<PAGE> 1
KEMPER
STATE TAX-FREE
INCOME SERIES
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED FEBRUARY 28, 1997
CALIFORNIA TAX-FREE
INCOME FUND
MICHIGAN TAX-FREE
INCOME FUND
OHIO TAX-FREE
INCOME FUND
TEXAS TAX-FREE
INCOME FUND
" . . . At the end of February, yields
were somewhat lower than they had been at the start
of the period. This had a modestly positive effect on
municipal securities."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
4
Economic Overview
6
Performance Update
7
Terms to Know
8
California's Portfolio Statistics and
Portfolio of Investments
14
Michigan's Portfolio Statistics and
Portfolio of Investments
17
Ohio's Portfolio Statistics and
Portfolio of Investments
20
Texas' Portfolio Statistics and
Portfolio of Investments
23
Financial Statements
26
Notes to Financial Statements
32
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME FUNDS' TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 28, 1997
(UNADJUSTED FOR SALES CHARGE):
[BAR GRAPH]
- --------------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 4.37%
CLASS B 3.93%
CLASS C 3.80%
LIPPER CALIFORNIA TAX-FREE INCOME FUNDS CATEGORY AVERAGE* 4.76%
</TABLE>
- --------------------------------------------------------------------------------
MICHIGAN
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 4.30%
CLASS B 3.93%
CLASS C 3.91%
LIPPER MICHIGAN TAX-FREE INCOME FUNDS CATEGORY AVERAGE* 4.56%
</TABLE>
- --------------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 4.20%
CLASS B 3.78%
CLASS C 3.80%
LIPPER OHIO TAX-FREE INCOME FUNDS CATEGORY AVERAGE* 4.55%
</TABLE>
- --------------------------------------------------------------------------------
TEXAS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 4.33%
CLASS B 3.91%
CLASS C 3.92%
LIPPER TEXAS TAX-FREE INCOME FUNDS CATEGORY AVERAGE* 4.74%
</TABLE>
Returns are historical and do not represent performance. Returns and net asset
value fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AS OF AS OF
2/28/97 8/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS A $ 7.40 $ 7.31
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS B $ 7.41 $ 7.32
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS C $ 7.39 $ 7.31
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MICHIGAN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AS OF AS OF
2/28/97 8/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER MICHIGAN TAX-FREE INCOME
FUND CLASS A $ 10.03 $ 9.92
- --------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME
FUND CLASS B $ 10.02 $ 9.91
- --------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME
FUND CLASS C $ 10.02 $ 9.91
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AS OF AS OF
2/28/97 8/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER OHIO TAX-FREE INCOME
FUND CLASS A $ 10.08 $ 9.93
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME
FUND CLASS B $ 10.08 $ 9.93
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME
FUND CLASS C $ 10.08 $ 9.93
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TEXAS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AS OF AS OF
2/28/97 8/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER TEXAS TAX-FREE INCOME
FUND CLASS A $ 10.29 $ 10.36
- --------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME
FUND CLASS B $ 10.29 $ 10.36
- --------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME
FUND CLASS C $ 10.29 $ 10.36
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 3
AT A GLANCE
KEMPER TAX-FREE INCOME FUND LIPPER RANKINGS*
COMPARED TO ALL OTHER FUNDS IN THEIR RESPECTIVE LIPPER CATEGORIES
- --------------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #65 OF 98 FUNDS #89 OF 98 FUNDS #92 OF 98 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #23 OF 50 FUNDS N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #3 OF 30 FUNDS N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
MICHIGAN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #27 OF 46 FUNDS #43 OF 46 FUNDS #42 OF 46 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #25 OF 52 FUNDS #44 OF 52 FUNDS #44 OF 52 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TEXAS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #5 OF 20 FUNDS #13 OF 20 FUNDS #14 OF 20 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #1 OF 6 FUNDS N/A N/A
- --------------------------------------------------------------------------------
</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 FEBRUARY 28, 1997.
- --------------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $0.1892 $0.1579 $0.1583
- --------------------------------------------------------------------------------
FEBRUARY
DIVIDEND: $0.0281 $0.0239 $0.0236
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 5.07% 4.29% 4.25%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.39% 3.75% 3.78%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 7.69% 6.57% 6.62%
BASED ON A MARGINAL TAX RATE OF 42.9%
(COMBINED CALIFORNIA STATE AND
FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
MICHIGAN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $0.2111 $0.1741 $0.1693
- --------------------------------------------------------------------------------
FEBRUARY
DIVIDEND: $0.0334 $0.0274 $0.0276
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 4.44% 3.65% 3.67%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.15% 3.54% 3.57%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.91% 5.89% 5.94%
BASED ON A MARGINAL TAX RATE OF 39.9%
(COMBINED MICHIGAN STATE AND
FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $0.2351 $0.1948 $0.1959
- --------------------------------------------------------------------------------
FEBRUARY
DIVIDEND: $0.0352 $0.0297 $0.0291
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 4.66% 3.93% 3.85%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.28% 3.67% 3.69%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 7.28% 6.24% 6.28%
BASED ON A MARGINAL INCOME
TAX RATE OF 41.2%
(COMBINED OHIO STATE
AND FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TEXAS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $0.2543 $0.2121 $0.2132
- --------------------------------------------------------------------------------
FEBRUARY
DIVIDEND: $0.0377 $0.0318 $0.0317
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 4.89% 4.12% 4.10%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.43% 3.81% 3.82%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 7.04% 6.06% 6.07%
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 February 28, 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 February 28, 1997 shown as an annualized
percentage of the maximum offering price on that date. The SEC yield is
computed in accordance with the standardized method prescribed by the
Securities and Exchange Commission. Tax equivalent yield is based on the
fund's yield and the applicable 1996 federal and state marginal tax rate.
Income may be subject to state and local taxes and, for some investors, a
portion may be subject to the alternative minimum tax.
3
<PAGE> 4
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $79 BILLION IN ASSETS, INCLUDING $42 BILLION IN RETAIL MUTUAL
FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
The Federal Reserve Board's recent decision to raise short-term interest rates
as a pre-emptive strike against inflation has changed the course that the
markets have been on for several months. In fact, we had not seen a change in
the federal funds target rate since January 1996, when the Fed reduced interest
rates. The raising of rates now -- coupled with the general expectation of at
least one and probably two more hikes -- requires a modest adjustment in our
views for 1997.
A review of the standard measures of the economy shows little to be concerned
about. As has been the pattern for more than five years, alternately strong and
weak quarters have produced an overall 2 percent to 3 percent rate of growth in
gross domestic product (GDP). Job creation and the unemployment rate are
consistent with a moderately expanding economy. Corporate profits continue to
grow at an expected 4 to 5 percent rate in 1997. The Consumer Price Index
continues to track at a 2.5 percent to 3.0 percent rate. However, the Fed has
become nervous about the recent modest increases in unit labor costs. To avert
the possibility of more severe later actions to control inflation, the Fed
decided to act now. Ironically, now that rates have been raised, we may never
know whether the economy was in fact in danger of overheating.
Investors' immediate reaction to the higher rates was negative, as evidenced
by the stock market's first sizable correction in years. Yet, as uncomfortable
as it is to participate in a market decline, a correction is a natural event in
a market cycle. A market correction is generally defined as a loss in value of 8
to 10 percent. Historically, corrections take place over a period of four to six
months, the current one has already fallen the average amount in a very short
amount of time. It is likely that the stock market will require many weeks of
retrenchment before a new sustainable upward movement begins.
A correction should be distinguished from a bear market, which involves a
decline of at least 20 percent and typically occurs over six to eight months. We
see no reason to believe that we are entering a classic bear market. The economy
is stable and the interest rate increases are likely to be gradual and modest.
Inflation is the greatest threat to the securities markets, and if higher rates
are what is required to control inflation, investors will be better off over the
longer term.
Just as we see a limited downside to today's rising interest rate environment,
so is there a limited upside in the near future. The effect of higher rates will
have to work itself through the economy. Higher rates have significant
implications for corporate profitability, debt issuance, credit extension and
international trade. Post-correction cash flows into the financial markets will
be a subject of great scrutiny. One of the factors driving the stock market to
its all-time high early in 1997 was the unprecedented high level of investment
through mutual funds, 401(k)s and qualified contribution plans. It is realistic
to expect that, on the margin, some of that cash will find a home in short-term,
liquid investments while the stock market sorts itself out.
One of the most interesting aspects of today's environment is the role of the
technology stocks. They seem to be demonstrating the same market leadership
characteristics that we have seen before. In the early 1970s, consumer
nondurable stocks led the market up and down. More recently, in the 1980s, oil
stocks led, followed by financial services stocks. Today, we look at technology
stocks as a strong indicator of market direction. When they finally find a
bottom and then turn upward, we would expect the general market to follow.
Higher interest rates are, of course, anathema to the fixed-income market. The
market has fallen, discounting a more restricting monetary policy. However, in
the era of instant adjustment, most of the damage is likely done. We expect now
that the bond market is likely to trade in a very narrow range -- with long-term
interest rates no lower than 6.75 percent and no higher than 7.25 percent. One
positive effect of the stock market correction was the widening of spreads
available on high yield bonds. As a consequence, high yield bonds today are more
reasonably priced.
4
<PAGE> 5
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and sharholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch has a significant impact on mutual fund performance.
The following are some significant economic guideposts and their investment
rationale that may help your investment decision-making. The 10-year Treasury
rate and the prime rate are prevailing interest rates. The other data report
year-to-year percentage changes.
BAR GRAPH
<TABLE>
<CAPTION>
NOW (3/31/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.69 6.53 6.51 7.06
PRIME RATE(2) 8.50 8.25 8.25 9.00
INFLATION RATE(3)* 2.72 2.62 2.86 2.57
THE U.S. DOLLAR(4) 8.58 4.74 8.94 -11.46
CAPITAL GOODS ORDERS(5)* 5.25 1.96 3.98 15.52
INDUSTRIAL PRODUCTION(5)* 3.79 3.13 1.36 3.38
EMPLOYMENT GROWTH(6) 2.27 2.18 1.76 3.12
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. The low, moderate inflation of the last
few years has meant hight 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 February 28, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
A natural response to a troubled U.S. equity market is to look abroad.
In fact, the valuations of many international markets are more attractive than
the U.S. There too, though, weak German and Japanese economies make it
difficult to identify exciting near-term opportunities.
Our recommendation to shareholders is to stay the course and to fight
the temptation to try to time when and where you should be invested. Financial
assets react much quicker today to events. Volatility has returned to the
market and with it heightened uncertainty. Now is the time to rely on your
financial representative for the expertise and the long-term investing
discipline that he or she can provide.
With that as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
President, Chief Investment and Executive Officer
Zurich Kemper Investments, Inc.
April 10, 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 B.A. DEGREE IN ECONOMICS FROM THE UNIVERSITY OF MICHIGAN AND WENT ON TO
RECEIVE A M.M. IN FINANCE FROM THE KELLOGG GRADUATE SCHOOL OF MANAGEMENT AT
NORTHWESTERN UNIVERSITY. HE IS A CHARTERED FINANCIAL ANALYST.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED
ON MARKET AND OTHER CONDITIONS.
FOR THE SIX-MONTH REPORTING PERIOD, THE MUNICIPAL MARKET FOCUSED PRIMARILY ON
THE POTENTIAL OF AN INTEREST RATE INCREASE BY THE FEDERAL RESERVE BOARD.
PORTFOLIO MANAGER CHRIS MIER EXPLAINS HOW THE FUNDS IN KEMPER STATE TAX-FREE
INCOME SERIES PERFORMED IN AN ENVIRONMENT CHARACTERIZED BY QUICK CHANGING
EXPECTATIONS.
Q HOW DID THE FUNDS PERFORM DURING THE FIRST SIX MONTHS OF THE FISCAL YEAR?
A The funds (Class A shares, unadjusted for sales charge) performed
relatively well, all returning 4 percent or more for the six-month period ended
February 28, 1997. Most of the return reflected income from the bonds in the
portfolios with some level of price appreciation.
Q MUNICIPAL BOND YIELDS FLUCTUATED QUITE A BIT DURING THE LAST SIX MONTHS.
WHAT IMPACT DID THIS HAVE ON THE MARKET?
A Yields in the municipal market fluctuated during the period, but tended to
be range-bound, trading within about a half of a percentage point. At the end of
February, yields were somewhat lower than they had been at the start of the
period. This had a modestly positive effect on prices of municipal securities.
The up and down movement of yields seemed to be based on the market's changing
expectations about whether or not the Federal Reserve Board (the Fed) would move
to raise short-term interest rates. It was assumed that the Fed would raise
short-term rates if there was an indication of the economy growing too quickly
and a possible emergence of inflation. We witnessed swings in the market
throughout the reporting period on the heels of sometimes conflicting economic
reports. The Fed took no action during the six-month period and the municipal
bond market performed relatively well, slightly outperforming the Treasury bond
market.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUNDS OVER THE SIX MONTHS?
A We shortened the durations of the funds somewhat during the period. The
shorter a fund's duration, the less sensitive it is to interest rate changes. We
shortened duration because we believed that growth in the economy would exceed
market expectations. We also saw signs of potential wage inflation and combined
with our outlook on economic growth, saw a bias for higher market interest
rates.
In addition to duration adjustments, we also added A-rated and BBB-rated bonds
on a selective basis. These bonds offered higher coupon rates than some of the
funds' higher quality and insured issues. We also continued to focus on
maintaining or improving call protection on issues within the portfolios.
We didn't make any significant shifts in the sectors in which the funds were
invested. However, we continued to favor essential service revenue bonds --
bonds used to finance basic governmental services such as water and sewer,
transportation and education among other things.
6
<PAGE> 7
PERFORMANCE UPDATE
Q WERE THERE ANY SIGNIFICANT TRENDS THAT AFFECTED INDIVIDUAL STATES WITHIN
KEMPER'S STATE TAX-FREE INCOME SERIES?
A The California economy continued to improve during the period. Unemployment
in the state decreased by about 1 percent from 1995, and the state's general
fund was increased due to stronger tax receipts from California's economic
recovery. New municipal issuance supply also increased during the period.
In Texas, the Gross State Product grew by more than $12.8 billion in 1996 -- a
3 percent increase over 1995. Unemployment continued to decline and the state is
expected to outpace the national economy in 1997, due to continued economic
growth trends in Texas. New issuance volume in the state has also increased.
Unemployment continued to fall in Michigan during the period and is below the
national average. Michigan ranks in the top 15 states nationwide on key measures
of wealth, such as median family and disposable personal income. In 1996, new
municipal issuance volume was $5.6 billion, a 15 percent increase from 1995.
Economic growth in Ohio continues to be positive and the state's general fund
has maintained a surplus. There was a 30 percent increase in new issuance volume
in Ohio in 1996 compared to 1995 levels.
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'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET?
A We expect moderate growth in the economy to continue, with a bias for a
slight pick-up in inflation and possibly an increase in short-term interest
rates. Municipal supply should come in close to 1996 levels.
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 generated by, and the effect of, 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
PORTFOLIO STATISTICS
KEMPER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- ----------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 86% 93%
- ----------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 9 --
- ----------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 2 5
- ----------------------------------------------------------------------------
CASH AND EQUIVALENTS 3 2
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
QUALITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- ----------------------------------------------------------------------------
<S> <C> <C>
AAA 51% 55%
- ----------------------------------------------------------------------------
AA 14 13
- ----------------------------------------------------------------------------
A 16 14
- ----------------------------------------------------------------------------
BBB 14 13
- ----------------------------------------------------------------------------
B 2 --
- ----------------------------------------------------------------------------
NOT RATED 3 5
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- ----------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 11% 9%
- ----------------------------------------------------------------------------
11-20 YEARS 44 45
- ----------------------------------------------------------------------------
+21 YEARS 45 46
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- -----------------------------------------------------------------------------
<S> <C> <C>
17.5 YEARS 17.8 YEARS
- ----------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT FEBRUARY 28, 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 01-01-98 @ 101 $ 1,750 $ 1,831
- -----------------------------------------------------------------------------------------------------------
Brea Public Financing Auth., Orange County, Redev. Proj. AB,
Rev., 6.75%, to be called 08-01-01 @ 102 3,885 4,342
- -----------------------------------------------------------------------------------------------------------
Coronado Community Dev. Agcy., Tax Allocation, Rev., 7.25%,
to be called 09-01-99 @ 102 4,500 4,931
- -----------------------------------------------------------------------------------------------------------
City of Los Angeles:
Convention and Exhibit Center, Certificates of
Participation, Rev., 9.00%, to be called 12-01-05 @ 100 1,000 1,318
Harbor Department, Rev., 8.70%, to be called 09-01-99 @
100 2,500 2,794
- -----------------------------------------------------------------------------------------------------------
City of San Bernardino, Sisters of Charity Health Care
System, Rev., 7.00%, to be called 07-01-01 @ 102 14,500 16,254
- -----------------------------------------------------------------------------------------------------------
Foothill-DeAnza Community College District, Santa Clara,
Rev., 7.875%, to be called 06-01-01 @ 102 4,055 4,660
- -----------------------------------------------------------------------------------------------------------
Fullerton Redev. Agcy., Local Government Finance Auth.,
Rev., 7.70%, to be called 02-01-99 @ 102 4,360 4,744
- -----------------------------------------------------------------------------------------------------------
Health Facilities Financing Auth.:
Children's Hospital, Rev., 7.50%, to be called 10-01-00 @
102 3,600 4,052
Eskaton Properties, Inc., Rev., 7.45%, to be called
05-01-00 @ 102 4,800 5,341
- -----------------------------------------------------------------------------------------------------------
Metropolitan Water District of Southern California, Water
Rev., 6.625%, to be called 07-01-01 @ 102 1,500 1,664
- -----------------------------------------------------------------------------------------------------------
Northern California Power Agcy., Hydroelectric Number One,
Rev., 7.00%, to be called 01-01-16 @ 100 210 250
- -----------------------------------------------------------------------------------------------------------
Orange County:
Civic Center, Certificates of Participation, Rev., 6.625%,
to be called 08-01-01 @ 102 2,000 2,225
Unified School District, Certificates of Participation,
Rev., 6.875%, to be called 06-01-99 @ 102 2,620 2,831
- -----------------------------------------------------------------------------------------------------------
Port of Oakland, Rev., 7.60%, to be called 05-01-97 @ 102 8,520 8,750
- -----------------------------------------------------------------------------------------------------------
Reedley, Sierra View Homes, Inc., Insured Certificates of
Participation, Rev., 7.60%, to be called 03-01-01 @ 102 4,090 4,667
- -----------------------------------------------------------------------------------------------------------
Santa Margarita Water District, Gen. Oblg., 7.30%, to be
called 06-01-97 @ 102 1,080 1,112
- -----------------------------------------------------------------------------------------------------------
Statewide Communities Dev. Auth., United Western Medical
Centers, Insured, Rev., 6.80%, to be called 12-01-01 @ 102 4,245 4,767
- -----------------------------------------------------------------------------------------------------------
Tulare County Public Facilities Corp., Certificates of
Participation, Rev., 8.10%, to be called 11-01-97 @ 102 1,000 1,050
- -----------------------------------------------------------------------------------------------------------
Victor Valley Community College District, Certificates of
Participation, Rev., 6.875%, to be called 08-01-03 @ 102 8,705 9,973
- -----------------------------------------------------------------------------------------------------------
Yosemite Community College District, Certificates of
Participation, Rev., 7.75%, to be called 07-01-01 @ 102 1,665 1,934
--------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--8.6% 89,490
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------
Department of Water Resources, Central Valley Proj., Water
System Rev., 4.75%, 2019 7,160 6,302
- -----------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Educational Facilities Auth.:
Mills College, Rev., 6.875%, 2022 $ 1,775 $ 1,914
University of San Francisco, Rev., 6.00%, 2016 5,140 5,342
- -----------------------------------------------------------------------------------------------------------
Health Facilities Financing Auth.:
Adventist Health System West, Rev., 6.50%, 2007 and 2011 5,750 6,221
America Baptist Homes West, Rev., 7.65%, 2014 4,000 4,208
Catholic Healthcare Facilities Finance Auth., Rev., 5.75%
and 6.00%, 2010 through 2025 28,370 29,219
Kaiser Permanante, Rev., 7.00%, 2010 3,550 3,896
Marshall Hospital Health System, Rev., 5.125%, 2012 2,270 2,148
Small Facilities Loan, Insured Health Facility, Rev.,
6.70%, 2011 1,200 1,283
Southern California Presbyterian Homes, Rev., 6.70%, 2011 2,000 2,131
Unihealth America, Rev., 7.625%, 2015 745 797
- -----------------------------------------------------------------------------------------------------------
Housing Finance Agcy., Home Mortgage Rev., 5.90% to 8.00%,
2010 through 2030 31,990 33,357
- -----------------------------------------------------------------------------------------------------------
PCR Mobile Oil, Rev., 5.50%, 2029 3,750 3,588
- -----------------------------------------------------------------------------------------------------------
Public Works Board:
Department of Corrections, Rev., 5.50% to 7.40%, 2010
through 2019 43,285 44,448
Various Universities, Rev., 5.50%, 2009 through 2013 15,700 15,699
- -----------------------------------------------------------------------------------------------------------
State, Gen. Oblg., 5.25% and 5.60%, 2020 and 2021 11,000 10,618
- -----------------------------------------------------------------------------------------------------------
Statewide Communities Dev. Auth.:
Cedars-Sinai Medical Center, Rev., 6.50%, 2012 20,000 21,962
Eastfield Ming Quong Inc., Certificates of Participation,
Rev., 5.625%, 2020 3,420 3,308
San Gabriel Valley Medical Center, Rev., 5.50%, 2014 10,750 10,662
Triad Healthcare, Rev., 5.80%, 2000 4,205 4,312
- -----------------------------------------------------------------------------------------------------------
University of California, Housing System Rev., 5.65% to
6.75%, 2009 through 2017 29,845 30,510
- -----------------------------------------------------------------------------------------------------------
Baldwin Park, Gen. Oblg., 5.80%, 2021 6,280 6,324
- -----------------------------------------------------------------------------------------------------------
Bellflower Certificates of Participation, Civic Center and
Capital Improvement, Rev., 7.20%, 2019 1,880 2,036
- -----------------------------------------------------------------------------------------------------------
Central Coast Water Authority, Rev., 6.00% and 5.00%, 2008
and 2022 20,420 18,921
- -----------------------------------------------------------------------------------------------------------
Central Valley Financing Auth., Carson Ice-Gen. Proj., Rev.,
6.10%, 2013 8,700 8,815
- -----------------------------------------------------------------------------------------------------------
City of Big Bear Lake, Department of Water and Power, Rev.,
6.00%, 2015 and 2022 15,405 16,455
- -----------------------------------------------------------------------------------------------------------
City of Carson Redev. Agcy., Proj. Number One, Tax
Allocation, Rev., 6.00%, 2016 3,350 3,355
- -----------------------------------------------------------------------------------------------------------
City of Concord Redev. Agcy., Central Concord Proj., Tax
Allocation, Rev., 8.00%, 2018 40 43
- -----------------------------------------------------------------------------------------------------------
City of Long Beach, Harbor Department, Rev., 5.25% to 7.25%,
2019 through 2025 24,105 23,482
- -----------------------------------------------------------------------------------------------------------
City of Los Angeles:
Department of Airports, Ontario International Airport,
Rev., 5.90%, 2012 3,290 3,421
Harbor Department, Rev., 5.375%, 2023 22,500 21,136
Wastewater System, Rev., 6.625% and 4.70%, 2012 and 2017 13,480 12,534
- -----------------------------------------------------------------------------------------------------------
City of Oakland:
Housing Finance Rev., 7.10%, 2010 1,655 1,733
Pension Financing Rev., 7.60%, 2021 26,075 27,792
- -----------------------------------------------------------------------------------------------------------
City of Reedley, Sierra View Homes, Inc., Insured
Certificates of Participation, Rev., 5.85%, 2021 2,325 2,310
- -----------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
City of Sacramento:
Cogeneration Auth., Power Auth., Rev., 5.875% and 6.00%,
2015 and 2022 $25,200 $ 25,059
Cogeneration Auth., Procter and Gamble Proj., Rev., 6.375%
to 6.50%, 2010 through 2021 17,500 18,187
Finance Auth., Lease Rev., 5.00% to 5.40%, 2014 through
2020 24,000 23,428
Municipal Utility District, Electric Rev., 6.20% to 6.75%,
2006 through 2009 7,020 7,705
- -----------------------------------------------------------------------------------------------------------
City of San Diego:
Horton Plaza Redev. Proj., Rev., 6.625%, 2017 2,000 2,125
Industrial Dev., Gas and Electric Company, Rev., 6.10%,
2018 5,000 5,175
- -----------------------------------------------------------------------------------------------------------
City and County of San Francisco:
Gen. Oblg., 6.50%, 2010 1,000 1,057
San Francisco International Airport, Rev., 5.625%, 2009
through 2021 20,010 20,081
Moscone Convention Center, Rev., 6.75%, 2015 2,200 2,462
Redev. Agcy., Hotel Tax, Rev., 6.75%, 2015 3,705 4,147
- -----------------------------------------------------------------------------------------------------------
Contra Costa County:
County Public Facilities Corp., Certificates of
Participation, Rev., 7.80%, 2005 1,250 1,360
Home Mortgage, Rev., 7.75%, 2022 2,715 3,367
- -----------------------------------------------------------------------------------------------------------
Corona-Norco University Special Tax, Rev., 5.75%, 2014 2,750 2,807
- -----------------------------------------------------------------------------------------------------------
Duarte, City of Hope National Medical Center, Certificates
of Participation, Rev., 6.25%, 2023 4,000 4,044
- -----------------------------------------------------------------------------------------------------------
Eldorado Public Agcy., Financial Auth., Rev., 5.60%, 2012 5,000 5,100
- -----------------------------------------------------------------------------------------------------------
Emeryville, Public Financing Auth., Redev. Proj., Rev.,
6.50%, 2021 10,255 10,684
- -----------------------------------------------------------------------------------------------------------
Encina Financing Joint Powers Auth., Wastewater, Rev.,
6.875%, 2011 3,000 3,260
- -----------------------------------------------------------------------------------------------------------
Fontana Public Financing Auth., Tax Allocation, Rev., 7.00%,
2021 3,900 4,100
- -----------------------------------------------------------------------------------------------------------
Foothill-DeAnza Community College District, DeAnza Campus
Center Proj., Certificates of Participation, Rev., 7.35%,
2007 1,700 1,883
- -----------------------------------------------------------------------------------------------------------
Foothill/Eastern, Transit Corridor Agcy., Toll Road, Rev.,
6.00% and 6.50%, 2016 and 2032 21,000 21,524
- -----------------------------------------------------------------------------------------------------------
Foster County Public Financing Authority, Rev., 5.60% and
5.80%, 2012 and 2016 2,225 2,218
- -----------------------------------------------------------------------------------------------------------
Fresno Health Facilities, Holy Cross Health System, St.
Agnes Medical Center, Rev., 6.50% and 6.625%, 2011 and
2021 3,500 3,756
- -----------------------------------------------------------------------------------------------------------
Hawthorne Community Redev. Agcy., Tax Allocation, Rev.,
6.625%, 2014 2,000 2,110
- -----------------------------------------------------------------------------------------------------------
Hollister Joint Powers Financing Auth., Sewer System
Improvement Proj., Rev., 5.75%, 2011 3,815 3,813
- -----------------------------------------------------------------------------------------------------------
Inglewood Civic Center:
Improvement Proj., Certificates of Participation, Rev.,
6.50% to 7.00%, 2011 through 2021 8,025 8,503
Redev. Proj., Industrial Proj., Rev., 7.00%, 2022 9,495 10,123
- -----------------------------------------------------------------------------------------------------------
Irvine Ranch, Water District Joint Powers Agcy., Rev.,
7.875%, 2023 5,000 5,162
- -----------------------------------------------------------------------------------------------------------
Kern High School District, Gen. Oblg., 6.40%, 2012 3,095 3,484
- -----------------------------------------------------------------------------------------------------------
Las Virgenes, Municipal Water District, Capital Improvement
Proj., Rev., 6.30%, 2016 2,175 2,300
- -----------------------------------------------------------------------------------------------------------
Lemon Grove Community Dev. Agcy., Tax Allocation, Rev.,
6.65% and 6.90%, 2006 and 2020 2,500 2,641
- -----------------------------------------------------------------------------------------------------------
Loma Linda, University Medical Center, Rev., 7.00%, 2015 2,500 2,701
- -----------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Los Angeles County:
Metropolitan Transportation Auth., Sales Tax Rev., 5.625%
to 6.00%, 2015 through 2023 $12,935 $ 13,295
Transportation Commission, Sales Tax Rev., 6.50% to 7.40%,
2003 through 2019 20,455 22,033
- -----------------------------------------------------------------------------------------------------------
Los Banos, Certificates of Participation, Rev., 6.00%, 2019 2,250 2,173
- -----------------------------------------------------------------------------------------------------------
Martinez, Multiple Lenders, Home Mortgage, Rev., 10.375%,
2002 35 43
- -----------------------------------------------------------------------------------------------------------
Metropolitan Water District of Southern California, Rev.,
5.75% and 5.00%, 2021 and 2027 24,450 22,463
- -----------------------------------------------------------------------------------------------------------
Midpeninsula Regional Open Space, Financial Auth., Rev.,
5.75%, 2011 1,950 2,020
- -----------------------------------------------------------------------------------------------------------
Mill Valley Certificates of Participation, The Redwoods,
Rev., 5.75%, 2020 3,230 3,178
- -----------------------------------------------------------------------------------------------------------
Modesto Irrigation District Financing Auth., Domestic Water
Proj., Rev., 5.65% to 6.00%, 2009 through 2015 15,935 16,565
- -----------------------------------------------------------------------------------------------------------
Mojave, Water Improvement District, Morongo Basin, Rev.,
5.60%, 2012 2,000 2,041
- -----------------------------------------------------------------------------------------------------------
Montebello Community Redev. Agcy., Montebello Hills Redev.,
Tax Allocation, Rev., 7.50%, 2010 3,750 4,033
- -----------------------------------------------------------------------------------------------------------
Moreno Valley, Towngate Community Facilities:
District 87-1, Improvement Area No. 1, Special Tax Rev.,
7.125%, 2023 2,810 2,910
Special Tax, Rev., 6.50%, 2009 3,670 3,836
- -----------------------------------------------------------------------------------------------------------
Northern California Power Agcy., Hydroelectric Number One,
Rev., 7.15%, 2024 8,875 9,316
- -----------------------------------------------------------------------------------------------------------
Orange County:
Recovery Certificates of Participation, Rev., 5.70% to
6.00%, 2010 through 2026 28,700 29,434
San Joaquin Hills Transportation Corridor Agcy., Toll Road
Rev., zero coupon to 7.00%, 2025 through 2032 41,355 21,973
Santa Margarita/Dana Point Auth., Rev., 7.25%, 2012 and
2013 7,075 8,558
- -----------------------------------------------------------------------------------------------------------
Pleasanton Junction Power, Finance Auth., Reassessment Rev.,
6.15%, 2012 9,510 9,805
- -----------------------------------------------------------------------------------------------------------
Port of Oakland, Port Auth., Rev., 5.60% and 6.40%, 2019 and
2022 35,280 35,642
- -----------------------------------------------------------------------------------------------------------
Public Power Agency, San Juan Project, Rev., 6.75%, 2020 2,000 2,302
- -----------------------------------------------------------------------------------------------------------
Redondo Beach, South Bay:
Redev. Proj., Rev., 7.00% and 7.125%, 2016 and 2026 3,000 3,158
Temecula Valley Unified School District, Gen. Oblg.,
5.80%, 2014 2,430 2,503
- -----------------------------------------------------------------------------------------------------------
Riverside County, Public Facilities Financing, Certificates
of Participation, Rev., 6.875%, 2009 3,000 3,279
- -----------------------------------------------------------------------------------------------------------
Sacramento County, Airport System, Rev., 6.00%, 2017 5,850 5,963
- -----------------------------------------------------------------------------------------------------------
Saddleback Valley Unified School District, Gen. Oblg.,
6.00%, 2012 through 2014 4,080 4,404
- -----------------------------------------------------------------------------------------------------------
San Bernardino County, West Valley Detention Center,
Certificates of Participation, Rev., 6.50%, 2012 8,000 8,801
- -----------------------------------------------------------------------------------------------------------
San Bernardino Joint Powers Financing Auth., Lease Rev.,
7.15%, 2013 4,250 4,593
- -----------------------------------------------------------------------------------------------------------
San Diego, Certificates of Participation, Rev., 8.00%, 2002 5,575 6,006
- -----------------------------------------------------------------------------------------------------------
Santa Clarita Public Financing Auth., Local Agcy., Rev.,
6.70% and 6.75%, 2011 and 2021 4,250 4,530
- -----------------------------------------------------------------------------------------------------------
Santa Cruz County Housing Auth., Multi-Family Housing, Rev.,
7.75%, 2023 2,000 2,145
- -----------------------------------------------------------------------------------------------------------
Snowline Joint Unified School District, 1993 Family Proj.,
Certificates of Participation, Rev., 6.30% and 6.40%, 2011
and 2018 3,695 3,786
- -----------------------------------------------------------------------------------------------------------
South San Francisco, Capital Improvement Financing Auth.,
Conference Center Proj., Rev., 6.125%, 2018 3,925 3,930
- -----------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Southern California Home Financing Auth., Single Family
Mortgage, Rev., 6.75% and 7.35%, 2022 and 2024 $ 1,555 $ 1,623
- -----------------------------------------------------------------------------------------------------------
Southern California Public Power Auth., Mead Adelanto Proj.,
Rev., 4.75%, 2016 7,500 6,643
- -----------------------------------------------------------------------------------------------------------
Sunnyvale, Financing Auth., Wastewater, Refuge and Sludge,
Management Facilities, Rev., 6.30%, 2017 4,000 4,228
- -----------------------------------------------------------------------------------------------------------
Torrance Memorial Hospital Medical Center, Rev., 6.75%, 2012 5,000 5,107
- -----------------------------------------------------------------------------------------------------------
University of California:
UC Davis Medical Center, Rev., 5.625% and 5.75%, 2010 and
2012 11,555 11,890
Multiple Purpose Proj., Rev, 4.75%, 2016 5,000 4,405
- -----------------------------------------------------------------------------------------------------------
Westminster Redev. Agcy., Westminster Commercial Redev.
Proj., Tax Allocation, Rev., 7.30%, 2021 2,500 2,704
- -----------------------------------------------------------------------------------------------------------
Puerto Rico Commonwealth, Highway and Transportation Auth.,
Rev., 6.00%, 2018 6,000 6,464
--------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--88.2% 912,430
--------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--96.8%
(Cost: $953,558) 1,001,920
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Money Market Instruments--1.9%
Yield--3.20% to 3.45%
Due--March 1997
(Cost: $19,200) 19,200 19,200
--------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.7%
(Cost: $972,758) 1,021,120
--------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.3% 13,401
--------------------------------------------------------------------------------------
NET ASSETS--100% $1,034,521
--------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIOS OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $972,758,000 for federal income tax purposes
at February 28, 1997, the gross unrealized appreciation was $49,215,000, the
gross unrealized depreciation was $853,000 and the net unrealized appreciation
on investments was $48,362,000.
See accompanying Notes to Financial Statements.
13
<PAGE> 14
PORTFOLIO STATISTICS
KEMPER MICHIGAN TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 54% 48%
- -------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 36 48
- -------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES 5 --
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS 5 4
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
QUALITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
AAA 78% 82%
- -------------------------------------------------------------------------------
AA 7 7
- -------------------------------------------------------------------------------
A 1 1
- -------------------------------------------------------------------------------
BBB 11 7
- -------------------------------------------------------------------------------
NOT RATED 3 3
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 18% 4%
- -------------------------------------------------------------------------------
11-20 YEARS 52 68
- -------------------------------------------------------------------------------
+21 YEARS 30 28
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- -------------------------------------------------------------------------------
<S> <C> <C>
13.5 YEARS 13.7 YEARS
- -------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
MICHIGAN TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT FEBRUARY 28, 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
- ----------------------------------------------------------------------------------------------------
Detroit, Gen. Oblg., 6.80%, to be called 04-01-05 @ 101 $ 65 $ 74
-------------------------------------------------------------------------------
Municipal Bond Auth., State Revolving Fund, Rev., 6.50%, to
be called 10-01-04 @ 102 15 17
-------------------------------------------------------------------------------
Reeths Ruffer School, Gen. Oblg., 6.625%, to be called
05-01-02 @ 102 50 56
-------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--4.6% 147
-------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ----------------------------------------------------------------------------------------------------
Building Auth., Rev., 6.25%, 2020 95 99
-------------------------------------------------------------------------------
Hospital Finance Auth.:
Gratiot Community Hospital, Rev., 6.10%, 2007 50 51
St. John Hospital and Medical Center, Rev., 6.00%, 2010 100 106
Mercy Memorial Hospital, Rev., 5.25% and 5.375%, 2021 and
2026 100 94
-------------------------------------------------------------------------------
Housing Dev. Auth.:
Limited Oblg., Green Hill Proj., Rev., 5.45%, 2011 20 20
Rental Housing Rev., 5.75%, 2014 15 15
Rev., 6.20%, 2027 50 50
-------------------------------------------------------------------------------
Kent Hospital Finance Auth., Health Care, Rev., 5.75%, 2011 100 103
-------------------------------------------------------------------------------
Municipal Bond Auth., Local Government Bond Rev., 6.00%,
2013 10 11
-------------------------------------------------------------------------------
Underground Storage Tank Financial Assurance Auth., Rev.,
5.75%, 2010 50 52
-------------------------------------------------------------------------------
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 50
-------------------------------------------------------------------------------
Allegan Public Schools, Gen. Oblg., 6.50%, 2007 100 112
-------------------------------------------------------------------------------
Avondale School District, Gen. Oblg., 5.40%, 2009 100 101
-------------------------------------------------------------------------------
Birmingham Public Schools, Gen. Oblg., 5.75%, 2011 15 15
-------------------------------------------------------------------------------
Board of Rights of Eastern Michigan University, Rev., 5.50%,
2012 60 60
-------------------------------------------------------------------------------
Brandon School District, Gen. Oblg., 5.60%, 2010 50 51
-------------------------------------------------------------------------------
Caledonia Community Schools, Gen. Oblg., 5.75%, 2012 100 103
-------------------------------------------------------------------------------
Clarkston Community Schools, Gen. Oblg., 6.25%, 2005 50 55
-------------------------------------------------------------------------------
Clintondale Community Schools, Gen. Oblg., 5.375%, 2010 50 50
-------------------------------------------------------------------------------
Dearborn, Sewage Disposal System, Rev., 5.125%, 2016 50 47
-------------------------------------------------------------------------------
Detroit:
Sewage Disposal System, Rev., 5.00%, 2025 35 31
Water Supply System, Rev., 4.75% and 6.25%, 2019 and 2012 65 66
-------------------------------------------------------------------------------
Economic Dev. Corp. of Dickinson County, Pollution Control,
Rev., 5.85%, 2018 100 100
-------------------------------------------------------------------------------
Genesee County, Sewage Disposal System No. 3, Rev., 7.00%,
2005 60 69
-------------------------------------------------------------------------------
Grand Ledge Public Schools, Gen. Oblg., 5.375%, 2024 50 48
-------------------------------------------------------------------------------
Grandville Public Schools, Gen. Oblg., 6.30%, 2009 25 27
-------------------------------------------------------------------------------
Greater Detroit Resource Recovery Auth., Rev., 6.25%, 2008 85 93
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
</TABLE>
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Kalamazoo, Hospital Finance Auth., Rev., 6.25%, 2012 $ 50 $ 53
-------------------------------------------------------------------------------
Lincoln Park School District, Gen. Oblg., 7.00%, 2020 100 113
-------------------------------------------------------------------------------
Marquette City Hospital Finance Auth., Rev., 5.875%, 2011 85 88
-------------------------------------------------------------------------------
Monroe County, Pollution Control Rev., 6.55%, 2024 100 108
-------------------------------------------------------------------------------
North Branch Area Schools, Gen. Oblg., 5.375%, 2021 5 5
-------------------------------------------------------------------------------
Oakland County, Drainage District, Rev., 6.40%, 2016 15 16
-------------------------------------------------------------------------------
Redford Union Schools, District No. 1, Gen. Oblg., 6.375%,
2010 100 111
-------------------------------------------------------------------------------
St. Clair County, Water Supply System No. VII, Gen. Oblg.,
5.25%, 2018 15 14
-------------------------------------------------------------------------------
Wayne County Building Auth., Gen. Oblg., 5.25%, 2016 65 62
-------------------------------------------------------------------------------
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
Project, Rev., 6.50%, 2018 75 78
Gen. Oblg., 5.50%, 2009 15 16
Highway and Transportation Auth., Rev., 6.25%, 2016 75 83
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 30 31
-------------------------------------------------------------------------------
Virgin Islands, Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, 2018 75 81
-------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--90.7% 2,884
-------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--95.3%
(Cost: $2,938) 3,031
-------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENT--3.1%
Yield--3.45%
Due--March 1997
(Cost: $100) 100 100
-------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.4%
(Cost: $3,038) 3,131
-------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES--1.6% 50
-------------------------------------------------------------------------------
NET ASSETS--100% $3,181
-------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $3,038,000 for federal income tax
purposes at February 28, 1997, the gross unrealized appreciation on investments
was $93,000, there was no gross unrealized depreciation.
See accompanying Notes to Financial Statements.
16
<PAGE> 17
PORTFOLIO STATISTICS
KEMPER OHIO TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- ----------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 48% 53%
- ----------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 39 45
- ----------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 6 --
- ----------------------------------------------------------------------------
CASH AND EQUIVALENTS 7 2
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
QUALITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- ----------------------------------------------------------------------------
<S> <C> <C>
AAA 71% 73%
- ----------------------------------------------------------------------------
AA 11 12
- ----------------------------------------------------------------------------
A 3 5
- ----------------------------------------------------------------------------
BBB 10 9
- ----------------------------------------------------------------------------
NOT RATED 5 1
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- ----------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 13% 1%
- ----------------------------------------------------------------------------
11-20 YEARS 55 58%
- ----------------------------------------------------------------------------
+21 YEARS 32 41
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- ----------------------------------------------------------------------------
<S> <C> <C>
15.7 YEARS 16.2 YEARS
- ----------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
OHIO TAX-FREE INCOME FUND
Portfolio of Investments at February 28, 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
12-01-00 @102 $1,000 $ 1,120
----------------------------------------------------------------------------------
Cleveland Public Power, First Mortgage, Rev., 7.00%, to be
called 11-15-04 @102 600 702
----------------------------------------------------------------------------------
Muskingum County, Franciscan Health Advisory Services, Inc.,
Rev., 7.50%, to be called 03-01-97 @ 102 30 31
----------------------------------------------------------------------------------
Northeast Ohio Regional Sewer District, Wastewater
Improvement, Rev., 6.50%, to be called 11-15-01 @ 101 300 330
----------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--5.6% 2,183
----------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -------------------------------------------------------------------------------------------------------
Building Auth.:
Administrative Building Funds Proj., Rev., 6.30%, 2011 140 148
Adult Correctional Building Fund Proj., Rev., 6.125%, 2012 310 324
James A. Rhodes State Office Tower, Rev., 6.25%, 2011 215 226
Juvenile Correctional Building Proj., Rev., 6.60%, 2014 200 223
----------------------------------------------------------------------------------
Higher Education Facility:
Dayton University, Rev., 6.60%, 2017 430 481
Dominican College, Rev., 6.625%, 2014 600 629
Rev., 6.125%, 2016 400 396
University of Cincinnati, Rev., 5.125%, 2024 500 469
----------------------------------------------------------------------------------
Housing Finance Agency:
Rev., 5.85% and 6.10%, 2016 and 2028 1,250 1,255
Single Family Mortgage, Rev., 7.85%, 2021 310 329
----------------------------------------------------------------------------------
Ohio State University, General Receipts, Rev., 5.00%, 2018 750 688
----------------------------------------------------------------------------------
State Turnpike, Rev., 6.00%, 2007 1,000 1,082
----------------------------------------------------------------------------------
Akron, Sewer System., Rev., 5.90%, 2011 385 406
----------------------------------------------------------------------------------
Archbold Area Local School District, Gen. Oblg., 5.90%, 2016 500 516
----------------------------------------------------------------------------------
Athens, Gen. Oblg., 6.25%, 2011 500 500
----------------------------------------------------------------------------------
Avon Local School District, Gen. Oblg., 6.50%, 2015 940 1,066
----------------------------------------------------------------------------------
Batavia Local School District, Gen. Oblg., 7.00%, 2014 500 571
----------------------------------------------------------------------------------
Beavercreek Local School District, Gen. Oblg., 6.60%, 2015 500 573
----------------------------------------------------------------------------------
Bowling Green State University, General Receipts, Rev.,
5.65%, 2011 445 458
----------------------------------------------------------------------------------
Cleveland Public Power, First Mortgage, Rev., 7.00% and
5.00%, 2017 and 2020 1,000 1,066
----------------------------------------------------------------------------------
Cleveland, Waterworks Improvement, First Mortgage, Rev.,
6.25%, 2015 640 677
----------------------------------------------------------------------------------
Columbus Municipal Airport Auth., Rev., 6.00%, 2014 750 773
----------------------------------------------------------------------------------
Crawford County, Gen. Oblg., 6.75%, 2019 700 786
----------------------------------------------------------------------------------
Cuyahoga County:
Gen. Oblg., 5.65%, 2018 1,000 1,022
Merida Health System, Rev., 6.25%, 2014 950 976
Multi-Family Housing, Rev., 6.50%, 2020 1,000 1,036
----------------------------------------------------------------------------------
Fayette County, Gen. Oblg., 5.90%, 2013 175 172
----------------------------------------------------------------------------------
Franklin County:
Gen. Oblg., 5.30%, 2011 500 505
Local School District, Gen. Oblg., 6.50%, 2013 500 562
----------------------------------------------------------------------------------
Green Springs, St. Francis Healthcare, Rev., 7.00%, 2014 400 406
----------------------------------------------------------------------------------
Highland Heights, Gen. Oblg., 6.15%, 2012 145 150
----------------------------------------------------------------------------------
Hillard School District, Gen. Oblg., 6.00%, 2006 500 545
----------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lakeview Local School District, Gen. Oblg., 6.90%, 2014 $ 700 $ 793
----------------------------------------------------------------------------------
Lakota, Gen. Oblg., 7.00%, 2008 500 590
----------------------------------------------------------------------------------
Lucas County, Public Improvement Water Utility, Rev., 6.05%
and 6.50%, 2013 and 2016 380 414
----------------------------------------------------------------------------------
Marion County, United Church Homes Proj., Rev., 6.375% and
6.30%, 2010 and 2015 700 707
----------------------------------------------------------------------------------
Napoleon, Health Care Facility, Lutheran Orphans' and Old
Folks' Home Society, Rev., 6.875%, 2023 480 508
----------------------------------------------------------------------------------
North Olmstead, Gen. Oblg., 6.20%, 2011 700 773
----------------------------------------------------------------------------------
North Royalton City School District, Gen. Oblg., 6.10%, 2019 500 530
----------------------------------------------------------------------------------
Olentangy Local School District, Gen. Oblg., 5.85% and
6.35%, 2007 and 2017 550 587
----------------------------------------------------------------------------------
Olmstead Falls School District, Gen. Oblg., 6.85%, 2011 250 283
----------------------------------------------------------------------------------
Sandusky County, Gen. Oblg., 6.20%, 2013 500 535
----------------------------------------------------------------------------------
South Euclid-Lyndhurst City School District, Gen. Oblg.,
6.40%, 2018 535 585
----------------------------------------------------------------------------------
Springboro Community City School District, School
Improvement, Gen. Oblg., 6.00%, 2011 500 543
----------------------------------------------------------------------------------
City of Springdale, Hospital Facilities First Mortgage,
Southwestern Ohio
Seniors Services, Rev., 6.00%, 2018 750 745
----------------------------------------------------------------------------------
Strongsville, Gen. Oblg., 6.70%, 2011 500 560
----------------------------------------------------------------------------------
Toledo, Gen. Oblg., 6.10% and 6.35%, 2014 and 2025 1,250 1,349
----------------------------------------------------------------------------------
Trumbull County Sewer Improvement, Gen. Oblg., 6.20%, 2014 500 533
----------------------------------------------------------------------------------
Tuscarawas Valley Local School District, Gen. Oblg., 6.60%,
2015 365 408
----------------------------------------------------------------------------------
Wayne Local School District, Gen Oblg., 6.45% and 6.60%,
2011 and 2016 355 404
----------------------------------------------------------------------------------
Willoughby Industrial Development, Rev., 6.875%, 2016 575 586
----------------------------------------------------------------------------------
Youngstown, Gen. Oblg., 6.125%, 2014 110 116
----------------------------------------------------------------------------------
Puerto Rico:
Electric Power Authority, Rev., 6.50%, 2006 750 851
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev., 6.50%, 2018 750 777
Finance Agcy., Rev., 6.00%, 2014 250 262
Highway and Transportation Auth., Rev., 6.25%, 2016 750 831
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 360 371
----------------------------------------------------------------------------------
Virgin Islands, Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, 2018 225 244
----------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--87.4% 33,901
----------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--93.0%
(Cost: $34,405) 36,084
----------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS
Yield--3.40% to 3.50%
Due--March 1997
----------------------------------------------------------------------------------
State Air Quality Development Auth., Rev. 1,000 1,000
----------------------------------------------------------------------------------
Other 1,200 1,200
----------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--5.7%
(Cost: $2,200) 2,200
----------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.7%
(Cost: $36,605) 38,284
----------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.3% 485
----------------------------------------------------------------------------------
NET ASSETS--100% $38,769
----------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $36,605,000 for federal income tax purposes
at February 28, 1997, the gross unrealized appreciation was $1,687,000, the
gross unrealized depreciation was $8,000 and the net unrealized appreciation on
investments was $1,679,000.
See accompanying Notes to Financial Statements.
19
<PAGE> 20
PORTFOLIO STATISTICS
KEMPER TEXAS TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- ----------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 62% 64%
- ----------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 31 34
- ----------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 5 --
- ----------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 2
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
QUALITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- ----------------------------------------------------------------------------
<S> <C> <C>
AAA 75% 74%
- ----------------------------------------------------------------------------
AA 8 8
- ----------------------------------------------------------------------------
A 6 11
- ----------------------------------------------------------------------------
BBB 11 7
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- ----------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 8% 1%
- ----------------------------------------------------------------------------
11-20 YEARS 64 72
- ----------------------------------------------------------------------------
+21 YEARS 28 27
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- ----------------------------------------------------------------------------
<S> <C> <C>
16.6 YEARS 14.4 YEARS
- ----------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
20
<PAGE> 21
PORTFOLIO OF INVESTMENTS
TEXAS TAX-FREE INCOME FUND
Portfolio of Investments at February 28, 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
04-15-02 @ 102 $ 450 $ 519
----------------------------------------------------------------------------------
Travis County Housing Finance Corp., Gen. Oblg., 6.75%, to
be called 09-01-01 @ 100 75 82
----------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--4.7% 601
----------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -------------------------------------------------------------------------------------------------------
Department of Housing and Community Affairs:
NHP Foundation, Asmara Proj. Rev., 6.40%, 2027 150 153
Single Family Mortgage, Rev., 6.00%, 2017 250 254
----------------------------------------------------------------------------------
Housing Agcy., Single Family Mortgage, Rev., 7.15%, 2012 60 63
----------------------------------------------------------------------------------
Public Financing Auth., Gen. Oblg., 7.00%, 2012 221 225
----------------------------------------------------------------------------------
State Veterans' Land, Gen. Oblg., 6.40%, 2024 350 369
----------------------------------------------------------------------------------
Turnpike Auth., Dallas North Tollway System, Rev., 5.00%,
2025 150 137
----------------------------------------------------------------------------------
Abilene Higher Education Facilities Corp., Abilene Christian
University Proj., Rev., 6.25%, 2011 300 303
----------------------------------------------------------------------------------
Austin:
Airport, Rev., 6.20%, 2015 585 611
Combined Utility Systems, Rev., zero coupon, 2010 600 289
----------------------------------------------------------------------------------
Bexar County Housing Finance Dev. Corp., Multi-Family
Housing, Rev., 6.875%, 2012 250 262
----------------------------------------------------------------------------------
Brazos River Auth., Texas Utilities Electric Company Proj.,
Rev., 8.125%, 2020 350 382
----------------------------------------------------------------------------------
Cameron County Housing Finance Corp., Single Family
Mortgage, Rev., 6.75%, 2025 365 384
----------------------------------------------------------------------------------
Canadian River Municipal Water Auth., Rev., 5.875%, 2016 250 255
----------------------------------------------------------------------------------
Circle C, Utility System, District Number Three, Rev.,
6.50%, 2009 250 270
----------------------------------------------------------------------------------
Conroe Independent School District, Gen. Oblg., 5.25%, 2021 150 142
----------------------------------------------------------------------------------
Corpus Christi, Utility System, Rev., 5.25%, 2013 300 295
----------------------------------------------------------------------------------
Dallas-Fort Worth International Airport, Rev., 6.00%, 2014 125 124
----------------------------------------------------------------------------------
Denton, Utility System, Rev., 6.50%, 2009 150 159
----------------------------------------------------------------------------------
Dripping Springs, Independent School District, Gen. Oblg.,
5.80%, 2013 280 289
----------------------------------------------------------------------------------
El Paso International Airport, Rev., 5.50%, 2009 150 151
----------------------------------------------------------------------------------
Fort Bend County:
Independent School District, Gen. Oblg., 5.00%, 2018 300 280
Levee Improvement District Number 2, Gen Oblg., 6.625%, 2008 200 215
----------------------------------------------------------------------------------
Georgetown Higher Education Finance Corp., Southwestern
University Proj., Rev., 6.30%, 2014 250 259
----------------------------------------------------------------------------------
Grand Prairie, Independent School District, Gen. Oblg.,
5.20%, 2024 200 188
----------------------------------------------------------------------------------
Gulf Coast Waste Disposal Auth., Rev., 6.875%, 2028 250 262
----------------------------------------------------------------------------------
Harris County:
Criminal Justice Center, Gen. Oblg., 7.50%, 2005 165 196
Health Facilities Dev. Corp., St. Luke's Episcopal
Hospital Proj., Rev., 6.75%, 2021 120 129
Hospital District Mortgage, Rev., 7.40%, 2010 60 72
Toll Road Senior Lien, Rev., 6.25%, 2015 250 267
----------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harrison County, Hallsville Independent School District,
Gen. Oblg., 6.50%, 2009 $ 150 $ 166
----------------------------------------------------------------------------------
Houston:
Higher Education Finance Corp., University of St. Thomas
Proj., Rev., 7.25%, 2007 300 322
Independent School District, Gen. Oblg., 6.30%, 2014 500 554
Water and Sewer System, Rev., 6.25%, 2005 200 220
----------------------------------------------------------------------------------
Lockhart:
Correctional Facilities Financing Corp., Rev., 6.625%, 2012 200 215
Tax and Utility System, Gen. Oblg., 5.875%, 2013 200 207
----------------------------------------------------------------------------------
Lower Colorado River Auth., Junior Lien, Rev., 5.25%, 2015 150 149
----------------------------------------------------------------------------------
North Central Health Facilities Dev. Corp., Presbysterian
Healthcare System, Rev., 6.625%, 2011 100 106
----------------------------------------------------------------------------------
Port Arthur, Gen. Oblg., 6.125%, 2019 245 253
----------------------------------------------------------------------------------
Red River Auth., Public Service Utilities Company, Rev.,
6.00%, 2020 430 443
----------------------------------------------------------------------------------
Socorro Independent School District, Gen. Oblg., 6.625%,
2013 90 96
----------------------------------------------------------------------------------
Spring Independent School District, Gen. Oblg., 6.375%, 2016 400 428
----------------------------------------------------------------------------------
Tarrant County Health Facilities Dev. Corp., Health System,
Rev., 6.00%, 2024 200 204
----------------------------------------------------------------------------------
Travis County Housing Finance Corp.:
Residential Mortgage, Senior Rev., 7.00%, 2011 225 239
Single Family Mortgage, Rev., 6.75%, 2014 130 135
----------------------------------------------------------------------------------
Trinity River Auth., Denton Creek Wastewater System, Rev.,
6.45%, 2015 390 421
----------------------------------------------------------------------------------
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 500 472
----------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Gen. Oblg., 6.25%, 2013 150 167
Highway and Transportation Auth., Rev., 5.50%, 2015 150 153
----------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--93.7% 12,033
----------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.4%
(Cost: $12,069) 12,634
----------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.6% 203
----------------------------------------------------------------------------------
NET ASSETS--100% $12,837
----------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $12,069,000 for federal income tax purposes
at February 28, 1997, gross unrealized appreciation was $568,000, the gross
unrealized depreciation was $3,000 and the net unrealized appreciation on
investments was $565,000.
See accompanying Notes to Financial Statements.
22
<PAGE> 23
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------
Investments, at value (Cost: $972,758, $3,038, $36,605 and
$12,069, respectively) $1,021,120 3,131 38,284 12,634
- -----------------------------------------------------------------------------------------------------
Cash 330 -- 39 60
- -----------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 206 -- 10 --
- -----------------------------------------------------------------------------------------------------
Investments sold 14,823 -- 3 144
- -----------------------------------------------------------------------------------------------------
Interest 15,394 62 541 181
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,051,873 3,193 38,877 13,019
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------------------------------------
Cash overdraft -- 3 -- --
- -----------------------------------------------------------------------------------------------------
Payable for:
Dividends 1,316 3 45 16
- -----------------------------------------------------------------------------------------------------
Fund shares redeemed 341 -- -- --
- -----------------------------------------------------------------------------------------------------
Investments purchased 14,489 -- 3 144
- -----------------------------------------------------------------------------------------------------
Management fee 456 1 18 6
- -----------------------------------------------------------------------------------------------------
Administrative services fee 154 -- 7 2
- -----------------------------------------------------------------------------------------------------
Distribution services fee 14 1 6 --
- -----------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 135 1 11 --
- -----------------------------------------------------------------------------------------------------
Trustees' fees and other 447 3 18 14
- -----------------------------------------------------------------------------------------------------
Total liabilities 17,352 12 108 182
- -----------------------------------------------------------------------------------------------------
NET ASSETS $1,034,521 3,181 38,769 12,837
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------------------------------------
Paid-in capital $ 993,151 3,091 37,328 12,290
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (6,992) (3) (238) (18)
- -----------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 48,362 93 1,679 565
- -----------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $1,034,521 3,181 38,769 12,837
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $1,010,869 1,876 29,629 11,951
- -----------------------------------------------------------------------------------------------------
Shares outstanding, no par value 136,573 187 2,939 1,161
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $7.40 10.03 10.08 10.29
- -----------------------------------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
4.71% of net asset value or 4.50% of offering price) $7.75 10.50 10.55 10.77
- -----------------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $ 22,351 1,112 8,697 720
- -----------------------------------------------------------------------------------------------------
Shares outstanding, no par value 3,016 111 863 70
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price (subject to
contingent deferred sales charge) per share
(net assets / shares outstanding) $7.41 10.02 10.08 10.29
- -----------------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $ 1,301 193 443 166
- -----------------------------------------------------------------------------------------------------
Shares outstanding, no par value 176 19 44 16
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price (subject to
contingent deferred sales charge) per share
(net assets / shares outstanding) $7.39 10.02 10.08 10.29
- -----------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------------------------------------------
Interest income $30,783 88 1,068 390
- -----------------------------------------------------------------------------------------------------------
Expenses:
Management fee 2,739 9 104 37
- -----------------------------------------------------------------------------------------------------------
Administrative services fee 859 4 40 12
- -----------------------------------------------------------------------------------------------------------
Distribution services fee 77 4 31 3
- -----------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 386 2 20 9
- -----------------------------------------------------------------------------------------------------------
Professional fees 69 -- 2 1
- -----------------------------------------------------------------------------------------------------------
Reports to shareholders 147 -- 5 2
- -----------------------------------------------------------------------------------------------------------
Trustees' fees and other 42 6 9 3
- -----------------------------------------------------------------------------------------------------------
Total expenses before expense waiver 4,319 25 211 67
- -----------------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment manager -- 1 -- --
- -----------------------------------------------------------------------------------------------------------
Total expenses after expense waiver 4,319 24 211 67
- -----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $26,464 64 857 323
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments
(including options purchased) 13,034 28 162 128
- -----------------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (3,155) (11) (222) (51)
- -----------------------------------------------------------------------------------------------------------
Net realized gain (loss) 9,879 17 (60) 77
- -----------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 7,949 53 722 173
- -----------------------------------------------------------------------------------------------------------
Net gain on investments 17,828 70 662 250
- -----------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $44,292 134 1,519 573
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
24
<PAGE> 25
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN
-------------------------- --------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
FEBRUARY 28, AUGUST 31, FEBRUARY 28, AUGUST 31,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $26,464 55,646 64 132
- -----------------------------------------------------------------------------------------------------------------
Net realized gain 9,879 7,354 17 38
- -----------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 7,949 240 53 (1)
- -----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 44,292 63,240 134 169
- -----------------------------------------------------------------------------------------------------------------
Distribution from net investment income (26,464) (55,646) (64) (132)
- -----------------------------------------------------------------------------------------------------------------
Distribution from net realized gain on investments (5,606) (12,275) (35) --
- -----------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (32,070) (67,921) (99) (132)
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (18,239) (42,013) (140) 170
- -----------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (6,017) (46,694) (105) 207
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------------------------
Beginning of period 1,040,538 1,087,232 3,286 3,079
- -----------------------------------------------------------------------------------------------------------------
END OF PERIOD $1,034,521 1,040,538 3,181 3,286
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OHIO TEXAS
-------------------------- --------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
FEBRUARY 28, AUGUST 31, FEBRUARY 28, AUGUST 31,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $857 1,614 323 684
- -----------------------------------------------------------------------------------------------------------------
Net realized gain (loss) (60) 390 77 332
- -----------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 722 (35) 173 (18)
- -----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,519 1,969 573 998
- -----------------------------------------------------------------------------------------------------------------
Distribution from net investment income (857) (1,614) (323) (684)
- -----------------------------------------------------------------------------------------------------------------
Distribution from net realized gain on investments (114) -- (326) (358)
- -----------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (971) (1,614) (649) (1,042)
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions 1,121 5,295 (682) (1,238)
- -----------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,669 5,650 (758) (1,282)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------------------------
Beginning of period 37,100 31,450 13,595 14,877
- -----------------------------------------------------------------------------------------------------------------
END OF PERIOD $38,769 37,100 12,837 13,595
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper California Tax-Free Income Fund, Kemper
Michigan Tax-Free Income Fund, Kemper Ohio Tax-Free
Income Fund and Kemper Texas Tax-Free Income Fund
(collectively the Funds) are four of eight
investment portfolios comprising the Kemper State
Tax-Free Income Series (the Trust). The remaining
portfolios are Kemper Florida, Kemper New Jersey,
Kemper New York and Kemper Pennsylvania Tax-Free
Income Funds. The Trust is an open-end management
investment company organized as a business trust
under the laws of Massachusetts.
Each Fund offers three classes of shares. Class A
shares are sold to investors subject to an initial
sales charge. Class B shares are sold without an
initial sales charge but are subject to higher
ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable on certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Differences in class expenses
will result in the payment of different per share
income dividends by class. All shares of each Fund
have 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.
26
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
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 for the six
months ended February 28, 1997.
DIVIDENDS TO SHAREHOLDERS. Each Fund declares and
records a daily dividend equal to its net
investment income for that day, to holders of
shares for which payment has been received. Income
dividends are distributed monthly. Net realized
capital gains, if any, will be distributed at least
annually. Dividends are determined in accordance
with income tax principles which may treat certain
transactions differently than generally accepted
accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Trust has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI), and each Fund pays a management fee at an
annual rate of .55% of the first $250 million of
average daily net assets declining to .40% of
average daily net assets in excess of $12.5
billion. Management fees paid for the six months
ended February 28, 1997 are as follows:
<TABLE>
<S> <C>
California $2,739,000
Michigan 9,000
Ohio 104,000
Texas 37,000
</TABLE>
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Trust has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of each Fund's Class A shares
for the six months ended February 28, 1997 are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS
RETAINED BY KDI ALLOWED BY KDI TO FIRMS
--------------- -----------------------
<S> <C> <C>
California $ 68,000 425,000
Michigan -- 1,000
Ohio 5,000 27,000
Texas 1,000 3,000
</TABLE>
For services under the distribution services
agreement, each Fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares of each Fund. In addition, KDI receives any
contingent deferred sales charges (CDSC) from
redemptions of Class B and Class C 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
27
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
connection with the redemption of such shares for
the six months ended February 28, 1997 are as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION COMMISSIONS AND
FEES AND CDSC DISTRIBUTION FEES
RECEIVED BY KDI PAID BY KDI TO FIRMS
--------------- --------------------
<S> <C> <C>
California $103,000 210,000
Michigan 5,000 2,000
Ohio 43,000 68,000
Texas 3,000 9,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, each Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
arrangements with financial services firms that
provide these services and pays these firms based
on assets of Fund accounts the firms service.
Administrative services fees (ASF) paid for the six
months ended February 28, 1997 are as follows:
<TABLE>
<CAPTION>
ASF ASF
PAID BY THE PAID BY
FUND TO KDI KDI TO FIRMS
----------- ------------
<S> <C> <C>
California $859,000 861,000
Michigan 4,000 4,000
Ohio 40,000 42,000
Texas 12,000 13,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds' transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Trust. Under the agreement,
for the six months ended February 28, 1997, KSvC
received shareholder services fees as follows:
<TABLE>
<CAPTION>
SHAREHOLDERS SERVICES FEES
REMITTED TO KSVC
--------------------------
<S> <C>
California $191,000
Michigan 1,000
Ohio 10,000
Texas 4,000
</TABLE>
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of ZKI.
For the six months ended February 28, 1997, the
Funds made no payments to its officers and incurred
trustees' fees aggregating $16,000 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 $1,000 during the six months
ended February 28, 1997.
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
4 INVESTMENT
TRANSACTIONS For the six months ended February 28, 1997,
investment transactions (excluding short-term
instruments) are as follows (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
---------- -------- ------ -----
<S> <C> <C> <C> <C>
Purchases $408,163 1,377 12,101 7,125
Proceeds from sales 445,340 1,582 13,209 8,123
</TABLE>
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the Funds (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 1997 1996
---------------------- ------------------------
CALIFORNIA SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 7,690 $ 57,212 10,345 $ 76,744
-------------------------------------------------------------------------------
Class B 833 6,194 1,285 9,551
-------------------------------------------------------------------------------
Class C 59 440 105 778
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 2,508 18,582 5,338 39,708
-------------------------------------------------------------------------------
Class B 42 315 59 440
-------------------------------------------------------------------------------
Class C 4 27 4 26
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES REDEEMED
Class A (13,370) (99,147) (22,338) (165,506)
-------------------------------------------------------------------------------
Class B (247) (1,833) (473) (3,516)
-------------------------------------------------------------------------------
Class C (4) (29) (32) (238)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 6 50 63 472
-------------------------------------------------------------------------------
Class B (7) (50) (63) (472)
-------------------------------------------------------------------------------
NET DECREASE FROM CAPITAL
SHARE TRANSACTIONS $(18,239) $ (42,013)
-------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1997 AUGUST 31, 1996
------------------- ----------------------
MICHIGAN SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
----------------------------------------------------------------------------
Class A 16 $ 157 112 $1,127
----------------------------------------------------------------------------
Class B 2 23 40 403
----------------------------------------------------------------------------
Class C 17 175 12 125
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
----------------------------------------------------------------------------
Class A 5 49 7 65
----------------------------------------------------------------------------
Class B 3 25 3 29
----------------------------------------------------------------------------
Class C 1 3 1 10
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SHARES REDEEMED
----------------------------------------------------------------------------
Class A (50) (496) (76) (754)
----------------------------------------------------------------------------
Class B (3) (26) (21) (210)
----------------------------------------------------------------------------
Class C (5) (50) (62) (625)
----------------------------------------------------------------------------
NET INCREASE (DECREASE)
FROM CAPITAL SHARE
TRANSACTIONS $(140) $ 170
----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1997 AUGUST 31, 1996
-------------------- -------------------
OHIO SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
----------------------------------------------------------------------------
Class A 175 1,767 655 $6,545
----------------------------------------------------------------------------
Class B 166 1,669 292 2,917
----------------------------------------------------------------------------
Class C 17 179 15 149
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
----------------------------------------------------------------------------
Class A 51 508 86 845
----------------------------------------------------------------------------
Class B 12 119 16 162
----------------------------------------------------------------------------
Class C 1 7 1 9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SHARES REDEEMED
----------------------------------------------------------------------------
Class A (256) (2,573) (440) (4,363)
----------------------------------------------------------------------------
Class B (53) (533) (93) (922)
----------------------------------------------------------------------------
Class C (2) (22) (5) (47)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CONVERSION OF SHARES
----------------------------------------------------------------------------
Class A -- -- 1 8
----------------------------------------------------------------------------
Class B -- -- (1) (8)
----------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE
TRANSACTIONS $1,121 $5,295
----------------------------------------------------------------------------
</TABLE>
30
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1997 AUGUST 31, 1996
-------------------- ---------------------
TEXAS SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
----------------------------------------------------------------------------
Class A 17 $ 177 87 $ 912
----------------------------------------------------------------------------
Class B 34 347 14 150
----------------------------------------------------------------------------
Class C -- -- -- --
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
----------------------------------------------------------------------------
Class A 41 431 64 666
----------------------------------------------------------------------------
Class B 1 11 1 9
----------------------------------------------------------------------------
Class C 1 8 1 11
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SHARES REDEEMED
----------------------------------------------------------------------------
Class A (159) (1,656) (263) (2,779)
----------------------------------------------------------------------------
Class B -- -- (15) (151)
----------------------------------------------------------------------------
Class C -- -- (5) (56)
----------------------------------------------------------------------------
NET DECREASE FROM CAPITAL
SHARE TRANSACTIONS $ (682) $(1,238)
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Funds 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 February 28, 1997,
the market values of assets pledged by the Funds to
cover margin requirements for open futures
positions were $6,054,000, $14,000, $416,000 and
$117,000 for the California, Michigan, Ohio and
Texas Funds, respectively. The Funds also had
liquid securities in their portfolios in excess of
the face amount of the following short Treasury
Bond futures open at February 28, 1997:
<TABLE>
<CAPTION>
EXPIRATION GAIN AT
FUND FACE AMOUNT MONTH 2/28/97
----------------------------------------------------------------
<S> <C> <C> <C>
California $33,398,000 Mar '97 $681,000
16,455,000 June '97 --
---------------------------------------------------------------
Michigan 226,000 Mar '97 5,000
110,000 June '97 --
---------------------------------------------------------------
Ohio 1,585,000 Mar '97 32,000
442,000 June '97 --
---------------------------------------------------------------
Texas 453,000 Mar '97 9,000
331,000 June '97 --
---------------------------------------------------------------
</TABLE>
31
<PAGE> 32
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------
CLASS A
-------------------------------------------------
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
CALIFORNIA 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.31 7.35 7.22 8.01 7.57
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .19 .39 .39 .39 .44
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .13 .04 .17 (.44) .53
- ----------------------------------------------------------------------------------------------------
Total from investment operations .32 .43 .56 (.05) .97
- ----------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .19 .39 .39 .39 .44
- ----------------------------------------------------------------------------------------------------
Distribution from net realized gain .04 .08 .04 .35 .09
- ----------------------------------------------------------------------------------------------------
Total dividends .23 .47 .43 .74 .53
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $7.40 7.31 7.35 7.22 8.01
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.37% 5.92 8.13 (.74) 13.21
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Expenses .81% .78 .74 .74 .63
- ----------------------------------------------------------------------------------------------------
Net investment income 5.10% 5.18 5.53 5.30 5.68
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------- -----------------------------------------
CLASS B CLASS C
-------------------------------------- -----------------------------------------
SIX MONTHS YEAR MAY 31 SIX MONTHS YEAR MAY 31
ENDED ENDED TO ENDED ENDED TO
FEBRUARY 28, AUGUST 31, AUGUST 31, FEBRUARY 28, AUGUST 31, AUGUST 31,
1997 1996 1995 1994 1997 1996 1995 1994
- -------------------------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------- -----------------------------------------
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 .16 .32 .33 .08 .16 .32 .33 .08
- -------------------------------------------------------------------------- -----------------------------------------
Net realized and unrealized
gain (loss) .13 .05 .17 (.01) .12 .05 .16 (.01)
- -------------------------------------------------------------------------- -----------------------------------------
Total from investment operations .29 .37 .50 .07 .28 .37 .49 .07
- -------------------------------------------------------------------------- -----------------------------------------
Less dividends:
Distribution from net
investment income .16 .32 .33 .08 .16 .32 .33 .08
- -------------------------------------------------------------------------- -----------------------------------------
Distribution from net realized
gain .04 .08 .04 -- .04 .08 .04 --
- -------------------------------------------------------------------------- -----------------------------------------
Total dividends .20 .40 .37 .08 .20 .40 .37 .08
- -------------------------------------------------------------------------- -----------------------------------------
Net asset value, end of period $7.41 7.32 7.35 7.22 7.39 7.31 7.34 7.22
- -------------------------------------------------------------------------- -----------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.93% 5.16 7.17 1.05 3.80 5.15 7.08 .96
- -------------------------------------------------------------------------- -----------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------- -----------------------------------------
Expenses 1.64% 1.63 1.60 1.60 1.62 1.64 1.56 1.56
- -------------------------------------------------------------------------- -----------------------------------------
Net investment income 4.27% 4.33 4.67 4.48 4.29 4.32 4.71 4.76
- -------------------------------------------------------------------------- -----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $1,034,521 1,040,538 1,087,232 1,168,449 1,331,377
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 80% 100 69 37 59
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------
CLASS A
------------------------------------------
SIX MONTHS MARCH 15
ENDED YEAR ENDED TO
FEBRUARY 28, AUGUST 31, AUGUST 31,
MICHIGAN 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.92 9.76 9.50
- ----------------------------------------------------------------------------------
Income from investment operations:
Net investment income .21 .44 .22
- ----------------------------------------------------------------------------------
Net realized and unrealized gain .22 .16 .26
- ----------------------------------------------------------------------------------
Total from investment operations .43 .60 .48
- ----------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .21 .44 .22
- ----------------------------------------------------------------------------------
Distribution from net realized gain .11 -- --
- ----------------------------------------------------------------------------------
Total dividends .32 .44 .22
- ----------------------------------------------------------------------------------
Net asset value, end of period $10.03 9.92 9.76
- ----------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.30% 6.19 5.00
- ----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.27% 1.21 .41
- ----------------------------------------------------------------------------------
Net investment income 4.20% 4.36 4.82
- ----------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------
Expenses 1.44% 1.53 .96
- ----------------------------------------------------------------------------------
Net investment income 4.03% 4.04 4.27
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------- ---------------------------------------
CLASS B CLASS C
-------------------------------------- ---------------------------------------
SIX MONTHS MARCH 15 SIX MONTHS MARCH 15
ENDED YEAR ENDED TO ENDED YEAR ENDED TO
FEBRUARY 28, AUGUST 31, AUGUST 31, FEBRUARY 28, AUGUST 31, AUGUST 31,
1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------ ---------------------------------------
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 .17 .36 .18 .17 .37 .18
- ------------------------------------------------------------------------------ ---------------------------------------
Net realized and unrealized gain .22 .14 .27 .22 .15 .26
- ------------------------------------------------------------------------------ ---------------------------------------
Total from investment operations .39 .50 .45 .39 .52 .44
- ------------------------------------------------------------------------------ ---------------------------------------
Less dividends:
Distribution from net investment income .17 .36 .18 .17 .37 .18
- ------------------------------------------------------------------------------ ---------------------------------------
Distribution from net realized gain .11 -- -- .11 -- --
- ------------------------------------------------------------------------------ ---------------------------------------
Total dividends .28 .36 .18 .28 .37 .18
- ------------------------------------------------------------------------------ ---------------------------------------
Net asset value, end of period $10.02 9.91 9.77 10.02 9.91 9.76
- ----------------------------------------------------------------------------- ---------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.93% 5.19 4.72 3.91 5.36 4.63
- ------------------------------------------------------------------------------ ---------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------ ---------------------------------------
Expenses absorbed by the Fund 1.99% 1.94 1.21 1.86 1.64 1.21
- ------------------------------------------------------------------------------ ---------------------------------------
Net investment income 3.48% 3.63 4.02 3.61 3.93 4.02
- ------------------------------------------------------------------------------ ---------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------ ---------------------------------------
Expenses 2.16% 2.26 1.76 2.03 1.96 1.76
- ------------------------------------------------------------------------------ ---------------------------------------
Net investment income 3.31% 3.31 3.47 3.44 3.61 3.47
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR MARCH 15
ENDED ENDED TO
FEBRUARY 28, AUGUST 31, AUGUST 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets at end of period (in thousands) $3,181 3,286 3,079
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 89% 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 waive certain operating expenses of the Fund. "Other
ratios to average net assets" are computed without expense waiver or absorption.
33
<PAGE> 34
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------
Class A
-------------------------------------------------------
SIX MONTHS YEAR ENDED AUGUST MARCH 22
ENDED 31, TO
FEBRUARY 28, ------------------ AUGUST 31,
OHIO 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.93 9.81 9.56 9.98 9.50
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .24 .48 .50 .53 .24
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .18 .12 .25 (.41) .48
- ----------------------------------------------------------------------------------------------------
Total from investment operations .42 .60 .75 .12 .72
- ----------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .24 .48 .50 .53 .24
- ----------------------------------------------------------------------------------------------------
Distribution from net realized gain .03 -- -- .01 --
- ----------------------------------------------------------------------------------------------------
Total dividends .27 .48 .50 .54 .24
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $10.08 9.93 9.81 9.56 9.98
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.20% 6.16 8.20 1.23 7.54
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund .93% .91 .63 .02 --
- ----------------------------------------------------------------------------------------------------
Net investment income 4.68% 4.78 5.27 5.44 5.21
- ----------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses .93% .91 .83 .82 .86
- ----------------------------------------------------------------------------------------------------
Net investment income 4.68% 4.78 5.07 4.64 4.36
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------- --------------------------------------
CLASS B CLASS C
------------------------------------- --------------------------------------
SIX MONTHS YEAR MAY 31 SIX MONTHS YEAR MAY 31
ENDED ENDED TO ENDED ENDED TO
FEBRUARY 28, AUGUST 31, AUGUST 31, FEBRUARY 28, AUGUST 31, AUGUST 31,
1997 1996 1995 1994 1997 1996 1995 1994
- ---------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------- --------------------------------------
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 .19 .39 .44 .14 .20 .39 .44 .14
- ---------------------------------------------------------------------------------- --------------------------------------
Net realized and unrealized gain .18 .12 .25 .02 .18 .12 .25 .02
- ---------------------------------------------------------------------------------- --------------------------------------
Total from investment operations .37 .51 .69 .16 .38 .51 .69 .16
- ---------------------------------------------------------------------------------- --------------------------------------
Less dividends:
Distribution from net investment income .19 .39 .44 .14 .20 .39 .44 .14
- ---------------------------------------------------------------------------------- --------------------------------------
Distribution from net realized gain .03 -- -- -- .03 -- -- --
- ---------------------------------------------------------------------------------- --------------------------------------
Total dividends .22 .39 .44 .14 .23 .39 .44 .14
- ---------------------------------------------------------------------------------- --------------------------------------
Net asset value, end of period $10.08 9.93 9.81 9.56 10.08 9.93 9.81 9.56
- ---------------------------------------------------------------------------------- --------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.78% 5.30 7.57 1.55 3.80 5.28 7.56 1.55
- ---------------------------------------------------------------------------------- --------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------- --------------------------------------
Expenses absorbed by the Fund 1.72% 1.73 1.32 .22 1.70 1.74 1.27 .21
- ---------------------------------------------------------------------------------- --------------------------------------
Net investment income 3.89% 3.96 4.58 4.72 3.91 3.95 4.63 5.04
- ---------------------------------------------------------------------------------- --------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------- --------------------------------------
Expenses 1.72% 1.73 1.75 1.72 1.70 1.74 1.69 1.67
- ---------------------------------------------------------------------------------- --------------------------------------
Net investment income 3.89% 3.96 4.15 3.22 3.91 3.95 4.21 3.58
- ---------------------------------------------------------------------------------- --------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------
SIX MONTHS MARCH 22
ENDED YEAR ENDED AUGUST 31, TO
FEBRUARY 28, ------------------------ AUGUST 31,
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $38,769 37,100 31,450 23,769 15,530
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 68% 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.
34
<PAGE> 35
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Class A
-------------------------------------------------------------------
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
TEXAS 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.36 10.42 10.14 10.69 9.95
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .25 .51 .54 .56 .60
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .19 .21 .36 (.42) .74
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations .44 .72 .90 .14 1.34
- -----------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .25 .51 .54 .56 .60
- -----------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .26 .27 .08 .13 --
- -----------------------------------------------------------------------------------------------------------------------
Total dividends .51 .78 .62 .69 .60
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.29 10.36 10.42 10.14 10.69
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.33% 7.04 9.28 1.28 13.89
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund .95% .92 .70 .36 .08
- -----------------------------------------------------------------------------------------------------------------------
Net investment income 4.89% 4.88 5.37 5.38 5.79
- -----------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------------------------------------
Expenses .95% .92 .89 .90 .79
- -----------------------------------------------------------------------------------------------------------------------
Net investment income 4.89% 4.88 5.18 4.82 5.08
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------- ------------------------------------------
CLASS B CLASS C
----------------------------------------- ------------------------------------------
SIX MONTHS YEAR MAY 31 SIX MONTHS YEAR MAY 31
ENDED ENDED TO ENDED ENDED TO
FEBRUARY 28, AUGUST 31, AUGUST 31, FEBRUARY 28, AUGUST 31, AUGUST 31,
1997 1996 1995 1994 1997 1996 1995 1994
- ------------------------------------------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------ ------------------------------------------
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 .21 .42 .45 .12 .21 .42 .46 .12
- ------------------------------------------------------------------------------ ------------------------------------------
Net realized and unrealized gain
(loss) .19 .21 .35 (.02) .19 .21 .35 (.02)
- ------------------------------------------------------------------------------ ------------------------------------------
Total from investment operations .40 .63 .80 .10 .40 .63 .81 .10
- ------------------------------------------------------------------------------ ------------------------------------------
Less dividends:
Distribution from net investment income .21 .42 .45 .12 .21 .42 .46 .12
- ------------------------------------------------------------------------------ ------------------------------------------
Distribution from net realized gain .26 .27 .08 -- .26 .27 .08 --
- ------------------------------------------------------------------------------ ------------------------------------------
Total dividends .47 .69 .53 .12 .47 .69 .54 .12
- ------------------------------------------------------------------------------ ------------------------------------------
Net asset value, end of period $10.29 10.36 10.42 10.15 10.29 10.36 10.42 10.15
- ------------------------------------------------------------------------------ ------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.91% 6.11 8.16 .92 3.92 6.13 8.27 .88
- ------------------------------------------------------------------------------ ------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------ ------------------------------------------
Expenses absorbed by the Fund 1.76% 1.79 1.54 1.24 1.75 1.76 1.50 1.23
- ------------------------------------------------------------------------------ ------------------------------------------
Net investment income 4.08% 4.01 4.53 4.44 4.09 4.04 4.57 3.96
- ------------------------------------------------------------------------------ ------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------ ------------------------------------------
Expenses 1.76% 1.79 1.73 1.78 1.75 1.76 1.69 1.77
- ------------------------------------------------------------------------------ ------------------------------------------
Net investment income 4.08% 4.01 4.34 3.90 4.09 4.04 4.38 3.42
- ------------------------------------------------------------------------------ ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, -------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $12,837 13,595 14,877 15,409 12,341
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 110% 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.
NOTE FOR ALL FUNDS: Total return does not reflect the effect of sales charges.
35
<PAGE> 36
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
DAVID W. BELIN CHARLES R. MANZONI, JR.
Trustee Vice President
LEWIS A. BURNHAM CHRISTOPHER J. MIER
Trustee Vice President
DONALD L. DUNAWAY JOHN E. NEAL
Trustee Vice President
ROBERT B. HOFFMAN PHILIP J. COLLORA
Trustee Vice President and
Secretary
DONALD R. JONES
Trustee JEROME L. DUFFY
Treasurer
DOMINIQUE P. MORAX
Trustee ELIZABETH C. WERTH
Assistant Secretary
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
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LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
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SHAREHOLDER SERVICE AGENT ZURICH KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
(800) 621-1048
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CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
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INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
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This report is not to be distributed
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KSTIS - 3 (4/97) 1030830
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