<PAGE> 1
CALIFORNIA TAX-FREE INCOME FUND
MICHIGAN TAX-FREE INCOME FUND
OHIO TAX-FREE INCOME FUND
TEXAS TAX-FREE INCOME FUND
KEMPER STATE TAX-FREE INCOME SERIES
"...We looked for ways to increase income without
significantly increasing the funds'
risk exposure..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
4
ECONOMIC OVERVIEW
6
PERFORMANCE UPDATE
7
TERMS TO KNOW
8
CALIFORNIA'S
PERFORMANCE UPDATE,
PORTFOLIO STATISTICS
AND PORTFOLIO
OF INVESTMENTS
15
MICHIGAN'S
PERFORMANCE UPDATE,
PORTFOLIO STATISTICS
AND PORTFOLIO
OF INVESTMENTS
19
OHIO'S
PERFORMANCE UPDATE,
PORTFOLIO STATISTICS
AND PORTFOLIO
OF INVESTMENTS
AT A GLANCE
- --------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME FUNDS' TOTAL RETURNS
FOR THE YEAR ENDED AUGUST 31, 1997 (UNADJUSTED FOR SALES CHARGE)
- --------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------
[BAR GRAPH]
- --------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.78%
CLASS B 7.73%
CLASS C 7.59%
LIPPER
CALIFORNIA TAX-FREE
INCOME FUNDS
CATEGORY AVERAGE* 8.98%
- --------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------
MICHIGAN
- --------------------------------------------------------------------------
[BAR GRAPH]
- --------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.35%
CLASS B 7.53%
CLASS C 7.54%
LIPPER
MICHIGAN TAX-FREE
INCOME FUNDS
CATEGORY AVERAGE* 8.32%
- --------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------
[BAR GRAPH]
- --------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.17%
CLASS B 7.29%
CLASS C 7.32%
LIPPER
OHIO TAX-FREE
INCOME FUNDS
CATEGORY AVERAGE* 8.20%
- --------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------
TEXAS
- --------------------------------------------------------------------------
[BAR GRAPH]
- --------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.28%
CLASS B 7.41%
CLASS C 7.43%
LIPPER
TEXAS TAX-FREE
INCOME FUNDS
CATEGORY AVERAGE* 8.76%
- --------------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------
AS OF AS OF
8/31/97 8/31/96
<S> <C> <C>
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS A $7.52 $7.31
- --------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS B $7.52 $7.32
- --------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS C $7.50 $7.31
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
MICHIGAN
- --------------------------------------------------------------------------
AS OF AS OF
8/31/97 8/31/96
- --------------------------------------------------------------------------
<S> <C> <C>
KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS A $10.19 $9.92
- --------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS B $10.18 $9.91
- --------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS C $10.18 $9.91
- --------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------
AS OF AS OF
8/31/97 8/31/96
- --------------------------------------------------------------------------
<S> <C> <C>
KEMPER OHIO TAX-FREE INCOME
FUND CLASS A $10.22 $9.93
- --------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME
FUND CLASS B $10.22 $9.93
- --------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME
FUND CLASS C $10.22 $9.93
- --------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
TEXAS
- --------------------------------------------------------------------------
AS OF AS OF
8/31/97 8/31/96
- --------------------------------------------------------------------------
<S> <C> <C>
KEMPER TEXAS TAX-FREE INCOME
FUND CLASS A $10.42 $10.36
- --------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME
FUND CLASS B $10.42 $10.36
- --------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME
FUND CLASS C $10.42 $10.36
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 3
CONTENTS
23
TEXAS'
PERFORMANCE UPDATE,
PORTFOLIO STATISTICS
AND PORTFOLIO
OF INVESTMENTS
27
REPORT OF
INDEPENDENT AUDITORS
28
FINANCIAL STATEMENTS
31
NOTES TO
FINANCIAL STATEMENTS
36
FINANCIAL HIGHLIGHTS
AT A GLANCE
- -------------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME FUNDS' 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 #53 of #90 of #94 of
101 funds 101 funds 101 funds
- -------------------------------------------------------------------------------
5-YEAR #15 of N/A N/A
51 funds
- -------------------------------------------------------------------------------
10-YEAR #12 of N/A N/A
30 funds
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
MICHIGAN
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #19 of #40 of #41 of
48 funds 48 funds 48 funds
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
OHIO
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #27 of #47 of #46 of
53 funds 53 funds 53 funds
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TEXAS
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #12 of #20 of #19 of
20 funds 20 funds 20 funds
- -------------------------------------------------------------------------------
5-YEAR #1 of
7 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, 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CALIFORNIA
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.3774 $0.3153 $0.3151
- -------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0296 $0.0246 $0.0240
- -------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 5.05% 4.21% 4.11%
- -------------------------------------------------------------------------------
SEC YIELD+: 4.04% 3.38% 3.42%
- -------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 7.08% 5.92% 5.99%
- -------------------------------------------------------------------------------
BASED ON A MARGINAL TAX RATE OF 42.9% (COMBINED
CALIFORNIA STATE AND FEDERAL INCOME TAX RATE)
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
MICHIGAN
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4336 $0.3566 $0.3544
- -------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0344 $0.0285 $0.0284
- -------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.34% 3.60% 3.59%
- -------------------------------------------------------------------------------
SEC YIELD+: 3.82% 3.19% 3.22%
- -------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.36% 5.31% 5.36%
- -------------------------------------------------------------------------------
BASED ON A MARGINAL TAX RATE OF 39.9% (COMBINED
MICHIGAN STATE AND FEDERAL INCOME TAX RATE)
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
OHIO
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4728 $0.3913 $0.3928
- -------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0372 $0.0307 $0.0309
- -------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.68% 3.86% 3.88%
- -------------------------------------------------------------------------------
SEC YIELD+: 3.98% 3.35% 3.37%
- -------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.79% 5.72% 5.75%
- -------------------------------------------------------------------------------
BASED ON A MARGINAL INCOME TAX RATE OF 41.4%
(COMBINED OHIO STATE AND FEDERAL INCOME TAX RATE)
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TEXAS
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.5080 $0.4226 $0.4248
- -------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0399 $0.0333 $0.0333
- -------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.92% 4.10% 4.10%
- -------------------------------------------------------------------------------
SEC YIELD+: 4.10% 3.47% 3.49%
- -------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.52% 5.52% 5.55%
- -------------------------------------------------------------------------------
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, 1997. 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, 1997 shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with a
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.
<PAGE> 4
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
Stephen B. Timbers is president, chief investment and executive officer of
Zurich Kemper Investments Inc. (ZKI). ZKI and its affiliates manage
approximately $86 billion in assets, including $49 billion in retail mutual
funds. Timbers is a graduate of Yale University and holds an M.B.A. from
Harvard University.
DEAR SHAREHOLDER,
A self-regulating economy, a balanced budget agreement and a positive stock
market all have contributed to another excellent year for investors. Given the
extended length of today's bull market (which celebrated its 15th anniversary on
August 12), it is prudent to wonder whether the end is near. Our position is
that while there is a certain precariousness to today's environment, which we
will elaborate on below, we see little to suggest that there will be more than
occasional market corrections.
Bipartisan agreement to balance the federal budget by the year 2002 represents
significant progress that should benefit investors over the long term. By
reducing the burden of capital gains and eliminating certain tax loopholes, the
Taxpayer Relief Act of 1997 and the Balanced Budget Act of 1997 have the
potential to meaningfully affect behavior. Now that the ceiling has been raised
on capital gains from the sale of a home, empty nesters will be more inclined to
move out of homes and into smaller condominiums. Added investment and savings
options should help boost the country's sagging savings rate. From a social
perspective, government's action to widen the difference between the taxation
rate on capital gains and on income reflects a conscious effort to encourage
capital investment. The more people and businesses can do for themselves, the
less likely they are to rely on the government, which should help restrain
federal spending.
The maximum tax on long-term capital gains is now 20 percent versus a maximum
of approximately 40 percent on ordinary income earned by Americans in the
highest income tax brackets. This dramatic difference could have some influence
on the management of mutual funds in the future. Although few investment
decisions are based on their tax consequences, the legislation supports a "buy
and hold" approach to investing, by which a mutual fund generates investment
returns through gains on investments held 18 months or longer. Such gains are
taxed at the reduced capital gains rate. On the margin, portfolio managers
should focus on long-term investing -- the strategy that we have always
supported.
In addition, mutual funds will gain investment flexibility with the new law's
repeal of what has been called the "short/short rule." Previously, investment
companies had been subject to a 30 percent limitation on total income arising
from the sale of securities held less than three months -- or face severe tax
consequences. The lifting of this limitation provides newer funds, in
particular, with much needed maneuvering ability.
You can expect to hear more from Kemper about the implications of the new
legislation, and specifically about the tax reporting changes, over the next
several weeks and months. Overall, we believe that this legislation is something
the country can be proud of. It represents years of a commitment on the part of
the federal government to hold spending in check and refrain from creating new
programs. Expanding corporate revenues and profits in an extended period of low
inflation also contributed to making this investor-friendly environment
possible.
As we look toward the end of the year, we see little to trouble us. The
economy appears to be in excellent condition. Continuing the alternatingly
fast/slow pace that we have experienced for several months, the fast-growing
first quarter was followed by a slower second quarter. Such self-regulation has
minimized any need for the Federal Reserve Board to raise interest rates again.
We don't rule out the possibility of another hike in the fourth quarter,
however.
Inflation is very low. In spite of unemployment being the lowest we have seen
in decades, wage pressures are still manageable. Strong productivity,
attributable to technological advances and better management practices, has
produced largely non-inflationary economic growth. This environment is one of
the best in decades.
Our primary concern is the very high valuations of the stock market. All
things considered, it is difficult to see where we can go from here. With prices
at such heady levels, the market can be expected to react negatively to even
minor earnings disappointments, as we saw in August. Kemper's response to this
market is to
4
<PAGE> 5
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic Activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund
performance.
The following are some significant economic guideposts and their investment
rationale that may help your investment decision-making. The 10-year Treasury
rate and the prime rate are prevailing interest rates. The other data report
year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
NOW (09/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-year Treasury Rate (1) 6.21 6.89 6.53 6.04
Prime Rate (2) 8.5 8.5 8.25 8.75
Inflation rate (3)* 2.22 2.76 3.07 2.54
The U.S. Dollar (4) 8.76 9.32 4.74 -1.05
Capital Goods Orders (5)* 11.11 8.1 3.77 9.42
Industrial Production (5)* 4.75 4.91 2.65 3.43
Employment Growth (6) 2.23 2.27 2.1 2.19
</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 percent. The low, moderate inflation of the
last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of August 31, 1997.
Source: Economics Department, Zurich Kemper Investment, Inc.
remain fully invested and to reduce risk by diversifying across a wider group of
investment opportunities. Research, the first step in stock selection, is key in
this kind of a market.
Bond markets are obviously cheered by recent events, and prospects for income
investors continue to be positive. Interest rates are stable and credit quality
has not been an issue. A dwindling supply of municipal bonds has enabled
municipal investments to outperform U.S. Treasuries.
In such a fully valued domestic market, it can make sense to look to
international markets for their growth potential. The strength of the dollar
thus far this year has diminished returns but international opportunities look
bright.
With this commentary 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,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
October 8, 1997
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 BACHELOR'S DEGREE IN ECONOMICS FROM THE UNIVERSITY OF MICHIGAN AND
WENT ON TO RECEIVE A MASTER'S OF MANAGEMENT DEGREE 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 FISCAL YEAR ENDED AUGUST 31, 1997, A YEAR WITH CONTINUED LOW INFLATION
DESPITE MODERATE ECONOMIC GROWTH, KEMPER STATE TAX-FREE INCOME FUNDS SERIES
BENEFITED FROM A RANGE-BOUND INTEREST RATE ENVIRONMENT. PORTFOLIO MANAGER CHRIS
MIER EXPLAINS HOW THE PORTFOLIOS WERE ADJUSTED TO TAKE ADVANTAGE OF THIS
CLIMATE.
Q THE FEDERAL RESERVE BOARD (THE FED) RAISED INTEREST RATES IN MARCH. HOW
DID THIS AFFECT THE MUNICIPAL BOND MARKET?
A First let's look at what led up to the interest rate increase. In January,
stronger economic growth surfaced, including higher-than-expected fourth quarter
GDP growth and better-than-expected holiday retail sales. Investors remained
cautious as it appeared likely that the Fed would move to raise interest rates
to slow the economy and keep inflation under control. Remember, strong economic
growth indicates the potential for higher inflation. Inflation is negative for
bond investors as it erodes the "real" value of fixed-income investments.
The markets' fears were realized when the Fed increased short-term interest
rates by 0.25 percent on March 25. This adjustment was considered a preemptive
move aimed at slowing growth in the economy to maintain the existing low rate of
inflation.
Although the market had already substantially discounted the expected move,
all investment markets suffered with the move and yields on bonds rose (prices
fell).
In April, economic growth once again appeared to slow. As no signs of
inflation surfaced, the markets began to recover and yields tended to fall or
remain stable throughout July. In August, the last month of the funds' fiscal
year, rates rose.
Q DID THIS FLUCTUATION IN MARKET YIELDS AFFECT THE PERFORMANCE OF THE
SERIES?
A Yields fluctuated with the markets' view on the direction of economic
growth and inflation. However, the fluctuations were not dramatic by historical
standards. In fact, the Bond Buyer 24-Bond Index (RBI)--a gauge of municipal
bond interest rates--fluctuated by less than one percent (70 basis points)
during the period. The RBI was at its period high on September 5, 1996 at 6.19
percent and dropped to its lowest July 31, 1997 at 5.49 percent. The tightness
of the yield range provided for relatively stable bond prices throughout the
fiscal year compared with previous fiscal years.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE SERIES IN THIS STABLE RATE
ENVIRONMENT?
A We looked for ways to increase income without significantly increasing the
series' risk exposure. One way we did this was by selectively choosing A and BBB
rated bonds, which offer higher coupon rates than some of the funds' higher
quality and insured issues.
6
<PAGE> 7
PERFORMANCE UPDATE
Q WERE THERE ANY OTHER SIGNIFICANT ADJUSTMENTS MADE TO THE FUNDS?
A We maintained duration in a much tighter band, which was more compatible
with the tighter prevailing rate range. Remember, 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.
Q DID THE LEVEL OF MUNICIPAL SUPPLY HAVE A SIGNIFICANT EFFECT ON THE MARKET?
A New issuance was slightly higher in 1997 compared with 1996. New issuance
volume in 1997 through August was $126.8 billion compared with $118.3 billion
for the same period in 1996, according to THE BOND BUYER. Demand for municipal
issues came mainly from property and casualty companies and individuals buying
direct.
Q WERE THERE ANY SECTORS THAT PERFORMED ABOVE YOUR EXPECTATIONS?
A The transportation sector performed well during the period. The stronger
economy encouraged increased travel by the public, helping toll road issues.
Toll road bonds are held by several of our tax-free funds.
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 may be
under-invested 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 IS YOUR OUTLOOK FOR THE MUNICIPAL MARKET?
A Municipals are attractively valued in this market environment. Demand will
continue to come mainly from the property and casualty industry as well as
individuals. Mutual fund demand for municipal bonds should pick up especially as
individuals who have accumulated wealth in the equity market attempt to maintain
or protect that wealth in a less risky vehicle.
Q WERE THERE ANY SIGNIFICANT TRENDS THAT AFFECTED INDIVIDUAL STATES WITHIN
KEMPER'S STATE TAX-FREE INCOME FUND SERIES?
A California's economy continues to improve, which has given a boost to the
state's fiscal condition. Michigan and Ohio also did well economically during
the year. Texas has seen a significant increase in high tech industries, which
has added to the state's already well-diversified economy.
- -------------------------------------------------------------------------------
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) RBI is the average yield on 25 revenue bonds with
30-year maturities compiled by THE BOND BUYER, a newspaper that reports on the
municipal bond market.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period. Total return assumes the
reinvestment of all dividends and it represents the aggregate percentage or
dollar value change over the period.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
7
<PAGE> 8
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER CALIFORNIA TAX-FREE INCOME FUND
CLASS A 3.94% 5.97% 7.44% 8.76% (since 2/17/83)
- --------------------------------------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND
CLASS B 4.72 N/A N/A 5.94 (since 5/31/94)
- --------------------------------------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND
CLASS C 7.59 N/A N/A 6.38 (since 5/31/94)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from 2/17/83 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2/17/83 12/31/88 12/31/92 8/31/97
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper California Tax-Free Income Fund Class A(1) 10000 17259 24755 33874
- -----------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ 10000 18133 26302 36090
- -----------------------------------------------------------------------------------------------------------------
Consumer Price Index++ 10000 12308 14494 16394
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 5/31/94 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 8/31/97
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper California Tax-Free Income Fund Class A(1) 10000 11576 11818 12069
- -----------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ 10000 11586 12099 12711
- -----------------------------------------------------------------------------------------------------------------
Consumer Price Index++ 10000 10407 10753 10881
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 5/31/94 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 8/31/97
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper California Tax-Free Income Fund Class C(1) 10000 11556 11782 12230
- -----------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ 10000 11586 12099 12711
- -----------------------------------------------------------------------------------------------------------------
Consumer Price Index++ 10000 10407 10753 10881
- -----------------------------------------------------------------------------------------------------------------
</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 Class A shares adjustment for the maximum sales
charge of 4.5 percent and for Class B shares adjustment for the applicable
contingent deferred sales charge (CDSC) as follows: 1-year, 3 percent;
5-year, 1 percent; since inception, 0 percent. The maximum CDSC for Class B
shares is 4 percent. For Class C shares, there is a 1 percent 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.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred
sales charge in effect at the end of the period for Class 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.
8
<PAGE> 9
KEMPER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 79% 85%
- -------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 9 8
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS 7 2
- -------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 5 5
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
QUALITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
AAA 44% 55%
- -------------------------------------------------------------------------------
AA 12 13
- -------------------------------------------------------------------------------
A 20 14
- -------------------------------------------------------------------------------
BBB 18 13
- -------------------------------------------------------------------------------
BB 2 --
- -------------------------------------------------------------------------------
NOT RATED 4 5
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
ON 8/31/97 ON 8/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 12% 9%
- -------------------------------------------------------------------------------
11-20 YEARS 44 45
- -------------------------------------------------------------------------------
21+ YEARS 44 46
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 17.7 years 17.8 years
- -------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- -----------------------------------------------------------------------------------------------------------
Bakersfield County Waste Water Treatment Plant, Certificates
of Participation, Rev., 8.00%, to be called 1-1-98 @ 101 $ 1,750 $ 1,792
--------------------------------------------------------------------------------------
Coronado Community Dev. Agcy., Tax Allocation Rev.,
7.25%, to be called 9-1-99 @ 102 4,500 4,869
--------------------------------------------------------------------------------------
City of Los Angeles:
Convention and Exhibit Center, Certificates of
Participation, Rev., 9.00%, to be called 12-1-05 @ 100 1,000 1,308
Harbor Department Rev., 8.70%, to be called 9-1-99 @ 100 2,500 2,726
--------------------------------------------------------------------------------------
City of Sacramento, Municipal Utility District, Electric
Rev., 6.75%, to be called 9-1-01 @ 102 6,020 6,700
--------------------------------------------------------------------------------------
City of San Bernardino:
Joint Powers Financing Auth., Lease Rev., 7.15%,
to be called 9-1-99 @ 102 4,250 4,590
Sisters of Charity Health Care System Rev., 7.00%,
to be called 7-1-0 @ 102 14,500 16,185
--------------------------------------------------------------------------------------
Encina Financing Joint Powers Auth. Rev., 6.875%,
to be called 8-1-99 @ 102 3,000 3,218
--------------------------------------------------------------------------------------
Foothill-DeAnza Community College District, Santa Clara,
Rev., 7.875%, to be called 6-1-01 @ 102 4,055 4,633
--------------------------------------------------------------------------------------
Fullerton Redev. Agcy., Local Government Finance Auth.,
Rev., 7.70%, to be called 2-1-99 @ 102 4,360 4,668
--------------------------------------------------------------------------------------
Health Facilities Financing Auth.:
Children's Hospital Rev., 7.50%, to be called 10-1-00 @
102 3,600 4,017
Eskaton Properties, Inc. Rev., 7.45%, to be called 5-1-00
@ 102 4,800 5,287
--------------------------------------------------------------------------------------
Northern California Power Agcy., Hydroelectric Number 1,
Rev., 7.00%, to be called 1-1-16 @ 100 210 252
--------------------------------------------------------------------------------------
Orange County, Unified School District, Certificates of
Participation, Rev., 6.875%, to be called 6-1-99 @ 102 2,620 2,794
--------------------------------------------------------------------------------------
Reedley, Sierra View Homes, Inc., Insured Certificates of
Participation, Rev., 7.60%, to be called 3-1-01 @ 102 4,030 4,512
--------------------------------------------------------------------------------------
Santa Clarita Public Financing Auth., Local Agcy. Rev.,
6.70% and 6.75%, to be called 10-1-01 @ 102 4,250 4,718
--------------------------------------------------------------------------------------
Tulare County Public Facilities Corp., Certificates of
Participation, Rev., 8.10%, to be called 11-1-97 @ 102 1,000 1,027
--------------------------------------------------------------------------------------
Victor Valley Community College District, Certificates of
Participation, Rev., 6.875%, to be called 8-1-03 @ 102 8,705 9,949
--------------------------------------------------------------------------------------
Yosemite Community College District, Certificates of
Participation, Rev., 7.75%, to be called 7-1-01 @ 102 1,605 1,829
--------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--8.5% 85,074
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------
Department of Water Resources, Central Valley Proj., Water
System Rev., 4.75%, 2019 7,160 6,500
--------------------------------------------------------------------------------------
Educational Facilities Auth.:
Chapman University Rev., 5.125%, 2026 6,730 6,366
Mills College Rev., 6.875%, 2022 1,775 1,934
University of San Francisco Rev., 6.00%, 2016 6,640 7,014
--------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Health Facilities Financing Auth.:
Adventist Health System West Rev., 6.50%, 2007 and 2011 $ 5,750 $ 6,198
America Baptist Homes West Rev., 7.65%, 2014 4,000 4,158
Catholic Healthcare Facilities Finance Auth. Rev., 5.75%
and 6.00%, 2010 and 2025 16,970 17,946
Kaiser Permanante Rev., 7.00%, 2010 3,550 3,900
Small Facilities Loan, Insured Health Facility Rev.,
6.70%, 2011 1,200 1,296
Southern California Presbyterian Homes Rev., 6.70%, 2011 2,000 2,142
Unihealth America Rev., 7.625%, 2015 745 786
Insured Health, ValleyCare Hospital Corp. Rev., 5.50%,
2020 7,500 7,385
--------------------------------------------------------------------------------------
Housing Finance Agcy., Home Mortgage Rev., 6.875% to 8.00%,
2010 through 2030 23,200 24,721
--------------------------------------------------------------------------------------
Public Works Board, Department of Corrections Rev., 5.50% to
7.40%, 2010 through 2015 19,585 21,105
--------------------------------------------------------------------------------------
Residential Efficiency Financing Auth. Rev., 5.50% and
6.00%,
2017 and 2012 5,970 6,180
--------------------------------------------------------------------------------------
State, Gen. Oblg., 6.25%, 2012 5,000 5,623
--------------------------------------------------------------------------------------
Statewide Communities Dev. Auth.:
Arc of San Diego, Certificates of Participation, Rev.,
5.625%, 2021 3,055 3,045
Cedars-Sinai Medical Center Rev., 6.50%, 2012 20,000 22,652
Eastfield Ming Quong Inc., Certificates of Participation,
Rev., 5.625%, 2020 3,420 3,421
San Gabriel Valley Medical Center Rev., 5.50%, 2014 10,750 10,884
Triad Healthcare Rev., 5.80%, 2000 4,205 4,312
United Airlines, Special Facilities Rev., 5.70%, 2033 19,100 18,617
--------------------------------------------------------------------------------------
University of California, Housing System Rev., 5.65% to
6.75%, 2009 through 2013 14,625 15,311
--------------------------------------------------------------------------------------
ABAG Financing Auth. for Nonprofit Corporations,
Certificates of Participation, Rev., 5.625%, 2022 3,000 2,970
--------------------------------------------------------------------------------------
Alameda Public Financing Auth. Rev., 6.375%, 2014 2,000 2,044
--------------------------------------------------------------------------------------
Bellflower Certificates of Participation, Civic Center and
Capital Improvement Rev., 7.20%, 2019 1,880 2,021
--------------------------------------------------------------------------------------
Benicia Unified School District, Gen. Oblg., zero coupon,
2018 and 2020 4,355 1,266
--------------------------------------------------------------------------------------
Central Coast Water Authority Rev., 5.00%, 2022 14,000 13,216
--------------------------------------------------------------------------------------
Central Valley Financing Auth., Carson Ice-Gen. Proj., Rev.,
6.10%, 2013 8,700 9,039
--------------------------------------------------------------------------------------
City of Big Bear Lake, Department of Water and Power Rev.,
6.00%, 2015 and 2022 15,405 16,851
--------------------------------------------------------------------------------------
City of Carson Redev. Agcy., Proj. Number 1, Tax Allocation,
Rev., 6.00%, 2016 3,350 3,414
--------------------------------------------------------------------------------------
City of Concord Redev. Agcy., Central Concord Proj., Tax
Allocation, Rev., 8.00%, 2018 40 42
--------------------------------------------------------------------------------------
City of Long Beach, Harbor Department Rev., 7.25%, 2019 8,000 8,330
--------------------------------------------------------------------------------------
City of Los Angeles:
Department of Airports, Ontario International Airport
Rev., 5.90%, 2012 3,290 3,450
Wastewater System Rev., 6.625%, 2012 3,480 3,770
--------------------------------------------------------------------------------------
City of Oakland:
Housing Finance Rev., 7.10%, 2010 1,585 1,668
Pension Financing Rev., 7.60%, 2021 26,075 27,379
--------------------------------------------------------------------------------------
City of Reedley, Sierra View Homes, Inc., Insured
Certificates of Participation, Rev., 5.85%, 2021 2,325 2,369
--------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
City and County of Sacramento:
Cogeneration Auth., Power Auth. Rev., 5.875% and 6.00%,
2015 and 2022 $25,200 $ 25,748
Cogeneration Auth., Procter and Gamble Proj., Rev., 6.375%
to 6.50%, 2010 through 2021 18,250 19,615
Community Facilities, Special Tax Rev., 6.125% and 6.30%,
2014 and 2021 2,105 2,097
Finance Auth., Lease Rev., 5.00% and 5.40%, 2014 and 2020 15,000 14,825
Municipal Utility District, Electric Rev., 6.20%, 2006 1,000 1,088
Utility District Electric Rev., 6.50%, 2013 1,270 1,467
------------------------------------------------------------------------------------------------
City and County of San Diego:
Central Jail, Certificates of Participation, Rev., 5.00%,
2025 10,000 9,411
Horton Plaza Redev. Proj., Rev., 6.625%, 2017 2,000 2,175
Industrial Development, Gas and Electric Company Rev.,
6.10%, 2018 5,000 5,264
San Ysidro School District, Gen. Oblg., 6.125%, 2021 1,400 1,519
------------------------------------------------------------------------------------------------
City and County of San Francisco:
Civic Center Complex, Building Auth. Rev., 5.25%, 2016 7,750 7,648
Gen. Oblg., 6.50%, 2010 1,000 1,060
Moscone Convention Center Rev., 6.75%, 2015 2,200 2,470
Redev. Agcy., Hotel Tax Rev., 6.75%, 2015 3,705 4,159
San Francisco International Airport Rev., 5.625% to 5.70%,
2010 through 2014 16,610 17,018
San Francisco Revdev. Agcy. Rev., 5.25%, 2021 15,610 15,013
------------------------------------------------------------------------------------------------
City of San Jose:
Redev. Agcy., Merged Area Redev. Proj., Tax Allocation
Rev., 5.50%, 2014 through 2016 9,520 9,677
Unified School District, Gen. Oblg., zero coupon, 2015 and
2017 3,920 1,412
------------------------------------------------------------------------------------------------
Contra Costa County:
Home Mortgage Rev., 7.75%, 2022 2,715 3,353
Public Facilities Corp., Certificates of Participation,
Rev. 7.80%, 2005, 1,250 1,346
------------------------------------------------------------------------------------------------
Corona-Norco University, Special Tax Rev., 5.75%, 2014 2,750 2,862
------------------------------------------------------------------------------------------------
Duarte, City of Hope National Medical Center, Certificates
of Participation, Rev., 6.25%, 2023 4,000 4,118
------------------------------------------------------------------------------------------------
Eldorado Public Agcy., Financial Auth. Rev., 5.60%, 2012 6,000 6,234
------------------------------------------------------------------------------------------------
Emeryville, Public Financing Auth., Redev. Proj., Rev.,
6.50%, 2021 10,255 10,851
------------------------------------------------------------------------------------------------
Fontana Public Financing Auth., Tax Allocation Rev., 7.00%,
2021 3,900 4,191
------------------------------------------------------------------------------------------------
Foothill-DeAnza Community College District, DeAnza Campus
Center Proj., Certificates of Participation, Rev., 7.35%,
2007 1,700 1,890
------------------------------------------------------------------------------------------------
Foothill/Eastern, Transit Corridor Agcy., Toll Road Rev.,
6.00% and 6.50%, 2016 through 2034 24,350 25,530
------------------------------------------------------------------------------------------------
Foster County Public Financing Auth. Rev., 5.60% and 5.80%,
2012 and 2016 2,225 2,264
------------------------------------------------------------------------------------------------
Fresno Health Facilities, Holy Cross Health System, St.
Agnes Medical Center Rev., 6.50% and 6.625%, 2011 and 2021 3,500 3,788
------------------------------------------------------------------------------------------------
Hawthorne Community Redev. Agcy., Tax Allocation Rev.,
6.625%, 2014 2,000 2,149
------------------------------------------------------------------------------------------------
Hollister Joint Powers Financing Auth., Sewer System
Improvement Proj., Rev., 5.75%, 2011 3,815 3,892
------------------------------------------------------------------------------------------------
Hollister Redev. Agcy., Tax Allocation, Community Dev.
Proj., Rev., 5.375%, 2013 2,630 2,664
------------------------------------------------------------------------------------------------
Inglewood:
Civic Center, Improvement Proj., Certificates of
Participation, Rev., 6.50% to 7.00%, 2011 through 2021 9,525 10,194
Redev. Proj., Rev., 7.00%, 2022 9,355 10,071
------------------------------------------------------------------------------------------------
Irvine Ranch, Water District Joint Powers Agcy. Rev.,
7.875%, 2023 5,000 5,086
------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kern High School District, Gen. Oblg., 6.40%, 2012 $ 3,095 $ 3,505
----------------------------------------------------------------------------------------------------
Las Vitgenes, Municipal Water District, Capital Improvement
Proj., Rev., 6.30%, 2016 2,175 2,339
----------------------------------------------------------------------------------------------------
Lemon Grove Community Dev. Agcy., Tax Allocation Rev.,
6.65% and 6.90%, 2006 and 2020 2,500 2,691
----------------------------------------------------------------------------------------------------
Loma Linda, University Medical Center Rev., 7.00%, 2015 2,500 2,684
----------------------------------------------------------------------------------------------------
Los Angeles County:
Harbor Department Rev., 6.25%, 2026 2,320 2,457
Metropolitan Transportation Auth., Sales Tax Rev., 5.625%
and 6.00%, 2015 and 2023 13,435 14,014
Public Works Financing Auth., Lease Rev., 5.00%, 2017 12,500 11,887
Transportation Commission, Sales Tax Rev., 6.50% to 7.40%,
2003 through 2019 20,455 21,918
Unified School District, Gen. Oblg., 6.00%, 2012 through
2015 18,010 19,795
----------------------------------------------------------------------------------------------------
Los Banos, Certificates of Participation, Rev., 6.00%, 2019 2,250 2,256
----------------------------------------------------------------------------------------------------
Martinez, Multiple Lenders, Home Mortgage Rev., 10.375%,
2002 35 42
----------------------------------------------------------------------------------------------------
Metropolitan Water District of Southern California Rev.,
5.75% and 5.00%, 2021 and 2027 14,450 13,795
----------------------------------------------------------------------------------------------------
Midpeninsula Regulatory Open Space, Financial Auth. Rev.,
5.75%, 2011 1,950 2,057
----------------------------------------------------------------------------------------------------
Mill Valley Certificates of Participation, The Redwoods,
Rev., 5.75%, 2020 3,230 3,254
----------------------------------------------------------------------------------------------------
Modesto Irrigation District Financing Auth., Domestic Water
Proj., Rev., 6.00%, 2015 7,000 7,431
----------------------------------------------------------------------------------------------------
Modesto Wastewater Treatment Facilities Rev., 5.625%, 2017 8,705 8,885
----------------------------------------------------------------------------------------------------
Mojave, Water Improvement District, Morongo Basin Rev.,
5.60%, 2012 2,500 2,595
----------------------------------------------------------------------------------------------------
Montebello Community Redev. Agcy., Montebello Hills Redev.,
Tax Allocation Rev., 7.50%, 2010 3,750 3,992
----------------------------------------------------------------------------------------------------
Moreno Valley, Towngate Community Facilities:
District 87-1, Improvement Area No. 1, Special Tax Rev.,
7.125%, 2023 2,810 2,968
Special Tax Rev., 6.50%, 2009 3,670 3,909
----------------------------------------------------------------------------------------------------
Northern California Power Agcy., Hydroelectric Number 1,
Rev., 7.15%, 2024 8,805 9,179
----------------------------------------------------------------------------------------------------
Orange County:
Recovery Certificates of Participation, Rev., 5.70% and
6.00%, 2010 and 2026 17,000 17,849
South Public Financing Auth., Special Tax Rev., 7.00%,
2008 1,000 1,192
----------------------------------------------------------------------------------------------------
Palm Desert Financing Auth., Tax Allocation Rev., 5.45%,
2018 7,475 7,481
----------------------------------------------------------------------------------------------------
Pleasanton Junction Power, Finance Auth., Reassessment Rev.,
6.15%, 2012 9,430 9,916
----------------------------------------------------------------------------------------------------
Port of Oakland, Port Auth. Rev., 6.40%, 2022 12,000 12,840
----------------------------------------------------------------------------------------------------
Public Power Agency, San Juan Proj., Rev, 6.75%, 2020 2,000 2,362
----------------------------------------------------------------------------------------------------
Redondo Beach, South Bay:
Redev. Proj., Rev., 7.00% and 7.125%, 2016 and 2026 3,000 3,265
Temecula Valley Unified School District, Gen. Oblg.,
5.80%, 2014 2,430 2,545
----------------------------------------------------------------------------------------------------
Riverside County, Public Facilities Financing, Certificates
of Participation, Rev., 6.875%, 2009 3,000 3,297
----------------------------------------------------------------------------------------------------
Saddleback Valley Unified School District, Gen. Oblg.,
6.00%, 2012 through 2014 4,080 4,491
----------------------------------------------------------------------------------------------------
San Bernardino County, West Valley Detention Center,
Certificates of Participation, Rev., 6.50%, 2012 8,000 8,780
----------------------------------------------------------------------------------------------------
San Diego, Certificates of Participation, Rev., 8.00%, 2002 4,925 5,234
----------------------------------------------------------------------------------------------------
San Joaquin Hills Transportation Corridor Agcy., Toll Road
Rev., zero coupon to 7.00%, 2025 through 2030 41,355 22,813
----------------------------------------------------------------------------------------------------
Santa Clara Redev. Agcy., Tax Allocation Rev., 7.00%, 2010 1,300 1,561
----------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Santa Cruz County Housing Auth., Multi-Family Housing Rev.,
7.75%, 2023 $ 2,000 $ 2,143
----------------------------------------------------------------------------------------------------
Santa Margarita/Dana Point Auth. Rev., 7.25%, 2012 and 2013 7,075 8,731
----------------------------------------------------------------------------------------------------
Santa Rosa High School District, Gen. Oblg., 5.25%, 2022 5,005 4,850
----------------------------------------------------------------------------------------------------
Snowline Joint Unified School District, 1993 Family Proj.,
Certificates of Participation, Rev., 6.30% and 6.40%, 2011
and 2018 3,695 3,861
----------------------------------------------------------------------------------------------------
South San Francisco, Capital Improvement Financing Auth.,
Conference Center Proj., Rev., 6.125%, 2018 3,925 3,998
----------------------------------------------------------------------------------------------------
Southern California Home Financing Auth., Single Family
Mortgage Rev., 6.75% and 7.35%, 2022 and 2024 1,555 1,637
----------------------------------------------------------------------------------------------------
Southern California Public Power Auth., Mead Adelanto Proj.,
Rev., 4.75%, 2016 7,500 6,869
----------------------------------------------------------------------------------------------------
Stockton Community Facilities, Special Tax Rev., 5.65% to
6.20%, 2007 through 2015 4,640 4,645
----------------------------------------------------------------------------------------------------
Sunnyvale, Financing Auth., Wastewater, Refuge and Sludge,
Management Facilities Rev., 6.30%, 2017 4,000 4,273
----------------------------------------------------------------------------------------------------
Torrance Memorial Hospital Medical Center Rev., 6.75%, 2012 5,000 5,108
----------------------------------------------------------------------------------------------------
Westminster Redev. Agcy., Westminster Commercial Redev.
Proj., Tax Allocation, Rev., 7.30%, 2021 2,500 2,719
----------------------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Highway and Transportation Auth. Rev., 6.00%, 2018 6,000 6,582
Public Buildings Auth. Rev., 5.25%, 2021 10,000 9,605
Public Improvement, Gen. Oblg., 5.375%, 2025 5,000 4,863
----------------------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--85.0% 856,637
----------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--93.5%
(Cost: $888,225) 941,711
----------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS
Yield--2.95% to 3.55%
Due--September 1997
Pollution Control Financing Auth. Rev. 16,700 16,700
----------------------------------------------------------------------------------------------------
Other 41,000 41,000
----------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--5.7%
(Cost: $57,700) 57,700
----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.2%
(Cost: $945,925) 999,411
----------------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.8% 8,496
----------------------------------------------------------------------------------------------------
NET ASSETS--100% $1,007,907
----------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- ------------------------------------------------------------------------------
Based on the cost of investments of $945,925,000 for federal income tax purposes
at August 31, 1997, the gross unrealized appreciation was $53,912,000, the gross
unrealized depreciation was $426,000 and the net unrealized appreciation on
investments was $53,486,000.
See accompanying Notes to Financial Statements.
14
<PAGE> 15
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS A 3.43% 5.96% (since 3/15/95)
- ----------------------------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS B 4.52 5.99 (since 3/15/95)
- ----------------------------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS C 7.54 7.14 (since 3/15/95)
- ----------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A Shares from 3/15/95 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3/15/95 12/31/95 12/31/96 8/31/97
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Michigan Tax-Free Income Fund Class A(1) 10000 10734 11026 11535
- --------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ 10000 11096 11588 12174
- --------------------------------------------------------------------------------------------------------------
Consumer Price Index++ 10000 10172 10510 10636
- --------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER MICHGIAN TAX-FREE INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 3/15/95 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3/15/95 12/31/95 12/31/96 8/31/97
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Michigan Tax-Free Income Fund Class B(1) 10000 11172 11392 11546
- -------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ 10000 11096 11588 12174
- -------------------------------------------------------------------------------------------------------------
Consumer Price Index++ 10000 10172 10510 10636
- -------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER MICHGIAN TAX-FREE INCOME FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 3/15/95 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3/15/95 12/31/95 12/31/96 8/31/97
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Michigan Tax-Free Income Fund Class C(1) 10000 11174 11387 11855
- -------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ 10000 11096 11588 12174
- -------------------------------------------------------------------------------------------------------------
Consumer Price Index++ 10000 10172 10510 10636
- -------------------------------------------------------------------------------------------------------------
</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 Class A shares adjustment for the maximum sales
charge of 4.5 percent and for Class B shares adjustment for the applicable
contingent deferred sales charge (CDSC) as follows: 1-year, 3 percent;
5-year, 1 percent; since inception, 0 percent. The maximum CDSC for Class
B shares is 4 percent. For Class C shares, there is a 1 percent 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.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred
sales charge in effect at the end of the period for Class 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.
15
<PAGE> 16
PORTFOLIO STATISTICS
KEMPER MICHIGAN TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 59% 48%
- -------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 29 48
- -------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 6 --
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS 6 4
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
QUALITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
AAA 78% 82%
- -------------------------------------------------------------------------------
AA 6 7
- -------------------------------------------------------------------------------
A 1 1
- -------------------------------------------------------------------------------
BBB 12 7
- -------------------------------------------------------------------------------
NOT RATED 3 3
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 24% 4%
- -------------------------------------------------------------------------------
11-20 YEARS 45 68
- -------------------------------------------------------------------------------
+ 21 YEARS 31 28
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 14.6 years 13.7 years
- -------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
MICHIGAN TAX-FREE INCOME FUND
Portfolio of Investments at August 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Detroit, Gen. Oblg., 6.80%, to be called 4-1-05 @ 101 $ 65 $ 74
---------------------------------------------------------------------------------------------------
Grandville Public Schools, Gen. Oblg., 6.30%, to be called
5-1-05 @ 101 25 28
---------------------------------------------------------------------------------------------------
Municipal Bond Auth., State Revolving Fund Rev., 6.50%,
to be called 10-1-04 @ 102 15 17
---------------------------------------------------------------------------------------------------
Reeths Ruffer School, Gen. Oblg., 6.625%, to be called
5-1-02 @ 102 50 55
---------------------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--5.6% 174
---------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------------
Building Auth. Rev., 6.25%, 2020 95 101
---------------------------------------------------------------------------------------------------
Higher Education Student Loan Auth. Rev., 5.75%, 2013 50 51
---------------------------------------------------------------------------------------------------
Hospital Finance Auth.:
Gratiot Community Hospital Rev., 6.10%, 2007 50 52
St. John Hospital and Medical Center Rev., 6.00%, 2010 100 108
---------------------------------------------------------------------------------------------------
Housing Dev. Auth.:
Limited Oblg., Green Hill Proj., Rev., 5.45%, 2011 20 20
Rental Housing Rev., 5.75%, 2014 15 15
Rev., 6.05%, 2027 50 51
---------------------------------------------------------------------------------------------------
Kent Hospital Finance Auth., Health Care Rev., 5.75%, 2011 100 105
---------------------------------------------------------------------------------------------------
Municipal Bond Auth., Local Government Bond Rev., 6.00%,
2013 10 11
---------------------------------------------------------------------------------------------------
Underground Storage Tank Financial Assurance Auth. Rev.,
5.75%, 2010 50 53
---------------------------------------------------------------------------------------------------
Regents of the University of Michigan:
Construction and Renovation Proj., Student Fee Bonds,
Rev. 5.50%, 2013, 10 10
Housing Rev., 5.50%, 2014 50 51
---------------------------------------------------------------------------------------------------
Albion Water & Sewer System Rev., 5.25%, 2017 50 49
---------------------------------------------------------------------------------------------------
Allegan Public Schools, Gen. Oblg., 6.50%, 2007 100 113
---------------------------------------------------------------------------------------------------
Birmingham Public Schools, Gen. Oblg., 5.75%, 2011 15 16
---------------------------------------------------------------------------------------------------
Board of Rights of Eastern Michigan University Rev., 5.50%,
2012 60 61
---------------------------------------------------------------------------------------------------
Brandon School District, Gen. Oblg., 5.60%, 2010 50 52
---------------------------------------------------------------------------------------------------
Caledonia Community Schools, Gen. Oblg., 5.75%, 2012 25 26
---------------------------------------------------------------------------------------------------
Clarkston Community Schools, Gen. Oblg., 6.25%, 2005 50 55
---------------------------------------------------------------------------------------------------
Detroit:
Sewage Disposal System Rev., 5.00%, 2025 35 32
Water Supply System Rev., 6.25% and 4.75%, 2012 and 2019 65 67
---------------------------------------------------------------------------------------------------
Economic Dev. Corp. of Dickinson County, Pollution Control
Rev., 5.85%, 2018 100 101
---------------------------------------------------------------------------------------------------
Genesee County, Sewage Disposal System No. 3, Rev., 7.00%,
2005 60 69
---------------------------------------------------------------------------------------------------
Greater Detroit Resource Recovery Auth. Rev., 6.25%, 2008 85 95
---------------------------------------------------------------------------------------------------
Grosse Ile Township Schools, Gen. Oblg., 6.25%, 2006 100 110
---------------------------------------------------------------------------------------------------
Gull Lake Community Schools, Gen. Oblg., 5.25%, 2021 5 5
---------------------------------------------------------------------------------------------------
Jackson County:
Wastewater Disposal Facility, Gen. Oblg., 7.25%, 2005 75 88
Hospital Finance Auth. Rev., 5.25%, 2017 75 72
---------------------------------------------------------------------------------------------------
Kalamazoo, Hospital Finance Auth. Rev., 6.25%, 2012 50 53
---------------------------------------------------------------------------------------------------
Lincoln Park School District, Gen. Oblg., 7.00%, 2020 100 115
---------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Marquette City Hospital Finance Auth. Rev., 5.875%, 2011 $ 85 $ 89
-------------------------------------------------------------------------------
Monroe County, Pollution Control Rev., 6.55%, 2024 100 109
-------------------------------------------------------------------------------
Morley-Stanwood Community Schools, Gen. Oblg., 5.625%, 2021 75 76
-------------------------------------------------------------------------------
North Branch Area Schools, Gen. Oblg., 5.375%, 2021 5 5
-------------------------------------------------------------------------------
Oakland County, Drainage District Rev., 6.40%, 2016 15 16
-------------------------------------------------------------------------------
Ottawa County, Spring Lake Public Schools, Gen. Oblg.,
5.625%, 2017 50 51
-------------------------------------------------------------------------------
Redford Union Schools, District No. 1, Gen. Oblg., 6.375%,
2010 100 113
-------------------------------------------------------------------------------
Schoolcraft Community Schools, Gen. Oblg., 5.40%, 2009 50 51
-------------------------------------------------------------------------------
Wyandotte, Electric Rev., 6.25%, 2017 45 48
-------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Electric Power Auth. Rev., 6.50%, 2006 75 85
Facilities Financing Auth., Mennonite General Hospital
Proj., Rev., 6.50%, 2018 75 79
Gen. Oblg., 5.50%, 2009 15 16
Highway and Transportation Auth. Rev., 6.25%, 2016 75 84
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 30 32
-------------------------------------------------------------------------------
Virgin Islands, Public Finance Auth., Matching Fund Loan
Rev., 7.25%, 2018 75 84
-------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--88.8% 2,745
-------------------------------------------------------------------------------
TOTAL INVESTMENTS--94.4%
(Cost: $2,795) 2,919
-------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--5.6% 172
-------------------------------------------------------------------------------
NET ASSETS--100.0% $3,091
-------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $2,795,000 for federal income tax purposes
at August 31, 1997, the gross unrealized appreciation was $125,000, the gross
unrealized depreciation was $1,000 and the net unrealized appreciation on
investments was $124,000.
See accompanying Notes to Financial Statements.
18
<PAGE> 19
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER OHIO TAX-FREE INCOME FUND CLASS A 3.26% 5.92% (since 3/22/93)
- ------------------------------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS B 4.28 6.14 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS C 7.32 6.67 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment
in Class A shares from 3/22/93 to 8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3/22/93 12/31/94 12/31/96 8/31/97
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Ohio Tax-Free Income Fund Class A(1) 10000 10124 12359 12914
Lehman Brothers Municipal Bond Index+ 10000 10267 12593 13230
Consumer Price Index++ 10000 10425 11045 11177
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment
in Class B shares from 5/31/94 to 8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 8/31/97
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Ohio Tax-Free Income Fund Class B(1) 10000 11609 11873 12141
Lehman Brothers Municipal Bond Index+ 10000 11586 12099 12711
Consumer Price Index++ 10000 10407 10753 10881
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment
in Class C shares from 5/31/94 to 8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 8/31/97
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Ohio Tax-Free Income Fund Class C(1) 10000 11608 11874 12341
Lehman Brothers Municipal Bond Index+ 10000 11586 12099 12711
Consumer Price Index++ 10000 10407 10753 10881
</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 Class A shares adjustment for the maximum sales
charge of 4.5 percent and for Class B shares adjustment for the applicable
contingent deferred sales charge (CDSC) as follows: 1-year, 3 percent;
5-year, 1 percent; since inception, 0 percent. The maximum CDSC for Class B
shares is 4 percent. For Class C shares, there is a 1 percent 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.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred sales
charge in effect at the end of the period for Class 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.
19
<PAGE> 20
KEMPER OHIO TAX-FREE INCOME FUND
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 50% 53%
- -------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 35 45
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS 9 2
- -------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 6 --
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
QUALITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
AAA 66% 73%
- -------------------------------------------------------------------------------
AA 11 12
- -------------------------------------------------------------------------------
A 3 5
- -------------------------------------------------------------------------------
BBB 10 9
- -------------------------------------------------------------------------------
BB 3 --
- -------------------------------------------------------------------------------
NOT RATED 7 1
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 16% 1%
- -------------------------------------------------------------------------------
11-20 YEARS 54 58
- -------------------------------------------------------------------------------
+ 21 YEARS 30 41
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 15.5 years 16.2 years
- -------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
20
<PAGE> 21
PORTFOLIO OF INVESTMENTS
OHIO TAX-FREE INCOME FUND
Portfolio of Investments at August 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- -------------------------------------------------------------------------------------------------------
Clermont County, Sewer Systems Rev., 7.20%, to be called
12-1-00 @ 102 $1,000 $ 1,108
----------------------------------------------------------------------------------
Cleveland Public Power, First Mortgage Rev., 7.00%,
to be called 11-15-04 @ 102 600 697
----------------------------------------------------------------------------------
Northeast Ohio Regional Sewer District, Wastewater
Improvement Rev., 6.50%, to be called 11-15-01 @ 101 300 328
----------------------------------------------------------------------------------
Olentangy Local School District, Gen. Oblg., 6.35%, to be
called 12-12-01 @ 102 150 164
----------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--5.8% 2,297
----------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -------------------------------------------------------------------------------------------------------
Building Auth.:
Administrative Building Funds Proj., Rev., 6.30%, 2011 140 150
Adult Correctional Building Fund Proj., Rev., 6.125%, 2012 310 328
James A. Rhodes State Office Tower Rev., 6.25%, 2011 215 227
Juvenile Correctional Building Proj., Rev., 6.60%, 2014 200 224
Rev., 5.60%, 2015 500 511
----------------------------------------------------------------------------------
Higher Education Facility:
Dayton University Rev. 6.60%, 2017 430 479
Dominican College Rev., 6.625%, 2014 600 639
Rev., 6.00% and 6.125%, 2011 and 2016 640 670
----------------------------------------------------------------------------------
Housing Finance Agency:
Rev., 5.85% and 6.10%, 2016 and 2028 750 763
Single Family Mortgage Rev., 7.85%, 2021 290 308
----------------------------------------------------------------------------------
Ohio State University, General Receipts Rev., 5.00%, 2018 250 236
----------------------------------------------------------------------------------
State Turnpike Rev., 6.00%, 2007 1,000 1,094
----------------------------------------------------------------------------------
Water Development Auth., Pollution Control Rev., 6.10%, 2020 1,000 1,006
----------------------------------------------------------------------------------
Akron, Sewer System Rev., 5.90%, 2011 385 411
----------------------------------------------------------------------------------
Athens, Gen. Oblg., 6.25%, 2011 500 519
----------------------------------------------------------------------------------
Avon Local School District, Gen. Oblg., 6.50%, 2015 940 1,082
----------------------------------------------------------------------------------
Batavia Local School District, Gen. Oblg., 7.00%, 2014 500 578
----------------------------------------------------------------------------------
Beavercreek Local School District, Gen. Oblg., 6.60%, 2015 500 582
----------------------------------------------------------------------------------
Bowling Green State University, General Receipts Rev.,
5.65%, 2011 445 464
----------------------------------------------------------------------------------
Cleveland Public Power, First Mortgage Rev., 5.00% and
7.00%, 2017 through 2024 1,250 1,301
----------------------------------------------------------------------------------
Cleveland, Waterworks Improvement, First Mortgage Rev.,
6.25%, 2015 640 686
----------------------------------------------------------------------------------
Columbus Municipal Airport Auth. Rev., 6.00%, 2014 250 260
----------------------------------------------------------------------------------
Crawford County, Gen. Oblg., 6.75%, 2019 700 789
----------------------------------------------------------------------------------
Cuyahoga County:
Gen. Oblg., 6.00% and 5.65%, 2007 and 2018 1,000 1,027
Merida Health System Rev., 6.25%, 2014 950 1,011
Multi-Family Housing Rev., 6.50%, 2020 1,000 1,055
----------------------------------------------------------------------------------
Fayette County, Gen. Oblg., 5.90%, 2013 175 173
----------------------------------------------------------------------------------
Finneytown Local School District, Gen. Oblg., 6.20%, 2017 320 357
----------------------------------------------------------------------------------
Franklin County Local School District, Gen. Oblg., 6.50%,
2013 500 571
----------------------------------------------------------------------------------
Green Springs, St. Francis Healthcare Rev., 7.00%, 2014 400 415
----------------------------------------------------------------------------------
Highland Heights, Gen. Oblg., 6.15%, 2012 145 152
----------------------------------------------------------------------------------
Hillard School District, Gen. Oblg., 6.00%, 2006 500 549
----------------------------------------------------------------------------------
Lakeview Local School District, Gen. Oblg., 6.90%, 2014 700 796
----------------------------------------------------------------------------------
Lakota, Gen. Oblg., 7.00%, 2008 500 595
----------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lucas County, Public Improvement Water Utility Rev., 6.05%
and 6.50, 2013 and 2016 $ 380 $ 419
----------------------------------------------------------------------------------
Marion County, United Church Homes Proj., Rev., 6.375% and
6.30%,
2010 and 2015 700 728
----------------------------------------------------------------------------------
Middleburg Heights Local School District, Gen. Oblg.,
5.625%, 2015 250 257
----------------------------------------------------------------------------------
Napoleon, Health Care Facility, Lutheran Orphans' and Old
Folks' Home Society Rev., 6.875%, 2023 475 513
----------------------------------------------------------------------------------
North Olmstead, Gen. Oblg., 6.20%, 2011 700 786
----------------------------------------------------------------------------------
Olentangy Local School District, Gen. Oblg., 5.85%, 2007 400 431
----------------------------------------------------------------------------------
Olmstead Falls School District, Gen. Oblg., 6.85%, 2011 250 284
----------------------------------------------------------------------------------
Sandusky County, Gen. Oblg., 6.20%, 2013 500 540
----------------------------------------------------------------------------------
South Euclid-Lyndhurst City School District, Gen. Oblg.,
6.40%, 2018 535 591
----------------------------------------------------------------------------------
Springboro Community City School District, School
Improvement,
Gen Oblg., 6.00%, 2011 500 551
----------------------------------------------------------------------------------
City of Springdale, Hospital Facilities First Mortgage,
Southwestern Ohio Seniors Services Rev., 6.00%, 2018 750 763
----------------------------------------------------------------------------------
Strongsville, Gen. Oblg., 6.70%, 2011 500 568
----------------------------------------------------------------------------------
Toledo, Gen. Oblg., 6.10% and 6.35%, 2014 and 2025 1,250 1,347
----------------------------------------------------------------------------------
Trumbull County Sewer Improvement, Gen. Oblg., 6.20%, 2014 500 540
----------------------------------------------------------------------------------
Tuscarawas Valley Local School District, Gen. Oblg., 6.60%,
2015 365 411
----------------------------------------------------------------------------------
Wayne Local School District, Gen Oblg., 6.45% and 6.60%,
2011 and 2016 355 411
----------------------------------------------------------------------------------
West Lake Local School District, Gen. Oblg., 6.15%, 2005 500 550
----------------------------------------------------------------------------------
Willoughby Industrial Development Rev., 6.875%, 2016 575 608
----------------------------------------------------------------------------------
Youngstown, Gen. Oblg., 6.125%, 2014 110 117
----------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Electric Power Auth. Rev., 6.50%, 2006 750 852
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev. 6.50%, 2018 750 788
Finance Agcy. Rev., 6.00%, 2014 250 264
Highway and Transportation Auth. Rev., 6.25%, 2016 750 844
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 360 383
----------------------------------------------------------------------------------
Virgin Islands, Public Finance Auth. Rev., 7.25%, 2018 225 250
----------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--85.7% 33,804
----------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--91.5%
(Cost: $33,995) 36,101
----------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS
Yield--2.65% to 3.85%
Due--September 1997
Air Quality Development Auth. Rev. 1,900 1,900
----------------------------------------------------------------------------------
Other 900 900
----------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--7.1%
(Cost: $2,800) 2,800
----------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.6%
(Cost: $36,795) 38,901
----------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.4% 567
----------------------------------------------------------------------------------
NET ASSETS--100% $39,468
----------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $36,795,000 for federal income tax purposes
at August 31, 1997, the gross unrealized appreciation was $2,108,000, the gross
unrealized depreciation was $2,000 and the net unrealized appreciation on
investments was $2,106,000.
See accompanying Notes to Financial Statements.
22
<PAGE> 23
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF
CLASS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER TEXAS TAX-FREE INCOME FUND CLASS A 3.38% 7.64% (since 11/1/91)
- ------------------------------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME FUND CLASS B 4.39 6.40 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME FUND CLASS C 7.43 6.97 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class A shares from 11/1/91 TO 8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
11/1/91 12/31/93 12/31/95 8/13/97
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Texas Tax-Free Income Fund Class A(1) 10000 12271 14158 15364
Lehman Brothers Municipal Bond Index+ 10000 12515 13940 15295
Consumer Price Index++ 10000 10611 11172 11681
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class B shares from 5/31/94 to 8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 8/31/97
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Texas Tax-Free Income Fund Class B(1) 10000 11614 11959 12240
Lehman Brothers Municipal Bond Index+ 10000 11586 12099 12711
Consumer Price Index++ 10000 10407 10753 10881
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class C shares from 5/31/94 to 8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 8/31/97
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Texas Tax-Free Income Fund Class C(1) 10000 11634 11981 12454
Lehman Brothers Municipal Bond Index+ 10000 11586 12099 12711
Consumer Price Index++ 10000 10407 10753 10881
</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 Class A shares adjustment for the maximum sales
charge of 4.5 percent and for Class B shares adjustment for the applicable
contingent deferred sales charge (CDSC) as follows: 1-year, 3 percent;
5-year, 1 percent; since inception, 0 percent. The maximum CDSC for
Class B shares is 4 percent. For Class C shares, there is a 1 percent 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.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred
sales charge in effect at the end of the period for Class 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 unicipal 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.
23
<PAGE> 24
PORTFOLIO STATISTICS
KEMPER TEXAS TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 58% 63%
- -------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 30 34
- -------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 8 1
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS 4 2
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
QUALITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
AAA 71% 74%
- -------------------------------------------------------------------------------
AA 7 8
- -------------------------------------------------------------------------------
A 8 11
- -------------------------------------------------------------------------------
BBB 14 7
- -------------------------------------------------------------------------------
NOT RATED -- --
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 9% 1%
- -------------------------------------------------------------------------------
11-20 YEARS 61 72
- -------------------------------------------------------------------------------
+ 21 YEARS 30 27
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 16.8 years 14.4 years
- -------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
24
<PAGE> 25
PORTFOLIO OF INVESTMENTS
TEXAS TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- -----------------------------------------------------------------------------------------------------
Ector County Hospital District Rev., 7.30%, to be called
4-15-02 @ 102 $450 $ 511
--------------------------------------------------------------------------------
Harris County:
Health Facilities Dev. Corp., St. Luke's Episcopal
Hospital Proj.,
Rev., 6.75%, to be called 2-15-21 @ 100 120 131
Toll Road Senior Lien Rev., 6.25%,
to be called 8-15-04 @ 102 250 278
--------------------------------------------------------------------------------
Travis County Housing Finance Corp., Gen. Oblg., 6.75%,
to be called 9-1-01 @ 100 75 82
--------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--8.1% 1,002
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -----------------------------------------------------------------------------------------------------
Department of Housing and Community Affairs:
NHP Foundation, Asmara Proj. Rev., 6.40%, 2027 150 156
Single Family Mortgage Rev., 6.00%, 2017 245 253
--------------------------------------------------------------------------------
Housing Agcy., Single Family Mortgage Rev., 7.15%, 2012 60 63
--------------------------------------------------------------------------------
Public Financing Auth., Gen. Oblg., 7.00%, 2012 221 229
--------------------------------------------------------------------------------
State Veterans' Land, Gen. Oblg., 6.40%, 2024 350 373
--------------------------------------------------------------------------------
Turnpike Auth., Dallas North Tollway System Rev., 5.25% and
5.00%,
2023 and 2025 300 286
--------------------------------------------------------------------------------
Water Dev. Board, Revolving Fund Rev., 5.125%, 2018 150 144
--------------------------------------------------------------------------------
Abilene Higher Education Facilities Corp., Abilene Christian
University Proj., Rev., 6.25%, 2011 300 311
--------------------------------------------------------------------------------
Argyle Independent School District, Gen. Oblg., zero coupon,
2014 500 199
--------------------------------------------------------------------------------
Austin Airport System Rev., 6.20%, 2015 585 619
--------------------------------------------------------------------------------
Azle Independent School District, Gen. Oblg., 5.00%, 2022 100 94
--------------------------------------------------------------------------------
Bexar County Housing Finance Dev. Corp., Multi-Family
Housing
Rev., 6.875%, 2012 250 263
--------------------------------------------------------------------------------
Brazos River Auth., Texas Utilities Electric Company Proj.,
Rev., 8.125%, 2020 350 381
--------------------------------------------------------------------------------
Cameron County Housing Finance Corp., Single Family Mortgage
Rev., 6.75%, 2025 365 387
--------------------------------------------------------------------------------
Canadian River Municipal Water Auth. Rev., 5.875%, 2016 250 259
--------------------------------------------------------------------------------
Circle C, Utility System, District Number 3 Rev., 6.50%,
2009 250 268
--------------------------------------------------------------------------------
Dallas-Fort Worth International Airport Rev., 6.00%, 2014 125 129
--------------------------------------------------------------------------------
Denison Hospital Auth., Texonna Medical Center, Inc. Proj.,
Rev., 6.125%, 2027 250 255
--------------------------------------------------------------------------------
Denton, Utility System Rev., 6.50%, 2009 150 162
--------------------------------------------------------------------------------
Dripping Springs, Independent School District,
Gen. Oblg., 5.80%, 2013 280 292
--------------------------------------------------------------------------------
Fort Bend County:
Independent School District, Gen. Oblg., 5.00%, 2018 300 286
Levee Improvement District Number 2, Gen. Oblg., 6.625%,
2008 200 213
--------------------------------------------------------------------------------
Galena Park Independent School District, Gen. Oblg., 5.00%,
2015 135 130
--------------------------------------------------------------------------------
Georgetown Higher Education Finance Corp., Southwest
University Proj., Rev., 6.30%, 2014 250 261
--------------------------------------------------------------------------------
Gulf Coast Waste Disposal Auth. Rev., 6.875%, 2028 250 272
--------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Harris County:
Criminal Justice Center, Gen. Oblg., 7.50%, 2005 $165 $ 196
Hospital District Mortgage Rev., 7.40%, 2010 60 72
--------------------------------------------------------------------------------
Houston:
Higher Education Finance Corp., University of St. Thomas
Proj., Rev., 7.25%, 2007 300 323
Independent School District, Gen. Oblg., 6.30%, 2014 500 564
--------------------------------------------------------------------------------
Lockhart Correctional Facilities Financing Corp. Rev.,
6.625%, 2012 200 214
--------------------------------------------------------------------------------
Lower Colorado River Auth.:
Junior Lien Rev., 5.25%, 2015 150 151
Samsung Austin Semiconductor, Pollution Control Rev.,
6.375%, 2027 200 210
--------------------------------------------------------------------------------
North Central Health Facilities Dev. Corp., Presbyterian
Healthcare System Rev., 6.625%, 2011 100 106
--------------------------------------------------------------------------------
Port Arthur, Gen. Oblg., 6.125%, 2019 95 99
--------------------------------------------------------------------------------
Red River Auth., Public Service Utilities Company Rev.,
6.00%, 2020 150 157
--------------------------------------------------------------------------------
Socorro Independent School District, Gen. Oblg., 6.625%,
2013 90 97
--------------------------------------------------------------------------------
Spring Independent School District, Gen. Oblg., 6.875% and
6.375%, 2009 and 2016 700 784
--------------------------------------------------------------------------------
Texarkana, Wadley Regional Medical Center Rev., 6.00%, 2016 300 319
--------------------------------------------------------------------------------
Travis County Housing Finance Corp.:
Residential Mortgage, Senior Rev., 7.00%, 2011 220 234
Single Family Mortgage Rev., 6.75%, 2014 80 85
--------------------------------------------------------------------------------
Trinity River Auth., Denton Creek Wastewater System Rev.,
6.45%, 2015 390 423
--------------------------------------------------------------------------------
Tyler Health Facilities Dev. Corp., East Texas Medical
Center Proj., Rev., 5.50%, 2017 100 100
--------------------------------------------------------------------------------
Waco Health Facilities Dev. Corp., Hillcrest Baptist Medical
Center Proj., Rev., 7.125%, 2014 90 98
--------------------------------------------------------------------------------
Watauga City, Certificates of Obligation, Rev., 5.00%, 2016 250 240
--------------------------------------------------------------------------------
Wylie Texas Independent School District, Gen. Oblg., 6.90%,
2012 50 59
--------------------------------------------------------------------------------
Puerto Rico Commonwealth, Gen. Oblg., 6.25%, 2013 150 169
--------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--88.1% 10,985
--------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--96.2%
(Cost: $11,341) 11,987
--------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS--3.3%
Yield--3.90%
Due--September 1997
(Cost: $415) 415 415
--------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.5%
(Cost: $11,756) 12,402
--------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.5% 67
--------------------------------------------------------------------------------
NET ASSETS--100% $12,469
--------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $11,756,000 for federal income tax purposes
at August 31, 1997, the gross unrealized appreciation was $653,000, the gross
unrealized depreciation was $7,000 and the net unrealized appreciation on
investments was $646,000.
See accompanying Notes to Financial Statements.
26
<PAGE> 27
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,
1997, 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 and the
financial highlights for each of the fiscal periods since 1993. 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, 1997, 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, 1997, the results of their operations for the year then ended, the changes
in their net assets for each of the two years in the period then ended, and the
financial highlights for each of the fiscal periods since 1993, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1997
27
<PAGE> 28
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
CALIFORNIA MICHIGAN OHIO TEXAS
ASSETS
- -----------------------------------------------------------------------------------------------------
Investments, at value (Cost: $945,925,
<S> <C> <C> <C> <C>
$2,795, $36,795 and $11,756, respectively) $ 999,411 2,919 38,901 12,402
- -----------------------------------------------------------------------------------------------------
Cash 540 77 103 187
- -----------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 222 -- 39 --
- -----------------------------------------------------------------------------------------------------
Investments sold 2,492 49 -- 299
- -----------------------------------------------------------------------------------------------------
Interest 13,718 53 537 155
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,016,383 3,098 39,580 13,043
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
Payable for:
Dividends 1,210 3 41 13
- -----------------------------------------------------------------------------------------------------
Fund shares redeemed 1,658 -- 24 --
- -----------------------------------------------------------------------------------------------------
Investments purchased 4,640 -- -- 545
- -----------------------------------------------------------------------------------------------------
Management fee 447 1 18 6
- -----------------------------------------------------------------------------------------------------
Administrative services fee 144 -- 7 2
- -----------------------------------------------------------------------------------------------------
Distribution services fee 18 1 6 1
- -----------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 66 1 6 2
- -----------------------------------------------------------------------------------------------------
Trustees' fees and other 293 1 10 5
- -----------------------------------------------------------------------------------------------------
Total liabilities 8,476 7 112 574
- -----------------------------------------------------------------------------------------------------
NET ASSETS $1,007,907 3,091 39,468 12,469
- -----------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
Paid-in capital $ 950,867 2,947 37,479 11,760
- -----------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments 3,554 20 (117) 63
- -----------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 53,486 124 2,106 646
- -----------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $1,007,907 3,091 39,468 12,469
- -----------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
CLASS A SHARES
Net assets applicable to shares outstanding $ 979,471 1,909 29,931 11,206
- -----------------------------------------------------------------------------------------------------
Shares outstanding 130,315 187 2,929 1,075
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $7.52 10.19 10.22 10.42
- -----------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $7.87 10.67 10.70 10.91
- -----------------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $ 26,930 1,065 9,147 955
- -----------------------------------------------------------------------------------------------------
Shares outstanding 3,579 105 895 92
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $7.52 10.18 10.22 10.42
- -----------------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $ 1,506 117 390 308
- -----------------------------------------------------------------------------------------------------
Shares outstanding 201 12 38 30
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $7.50 10.18 10.22 10.42
- -----------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 29
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
CALIFORNIA MICHIGAN OHIO TEXAS
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
<S> <C> <C> <C> <C>
Interest income $60,391 175 2,155 759
- --------------------------------------------------------------------------------------------------------
Expenses:
Management fee 5,417 18 212 72
- --------------------------------------------------------------------------------------------------------
Administrative services fee 1,718 8 82 24
- --------------------------------------------------------------------------------------------------------
Distribution services fee 176 10 66 7
- --------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 697 6 36 14
- --------------------------------------------------------------------------------------------------------
Professional fees 114 -- 5 1
- --------------------------------------------------------------------------------------------------------
Reports to shareholders 137 1 5 5
- --------------------------------------------------------------------------------------------------------
Trustees' fees and other 32 8 9 4
- --------------------------------------------------------------------------------------------------------
Total expenses before expense waiver 8,291 51 415 127
- --------------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment manager -- 5 -- --
- --------------------------------------------------------------------------------------------------------
Total expenses after expense waiver 8,291 46 415 127
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 52,100 129 1,740 632
- --------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on sales of investments (including
options purchased) 23,400 49 300 199
- --------------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (2,975) (9) (239) (41)
- --------------------------------------------------------------------------------------------------------
Net realized gain 20,425 40 61 158
- --------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 13,073 84 1,149 254
- --------------------------------------------------------------------------------------------------------
Net gain on investments 33,498 124 1,210 412
- --------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $85,598 253 2,950 1,044
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
29
<PAGE> 30
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN
------------------------- ------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $ 52,100 55,646 129 132
- ----------------------------------------------------------------------------------------------------------------
Net realized gain 20,425 7,354 40 38
- ----------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation
(depreciation) 13,073 240 84 (1)
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 85,598 63,240 253 169
- ----------------------------------------------------------------------------------------------------------------
Distribution from net investment income (52,100) (55,646) (129) (132)
- ----------------------------------------------------------------------------------------------------------------
Distribution from net realized gain on
investments (5,606) (12,275) (35) --
- ----------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (57,706) (67,921) (164) (132)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (60,523) (42,013) (284) 170
- ----------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (32,631) (46,694) (195) 207
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
Beginning of year 1,040,538 1,087,232 3,286 3,079
- ----------------------------------------------------------------------------------------------------------------
END OF YEAR $ 1,007,907 1,040,538 3,091 3,286
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OHIO TEXAS
------------------------ ------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $ 1,740 1,614 632 684
- ----------------------------------------------------------------------------------------------------------------
Net realized gain 61 390 158 332
- ----------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation
(depreciation) 1,149 (35) 254 (18)
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,950 1,969 1,044 998
- ----------------------------------------------------------------------------------------------------------------
Distribution from net investment income (1,740) (1,614) (632) (684)
- ----------------------------------------------------------------------------------------------------------------
Distribution from net realized gain on investments (114) -- (326) (358)
- ----------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (1,854) (1,614) (958) (1,042)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions 1,272 5,295 (1,212) (1,238)
- ----------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,368 5,650 (1,126) (1,282)
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
Beginning of year 37,100 31,450 13,595 14,877
- ----------------------------------------------------------------------------------------------------------------
END OF YEAR $39,468 37,100 12,469 13,595
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUNDS Kemper California Tax-Free Income Fund, Kemper
Michigan Tax-Free Income Fund, Kemper Ohio Tax-Free
Income Fund and Kemper Texas Tax-Free Income Fund
(collectively the Funds) are four of eight
investment portfolios comprising the Kemper State
Tax-Free Income Series (the Trust). The remaining
portfolios are Kemper Florida, Kemper New Jersey,
Kemper New York and Kemper Pennsylvania Tax-Free
Income Funds. The Trust is an open-end management
investment company organized as a business trust
under the laws of Massachusetts.
Each Fund offers three classes of shares. Class A
shares are sold to investors subject to an initial
sales charge. Class B shares are sold without an
initial sales charge but are subject to higher
ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon 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 has
equal rights with respect to voting, dividends and
assets, subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Exchange traded financial futures
and options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Over-the-counter
traded options are valued based upon prices
provided by market makers. Other securities and
assets are valued at fair value as determined in
good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes premium and original
discount amortization on fixed income securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated 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
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, are distributed at least
annually. Dividends are determined in accordance
with income tax principles which may treat certain
transactions differently from generally accepted
accounting principles.
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. Management fees incurred for the year
ended August 31, 1997 are as follows:
California $5,417,000
Michigan 18,000
Ohio 212,000
Texas 72,000
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT.The Trust has an underwriting and
distribution services agreement with Zurich Kemper
Distributors, Inc. (ZKDI) (formerly known as Kemper
Distributors, Inc.). Underwriting commissions paid
in connection with the distribution of each Fund's
Class A shares for the year ended August 31, 1997
are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS
RETAINED BY ZKDI ALLOWED BY ZKDI TO FIRMS
---------------- ------------------------
<S> <C> <C>
California $129,000 813,000
Michigan 1,000 8,000
Ohio 11,000 77,000
Texas 3,000 15,000
</TABLE>
For services under the distribution services
agreement, each Fund pays ZKDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, ZKDI 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, ZKDI receives any
contingent deferred sales charges (CDSC) from
redemptions of Class B and Class C 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, 1997 are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY ZKDI PAID BY ZKDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
California $222,000 376,000
Michigan 13,000 5,000
Ohio 95,000 115,000
Texas 7,000 23,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agreement with ZKDI. For
providing information and administrative services
to shareholders, each Fund pays ZKDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. ZKDI in turn has various
arrangements with financial services firms that
provide these services and pays these firms based
on assets of Fund accounts the firms service.
Administrative services fees (ASF) paid for the
year ended August 31, 1997 are as follows:
<TABLE>
<CAPTION>
ASF PAID BY THE ASF PAID BY
FUND TO ZKDI ZKDI TO FIRMS
---------------- --------------
<S> <C> <C>
California $1,718,000 1,726,000
Michigan 8,000 8,000
Ohio 82,000 84,000
Texas 24,000 25,000
</TABLE>
32
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds' transfer agent,
Zurich Kemper Service Company (ZKSvC) (formerly
known as Kemper Service Company) is the shareholder
service agent of the Trust. Under the agreement,
for the year ended August 31, 1997, ZKSvC received
shareholder services fees as follows:
<TABLE>
<S> <C>
California $359,000
Michigan 2,000
Ohio 21,000
Texas 7,000
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of ZKI.
For the year ended August 31, 1997, the Funds made
no payments to their officers and incurred
trustees' fees aggregating $31,000 to independent
trustees.
OPERATING EXPENSE WAIVER. ZKI has agreed to waive
certain operating expenses of the Michigan Fund
beginning in December 1996. Under this arrangement,
ZKI waived expenses of $5,000 for the year ended
August 31, 1997.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
4 INVESTMENT
TRANSACTIONS For the year ended August 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
---------- -------- ------ ------
<S> <C> <C> <C> <C>
Purchases $776,746 2,112 18,835 10,328
Proceeds from sales 889,622 2,481 20,491 12,125
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
5 CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the Funds (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
---------------------- -----------------------
CALIFORNIA SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------
SHARES SOLD
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 14,893 $110,663 10,345 $ 76,744
-------------------------------------------------------------------------------
Class B 1,616 12,006 1,285 9,551
-------------------------------------------------------------------------------
Class C 929 6,969 105 778
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-------------------------------------------------------------------------------
Class A 4,458 33,067 5,338 39,708
-------------------------------------------------------------------------------
Class B 84 621 59 440
-------------------------------------------------------------------------------
Class C 8 59 4 26
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES REDEEMED
-------------------------------------------------------------------------------
Class A (28,797) (213,817) (22,338) (165,506)
-------------------------------------------------------------------------------
Class B (493) (3,662) (473) (3,516)
-------------------------------------------------------------------------------
Class C (853) (6,429) (32) (238)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CONVERSION OF SHARES
-------------------------------------------------------------------------------
Class A 22 169 63 472
-------------------------------------------------------------------------------
Class B (23) (169) (63) (472)
-------------------------------------------------------------------------------
NET DECREASE
FROM CAPITAL SHARE
TRANSACTIONS $(60,523) $ (42,013)
-------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
--------------------- -----------------------
MICHIGAN SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
SHARES SOLD
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 59 $ 594 112 $ 1,127
------------------------------------------------------------------------------
Class B 10 103 40 403
------------------------------------------------------------------------------
Class C 24 232 12 125
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
------------------------------------------------------------------------------
Class A 8 80 7 65
------------------------------------------------------------------------------
Class B 4 40 3 29
------------------------------------------------------------------------------
Class C 1 7 1 10
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES REDEEMED
------------------------------------------------------------------------------
Class A (96) (964) (76) (754)
------------------------------------------------------------------------------
Class B (18) (184) (21) (210)
------------------------------------------------------------------------------
Class C (19) (192) (62) (625)
------------------------------------------------------------------------------
NET INCREASE (DECREASE)
FROM CAPITAL SHARE
TRANSACTIONS $ (284) $ 170
------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
--------------------- -----------------------
OHIO SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
SHARES SOLD
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 423 $ 4,247 655 $ 6,545
------------------------------------------------------------------------------
Class B 287 2,896 292 2,917
------------------------------------------------------------------------------
Class C 28 280 15 149
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
------------------------------------------------------------------------------
Class A 95 953 86 845
------------------------------------------------------------------------------
Class B 23 231 16 162
------------------------------------------------------------------------------
Class C 1 15 1 9
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES REDEEMED
------------------------------------------------------------------------------
Class A (559) (5,624) (440) (4,363)
------------------------------------------------------------------------------
Class B (152) (1,536) (93) (922)
------------------------------------------------------------------------------
Class C (19) (190) (5) (47)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
CONVERSION OF SHARES
------------------------------------------------------------------------------
Class A 1 11 1 8
------------------------------------------------------------------------------
Class B (1) (11) (1) (8)
------------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL SHARE
TRANSACTIONS $ 1,272 $ 5,295
------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
--------------------- -----------------------
TEXAS SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
SHARES SOLD
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 87 $ 897 87 $ 912
------------------------------------------------------------------------------
Class B 56 573 14 150
------------------------------------------------------------------------------
Class C 15 135 -- --
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
------------------------------------------------------------------------------
Class A 59 613 64 666
------------------------------------------------------------------------------
Class B 2 16 1 9
------------------------------------------------------------------------------
Class C 1 12 1 11
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES REDEEMED
------------------------------------------------------------------------------
Class A (333) (3,448) (263) (2,779)
------------------------------------------------------------------------------
Class B (1) (9) (15) (151)
------------------------------------------------------------------------------
Class C (1) (1) (5) (56)
------------------------------------------------------------------------------
NET DECREASE
FROM CAPITAL SHARE
TRANSACTIONS $(1,212) $ (1,238)
------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6
FINANCIAL FUTURES
CONTRACTS The Funds listed below have entered into exchange
traded financial futures 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, 1997,
the market values of assets pledged by the Funds to
cover margin requirements for open futures
positions were $274,000, $8,000 and $8,000 for the
California, Michigan and Texas Funds, respectively.
The Funds also had liquid securities in their
portfolios in excess of the face amount of the
following short Treasury Note futures open at
August 31, 1997. The contracts expire in December,
1997.
<TABLE>
<CAPTION>
GAIN AT
FUND FACE AMOUNT 8/31/97
---------------------------------------------------------
<S> <C> <C>
California $5,450,000 $ 16,000
---------------------------------------------------------
Michigan 108,000 --
---------------------------------------------------------
Texas 218,000 1,000
---------------------------------------------------------
</TABLE>
35
<PAGE> 36
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED AUGUST 31,
--------------------------------------
CALIFORNIA 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $7.31 7.35 7.22 8.01 7.57
- ------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .38 .39 .39 .39 .44
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .25 .04 .17 (.44) .53
- ------------------------------------------------------------------------------------
Total from investment operations .63 .43 .56 (.05) .97
- ------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .38 .39 .39 .39 .44
- ------------------------------------------------------------------------------------
Distribution from net realized gain .04 .08 .04 .35 .09
- ------------------------------------------------------------------------------------
Total dividends .42 .47 .43 .74 .53
- ------------------------------------------------------------------------------------
Net asset value, end of year $7.52 7.31 7.35 7.22 8.01
- ------------------------------------------------------------------------------------
TOTAL RETURN 8.78% 5.92 8.13 (.74) 13.21
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------
Expenses .79% .78 .74 .74 .63
- ------------------------------------------------------------------------------------
Net investment income 5.08% 5.18 5.53 5.30 5.68
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED AUGUST MAY 31 YEAR ENDED AUGUST MAY 31
31, TO 31, TO
------------------- AUGUST 31, ------------------ AUGUST 31,
1997 1996 1995 1994 1997 1996 1995 1994
- ------------------------------------------------------------------------------ -------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $7.32 7.35 7.22 7.23 7.31 7.34 7.22 7.23
- ------------------------------------------------------------------------------ -------------------------------
Income from investment operations:
Net investment income .32 .32 .33 .08 .32 .32 .33 .08
- ------------------------------------------------------------------------------ -------------------------------
Net realized and unrealized gain (loss) .24 .05 .17 (.01) .23 .05 .16 (.01)
- ------------------------------------------------------------------------------ -------------------------------
Total from investment operations .56 .37 .50 .07 .55 .37 .49 .07
- ------------------------------------------------------------------------------ -------------------------------
Less dividends:
Distribution from net investment income .32 .32 .33 .08 .32 .32 .33 .08
- ------------------------------------------------------------------------------ -------------------------------
Distribution from net realized gain .04 .08 .04 -- .04 .08 .04 --
- ------------------------------------------------------------------------------ -------------------------------
Total dividends .36 .40 .37 .08 .36 .40 .37 .08
- ------------------------------------------------------------------------------ -------------------------------
Net asset value, end of period $7.52 7.32 7.35 7.22 7.50 7.31 7.34 7.22
- ------------------------------------------------------------------------------ -------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.73% 5.16 7.17 1.05 7.59 5.15 7.08 .96
- ------------------------------------------------------------------------------ -------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------ -------------------------------
Expenses 1.62% 1.63 1.60 1.60 1.60 1.64 1.56 1.56
- ------------------------------------------------------------------------------ -------------------------------
Net investment income 4.25% 4.33 4.67 4.48 4.27 4.32 4.71 4.76
- ------------------------------------------------------------------------------ -------------------------------
- ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $1,007,907 1,040,538 1,087,232 1,168,449 1,331,377
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 79% 100 69 37 59
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR ALL FUNDS: Total return does not reflect the effect of sales charges.
36
<PAGE> 37
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED MARCH 15
AUGUST 31, TO
-------------- AUGUST 31,
MICHIGAN 1997 1996 1995
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.92 9.76 9.50
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income .43 .44 .22
- ----------------------------------------------------------------------------
Net realized and unrealized gain .38 .16 .26
- ----------------------------------------------------------------------------
Total from investment operations .81 .60 .48
- ----------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .43 .44 .22
- ----------------------------------------------------------------------------
Distribution from net realized gain .11 -- --
- ----------------------------------------------------------------------------
Total dividends .54 .44 .22
- ----------------------------------------------------------------------------
Net asset value, end of period $10.19 9.92 9.76
- ----------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.35% 6.19 5.00
- ----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------
Expenses absorbed by the Fund 1.13% 1.21 .41
- ----------------------------------------------------------------------------
Net investment income 4.31% 4.36 4.82
- ----------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------
Expenses 1.29% 1.53 .96
- ----------------------------------------------------------------------------
Net investment income 4.15% 4.04 4.27
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED MARCH 15 YEAR ENDED MARCH 15
AUGUST 31, TO AUGUST 31, TO
-------------- AUGUST 31, ------------- AUGUST 31,
1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------ --------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.91 9.77 9.50 9.91 9.76 9.50
- ------------------------------------------------------------------------ --------------------------------
Income from investment operations:
Net investment income .36 .36 .18 .35 .37 .18
- ------------------------------------------------------------------------ --------------------------------
Net realized and unrealized gain .38 .14 .27 .38 .15 .26
- ------------------------------------------------------------------------ --------------------------------
Total from investment operations .74 .50 .45 .73 .52 .44
- ------------------------------------------------------------------------ --------------------------------
Less dividends:
Distribution from net investment income .36 .36 .18 .35 .37 .18
- ------------------------------------------------------------------------ --------------------------------
Distribution from net realized gain .11 -- -- .11 -- --
- ------------------------------------------------------------------------ --------------------------------
Total dividends .47 .36 .18 .46 .37 .18
- ------------------------------------------------------------------------ --------------------------------
Net asset value, end of period $10.18 9.91 9.77 10.18 9.91 9.76
- ------------------------------------------------------------------------ --------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.53% 5.19 4.72 7.54 5.36 4.63
- ------------------------------------------------------------------------ --------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------ --------------------------------
Expenses absorbed by the Fund 1.89% 1.94 1.21 1.78 1.64 1.21
- ------------------------------------------------------------------------ --------------------------------
Net investment income 3.55% 3.63 4.02 3.66 3.93 4.02
- ------------------------------------------------------------------------ --------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------ --------------------------------
Expenses 2.05% 2.26 1.76 1.94 1.96 1.76
- ------------------------------------------------------------------------ --------------------------------
Net investment income 3.39% 3.31 3.47 3.50 3.61 3.47
- ------------------------------------------------------------------------ --------------------------------
- ------------------------------------------------------------------------ --------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------ --------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 15
AUGUST 31, TO
------------------ AUGUST 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets at end of period (in thousands) $3,091 3,286 3,079
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 69% 135 161
- ------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR MICHIGAN FUND:
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 through September 15, 1996. Additionally, beginning in
December 1996, ZKI agreed to absorb certain operating expenses of the Fund.
"Other ratios to average net assets" are computed without expense waiver or
absorption.
37
<PAGE> 38
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
MARCH 22
YEAR ENDED AUGUST 31, TO
--------------------------- AUGUST 31,
OHIO 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.93 9.81 9.56 9.98 9.50
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .47 .48 .50 .53 .24
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .32 .12 .25 (.41) .48
- ---------------------------------------------------------------------------------------
Total from investment operations .79 .60 .75 .12 .72
- ---------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .47 .48 .50 .53 .24
- ---------------------------------------------------------------------------------------
Distribution from net realized gain .03 -- -- .01 --
- ---------------------------------------------------------------------------------------
Total dividends .50 .48 .50 .54 .24
- ---------------------------------------------------------------------------------------
Net asset value, end of period $10.22 9.93 9.81 9.56 9.98
- ---------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.17% 6.16 8.20 1.23 7.54
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses absorbed by the Fund .89% .91 .63 .02 --
- ---------------------------------------------------------------------------------------
Net investment income 4.69% 4.78 5.27 5.44 5.21
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses .89% .91 .83 .82 .86
- ---------------------------------------------------------------------------------------
Net investment income 4.69% 4.78 5.07 4.64 4.36
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
MAY 31 MAY 31
YEAR ENDED AUGUST 31, TO YEAR ENDED AUGUST 31, TO
------------------------ AUGUST 31, ----------------------- AUGUST 31,
1997 1996 1995 1994 1997 1996 1995 1994
- -------------------------------------------------------------------------------- ------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.93 9.81 9.56 9.54 9.93 9.81 9.56 9.54
- -------------------------------------------------------------------------------- ------------------------------------
Income from investment operations:
Net investment income .39 .39 .44 .14 .39 .39 .44 .14
- -------------------------------------------------------------------------------- ------------------------------------
Net realized and unrealized gain .32 .12 .25 .02 .32 .12 .25 .02
- -------------------------------------------------------------------------------- ------------------------------------
Total from investment operations .71 .51 .69 .16 .71 .51 .69 .16
- -------------------------------------------------------------------------------- ------------------------------------
Less dividends:
Distribution from net investment income .39 .39 .44 .14 .39 .39 .44 .14
- -------------------------------------------------------------------------------- ------------------------------------
Distribution from net realized gain .03 -- -- -- .03 -- -- --
- -------------------------------------------------------------------------------- ------------------------------------
Total dividends .42 .39 .44 .14 .42 .39 .44 .14
- -------------------------------------------------------------------------------- ------------------------------------
Net asset value, end of period $10.22 9.93 9.81 9.56 10.22 9.93 9.81 9.56
- ------------------------------------------------------------------------------- ----------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.29% 5.30 7.57 1.55 7.32 5.28 7.56 1.55
- -------------------------------------------------------------------------------- ------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------- ------------------------------------
Expenses absorbed by the Fund 1.70% 1.73 1.32 .22 1.68 1.74 1.27 .21
- -------------------------------------------------------------------------------- ------------------------------------
Net investment income 3.88% 3.96 4.58 4.72 3.90 3.95 4.63 5.04
- -------------------------------------------------------------------------------- ------------------------------------
- -------------------------------------------------------------------------------- ------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------- ------------------------------------
Expenses 1.70% 1.73 1.75 1.72 1.68 1.74 1.69 1.67
- -------------------------------------------------------------------------------- ------------------------------------
Net investment income 3.88% 3.96 4.15 3.22 3.90 3.95 4.21 3.58
- -------------------------------------------------------------------------------- ------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 22
YEAR ENDED AUGUST 31, TO
------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $39,468 37,100 31,450 23,769 15,530
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 52% 86 90 103 17
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR OHIO FUND:
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
expense waiver or absorption.
38
<PAGE> 39
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED AUGUST 31,
--------------------------------------
TEXAS 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.36 10.42 10.14 10.69 9.95
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .51 .51 .54 .56 .60
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .32 .21 .36 (.42) .74
- -----------------------------------------------------------------------------------------
Total from investment operations .83 .72 .90 .14 1.34
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .51 .51 .54 .56 .60
- -----------------------------------------------------------------------------------------
Distribution from net realized gain .26 .27 .08 .13 --
- -----------------------------------------------------------------------------------------
Total dividends .77 .78 .62 .69 .60
- -----------------------------------------------------------------------------------------
Net asset value, end of period $10.42 10.36 10.42 10.14 10.69
- -----------------------------------------------------------------------------------------
TOTAL RETURN 8.28% 7.04 9.28 1.28 13.89
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------
Expenses absorbed by the Fund .92% .92 .70 .36 .08
- -----------------------------------------------------------------------------------------
Net investment income 4.90% 4.88 5.37 5.38 5.79
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses .92% .92 .89 .90 .79
- -----------------------------------------------------------------------------------------
Net investment income 4.90% 4.88 5.18 4.82 5.08
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR YEAR
ENDED MAY 31 ENDED MAY 31
AUGUST 31, TO AUGUST 31, TO
---------------------- AUGUST 31, ---------------------- AUGUST 31,
1997 1996 1995 1994 1997 1996 1995 1994
- ---------------------------------------------------------------------------------- ---------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.36 10.42 10.15 10.17 10.36 10.42 10.15 10.17
- ---------------------------------------------------------------------------------- ---------------------------------------
Income from investment operations:
Net investment income .42 .42 .45 .12 .42 .42 .46 .12
- ---------------------------------------------------------------------------------- ---------------------------------------
Net realized and unrealized gain (loss) .32 .21 .35 (.02) .32 .21 .35 (.02)
- ---------------------------------------------------------------------------------- ---------------------------------------
Total from investment operations .74 .63 .80 .10 .74 .63 .81 .10
- ---------------------------------------------------------------------------------- ---------------------------------------
Less dividends:
Distribution from net investment income .42 .42 .45 .12 .42 .42 .46 .12
- ---------------------------------------------------------------------------------- ---------------------------------------
Distribution from net realized gain .26 .27 .08 -- .26 .27 .08 --
- ---------------------------------------------------------------------------------- ---------------------------------------
Total dividends .68 .69 .53 .12 .68 .69 .54 .12
- ---------------------------------------------------------------------------------- ---------------------------------------
Net asset value, end of period $10.42 10.36 10.42 10.15 10.42 10.36 10.42 10.15
- -------------------------------------------------------------------------------- ---------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.41% 6.11 8.16 .92 7.43 6.13 8.27 .88
- ---------------------------------------------------------------------------------- ---------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------- ---------------------------------------
Expenses absorbed by the Fund 1.73% 1.79 1.54 1.24 1.71 1.76 1.50 1.23
- ---------------------------------------------------------------------------------- ---------------------------------------
Net investment income 4.09% 4.01 4.53 4.44 4.11 4.04 4.57 3.96
- ---------------------------------------------------------------------------------- ---------------------------------------
- ---------------------------------------------------------------------------------- ---------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------- ---------------------------------------
Expenses 1.73% 1.79 1.73 1.78 1.71 1.76 1.69 1.77
- ---------------------------------------------------------------------------------- ---------------------------------------
Net investment income 4.09% 4.01 4.34 3.90 4.11 4.04 4.38 3.42
- ---------------------------------------------------------------------------------- ---------------------------------------
- ---------------------------------------------------------------------------------- ---------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------- ---------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $12,469 13,595 14,877 15,409 12,341
- ----------------------------------------------------------------------------------------------
Portfolio turnover rate 62% 112 75 58 47
- ----------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR TEXAS FUND:
Certain expenses of the Texas Fund were waived or absorbed by ZKI from November
1, 1991 through December 31, 1993. 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 expense waiver or absorption.
FEDERAL TAX STATUS OF 1997 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.
39
<PAGE> 40
TRUSTEES
OFFICERS
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
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
CHARLES R. MANZONI, JR.
Vice President
CHRISTOPHER J. MIER
Vice President
JOHN E. NEAL
Vice President
ROBERT C. PECK, JR.
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
ZURICH KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
(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
ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
KEMPER LOGO
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 (10/97) 1038270
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
TRUSTEES&OFFICERS
