters into a futures contract,
it is required to make a margin deposit with its
custodian. Subsequently, gain or loss is recognized
and payments are made on a daily basis between the
Fund and its broker as the market value of the
futures contract fluctuates. At August 31, 1996,
the market values of assets pledged by the Funds to
cover margin requirements for open futures
positions were $2,051,000, $14,000, $237,000 and
$115,000 for the California, Michigan, Ohio and
Texas Funds, respectively. The Funds also had
liquid securities in their portfolios in excess of
the face amount of the following short Treasury
Bond futures open at August 31, 1996. The contracts
expire in December, 1996.
<TABLE>
<CAPTION>
GAIN AT
FUND FACE AMOUNT 8/31/96
<S> <C> <C>
----------------------------------------------------
California $32,442,000 $408,000
----------------------------------------------------
Michigan 541,000 7,000
----------------------------------------------------
Ohio 5,946,000 73,000
----------------------------------------------------
Texas 2,596,000 33,000
----------------------------------------------------
</TABLE>
37
<PAGE> 38
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED AUGUST 31,
CALIFORNIA 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $7.35 7.22 8.01 7.57 7.31
- ------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .39 .39 .39 .44 .46
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .04 .17 (.44) .53 .29
- ------------------------------------------------------------------------------------------------------
Total from investment operations .43 .56 (.05) .97 .75
- ------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .39 .39 .39 .44 .46
- ------------------------------------------------------------------------------------------------------
Distribution from net realized gain .08 .04 .35 .09 .03
- ------------------------------------------------------------------------------------------------------
Total dividends .47 .43 .74 .53 .49
- ------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.31 7.35 7.22 8.01 7.57
======================================================================================================
TOTAL RETURN 5.92% 8.13 (.74) 13.21 10.47
======================================================================================================
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------------
Expenses .78% .74 .74 .63 .64
- ------------------------------------------------------------------------------------------------------
Net investment income 5.18 5.53 5.30 5.68 6.11
- ------------------------------------------------------------------------------------------------------
</TABLE>
[CAPTION]
<TABLE>
<CAPTION>
CLASS B CLASS C
MAY 31, MAY 31,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1996 1995 1994 1996 1995 1994
- ------------------------------------------------------------------------------- -------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $7.35 7.22 7.23 7.34 7.22 7.23
- ------------------------------------------------------------------------------- ------------------------------------
Income from investment operations:
Net investment income .32 .33 .08 .32 .33 .08
- ------------------------------------------------------------------------------- ------------------------------------
Net realized and unrealized gain (loss) .05 .17 (.01) .05 .16 (.01)
- ------------------------------------------------------------------------------- ------------------------------------
Total from investment operations .37 .50 .07 .37 .49 .07
- ------------------------------------------------------------------------------- ------------------------------------
Less dividends:
Distribution from net investment income .32 .33 .08 .32 .33 .08
- ------------------------------------------------------------------------------- ------------------------------------
Distribution from net realized gain .08 .04 -- .08 .04 --
- ------------------------------------------------------------------------------- ------------------------------------
Total dividends .40 .37 .08 .40 .37 .08
- ------------------------------------------------------------------------------- ------------------------------------
Net asset value, end of period $7.32 7.35 7.22 7.31 7.34 7.22
=============================================================================== ===================================
TOTAL RETURN (NOT ANNUALIZED) 5.16% 7.17 1.05 5.15 7.08 .96
- ------------------------------------------------------------------------------- -----------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------- ------------------------------------
Expenses 1.63% 1.60 1.60 1.64 1.56 1.56
- ------------------------------------------------------------------------------- ------------------------------------
Net investment income 4.33 4.67 4.48 4.32 4.71 4.76
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL DATA FOR ALL CLASSES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $1,040,538 1,087,232 1,168,449 1,331,377 1,182,891
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 100% 69 37 59 15
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
MARCH 15, MARCH 15, MARCH 15,
YEAR ENDED 1995 TO YEAR ENDED 1995 TO YEAR ENDED 1995 TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
MICHIGAN 1996 1995 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.76 9.50 9.77 9.50 9.76 9.50
- ---------------------------------------------------------------- ------------------------- ------------------------------
Income from investment operations:
Net investment income .44 .22 .36 .18 .37 .18
- ---------------------------------------------------------------- ------------------------- ------------------------------
Net realized and unrealized gain .16 .26 .14 .27 .15 .26
- ---------------------------------------------------------------- ------------------------- ------------------------------
Total from investment operations .60 .48 .50 .45 .52 .44
- ---------------------------------------------------------------- ------------------------- ------------------------------
Less distribution from net investment
income .44 .22 .36 .18 .37 .18
- ---------------------------------------------------------------- ------------------------- ------------------------------
Net asset value, end of period $ 9.92 9.76 9.91 9.77 9.91 9.76
================================================================ ========================= ==============================
TOTAL RETURN (NOT ANNUALIZED) 6.19% 5.00 5.19 4.72 5.36 4.63
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED) (A)
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.21% .41 1.94 1.21 1.64 1.21
- ---------------------------------------------------------------- ------------------------- ------------------------------
Net investment income 4.36 4.82 3.63 4.02 3.93 4.02
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED) (A)
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses 1.53% .96 2.26 1.76 1.96 1.76
- ---------------------------------------------------------------- ------------------------- ------------------------------
Net investment income 4.04 4.27 3.31 3.47 3.61 3.47
- ---------------------------------------------------------------- ------------------------- ------------------------------
</TABLE>
SUPPLEMENTAL DATA FOR ALL CLASSES
<TABLE>
<CAPTION>
MARCH 15,
YEAR ENDED 1995 TO
AUGUST 31, AUGUST 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net assets at end of period (in thousands) $3,286 3,079
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 135% 161
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR MICHIGAN FUND:
(a) ZKI agreed to waive the management fee of the Michigan Fund from its
inception, March 15, 1995, through September 15, 1995. Thereafter, the
management fee was gradually reinstated. "Other ratios to average net assets"
are computed without the undertaking to waive the management fee.
39
<PAGE> 40
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
MARCH 22,
1993 TO
YEAR ENDED AUGUST 31, AUGUST 31,
OHIO 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $9.81 9.56 9.98 9.50
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .48 .50 .53 .24
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .12 .25 (.41) .48
- ----------------------------------------------------------------------------------------
Total from investment operations .60 .75 .12 .72
- ----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .48 .50 .53 .24
- ----------------------------------------------------------------------------------------
Distribution from net realized gain -- -- .01 --
- ----------------------------------------------------------------------------------------
Total dividends .48 .50 .54 .24
- ----------------------------------------------------------------------------------------
Net asset value, end of period $9.93 9.81 9.56 9.98
- ----------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.16% 8.20 1.23 7.54
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED) (B)
- ----------------------------------------------------------------------------------------
Expenses absorbed by the Fund .91% .63 .02 --
- ----------------------------------------------------------------------------------------
Net investment income 4.78 5.27 5.44 5.21
- ----------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED) (B)
- ----------------------------------------------------------------------------------------
Expenses .91% .83 .82 .86
- ----------------------------------------------------------------------------------------
Net investment income 4.78 5.07 4.64 4.36
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
MAY 31, MAY 31,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1996 1995 1994 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.81 9.56 9.54 9.81 9.56 9.54
- -------------------------------------------------------------------------- --------------------------------------
Income from investment operations:
Net investment income .39 .44 .14 .39 .44 .14
- -------------------------------------------------------------------------- --------------------------------------
Net realized and unrealized gain .12 .25 .02 .12 .25 .02
- -------------------------------------------------------------------------- --------------------------------------
Total from investment operations .51 .69 .16 .51 .69 .16
- -------------------------------------------------------------------------- --------------------------------------
Less distribution from net investment
income .39 .44 .14 .39 .44 .14
- -------------------------------------------------------------------------- --------------------------------------
Net asset value, end of period $9.93 9.81 9.56 9.93 9.81 9.56
- -------------------------------------------------------------------------- --------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.30% 7.57 1.55 5.28 7.56 1.55
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED) (B)
- ---------------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.73% 1.32 .22 1.74 1.27 .21
- -------------------------------------------------------------------------- --------------------------------------
Net investment income 3.96 4.58 4.72 3.95 4.63 5.04
- -------------------------------------------------------------------------- --------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED) (B)
- ---------------------------------------------------------------------------------------------------------------------
Expenses 1.73% 1.75 1.72 1.74 1.69 1.67
- -------------------------------------------------------------------------- --------------------------------------
Net investment income 3.96 4.15 3.22 3.95 4.21 3.58
- -------------------------------------------------------------------------- --------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 22,
1993 TO
YEAR ENDED AUGUST 31, AUGUST 31,
1996 1995 1994 1993
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Net assets at end of period (in
thousands) $37,100 31,450 23,769 15,530
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 86% 90 103 17
- ---------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR OHIO FUND:
(b) Certain expenses of the Ohio Fund were waived or absorbed by ZKI from March
22, 1993 through June 30, 1994. Thereafter, these expenses were gradually
reinstated through June 30, 1995. "Other ratios to average net assets" are
computed without the undertaking to waive such expenses.
40
<PAGE> 41
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
NOVEMBER 1,
1991 TO
YEAR ENDED AUGUST 31, AUGUST 31,
TEXAS 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.42 10.14 10.69 9.95 9.50
- -------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .51 .54 .56 .60 .50
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .21 .36 (.42) .74 .45
- -------------------------------------------------------------------------------------------------
Total from investment operations .72 .90 .14 1.34 .95
- -------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .51 .54 .56 .60 .50
- -------------------------------------------------------------------------------------------------
Distribution from net realized gain .27 .08 .13 -- --
- -------------------------------------------------------------------------------------------------
Total dividends .78 .62 .69 .60 .50
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $10.36 10.42 10.14 10.69 9.95
- -------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.04% 9.28 1.28 13.89 10.15
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED) (C)
- -------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund .92% .70 .36 .08 --
- -------------------------------------------------------------------------------------------------
Net investment income 4.88 5.37 5.38 5.79 5.98
- -------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED) (C)
- -------------------------------------------------------------------------------------------------
Expenses .92% .89 .90 .79 .93
- -------------------------------------------------------------------------------------------------
Net investment income 4.88 5.18 4.82 5.08 5.05
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
MAY 31, MAY 31,
YEAR ENDED AUGUST 1994 TO YEAR ENDED AUGUST 1994 TO
31, AUGUST 31, 31, AUGUST 31,
1996 1995 1994 1996 1995 1994
- -------------------------------------------------------------------------- ------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.42 10.15 10.17 10.42 10.15 10.17
- ------------------------------------------------------------------------- ------------------------------------
Income from investment operations:
Net investment income .42 .45 .12 .42 .46 .12
- ------------------------------------------------------------------------- ------------------------------------
Net realized and unrealized gain (loss) .21 .35 (.02) .21 .35 (.02)
- ------------------------------------------------------------------------- ------------------------------------
Total from investment operations .63 .80 .10 .63 .81 .10
- ------------------------------------------------------------------------- ------------------------------------
Less dividends:
Distribution from net investment income .42 .45 .12 .42 .46 .12
- ------------------------------------------------------------------------- ------------------------------------
Distribution from net realized gain .27 .08 -- .27 .08 --
- ------------------------------------------------------------------------- ------------------------------------
Total dividends .69 .53 .12 .69 .54 .12
- ------------------------------------------------------------------------- ------------------------------------
Net asset value, end of period $10.36 10.42 10.15 10.36 10.42 10.15
- ------------------------------------------------------------------------- ------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.11 8.16 .92 6.13 8.27 .88
- -------------------------------------------------------------------------- ------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED) (C)
- -------------------------------------------------------------------------- ------------------------------------
Expenses absorbed by the Fund 1.79% 1.54 1.24 1.76 1.50 1.23
- ------------------------------------------------------------------------- ------------------------------------
Net investment income 4.01 4.53 4.44 4.04 4.57 3.96
- ------------------------------------------------------------------------- ------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED) (C)
- -------------------------------------------------------------------------- ------------------------------------
Expenses 1.79% 1.73 1.78 1.76 1.69 1.77
- ------------------------------------------------------------------------- ------------------------------------
Net investment income 4.01 4.34 3.90 4.04 4.38 3.42
- ------------------------------------------------------------------------- ------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 1,
1991 TO
YEAR ENDED AUGUST 31, AUGUST 31,
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $13,595 14,877 15,409 12,341 7,810
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 112% 75 58 47 18
- ------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR TEXAS FUND: (c) Certain expenses of the Texas Fund were waived or
absorbed by ZKI 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.
NOTE FOR ALL FUNDS: Total return does not reflect the effect of sales charges.
FEDERAL TAX STATUS OF 1996 DIVIDENDS
All of the dividends paid from net investment income by the Funds constitute
tax-exempt interest that is not taxable for federal income tax purposes;
however, a portion of the dividends paid may be includable in the alternative
minimum tax calculation. A short-term capital gain dividend is taxable as
ordinary income, and a long-term capital gain dividend is taxable as a long-term
capital gain regardless of how long you have owned your shares.
41
<PAGE> 42
NOTES
42
<PAGE> 43
NOTES
43
<PAGE> 44
TRUSTEES & 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
DOMINIQUE P. MORAX
Trustee
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
OFFICERS
J. PATRICK BEIMFORD, JR.
Vice President
CHARLES R. MANZONI, JR.
Vice President
CHRISTOPHER J. MIER
Vice President
JOHN E. NEAL
Vice President
PHILIP J. COLLORA
Vice President and
Secretary
JEROME L. DUFFY
Treasurer
ELIZABETH C. WERTH
Assistant Secretary
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
1-800-621-1048
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER
ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER
KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
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Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Tax-Free Income Funds prospectus.
KSTIS - 2 (10/96) 1023300
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