<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED FEBRUARY 28, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
California Tax-Free Income Refund
Michigan Tax-Free Income Refund
Ohio Tax-Free Income Refund
Texas Tax-Free Income Refund
KEMPER
STATE TAX-FREE INCOME SERIES
"... The funds benefited from the strong rally
in the municipal bond market from October 24
through early January. ..."
[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
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME
FUNDS' TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 28, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
CALIFORNIA
<TABLE>
<S> <C>
CLASS A 4.85%
CLASS B 4.55%
CLASS C 4.12%
LIPPER CALIFORNIA TAX-FREE INCOME FUNDS
CATEGORY AVERAGE* 5.06%
- -------------------------------------------------------------------------------
</TABLE>
[BAR GRAPH]
- --------------------------------------------------------------------------------
MICHIGAN
<TABLE>
<S> <C>
CLASS A 5.27%
CLASS B 4.99%
CLASS C 4.98%
LIPPER MICHIGAN TAX-FREE INCOME FUNDS
CATEGORY AVERAGE* 4.78%
- -------------------------------------------------------------------------------
</TABLE>
[BAR GRAPH]
- --------------------------------------------------------------------------------
OHIO
<TABLE>
<S> <C>
CLASS A 5.09%
CLASS B 4.67%
CLASS C 4.67%
LIPPER OHIO TAX-FREE INCOME FUNDS
CATEGORY AVERAGE* 4.57%
- -------------------------------------------------------------------------------
</TABLE>
[BAR GRAPH]
- --------------------------------------------------------------------------------
TEXAS
<TABLE>
<S> <C>
CLASS A 5.10%
CLASS B 4.68%
CLASS C 4.68%
LIPPER TEXAS TAX-FREE INCOME FUNDS
CATEGORY AVERAGE* 4.83%
- -------------------------------------------------------------------------------
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT REPRESENT FUTURE PERFORMANCE. RETURNS AND NET
ASSET VALUE FLUCTUATE. SHARES ARE REDEEMABLE AT CURRENT NET ASSET VALUE, WHICH
MAY BE MORE OR LESS THAN ORIGINAL COST.
- -------------------------------------------------------------------------------
NET ASSET VALUE
- -------------------------------------------------------------------------------
CALIFORNIA
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AS OF AS OF
2/28/98 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS A $7.57 $7.52
- -------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS B $7.58 $7.52
- -------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS C $7.53 $7.50
- -------------------------------------------------------------------------------
</TABLE>
MICHIGAN
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AS OF AS OF
2/28/98 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS A $10.33 $10.19
- -------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS B $10.33 $10.18
- -------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS C $10.33 $10.18
- -------------------------------------------------------------------------------
</TABLE>
OHIO
<TABLE>
<CAPTION>
AS OF AS OF
2/28/98 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
KEMPER OHIO TAX-FREE
INCOME FUND CLASS A $10.44 $10.22
- -------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE
INCOME FUND CLASS B $10.44 $10.22
- -------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE
INCOME FUND CLASS C $10.44 $10.22
- -------------------------------------------------------------------------------
</TABLE>
TEXAS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AS OF AS OF
2/28/98 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
KEMPER TEXAS TAX-FREE
INCOME FUND CLASS A $10.58 $10.42
- -------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE
INCOME FUND CLASS B $10.58 $10.42
- -------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE
INCOME FUND CLASS C $10.58 $10.42
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
CONTENTS
20
TEXAS'S
PORTFOLIO STATISTICS
AND PORTFOLIO
OF INVESTMENTS
23
SHAREHOLDERS' MEETING
24
FINANCIAL STATEMENTS
27
NOTES TO
FINANCIAL STATEMENTS
32
FINANCIAL HIGHLIGHTS
AT A GLANCE
- -------------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME
FUNDS' LIPPER RANKINGS*
- -------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THEIR RESPECTIVE LIPPER CATEGORY
- -------------------------------------------------------------------------------
CALIFORNIA
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #48 of #80 of #95 of
102 funds 102 funds 102 funds
- -------------------------------------------------------------------------------
5-YEAR #17 of N/A N/A
53 funds
- -------------------------------------------------------------------------------
10-YEAR #7 of N/A N/A
29 funds
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
MICHIGAN
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #8 of #24 of #22 of
52 funds 52 funds 52 funds
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
OHIO
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #7 of #29 of #31 of
52 funds 52 funds 52 funds
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
TEXAS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #8 of #16 of #15 of
20 funds 20 funds 20 funds
- -------------------------------------------------------------------------------
</TABLE>
*Lipper Analytical Services, Inc. returns and rankings are based upon changes in
net asset value with all dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable. Returns
and rankings are historical and do not reflect future performance. The funds
are compared to their respective Lipper categories as follows: California
Municipal Debt, Michigan Municipal Debt, Ohio Municipal Debt and Texas
Municipal Debt.
DIVIDEND REVIEW
THE FOLLOWING TABLES SHOW PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE
FUNDS AS OF FEBRUARY 28, 1998.
- -------------------------------------------------------------------------------
CALIFORNIA
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $0.1827 $0.1504 $0.1478
- -------------------------------------------------------------------------------
FEBRUARY DIVIDEND: $0.0276 $0.0227 $0.0220
- -------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.69% 3.86% 3.76%
- -------------------------------------------------------------------------------
SEC YIELD+: 3.80% 3.10% 3.13%
- -------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.65% 5.43% 5.48%
- -------------------------------------------------------------------------------
BASED ON A MARGINAL TAX RATE OF 42.9% (COMBINED
CALIFORNIA STATE AND FEDERAL INCOME TAX RATE)
</TABLE>
- -------------------------------------------------------------------------------
MICHIGAN
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $0.2148 $0.1756 $0.1755
- -------------------------------------------------------------------------------
FEBRUARY DIVIDEND: $0.0311 $0.0251 $0.0250
- -------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 3.87% 3.12% 3.12%
- -------------------------------------------------------------------------------
SEC YIELD+: 3.41% 2.78% 2.79%
- -------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 5.67% 4.63% 4.64%
- -------------------------------------------------------------------------------
BASED ON A MARGINAL TAX RATE OF 39.9% (COMBINED
MICHIGAN STATE AND FEDERAL INCOME TAX RATE)
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
OHIO
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $0.2273 $0.1849 $0.1844
- -------------------------------------------------------------------------------
FEBRUARY DIVIDEND: $0.0334 $0.0270 $0.0270
- -------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.12% 3.32% 3.33%
- -------------------------------------------------------------------------------
SEC YIELD+: 3.59% 2.93% 2.93%
- -------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.10% 4.98% 4.98%
- -------------------------------------------------------------------------------
BASED ON A MARGINAL INCOME TAX RATE OF 41.2%
(COMBINED OHIO STATE AND FEDERAL INCOME TAX RATE)
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
TEXAS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $0.2432 $0.1999 $0.2007
- -------------------------------------------------------------------------------
FEBRUARY DIVIDEND: $0.0357 $0.0287 $0.0292
- -------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.33% 3.49% 3.55%
- -------------------------------------------------------------------------------
SEC YIELD+: 3.73% 3.07% 3.08%
- -------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 5.93% 4.88% 4.90%
- -------------------------------------------------------------------------------
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, 1998.
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, 1998 shown as an annualized
percentage of the maximum offering price on that date. The SEC yield is
computed in accordance with a standardized method prescribed by the
Securities and Exchange Commission. Tax equivalent yield is based on the
fund's yield and the applicable 1997 federal and state marginal tax rate.
Income may be subject to state and local taxes and, for some investors, a
portion may be subject to the alternative minimum tax.
<PAGE> 4
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS. HE IS ALSO A MEMBER OF THE INVESTMENT POLICY AND STRATEGY COMMITTEE
FOR KEMPER FUNDS.
SILVIA HOLDS A BACHELOR OF ARTS AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND HAS A MASTER'S DEGREE IN ECONOMICS FROM BROWN
UNIVERSITY IN PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS
WITH THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT ADVISOR FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $200 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS. IT IS ONE OF
THE 10 LARGEST MUTUAL FUND COMPLEXES IN THE UNITED STATES.
DEAR SHAREHOLDERS,
Despite ongoing stock market volatility, the economic climate for mutual fund
investors was fairly positive in the first quarter of 1998. The Dow Jones
Industrial Average rose 11.3 percent, making it the best first quarter since
1987. Seemingly in defiance of our diplomatic struggles with Iraq, political
scandal at home and a few major earnings disappointments particularly in the
technology sector, the market managed to hit several new highs in the first
quarter. U.S. corporate profit growth and earnings continued to boost stock
prices, making the market all the more attractive to investors. Steady U.S.
economic growth bolstered by stable interest rates created a positive
environment for both equity and fixed-income investing -- and we expect this
trend to continue.
The U.S. economy, as measured by the gross domestic product (GDP) growth rate,
grew at a 3.8 percent rate in 1997, representing solid growth for the year
ahead. Momentum for the year is expected to slow to a rate of 2.5 to 3.0
percent, still a very respectable rate.
Although the economy will continue to slow in the months ahead, the outlook is
still positive. Employment growth is expected to remain steady. Both bonds and
equities continue to perform well, thereby boosting consumer confidence and
spending. The housing market has been noteworthy, with new home sales reaching
an all-time high for this point in the economic cycle and housing starts remain
high relative to demographic trends.
Output prices, as measured by the Consumer Price Index (CPI), remained stable
at 1.5 to 2 percent year over year. When the rate of inflation remains stable
and as low as it has, the risk of higher interest rates is reduced and the real
return on financial assets grows. It is unlikely that the Fed will raise
interest rates in the second quarter.
Much of the market activity in the first quarter can be attributed to today's
service-based economy. With the arrival of annual and holiday bonuses at the end
of the fourth quarter -- compensation for a good year's work -- the first
quarter has established itself as a time for American employees to either spend
or stash away these lump sum earnings in Individual Retirement Accounts (IRAs)
and other investments.
One factor that affected the U.S. market in 1997 appears to be having a
diminished influence in 1998. The East Asian market crisis now appears for most
Asian countries to be subsiding. East Asia's economic difficulties did not
affect global production or employment nearly as much as the markets had
anticipated. Consequently, most investors have not felt the serious
repercussions that had been feared. Obviously, investors with heavy
concentrations in the region suffered the largest losses. But the markets were
anticipating a greater global impact -- and this has not yet come to pass.
Further impacts may occur or orders on shipments already made may find no
ultimate buyer. Then again, many East Asian countries appear to have already
recovered from the crisis. Some Asian currencies have stabilized and several
Asian stock markets have rebounded. Korea and Malaysia are two countries where
this has happened. The perception of an Asian "contagion" or flu throughout the
region is fading fast -- and investors in general seem to be staying in the
game.
At the end of February, the U.S. federal budget deficit essentially vanished.
Recent efforts to reduce the deficit, combined with higher federal revenues due
to the robust economy, left us with an expected budget surplus for fiscal 1998.
This stable fiscal environment is characterized by a reduction in Treasury
financing, which tends to have a downward effect on interest rates. Lower
interest rates fuel consumer spending, which clearly benefits the marketplace in
the form of higher corporate revenues and earnings. One result of higher
earnings is higher stock prices, which can ultimately benefit investors.
The last time the U.S. enjoyed a budget surplus was 1969. After nearly 30
years of being in the red, we very well may notice a new shift in psychology
about the Treasury market and the issuance of Treasury securities. In the past,
investors worried about deficits that were out of control and expected higher
interest rates on Treasuries. High interest rates are the bane of fixed-income
investing, so a balanced budget can be expected to have a positive effect.
On the global front, current economic fundamentals continue to favor the U.S.,
with the dollar persisting as a safe haven for investors. International
investors want to
4
<PAGE> 5
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The
10-year Treasury rate and the prime rate are prevailing interest rates. The
other data report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (3/31/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.65 6.03 6.89 6.51
PRIME RATE(2) 8.5 8.5 8.5 8.25
INFLATION RATE(3) 1.38 2.08 2.43 2.9
THE U.S. DOLLAR(4) 4.88 7.62 9.32 8.94
CAPITAL GOODS ORDERS(5)* 8.14 15.24 8.1 3.54
INDUSTRIAL PRODUCTION(5)* 4.95 4.99 5.31 2.41
EMPLOYMENT GROWTH(6) 2.59 2.36 2.27 1.78
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6 percent. The low, moderate inflation of
the last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of February 28, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
participate in U.S. economic growth, which, at 3.8 percent for 1997, was better
than the economic growth in both Europe and Japan. Europe's 1997 growth rate
remained fairly steady at 2 to 3 percent. Japan experienced a growth rate last
year of 1 percent. U.S. real interest rates have also been more attractive than
those of most other countries, enticing foreign investors to buy U.S.
Treasuries.
We anticipate the positive economic environment to continue. The budget
surplus should hold for at least the near term. President Clinton's initiatives
for increased spending and more tax credits haven't come to fruition. In fact,
proponents of spending control have continued to squelch spending programs on
Capitol Hill. All the while, fiscal policy has remained steady.
With solid economic growth, lower interest rates, low inflation and a
record-setting stock market, it is no wonder that investor expectations are
high. But, are investors expecting too much?
It is important to recognize that although from a macroeconomic perspective
the economy is strong, there are some microeconomic challenges that could
threaten in the months to come. These include health care reform and shifts in
the political landscape at home and continuing conflicts or new developments
abroad. For example, the European monetary union (EMU) appears to be proceeding
as we would expect. But within six months to a year after the EMU is established
in 1999, tensions may indeed mount as countries try to adapt to the new
structure. Each of these issues could affect our strong, yet reactive
marketplace. Be sure to stay tuned.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
JOHN E. SILVIA
JOHN E. SILVIA
April 10, 1998
5
<PAGE> 6
PERFORMANCE UPDATE
[MIER PHOTO]
CHRISTOPHER MIER JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1986 AND IS A
MANAGING DIRECTOR. MIER IS A VICE PRESIDENT AND PORTFOLIO MANAGER OF THE KEMPER
STATE TAX-FREE INCOME SERIES FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 28, 1998.
MIER RECEIVED A BACHELOR'S DEGREE IN ECONOMICS FROM THE UNIVERSITY OF MICHIGAN
AND WENT ON TO RECEIVE HIS M.M. IN FINANCE FROM THE KELLOGG GRADUATE SCHOOL OF
MANAGEMENT AT NORTHWESTERN UNIVERSITY. HE IS A CHARTERED FINANCIAL ANALYST.
AS OF MARCH 1, 1998, ELEANOR R. BRENNAN HAS BEEN THE LEAD PORTFOLIO MANAGER OF
THE KEMPER MICHIGAN TAX-FREE INCOME FUND AND KEMPER NEW JERSEY TAX-FREE INCOME
FUND. BRENNAN JOINED SCUDDER KEMPER INVESTMENTS, INC. IN MARCH 1995 AND IS A
VICE PRESIDENT. PRIOR TO JOINING SCUDDER KEMPER, BRENNAN WAS AN ASSISTANT
PORTFOLIO MANAGER FOR AN UNAFFILIATED INVESTMENT MANAGEMENT FIRM FROM 1993 TO
1995. SHE RECEIVED HER B.A. IN ECONOMICS FROM URSINUS COLLEGE AND AN M.S. IN
FINANCE FROM DREXEL UNIVERSITY. BRENNAN IS A CHARTERED FINANCIAL ANALYST.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
THE ASIAN CRISIS AND RECORD LOW INFLATION SUPPORTED STRONG SIX-MONTH
PERFORMANCE BY THE FUNDS IN THE KEMPER STATE TAX-FREE INCOME FUND SERIES.
PORTFOLIO MANAGER CHRIS MIER EXPLAINS HOW THESE AND OTHER FACTORS AFFECTED THE
MUNICIPAL MARKET AND WHAT HE EXPECTS DOWN THE ROAD.
Q THE ASIAN MARKET AND CURRENCY CRISIS DOMINATED FINANCIAL NEWS DURING THE
PAST SIX MONTHS. HOW HAS IT AFFECTED THE MUNICIPAL BOND MARKET?
A When the Asian crisis came to the forefront in October, we recognized that
it would have a deflationary effect and would eventually trigger a flight to
quality in the bond market. With that in mind, we lengthened the duration in our
portfolios by late October. The funds benefited from a strong rally in the
municipal bond market from October 24 through early January.
We began reducing the duration of our portfolios in early January, feeling
that most of the effects of the Asian crisis were already embedded in the bond
market by mid-January when prices peaked. February was rather flat for the
municipal bond market, but Kemper State Tax-Free Income Series performed well
because of their structure and neutral positioning.
Q HOW DID THE UNPRECEDENTED NUMBER OF BONDS ISSUED DURING THIS PERIOD AFFECT
THE MARKET AND THE FUNDS?
A The tremendous number of bonds marketed during this period had a
significant effect on the market and a positive effect on our funds' portfolios.
Because of the large volume, we were able to shop around for attractive issues
to include in our portfolios. As for the market, the volume of new issues forced
municipal rates to stay attractive. Municipal rates were about 90 percent of a
30-year Treasury bond for the six-month period ended February 28, 1998.
In January, the market saw about $17.6 billion in volume compared to an
average of about $10 billion in the past three Januarys. February 1998 saw the
greatest volume of any February for the last decade at $20.2 billion. The
elevated supply was due to two factors -- declining interest rates, which led to
an increase in advanced refunding issues, and continued growth in new project
financings.
The solid economy also contributed to a significant improvement in credit
quality. When the economy is strong, cities and states get more tax revenue, and
more tax revenue means budgets are in balance and sometimes in surplus. That
results in higher credit ratings and thus, higher-quality bonds. We can choose
from among these higher-quality issues, which benefits the funds' portfolios.
Q HOW HAS THE DIRECTION OF INTEREST RATES AFFECTED THE MARKET?
A Throughout most of this period, the Federal Reserve Board (the Fed) had
indicated a bias toward tightening rates because of strong domestic growth. When
the economy expands too quickly, inflation becomes a threat. The Fed was poised
to slow that growth by raising interest rates. However, on February 4, 1998, the
Fed went to a neutral bias because it was becoming apparent the Asian crisis
would have a deflationary effect and offset our very strong economy to some
degree.
6
<PAGE> 7
PERFORMANCE UPDATE
Q EL NINO HAS HIT CALIFORNIA ESPECIALLY HARD. WILL THE COSTS ASSOCIATED WITH
REBUILDING AFFECT THE STATES ABILITY TO REPAY THEIR OBLIGATIONS?
A When a natural disaster occurs, cities, counties and states receive a
great deal of federal money and insurance money to repair whatever has been
destroyed, so the disaster isn't as much of a financial drain as would be
expected. California has such a huge economy that should absorb the small
remaining costs without much difficulty.
Q WERE THERE ANY SIGNIFICANT EVENTS THAT AFFECTED THE INDIVIDUAL STATES
WITHIN KEMPER STATE TAX-FREE INCOME SERIES?
A California's economy continues to expand. A lot of the growth there has
come from improved real estate markets, especially in the southern part of the
state. The state's motion picture industry and port facilities have supported
the economy well.
The Asian problem may affect California to a slightly greater extent than the
rest of the country because of the state's proximity to Asia and its import and
export activity. New York may likewise be a bit more affected because it is a
major banking center and therefore carries a disproportionate exposure to Asia's
banking crisis. However, I don't feel these Asian ties place either of the
states at risk.
Q HOW HAVE YOU RESPONDED TO THE CHANGING MUNICIPAL YIELD CURVE?
A We continue to take advantage of the relative flatness of the municipal
yield curve. I think the most attractive portion of the curve is in the 15-year
area. There is very little incentive to go beyond the 20-year range. The only
30-year paper we have is the premium bonds with prices that reflect their
shorter call features or else higher yielding securities like a 'BBB'- or
'A'-rated bond (see Terms to Know for callable bonds and bond ratings.)
Q WHAT IS YOUR OUTLOOK FOR THE MUNICIPAL BOND MARKET?
A We expect a number of large issues in March and April, and we will see
some refunding. After April, we expect supply to start to taper off. The market
is likely to be relatively range bound, and prices should remain somewhat
stable. The volatility in the funds should be even lower this year than it was
last. I do think rates will trend lower again once the domestic economy begins
to show the effect from the Asian problems.
Q IS THIS STILL A GOOD TIME TO BE IN MUNICIPALS?
A I think municipals are quite attractive right now. They're at high yield
percentages to Treasuries and offer attractive real rates of interest because of
our current low rate of inflation. If supply begins to taper off and the economy
begins to slow a bit as we expect, that should be good news for the funds.
TERMS TO KNOW
BOND RATINGS Grades assigned by credit-rating agencies to corporate and
municipal debt securities, based on the borrower's expected ability to repay.
The higher the grade, the lower the interest rate a borrower must pay. The two
major Wall Street credit rating firms are Moody's Investors Service Inc. and
Standard & Poor's bond ratings.
CALLABLE BOND A bond issue, all or part of which may be redeemed before maturity
by the issuer under specified conditions. The term also applies to preferred
shares that may be redeemed by the issuing corporation.
DURATION A measure of the interest rate sensitivity of a portfolio,
incorporating time to maturity and coupon size. The longer the duration, the
greater the interest rate risk.
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
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 2/28/98 ON 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 72% 79%
- -------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 12 9
- -------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 11 5
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS 5 7
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
QUALITY ON 2/28/98 ON 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------
AAA 51% 44%
- -------------------------------------------------------------------------------
AA 9 12
- -------------------------------------------------------------------------------
A 20 20
- -------------------------------------------------------------------------------
BBB 16 18
- -------------------------------------------------------------------------------
BB -- 2
- -------------------------------------------------------------------------------
NOT RATED 4 4
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
YEARS TO MATURITY ON 2/28/98 ON 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------
1-10 YEARS 13% 12%
- -------------------------------------------------------------------------------
11-20 YEARS 56 44
- -------------------------------------------------------------------------------
21+ YEARS 31 44
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE MATURITY ON 2/28/98 ON 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------
16.2 years 17.7 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, 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- -----------------------------------------------------------------------------------------------------------
Irvine Ranch, Water District Joint Powers Agcy., Rev.,
7.875%, callable 2-15-98 @ 100 $ 5,000 $ 5,013
--------------------------------------------------------------------------------------
Health Facilities Financing Auth., American Baptist Homes of
the West Rev., 7.65%, to be called 4-1-98 @ 102 4,000 4,095
--------------------------------------------------------------------------------------
City of Long Beach, Harbor Department, Rev., 7.25%, to be
called 5-15-98 @ 102 8,000 8,222
--------------------------------------------------------------------------------------
Fullerton Redev. Agcy., Local Government Finance Auth.,
Rev., 7.70%, to be called 2-1-99 @ 102 4,360 4,607
--------------------------------------------------------------------------------------
Orange County, Unified School District, Certificates of
Participation, Rev., 6.875%, to be called 6-1-99 @ 102 2,620 2,771
--------------------------------------------------------------------------------------
Coronado Community Dev. Agcy., Tax Allocation Rev., 7.25%,
to be called 9-1-99 @ 102 4,500 4,819
--------------------------------------------------------------------------------------
City of Los Angeles, Harbor Department, Rev., 8.70%, to be
called 9-1-99 @ 100 2,500 2,682
--------------------------------------------------------------------------------------
City of San Bernadino, Joint Powers Financing Auth., Lease
Rev., 7.15%, to be called 9-1-99 @ 102 4,250 4,546
--------------------------------------------------------------------------------------
Health Facilities Financing Auth:
Eskaton Properties, Inc., Rev., 7.45%, to be called 5-1-00
@ 102 4,800 5,248
Children's Hospital, Rev., 7.50%, to be called 10-1-00 @
102 3,600 3,992
--------------------------------------------------------------------------------------
University of California, Housing System Rev., 6.75%, to be
called 11-1-00 @ 102 1,515 1,654
--------------------------------------------------------------------------------------
City and County of San Francisco, Gen. Oblg., 6.50%, to be
called 12-15-00 @ 100 1,000 1,072
--------------------------------------------------------------------------------------
Reedley, Sierra View Homes, Inc., Insured Certificates of
Participation, Rev., 7.60%, to be called 3-1-01 @ 102 4,030 4,458
--------------------------------------------------------------------------------------
Foothill-DeAnza Community College District, Santa Clara,
Rev., 7.875%, to be called 6-1-01 @ 102 4,055 4,601
--------------------------------------------------------------------------------------
City of San Bernadino, Sisters of Charity Health Care System
Rev., 7.00%, to be called 7-1-01 @ 102 14,500 16,115
--------------------------------------------------------------------------------------
Yosemite Community College District, Certificates of
Participation, Rev., 7.75%, to be called 7-1-01 @ 102 1,605 1,797
--------------------------------------------------------------------------------------
Westminster Redev. Agcy., Westminster Commercial Redev.
Proj., Tax Allocation, Rev., 7.30%, to be called 8-1-01 @
102 2,500 2,805
--------------------------------------------------------------------------------------
City of Sacramento, Municipal Utility District, Electric
Rev., 6.75%, to be called 9-1-01 @ 102 6,020 6,684
--------------------------------------------------------------------------------------
Santa Clarita Public Financing Auth., Local Agcy., Rev.,
6.70% and 6.75%, to be called 10-1-01 @ 102 2,750 3,050
--------------------------------------------------------------------------------------
Riverside County, Public Facilities Financing, Certificates
of Participation, Rev., 6.875%, to be called 11-1-01 @ 102 3,000 3,348
--------------------------------------------------------------------------------------
Educational Facilities Auth., Mills College Rev., 6.875%, to
be called 9-1-02 @ 102 1,775 2,010
--------------------------------------------------------------------------------------
Snowline Joint Unified School District, Certificates of
Participation, Rev., 6.30% and 6.40%, to be called 7-1-03
@ 102 3,695 4,146
--------------------------------------------------------------------------------------
Victor Valley Community College District, Certificates of
Participation, Rev., 6.875%, to be called 8-1-03 @ 102 8,705 10,002
--------------------------------------------------------------------------------------
City of Los Angeles, Convention and Exhibit Center,
Certificates of Participation, Rev., 9.00%, to be called
12-1-05 @ 100 1,000 1,316
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Northern California Power Agcy., Hydroelectric No. 1, Rev.,
7.00%, to be called 1-1-16 @ 100 $ 210 $ 262
--------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--10.8% 109,315
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------
Health Facilities Financing Auth.:
Adventist Health System West, Rev., 6.50%, 2007 and 2011 5,750 6,219
Catholic Healthcare Facilities Finance Auth., Rev., 5.75%
and 6.00%, 2010 and 2025 16,970 18,470
Kaiser Permanante, Rev., 7.00%, 2010 3,550 3,857
Small Facilities Loan, Insured Health Facility Rev.,
6.70%, 2011 1,200 1,305
Southern California Presbyterian Homes, Rev., 6.70%, 2011 2,000 2,152
Sutter Health Series, Rev., 5.25% and 5.50%, 2008 and 2012 8,175 8,707
Unihealth America, Rev., 7.625%, 2015 745 776
--------------------------------------------------------------------------------------
Housing Finance Agcy., Home Mortgage Rev., 6.875% to 8.00%,
2010 through 2030 22,910 24,513
--------------------------------------------------------------------------------------
Residential Efficiency Financing Auth., Rev., 5.50% and
6.00%, 2017 and 2012 5,970 6,402
--------------------------------------------------------------------------------------
State Public Works Board of the State of California:
Gen. Oblg., 5.00% to 6.50%, 2010 through 2015 33,930 35,696
Lease Rev., 5.50% to 7.40%, 2010 through 2015 19,585 21,796
Rev., 5.25% and 5.375%, 2022 and 2016 9,115 9,290
--------------------------------------------------------------------------------------
Statewide Communities Dev. Auth.:
Arc of San Diego, Certificates of Participation, Rev.,
5.625%, 2020 through 2021 6,475 6,719
Cedars-Sinai Medical Center, Rev., 6.50%, 2012 20,205 23,406
San Gabriel Valley Medical Center, Rev., 5.125% and 5.50%,
2012 through 2017 15,750 16,483
Triad Healthcare, Rev., 5.80%, 2000 4,205 4,359
--------------------------------------------------------------------------------------
University of California, Housing System Rev., 5.65% and
5.70%, 2012 and 2013 13,110 14,157
--------------------------------------------------------------------------------------
University of San Francisco, Educational Facilities Auth.,
Rev., 5.10% to 6.00%, 2005 through 2017 12,000 12,871
--------------------------------------------------------------------------------------
Alameda Public Financing Auth., Rev., 6.375%, 2014 2,000 2,058
--------------------------------------------------------------------------------------
Bellflower Certificates of Participation Civic Center and
Capital Improvement, Rev., 7.20%, 2019 1,880 2,004
--------------------------------------------------------------------------------------
Benicia Unified School District, Gen. Oblg., zero coupon,
2017 through 2022 23,785 7,383
--------------------------------------------------------------------------------------
Cabrillo Unified School District, Gen. Oblg., zero coupon,
2019 and 2021 9,500 2,952
--------------------------------------------------------------------------------------
Campbell County Unified School District, Gen. Oblg., zero
coupon, 2018 3,000 1,055
--------------------------------------------------------------------------------------
Carlsbad County Unified School District, Gen. Oblg., zero
coupon, 2007 through 2022 36,130 15,109
--------------------------------------------------------------------------------------
Central Valley Financing Auth., Carson Ice-Gen. Proj., Rev.,
6.10%, 2013 8,700 9,238
--------------------------------------------------------------------------------------
City of Big Bear Lake, Department of Water and Power, Rev.,
6.00%, 2015 and 2022 15,405 17,548
--------------------------------------------------------------------------------------
City of Carson Redev. Agcy., Proj. No. 1, Tax Allocation,
Rev., 6.00%, 2016 3,350 3,506
--------------------------------------------------------------------------------------
City of Concord Redev. Agcy., Central Concord Proj., Tax
Allocation, Rev., 8.00%, 2018 40 41
--------------------------------------------------------------------------------------
City of Long Beach, Rev., 5.75%, 2015 1,725 1,907
--------------------------------------------------------------------------------------
City of Los Angeles:
Department of Airports, Ontario International Airport,
Rev., 5.90%, 2012 3,290 3,557
Harbor Department, Rev., 6.25%, 2026 2,320 2,539
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
City of Oakland:
Housing Finance Rev., 7.10%, 2010 $ 1,565 $ 1,655
Pension Financing Rev., 7.60%, 2021 26,075 27,012
--------------------------------------------------------------------------------------
City of Reedley, Sierra View Homes, Inc., Insured
Certificates of Participation, Rev., 5.85%, 2021 2,325 2,438
--------------------------------------------------------------------------------------
City of Sacramento:
Cogeneration Auth., Power Auth., Rev., 5.875% and 6.00%,
2015 and 2022 25,200 26,541
Cogeneration Auth., Procter and Gamble Proj., Rev., 6.375%
to 6.50%, 2010 through 2021 18,250 20,023
Community Facilities, Special Tax, Rev., 5.50% to 6.30%,
2010 through 2021 6,045 6,193
Finance Auth., Lease Rev., 5.00% and 5.40%, 2014 and 2020 15,000 15,434
Municipal Utility District, Electric Rev., 6.20% and
6.50%, 2006 and 2013 2,270 2,612
--------------------------------------------------------------------------------------
City of Salinas, Certificates of Participation, Rev.,
5.625%, 2017 2,000 2,077
--------------------------------------------------------------------------------------
City of San Diego:
Certificates of Participation, Rev., 8.00%, 2002 4,925 5,321
Industrial Development, Gas and Electric Company, Rev.,
6.10%, 2018 5,000 5,443
Redev. Agcy., Tax Allocation, Rev., 6.625%, 2017 2,000 2,230
San Ysidro School District, Gen. Oblg., 6.125%, 2021 1,400 1,581
--------------------------------------------------------------------------------------
City and County of San Francisco:
Civic Center Complex, Building Auth., Rev., 5.25%, 2021 10,525 10,785
Moscone Convention Center, Rev., 5.25% and 6.75%, 2020 and
2015 7,200 7,501
Redev. Agcy., Horton Plaza Redev. Proj. Rev., 6.75%, 2015 3,705 4,212
San Francisco International Airport, Rev., 5.70%, 2013 and
2014 12,265 12,973
--------------------------------------------------------------------------------------
City of San Jose:
Redev. Agcy., Merged Area Redev. Proj., Tax Allocation,
Rev., 5.50%, 2014 through 2016 9,520 10,109
Unified School District, Gen. Oblg., zero coupon, 2015 and
2017 3,920 1,570
--------------------------------------------------------------------------------------
Community Development Commission of the City of Commerce,
Redev. Proj. No. 1, Tax Allocation, Rev., 5.50%, 2009 3,360 3,648
--------------------------------------------------------------------------------------
Contra Costa County:
County Public Facilities Corp., Certificates of
Participation, Rev., 7.80%, 2005 1,250 1,335
Home Mortgage, Rev., 7.75%, 2022 2,715 3,546
--------------------------------------------------------------------------------------
Corona-Norco University, Special Tax Rev., 5.75%, 2014 2,750 2,985
--------------------------------------------------------------------------------------
Duarte, City of Hope National Medical Center, Certificates
of Participation, Rev., 6.25%, 2023 4,000 4,256
--------------------------------------------------------------------------------------
Eldorado Public Agcy., Financial Auth., Rev., 5.60%, 2012 6,000 6,456
--------------------------------------------------------------------------------------
Emeryville, Public Financing Auth., Redev. Proj., Rev.,
6.50%, 2021 10,255 11,083
--------------------------------------------------------------------------------------
Escondido Union High School District, Gen. Oblg., zero
coupon, 2015 through 2018 15,225 5,819
--------------------------------------------------------------------------------------
Fontana Public Financing Auth., Tax Allocation, Rev., 7.00%,
2021 3,900 4,219
--------------------------------------------------------------------------------------
Foothill-DeAnza Community College District, DeAnza Campus
Center Proj., Certificates of Participation, Rev., 7.35%,
2007 1,700 1,895
--------------------------------------------------------------------------------------
Foothill/Eastern, Transit Corridor Agcy., Toll Road, Rev.,
6.00% and 6.50%, 2016 through 2034 24,350 26,280
--------------------------------------------------------------------------------------
Foster County Public Financing Auth., Rev., 5.60% and 5.80%,
2012 and 2016 2,225 2,345
--------------------------------------------------------------------------------------
Fresno Health Facilities, Holy Cross Health System, St.
Agnes Medical Center, Rev., 6.50% and 6.625%, 2011 and
2021 3,500 3,824
--------------------------------------------------------------------------------------
Hawthorne Community Redev. Agcy., Tax Allocation, Rev.,
6.625%, 2014 2,000 2,202
--------------------------------------------------------------------------------------
Hollister Joint Powers Financing Auth., Sewer System
Improvement Proj., Rev., 5.75%, 2011 3,815 3,987
--------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hollister Redev. Agcy., Tax Allocation, Community Dev.
Proj., Rev., 5.375%, 2013 $ 2,630 $ 2,773
--------------------------------------------------------------------------------------
Inglewood Civic Center:
Improvement Proj., Certificates of Participation, Rev.,
6.50% to 7.00%, 2011 through 2021 9,525 10,261
Redev. Proj., Rev., 7.00%, 2022 9,355 10,168
--------------------------------------------------------------------------------------
Kern High School District, Gen. Oblg., 6.40%, 2012 3,095 3,624
--------------------------------------------------------------------------------------
Las Virgenes:
Unified School District, Gen. Oblg., zero coupon, 2013
through 2015 5,890 2,580
Municipal Water District, Capital Improvement Proj., Rev.,
6.30%, 2016 2,175 2,357
--------------------------------------------------------------------------------------
Lemon Grove Community Dev. Agcy., Tax Allocation, Rev.,
6.65% and 6.90%, 2006 and 2020 2,500 2,713
--------------------------------------------------------------------------------------
Loma Linda, University Medical Center, Rev., 7.00%, 2015 2,500 2,668
--------------------------------------------------------------------------------------
Los Angeles County:
Metropolitan Transportation Auth., Sales Tax Rev., 5.25%
to 6.00%, 2013 through 2023 18,680 19,953
Public Works Financing Auth., Lease Rev., 5.25% and 5.50%,
2014 and 2010 8,660 9,015
Transportation Commission, Sales Tax Rev., 7.00% and
7.40%, 2019 and 2015 18,405 19,547
Unified School District, Gen. Oblg., 6.00%, 2012 through
2015 20,760 23,605
--------------------------------------------------------------------------------------
Los Banos, Certificates of Participation, Rev., 6.00%, 2019 2,250 2,311
--------------------------------------------------------------------------------------
Lucia Mar Unified School District, Gen. Oblg., zero coupon,
2016 1,000 394
--------------------------------------------------------------------------------------
Martinez, Multiple Lenders, Home Mortgage, Rev., 10.375%,
2002 30 34
--------------------------------------------------------------------------------------
Metropolitan Water District of Southern California, Rev.,
5.75% , 2021 2,000 2,208
--------------------------------------------------------------------------------------
Midpeninsula Regulatory Open Space, Financial Auth., Rev.,
5.75%, 2011 1,950 2,121
--------------------------------------------------------------------------------------
Mill Valley Certificates of Participation, The Redwoods,
Rev., 5.75%, 2020 3,230 3,377
--------------------------------------------------------------------------------------
Modesto Irrigation District Financing Auth., Domestic Water
Proj., Rev., 5.125% and 6.00%, 2013 through 2015 14,145 15,016
--------------------------------------------------------------------------------------
Mojave, Water Improvement District, Morongo Basin, Rev.,
5.60%, 2012 2,500 2,692
--------------------------------------------------------------------------------------
Montebello Community Redev. Agcy., Montebello Hills Redev.,
Tax Allocation, Rev., 7.50%, 2010 3,750 3,957
--------------------------------------------------------------------------------------
Moreno Valley, Towngate Community Facilities:
District 87-1, Improvement Area No. 1, Special Tax Rev.,
7.125%, 2023 2,810 2,979
Special Tax, Rev., 6.50%, 2009 3,670 3,950
--------------------------------------------------------------------------------------
Northern California Power Agcy., Hydroelectric No. 1, Rev.,
7.15%, 2024 8,805 9,068
--------------------------------------------------------------------------------------
Orange County:
Airport Rev., 5.50%, 2010 4,000 4,280
Recovery Certificates of Participation, Rev., 5.70% and
6.00%, 2008 through 2026 22,575 24,757
Local Transportation Auth., Sales Tax Rev., 6.00%, 2008 1,600 1,807
--------------------------------------------------------------------------------------
Palmdale School District, Certificates of Participation,
Rev., zero coupon, 2019 through 2028 7,885 2,032
--------------------------------------------------------------------------------------
Pleasanton Junction Power, Finance Auth., Reassessment Rev.,
6.15%, 2012 9,340 10,018
--------------------------------------------------------------------------------------
Port of Oakland, Port Auth., Rev., 6.40%, 2022 12,000 13,151
--------------------------------------------------------------------------------------
Public Power Agency, San Juan Project, Rev, 6.75%, 2020 2,000 2,371
--------------------------------------------------------------------------------------
Redondo Beach, South Bay, Redev. Proj., Rev., 7.00% and
7.125%, 2016 and 2026 3,000 3,344
--------------------------------------------------------------------------------------
Richmond Redev. Tax Allocation, Rev., 5.50%, 2018 2,350 2,434
--------------------------------------------------------------------------------------
Riverside County, Temecula Valley Unified School District,
Gen. Oblg., 5.80%, 2014 2,430 2,655
--------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Saddleback Valley Unified School District, Gen. Oblg.,
6.00%, 2012 through 2014 $ 4,080 $ 4,646
--------------------------------------------------------------------------------------
San Bernardino County, West Valley Detention Center,
Certificates of Participation, Rev., 6.50%, 2012 8,000 8,819
--------------------------------------------------------------------------------------
San Joaquin Hills Transportation Corridor Agcy., Toll Road
Rev., zero coupon to 7.00%, 2025 through 2030 70,415 27,204
--------------------------------------------------------------------------------------
Santa Clara County:
Redev. Agcy., Tax Allocation, Rev., 7.00%, 2010 1,300 1,584
Transit District Sales Tax Rev., 5.25%, 2021 7,500 7,550
Whisman School District, Gen. Oblg., zero coupon, 2020 and
2022 3,000 876
--------------------------------------------------------------------------------------
Santa Cruz County Housing Auth., Multi-Family Housing, Rev.,
7.75%, 2023 2,000 2,137
--------------------------------------------------------------------------------------
Santa Margarita/Dana Point Auth., Rev., 7.25%, 2012 and 2013 7,075 8,975
--------------------------------------------------------------------------------------
South Orange County Public Finance Auth., Rev., 7.00%, 2008 1,000 1,216
--------------------------------------------------------------------------------------
South San Francisco, Capital Improvement Financing Auth.,
Conference Center Proj., Rev., 6.125%, 2018 3,925 4,146
--------------------------------------------------------------------------------------
Southern California Home Financing Auth., Single Family
Mortgage, Rev., 6.75% and 7.35%, 2022 and 2024 1,555 1,643
--------------------------------------------------------------------------------------
Stockton Community Facilities, Special Tax Rev., 5.65% to
6.20%, 2007 through 2015 4,640 4,836
--------------------------------------------------------------------------------------
Sunnyvale, Financing Auth., Wastewater, Refuge and Sludge,
Management Facilities, Rev., 6.30%, 2017 4,000 4,281
--------------------------------------------------------------------------------------
Torrance Memorial Hospital Medical Center, Rev., 6.75%, 2012 5,000 5,062
--------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Highway and Transportation Auth., Rev., 6.00%, 2018 6,000 6,777
Public Improvement, Gen. Oblg., zero coupon, 2015 and 2018 9,000 3,543
--------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--84.6% 853,180
--------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--95.4%
(Cost: $896,977) 962,495
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--3.65% to 4.05%
INSTRUMENTS
- --3.1%
Due--March 1998
(Cost: $31,000) 31,000 31,000
--------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.5%
(Cost: $927,977) 993,495
--------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.5% 14,992
--------------------------------------------------------------------------------------
NET ASSETS--100% $1,008,487
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $927,977,000 for federal income tax purposes
at February 28, 1998, the gross unrealized appreciation was $66,021,000, the
gross unrealized depreciation was $503,000 and the net unrealized appreciation
on investments was $65,518,000.
See accompanying Notes to Financial Statements.
13
<PAGE> 14
PORTFOLIO STATISTICS
KEMPER MICHIGAN TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 2/28/98 ON 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------
REVENUE BONDS 58% 59%
- -------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 25 29
- -------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 12 6
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS 5 6
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
QUALITY ON 2/28/98 ON 8/31/97
<S> <C> <C>
AAA 75% 78%
- -------------------------------------------------------------------------------
AA 6 6
- -------------------------------------------------------------------------------
A 3 1
- -------------------------------------------------------------------------------
BBB 11 12
- -------------------------------------------------------------------------------
NOT RATED 5 3
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
YEARS TO MATURITY ON 2/28/98 ON 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 32% 24%
- -------------------------------------------------------------------------------
11-20 YEARS 47 45
- -------------------------------------------------------------------------------
21+ YEARS 21 31
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE MATURITY ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
13.5 years 14.6 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, 1998 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- ----------------------------------------------------------------------------------------------------
Municipal Bond Auth., State Revolving Fund, Rev.,
6.50%, to be called 10-1-04 @ 102 $ 15 $ 17
-------------------------------------------------------------------------------
Detroit, Gen. Oblg., 6.80%, to be called 4-1-05 @ 101 65 75
-------------------------------------------------------------------------------
Grandville Public Schools, Gen. Oblg., 6.30%, to be called
5-1-05 @ 101 25 28
-------------------------------------------------------------------------------
Brandon School District, Gen. Oblg., 5.60%, to be called
5-1-06 @ 101 50 55
-------------------------------------------------------------------------------
Lincoln Park School District, Gen. Oblg., 7.00%, to be
called 5-1-06 @ 101 100 119
-------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--8.5% 294
-------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ----------------------------------------------------------------------------------------------------
Building Auth., Rev., zero coupon to 6.25%, 2005 through
2020 235 179
-------------------------------------------------------------------------------
Hospital Finance Auth.:
Gratiot Community Hospital, Rev., 6.10%, 2007 50 54
St. John Hospital and Medical Center, Rev., 6.00%, 2010 100 112
-------------------------------------------------------------------------------
Housing Dev. Auth.:
Limited Oblg., Green Hill Proj., Rev., 5.45%, 2011 20 20
Rental Housing Rev., 5.75%, 2014 15 15
Rev., 6.05%, 2027 50 52
-------------------------------------------------------------------------------
Kent Hospital Finance Auth., Health Care, Rev., 5.75%, 2011 100 108
-------------------------------------------------------------------------------
Municipal Bond Auth., Local Government Bond Rev., 5.75% and
6.00%, 2013 60 64
-------------------------------------------------------------------------------
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 53
-------------------------------------------------------------------------------
Trunk Line Fund, Rev., zero coupon, 2010 100 56
-------------------------------------------------------------------------------
Underground Storage Tank Financial Assurance Auth., Rev.,
5.75%, 2010 50 54
-------------------------------------------------------------------------------
Allegan Public Schools, Gen. Oblg., 6.50%, 2007 100 116
-------------------------------------------------------------------------------
Brandon School District, Gen. Oblg., 5.125%, 2008 55 58
-------------------------------------------------------------------------------
Caledonia Community Schools, Gen. Oblg., 5.75%, 2012 25 27
-------------------------------------------------------------------------------
Clarkston Community Schools, Gen. Oblg., 6.25%, 2005 50 56
-------------------------------------------------------------------------------
Chippewa County, Hospital Finance Auth., Rev., 5.625%, 2014 80 81
-------------------------------------------------------------------------------
Detroit:
Economic Improvements Auth., Gen. Oblg., 5.50%, 2007 50 54
Local Dev. Finance Auth., Rev., 5.20%, 2010 70 72
Water Supply System, Rev., 6.25%, 2012 50 55
-------------------------------------------------------------------------------
Economic Dev. Corp. of Dickinson County, Pollution Control,
Rev., 5.85%, 2018 50 53
-------------------------------------------------------------------------------
Genesee County, Sewage Disposal System No. 3, Rev., 7.00%,
2005 60 70
-------------------------------------------------------------------------------
Grand Rapids, Downtown Dev. Auth., Rev., zero coupon, 2013 10 5
-------------------------------------------------------------------------------
Greater Detroit Resource Recovery Auth., Rev., 6.25%, 2008 85 98
-------------------------------------------------------------------------------
Grosse Ile Township Schools, Gen. Oblg., 6.25%, 2006 100 113
-------------------------------------------------------------------------------
Gull Lake Community Schools, Gen. Oblg., 5.25%, 2021 5 5
-------------------------------------------------------------------------------
Huron School District, Gen. Oblg., zero coupon, 2005 20 15
-------------------------------------------------------------------------------
Jackson County, Wastewater Disposal Facility, Gen. Oblg.,
7.25%, 2005 75 89
-------------------------------------------------------------------------------
Lansing Building Auth., Gen. Oblg., zero coupon, 2014 105 47
-------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Livonia Public Schools, Gen. Oblg., zero coupon, 2006 $ 20 $ 14
-------------------------------------------------------------------------------
Kalamazoo, Hospital Finance Auth., Rev., 6.25%, 2012 50 55
-------------------------------------------------------------------------------
Marquette City Hospital Finance Auth., Rev., 5.875%, 2011 85 92
-------------------------------------------------------------------------------
Macomb County, L'Anse Creuse Public Schools, Gen. Oblg.,
5.50%, 2007 50 54
-------------------------------------------------------------------------------
Monroe County, Pollution Control Rev., 6.55%, 2024 100 111
-------------------------------------------------------------------------------
North Branch Area Schools, Gen. Oblg., 5.375%, 2021 5 5
-------------------------------------------------------------------------------
Oakland County:
Avondale School District, Gen. Oblg., 5.75%, 2022 75 79
Birmingham Public Schools, Gen. Oblg., 5.75%, 2011 15 16
Drainage District, Rev., 6.40%, 2016 15 16
-------------------------------------------------------------------------------
Ottawa County, Spring Lake Public Schools, Gen. Oblg.,
5.625%, 2017 50 52
-------------------------------------------------------------------------------
Redford Union Schools, District No. 1, Gen. Oblg., 6.375%,
2010 100 117
-------------------------------------------------------------------------------
Romulus Community Schools, Gen. Oblg., zero coupon, 2005 15 11
-------------------------------------------------------------------------------
Tawas, Hospital Finance Auth., Rev., 5.75%, 2023 75 74
-------------------------------------------------------------------------------
Wyandotte, Electric Rev., 6.25%, 2017 45 49
-------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Electric Power Auth., Rev., zero coupon and 6.50%, 2017 and
2006 225 143
Facilities Financing Auth., Mennonite General Hospital
Project, Rev.,
6.50%, 2018 75 82
Gen. Oblg., 5.50%, 2009 15 16
Highway and Transportation Auth., Rev., 6.25%, 2016 75 88
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 30 33
-------------------------------------------------------------------------------
Virgin Islands, Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, 2018 75 84
-------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--86.1% 2,982
-------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--94.6%
(Cost: $3,074) 3,276
-------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
MONEY MARKET Yield--3.65%
INSTRUMENTS
- --5.8%
Due--March 1998
-------------------------------------------------------------------------------
Delta County, Environmental Improvement Rev. 100 100
-------------------------------------------------------------------------------
Strategic Fund, Pollution Control Rev. 100 100
-------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--5.8%
(Cost: $200) 200
-------------------------------------------------------------------------------
TOTAL INVESTMENTS--100.4%
(Cost: $3,274) 3,476
-------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(.4)% (13)
-------------------------------------------------------------------------------
NET ASSETS--100% $3,463
-------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $3,274,000 for federal income tax purposes
at February 28, 1998, the gross unrealized appreciation was $203,000, the gross
unrealized depreciation was $1,000 and the net unrealized appreciation on
investments was $202,000.
See accompanying Notes to Financial Statements.
16
<PAGE> 17
PORTFOLIO STATISTICS
KEMPER OHIO TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 2/28/98 ON 8/31/97
<S> <C> <C>
REVENUE BONDS 46% 50%
- ------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 36 35
- ------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 11 6
- ------------------------------------------------------------------------------
CASH AND EQUIVALENTS 8 9
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
QUALITY ON 2/28/98 ON 8/31/97
<S> <C> <C>
- ------------------------------------------------------------------------------
AAA 68% 66%
- ------------------------------------------------------------------------------
AA 13 11
- ------------------------------------------------------------------------------
A -- 3
- ------------------------------------------------------------------------------
BBB 9 10
- ------------------------------------------------------------------------------
BB 4 3
- ------------------------------------------------------------------------------
NOT RATED 6 7
- ------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
YEARS TO MATURITY ON 2/28/98 ON 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 22% 16%
- -------------------------------------------------------------------------------
11-20 YEARS 54 54
- -------------------------------------------------------------------------------
21+ YEARS 24 30
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AVERAGE MATURITY ON 2/28/98 ON 8/31/97
- ------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------
14.7 years 15.5 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, 1998 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- -------------------------------------------------------------------------------------------------------
Clermont County, Sewer Systems, Rev., 7.20%, to be called
12-1-00 @ 102 $1,000 $ 1,105
----------------------------------------------------------------------------------
Northeast Ohio Regional Sewer District, Wastewater
Improvement, Rev., 6.50%, to be called 11-15-01 @ 101 300 328
----------------------------------------------------------------------------------
Olentangy Local School District, Gen. Oblg., 6.35%, to be
called 12-1-01 @ 102 150 165
----------------------------------------------------------------------------------
Cleveland Public Power, First Mortgage, Rev., 7.00%, to be
called 11-15-04 @ 102 600 705
----------------------------------------------------------------------------------
Olmstead Falls City School District, Gen. Oblg., 6.85%, to
be called 12-15-04 @ 102 250 292
----------------------------------------------------------------------------------
Cuyahoga County: Merida Health System, Rev., 6.25%, to be
called 8-15-05 @ 102 950 1,081
----------------------------------------------------------------------------------
Batavia Local School District, Gen. Oblg., 7.00%, to be
called 12-1-05 @ 102 500 598
----------------------------------------------------------------------------------
Ohio Housing Finance Agency Single Family Mortgage, Rev.,
zero coupon, to be called 1-15-13 @ 82 1,000 393
----------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--11.3% 4,667
----------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -------------------------------------------------------------------------------------------------------
Building Auth.:
Administrative Building Funds Proj., Rev., 6.30%, 2011 140 151
Adult Correctional Building Fund Proj., Rev., 6.125%, 2012 310 335
James A. Rhodes State Office Tower, Rev., 6.25%, 2011 215 229
Juvenile Correctional Building Proj., Rev., 6.60%, 2014 200 226
----------------------------------------------------------------------------------
Higher Education Facility:
Dayton University, Rev., 6.60%, 2017 430 484
Dominican College, Rev., 6.625%, 2014 600 661
Rev., 6.00% and 6.125%, 2011 and 2016 640 684
----------------------------------------------------------------------------------
Housing Finance Agency:
Rev., 5.85% and 6.10%, 2016 and 2028 750 783
Single Family Mortgage, Rev., 7.85%, 2021 275 292
----------------------------------------------------------------------------------
State Turnpike, Rev., 6.00%, 2007 1,000 1,120
----------------------------------------------------------------------------------
Water Development Auth., Pollution Control, Rev., 6.00% and
6.10%, 2006 and 2020 1,550 1,668
----------------------------------------------------------------------------------
Akron, Sewer System., Rev., 5.90%, 2011 385 423
----------------------------------------------------------------------------------
Athens, Gen. Oblg., 6.25%, 2011 500 534
----------------------------------------------------------------------------------
Avon Local School District, Gen. Oblg., 6.50%, 2015 940 1,122
----------------------------------------------------------------------------------
Beavercreek Local School District, Gen. Oblg., 6.60%, 2015 500 603
----------------------------------------------------------------------------------
Big Walnut Local School District, Gen. Oblg., zero coupon,
2012 420 205
----------------------------------------------------------------------------------
City of Springdale, Hospital Facilities First Mortgage,
Southwestern Ohio Seniors Services, Rev., 6.00%, 2018 750 787
----------------------------------------------------------------------------------
Cleveland Public Power, First Mortgage, Rev., 7.00%, 2017 750 831
----------------------------------------------------------------------------------
Cleveland, Waterworks Improvement, First Mortgage, Rev.,
6.25%, 2015 640 695
----------------------------------------------------------------------------------
Columbus Municipal Airport Auth., Rev., 6.00%, 2014 250 270
----------------------------------------------------------------------------------
Crawford County, Gen. Oblg., 6.75%, 2019 700 800
----------------------------------------------------------------------------------
Cuyahoga County:
Gen. Oblg., 6.00% and 5.65%, 2007 and 2018 1,000 1,057
Multi-Family Housing, Rev., 6.50%, 2020 1,000 1,068
----------------------------------------------------------------------------------
Dublin City School District, Gen. Oblg., zero coupon, 2010
and 2011 1,595 842
----------------------------------------------------------------------------------
Edon Township Local School District, Gen. Oblg., 6.00%, 2019 475 537
----------------------------------------------------------------------------------
Fayette County, Gen. Oblg., 5.90%, 2013 160 168
----------------------------------------------------------------------------------
Finneytown Local School District, Gen. Oblg., 6.20%, 2017 320 369
----------------------------------------------------------------------------------
Franklin County Local School District, Gen. Oblg., 6.50%,
2013 500 594
----------------------------------------------------------------------------------
Green Springs, St. Francis Healthcare, Rev., 7.00%, 2014 400 432
----------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Highland Heights, Gen. Oblg., 6.15%, 2012 $ 145 $ 157
----------------------------------------------------------------------------------
Hillard School District, Gen. Oblg., 6.00%, 2006 500 562
----------------------------------------------------------------------------------
Lakeview Local School District, Gen. Oblg., 6.90%, 2014 700 806
----------------------------------------------------------------------------------
Lakota, Gen. Oblg., 7.00%, 2008 500 609
----------------------------------------------------------------------------------
Liberty Local School District, Gen Oblg., zero coupon, 2011
and 2012 505 253
----------------------------------------------------------------------------------
Lucas County, Public Improvement Water Utility, Rev., 6.05%
and 6.50%, 2013 and 2016 380 430
----------------------------------------------------------------------------------
Marion County, United Church Homes Proj., Rev., 6.375% and
6.30%, 2010 and 2015 700 743
----------------------------------------------------------------------------------
Napoleon, Health Care Facility, Lutheran Orphans' and Old
Folks' Home Society, Rev., 6.875%, 2023 470 518
----------------------------------------------------------------------------------
Olentangy Local School District, Gen. Oblg., 5.85%, 2007 400 440
----------------------------------------------------------------------------------
Sandusky County, Gen. Oblg., 6.20%, 2013 500 560
----------------------------------------------------------------------------------
South Euclid-Lyndhurst City School District, Gen. Oblg.,
6.40%, 2018 535 606
----------------------------------------------------------------------------------
Springboro Community City School District, School
Improvement, Gen. Oblg., 6.00%, 2011 500 569
----------------------------------------------------------------------------------
Strongsville, Gen. Oblg., 6.70%, 2011 500 580
----------------------------------------------------------------------------------
Toledo, Gen. Oblg., 6.10% and 6.35%, 2014 and 2025 1,250 1,392
----------------------------------------------------------------------------------
Trumbull County Sewer Improvement, Gen. Oblg., 6.20%, 2014 500 555
----------------------------------------------------------------------------------
Tuscarawas Valley Local School District, Gen. Oblg., 6.60%,
2015 365 418
----------------------------------------------------------------------------------
University of Cincinnati, Rev., 5.50%, 2013 620 662
----------------------------------------------------------------------------------
Wayne Local School District, Gen Oblg., 6.45% and 6.60%,
2011 and 2016 355 423
----------------------------------------------------------------------------------
West Lake Local School District, Gen. Oblg., 6.15%, 2005 500 562
----------------------------------------------------------------------------------
Willoughby Industrial Development, Rev., 6.875%, 2016 575 640
----------------------------------------------------------------------------------
Wooster City School District, Gen. Oblg., zero coupon, 2013 930 429
----------------------------------------------------------------------------------
Youngstown, Gen. Oblg., 6.125%, 2014 110 122
----------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Electric Power Auth., Rev., 6.50%, 2006 750 868
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev., 6.50%, 2018 750 818
Finance Agcy., Rev., 6.00%, 2014 250 273
Highway and Transportation Auth., Rev., 6.25%, 2016 750 878
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 360 391
----------------------------------------------------------------------------------
Virgin Islands, Public Finance Auth., Rev., 7.25%, 2018 225 253
----------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--81.2% 33,487
----------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--92.5%
(Cost: $35,156) 38,154
----------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--3.70% to 3.90%
INSTRUMENTS
- --6.5%
Due--March 1998
----------------------------------------------------------------------------------
Air Quality Development Auth., Rev. 1,700 1,700
----------------------------------------------------------------------------------
State Solid Waste, Rev. 1,000 1,000
----------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--6.5%
(Cost: $2,700) 2,700
----------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.0%
(Cost: $37,856) 40,854
----------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.0% 417
----------------------------------------------------------------------------------
NET ASSETS--100% $41,271
----------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $37,856,000 for federal income tax purposes
at February 28, 1998, the gross unrealized appreciation was $2,999,000, the
gross unrealized depreciation was $1,000 and the net unrealized appreciation on
investments was $2,998,000.
See accompanying Notes to Financial Statements.
19
<PAGE> 20
PORTFOLIO STATISTICS
KEMPER TEXAS TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 2/28/98 ON 8/31/97
- ------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 56% 58%
- ------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 28 30
- ------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 10 8
- ------------------------------------------------------------------------------
CASH AND EQUIVALENTS 6 4
- ------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
QUALITY ON 2/28/98 ON 8/31/97
- ------------------------------------------------------------------------------
<S> <C> <C>
AAA 69% 71%
- ------------------------------------------------------------------------------
AA 8 7
- ------------------------------------------------------------------------------
A 7 8
- ------------------------------------------------------------------------------
BBB 16 14
- ------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
YEARS TO MATURITY ON 2/28/98 ON 8/31/97
- ------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------
1-10 YEARS 14% 9%
- -------------------------------------------------------------------------------
11-20 YEARS 66 61
- -------------------------------------------------------------------------------
21+ YEARS 20 30
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE MATURITY ON 2/28/98 ON 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------
16.0 years 16.8 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, 1998 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- -----------------------------------------------------------------------------------------------------
Travis County Housing Finance Corp., Gen. Oblg., 6.75%,
to be called 9-1-01 @ 100 $ 75 $ 82
--------------------------------------------------------------------------------
Ector County Hospital District, Rev., 7.30%, to be called
4-15-02 @ 102 450 511
--------------------------------------------------------------------------------
Port Arthur, Gen. Oblg., 6.125%, to be called 3-1-04 @ 100 95 105
--------------------------------------------------------------------------------
Dripping Springs, Independent School District, Gen. Oblg.,
5.80%, to be called 8-15-07 @ 100 280 311
--------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--7.9% 1,009
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -----------------------------------------------------------------------------------------------------
Department of Housing and Community Affairs:
NHP Foundation, Asmara Proj., Rev., 6.40%, 2027 150 160
Single Family Mortgage Rev., 6.00%, 2017 235 247
--------------------------------------------------------------------------------
Housing Agcy., Single Family Mortgage Rev., 7.15%, 2012 60 64
--------------------------------------------------------------------------------
Public Financing Auth., Gen. Oblg., 7.00%, 2012 213 226
--------------------------------------------------------------------------------
State Veterans' Land, Gen. Oblg., 6.40%, 2024 350 381
--------------------------------------------------------------------------------
Texas Higher Education Coordinating Board, College Student
Loan, Gen. Oblg., 5.00%, 2017 150 147
--------------------------------------------------------------------------------
Abilene Higher Education Facilities Corp., Abilene Christian
University Proj.,
Rev., 6.25%, 2011 300 321
--------------------------------------------------------------------------------
Argyle Independent School District, Gen. Oblg., zero coupon,
2014 500 219
--------------------------------------------------------------------------------
Austin:
Airport System Rev., 6.20%, 2015 585 641
Utilities System Rev., zero coupon, 2011 100 51
--------------------------------------------------------------------------------
Bexar County Housing Finance Dev. Corp., Multi-Family
Housing
Rev., 6.875%, 2012 250 264
--------------------------------------------------------------------------------
Brazos River Auth., Texas Utilities Electric Company Proj.,
Rev., 8.125%, 2020 350 379
--------------------------------------------------------------------------------
Cameron County Housing Finance Corp., Single Family
Mortgage,
Rev., 6.75%, 2025 365 396
--------------------------------------------------------------------------------
Canadian River Municipal Water Auth., Rev., 5.875%, 2016 250 267
--------------------------------------------------------------------------------
Circle C, Utility System, District No. 3, Rev., 6.50%, 2009 250 270
--------------------------------------------------------------------------------
Dallas-Fort Worth International Airport, Rev., 6.00%, 2014 125 132
--------------------------------------------------------------------------------
Denison Hospital Auth., Texonna Medical Center, Inc. Proj.,
Rev., 6.125%, 2027 250 264
--------------------------------------------------------------------------------
Denton, Utility System Rev., 6.50%, 2009 150 166
--------------------------------------------------------------------------------
Ellis County, Waxahachie Independent School District, Gen.
Oblg., zero coupon, 2009 350 205
--------------------------------------------------------------------------------
Fort Bend County, Levee Improvement District No. 2, Gen.
Oblg.,
6.625%, 2008 200 213
--------------------------------------------------------------------------------
Georgetown Higher Education Finance Corp., Southwest
University Proj.,
Rev., 6.30%, 2014 250 268
--------------------------------------------------------------------------------
Gulf Coast Waste Disposal Auth., Rev., 6.875%, 2028 250 277
--------------------------------------------------------------------------------
Harris County:
Aldine Independent School District, Gen. Oblg., 5.35%,
2017 250 255
Criminal Justice Center, Gen. Oblg., 7.50%, 2005 165 199
Health Facilities Dev. Corp., St. Luke's Episcopal
Hospital Proj.,
Rev., 6.75%, 2021 120 130
Hospital District Mortgage Rev., 7.40%, 2010 60 74
--------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Houston:
Higher Education Finance Corp., University of St. Thomas
Proj.,
Rev., 7.25%, 2007 $300 $ 329
Independent School District, Gen. Oblg., 6.30%, 2014 500 583
--------------------------------------------------------------------------------
Lockhart Correctional Facilities Financing Corp. Rev.,
6.625%, 2012 200 214
--------------------------------------------------------------------------------
Lower Colorado River Auth., Junior Lien Rev., 5.25%, 2015 150 157
--------------------------------------------------------------------------------
Municipal Power Agency, Rev., zero coupon, 2015 620 255
--------------------------------------------------------------------------------
North Central Health Facilities Dev. Corp.:
Presbyterian Healthcare System, Rev., 6.625%, 2011 100 115
Health Resources System, Rev., 5.75%, 2011 250 272
--------------------------------------------------------------------------------
Red River Auth., Public Service Utilities Company Rev.,
6.00%, 2020 150 162
--------------------------------------------------------------------------------
Socorro Independent School District, Gen. Oblg., 6.625%,
2013 90 98
--------------------------------------------------------------------------------
Spring Independent School District, Gen. Oblg., 6.875% and
6.375%,
2009 and 2016 700 802
--------------------------------------------------------------------------------
Texarkana, Wadley Regional Medical Center Rev., 6.00%, 2016 300 338
--------------------------------------------------------------------------------
Travis County Housing Finance Corp.:
Lago Vista Independent School District, Gen. Oblg., zero
coupon, 2023 675 181
Residential Mortgage, Senior Rev., 7.00%, 2011 210 224
Single Family Mortgage Rev., 6.75%, 2014 80 86
--------------------------------------------------------------------------------
Trinity River Auth., Denton Creek Wastewater System Rev.,
6.45%, 2015 390 433
--------------------------------------------------------------------------------
Waco Health Facilities Dev. Corp., Hillcrest Baptist Medical
Center Proj.,
Rev., 7.125%, 2014 90 98
--------------------------------------------------------------------------------
Wylie Texas Independent School District, Gen. Oblg., 6.90%,
2012 50 61
--------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Gen. Oblg., 6.25%, 2013 150 175
Industrial Tourist, Educational, Medical and Environmental
Control Facilities Financing Auth., Rev., 5.625%, 2017 250 257
--------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--86.1% 11,056
--------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--94.0%
(Cost: $11,181) 12,065
--------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
MONEY MARKET Yield--3.70% to 3.95%
INSTRUMENTS
- --4.7%
Due--February 1998
(Cost: $600) 600 600
--------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.7%
(Cost: $11,781) 12,665
--------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES--1.3% 173
--------------------------------------------------------------------------------
NET ASSETS--100% $12,838
--------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $11,781,000 for federal income tax purposes
at February 28, 1998, gross unrealized appreciation and the net unrealized
appreciation on investments was $884,000.
See accompanying Notes to Financial Statements.
22
<PAGE> 23
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 3, 1997, a special shareholders' meeting was held, and adjourned as
necessary. Kemper State Tax-Free Income Series Fund shareholders were asked to
vote on five separate issues: election of the nine members to the Board of
Trustees, ratification of Ernst & Young LLP as independent auditors, approval of
new investment management agreement with Scudder Kemper Investments, Inc.,
approval of changes in the funds' fundamental investment policies to permit a
master/feeder fund structure and approval of a new rule 12b-1 distribution plan
with Zurich Kemper Distributors, Inc. for Class B shares and Class C shares. The
following are the results for each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 119,248,795 2,108,979
Lewis A. Burnham 119,311,562 2,046,211
Donald L. Dunaway 119,304,528 2,053,245
Robert B. Hoffman 119,334,394 2,023,379
Donald R. Jones 119,298,645 2,059,128
Shirley D. Peterson 119,239,486 2,118,287
Daniel Pierce 119,315,863 2,041,911
William P. Sommers 119,329,837 2,027,937
Edmond D. Villani 119,280,576 2,077,197
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
117,579,199 738,097 3,040,476
</TABLE>
3) Approval of new investment management agreement with Scudder Kemper
Investments, Inc.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
California 80,712,708 1,676,927 3,851,109
Michigan 174,037 11,615 5,551
Ohio 2,776,485 9,043 74,864
Texas 696,921 20,745 27,456
</TABLE>
4) Approval of changes in the funds' fundamental investment policies to permit a
master/feeder fund structure.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
California 69,563,872 2,469,902 5,458,605 8,748,365
Michigan 170,268 12,209 6,593 2,133
Ohio 2,101,971 46,816 121,579 590,025
Texas 647,626 27,887 18,802 0
</TABLE>
5) To approve a new rule 12b-1 distribution plan with Zurich Kemper
Distributors, Inc.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
California
Class B 2,025,046 20,538 163,816 175,285
Class C 333,407 0 0 458
Michigan
Class B 59,473 1,381 4,251 914
Class C 8,176 0 0 2,386
Ohio
Class B 650,995 2,654 43,368 30,343
Class C 20,434 1,715 0 0
Texas
Class B 50,661 0 0 0
Class C 26,206 0 0 0
</TABLE>
23
<PAGE> 24
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
CALIFORNIA MICHIGAN OHIO TEXAS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------
Investments, at value (Cost: $927,977,
$3,274, $37,856 and $11,781, respectively) $ 993,495 3,476 40,854 12,665
- -----------------------------------------------------------------------------------------------------
Cash 36 55 70 --
- -----------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 250 -- 33 90
- -----------------------------------------------------------------------------------------------------
Investments sold 20,311 20 -- --
- -----------------------------------------------------------------------------------------------------
Interest 12,804 51 504 145
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,026,896 3,602 41,461 12,900
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------------------------------------
Cash overdraft -- -- -- 35
- -----------------------------------------------------------------------------------------------------
Payable for:
Dividends 863 2 30 11
- -----------------------------------------------------------------------------------------------------
Fund shares redeemed 567 -- 105 --
- -----------------------------------------------------------------------------------------------------
Investments purchased 16,250 132 -- --
- -----------------------------------------------------------------------------------------------------
Management fee 451 2 19 6
- -----------------------------------------------------------------------------------------------------
Administrative services fee 151 -- 7 2
- -----------------------------------------------------------------------------------------------------
Distribution services fee 21 2 7 1
- -----------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 19 1 6 3
- -----------------------------------------------------------------------------------------------------
Trustees' fees and other 87 -- 16 4
- -----------------------------------------------------------------------------------------------------
Total liabilities 18,409 139 190 62
- -----------------------------------------------------------------------------------------------------
NET ASSETS $1,008,487 3,463 41,271 12,838
- -----------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
Paid-in capital $ 944,106 3,276 38,444 11,928
- -----------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (1,137) (15) (171) 26
- -----------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 65,518 202 2,998 884
- -----------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $1,008,487 3,463 41,271 12,838
- -----------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $ 976,142 2,030 30,615 10,944
- -----------------------------------------------------------------------------------------------------
Shares outstanding 128,961 196 2,932 1,034
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $7.57 10.33 10.44 10.58
- -----------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $7.93 10.82 10.93 11.08
- -----------------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $ 30,569 1,360 9,927 1,574
- -----------------------------------------------------------------------------------------------------
Shares outstanding 4,033 132 951 149
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $7.58 10.33 10.44 10.58
- -----------------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $ 1,776 73 729 320
- -----------------------------------------------------------------------------------------------------
Shares outstanding 236 7 70 30
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $7.53 10.33 10.44 10.58
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
24
<PAGE> 25
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
CALIFORNIA MICHIGAN OHIO TEXAS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------------------------------
Interest income $28,498 81 1,064 357
- --------------------------------------------------------------------------------------------------------
Expenses:
Management fee 2,702 9 110 36
- --------------------------------------------------------------------------------------------------------
Administrative services fee 892 2 43 13
- --------------------------------------------------------------------------------------------------------
Distribution services fee 119 5 37 6
- --------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 177 2 18 6
- --------------------------------------------------------------------------------------------------------
Professional fees 1 -- 1 --
- --------------------------------------------------------------------------------------------------------
Reports to shareholders 7 -- 3 1
- --------------------------------------------------------------------------------------------------------
Trustees' fees and other 17 2 15 4
- --------------------------------------------------------------------------------------------------------
Total expenses before expense waiver 3,915 20 227 66
- --------------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment manager -- 1 -- --
- --------------------------------------------------------------------------------------------------------
Total expenses after expense waiver 3,915 19 227 66
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 24,583 62 837 291
- --------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on sales of investments 12,305 19 192 109
- --------------------------------------------------------------------------------------------------------
Net realized gain (loss) from futures transactions (184) -- 4 1
- --------------------------------------------------------------------------------------------------------
Net realized gain 12,121 19 196 110
- --------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 12,032 78 892 238
- --------------------------------------------------------------------------------------------------------
Net gain on investments 24,153 97 1,088 348
- --------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $48,736 159 1,925 639
- --------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED) AND THE YEAR ENDED AUGUST
31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
CALIFORNIA MICHIGAN
- -------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------------------------
Net investment income $ 24,583 52,100 62 129
- -------------------------------------------------------------------------------------------------------------
Net realized gain 12,121 20,425 19 40
- -------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 12,032 13,073 78 84
- -------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 48,736 85,598 159 253
- -------------------------------------------------------------------------------------------------------------
Distribution from net investment income (24,583) (52,100) (62) (129)
- -------------------------------------------------------------------------------------------------------------
Distribution from net realized gain (16,812) (5,606) (54) (35)
- -------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (41,395) (57,706) (116) (164)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions (6,761) (60,523) 329 (284)
- -------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 580 (32,631) 372 (195)
- -------------------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------------------
Beginning of period 1,007,907 1,040,538 3,091 3,286
- -------------------------------------------------------------------------------------------------------------
END OF PERIOD $1,008,487 1,007,907 3,463 3,091
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
OHIO TEXAS
- -------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------------------------
Net investment income $ 837 1,740 291 632
- ---------------------------------------------------------------------------------------------------------
Net realized gain 196 61 110 158
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 892 1,149 238 254
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,925 2,950 639 1,044
- ---------------------------------------------------------------------------------------------------------
Distribution from net investment income (837) (1,740) (291) (632)
- ---------------------------------------------------------------------------------------------------------
Distribution from net realized gain (250) (114) (147) (326)
- ---------------------------------------------------------------------------------------------------------
Total dividends to shareholders (1,087) (1,854) (438) (958)
- ---------------------------------------------------------------------------------------------------------
Net increase from capital share transactions 965 1,272 168 (1,212)
- ---------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,803 2,368 369 (1,126)
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of period 39,468 37,100 12,469 13,595
- ---------------------------------------------------------------------------------------------------------
END OF PERIOD $41,271 39,468 12,838 12,469
- ---------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUNDS Kemper California Tax-Free Income Fund, Kemper
Michigan Tax-Free Income Fund, Kemper Ohio Tax-Free
Income Fund and Kemper Texas Tax-Free Income Fund
(collectively the Funds) are four of eight
investment portfolios comprising the Kemper State
Tax-Free Income Series (the Trust). The remaining
portfolios are Kemper Florida, Kemper New Jersey,
Kemper New York and Kemper Pennsylvania Tax-Free
Income Funds. The Trust is an open-end management
investment company organized as a business trust
under the laws of Massachusetts.
Each Fund offers three classes of shares. Class A
shares are sold to investors subject to an initial
sales charge. Class B shares are sold without an
initial sales charge but are subject to higher
ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Differences in class expenses
will result in the payment of different per share
income dividends by class. Each share of a Fund has
equal rights with respect to voting, dividends and
assets, subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Financial futures and options are
valued at the settlement price established each day
by the board of trade or exchange on which they are
traded. Over-the-counter traded options are valued
based upon prices provided by market makers. Other
securities and assets are valued at fair value as
determined in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes premium and original
discount amortization on fixed income securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated among the Funds in
proportion to their relative net assets.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
27
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
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, 1998.
DIVIDENDS TO SHAREHOLDERS. Each Fund declares and
records a daily dividend equal to its net
investment income for that day, to holders of
shares for which payment has been received. Income
dividends are distributed monthly. Net realized
capital gains, if any, are distributed at least
annually. Dividends are determined in accordance
with income tax principles which may treat certain
transactions differently from generally accepted
accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS
WITH AFFILIATES INVESTMENT MANAGER COMBINATION. Effective December
31, 1997, Zurich Insurance Company, the parent of
Zurich Kemper Investments, Inc. (ZKI), acquired a
majority interest in Scudder, Stevens & Clark, Inc.
(Scudder), another major investment manager. As a
result of this transaction, the operations of ZKI
were combined with Scudder to form a new global
investment organization named Scudder Kemper
Investments, Inc. (Scudder Kemper). The transaction
resulted in the termination of the Funds'
investment management agreement with ZKI, however,
a new investment management agreement between the
Funds and Scudder Kemper was approved by the Funds'
Board of Trustees and by the Funds' shareholders.
The new management agreement, which was effective
December 31, 1997, is the same in all material
respects as the previous management agreement,
except that Scudder Kemper is the new investment
adviser to the Funds. In addition, the names of the
Funds' principal underwriter and shareholder
service agent were changed to Kemper Distributors,
Inc. (KDI) and Kemper Service Company (KSvC),
respectively.
MANAGEMENT AGREEMENT. Under the Funds' management
agreement each Fund pays a management fee at an
annual rate of .55% of the first $250 million of
average daily net assets declining to .40% of
average daily net assets in excess of $12.5
billion. Management fees incurred for the six
months ended February 28, 1998 are as follows:
<TABLE>
<S> <C>
California $2,702,000
Michigan 9,000
Ohio 110,000
Texas 36,000
</TABLE>
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Trust has an underwriting and distribution
services agreement with KDI. Underwriting
commissions paid in connection with the
distribution of each Fund's Class A shares for the
six months ended February 28, 1998 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS
RETAINED BY KDI ALLOWED BY KDI TO FIRMS
--------------- -----------------------
<S> <C> <C>
California $58,000 346,000
Michigan -- 2,000
Ohio 4,000 21,000
Texas -- 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, CDSC and
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
commissions related to Class B and Class C shares
for the six months ended February 28, 1998 are as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY KDI PAID BY KDI TO FIRMS
----------------- --------------------
<S> <C> <C>
California $147,000 168,000
Michigan 6,000 11,000
Ohio 50,000 43,000
Texas 6,000 23,000
</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, 1998 are as follows:
<TABLE>
<CAPTION>
ASF PAID BY THE ASF PAID BY
FUND TO KDI KDI TO FIRMS
---------------- -------------
<S> <C> <C>
California $892,000 895,000
Michigan 2,000 4,000
Ohio 43,000 44,000
Texas 13,000 13,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds' transfer agent,
KSvC is the shareholder service agent of the Trust.
Under the agreement, for the six months ended
February 28, 1998, KSvC received shareholder
services fees as follows:
<TABLE>
<S> <C>
California $177,000
Michigan 1,000
Ohio 11,000
Texas 4,000
</TABLE>
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of
Scudder Kemper. For the six months ended February
28, 1998, the Funds made no payments to their
officers and incurred trustees' fees aggregating
$7,000 to independent trustees.
OPERATING EXPENSE WAIVER. Scudder Kemper has agreed
to waive certain operating expenses of the Michigan
Fund beginning in December 1996. Under this
arrangement, Scudder Kemper waived expenses of
$1,000 for the six months ended February 28, 1998.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended February 28, 1998,
investment transactions (excluding short-term
instruments) are as follows (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
---------- -------- ----- -----
<S> <C> <C> <C> <C>
Purchases $327,101 1,189 6,024 2,133
Proceeds from sales 330,654 929 5,055 2,402
</TABLE>
29
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
FEBRUARY 28, 1998 AUGUST 31, 1997
----------------------- -----------------------
CALIFORNIA SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 9,814 $ 74,436 14,893 $ 110,663
--------------------------------------------------------------------------------
Class B 674 5,123 1,616 12,006
--------------------------------------------------------------------------------
Class C 5,603 42,309 929 6,969
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 3,419 25,866 4,458 33,067
--------------------------------------------------------------------------------
Class B 85 646 84 621
--------------------------------------------------------------------------------
Class C 10 77 8 59
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (14,668) (111,309) (28,797) (213,817)
--------------------------------------------------------------------------------
Class B (224) (1,703) (493) (3,662)
--------------------------------------------------------------------------------
Class C (5,578) (42,207) (853) (6,429)
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 81 613 22 169
--------------------------------------------------------------------------------
Class B (81) (612) (23) (169)
--------------------------------------------------------------------------------
NET DECREASE
FROM CAPITAL SHARE
TRANSACTIONS $ (6,761) $ (60,523)
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997
------------------- -------------------
MICHIGAN SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 15 $ 162 59 $ 594
-------------------------------------------------------------------------
Class B 31 325 10 103
-------------------------------------------------------------------------
Class C 2 25 24 232
-------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 5 48 8 80
-------------------------------------------------------------------------
Class B 3 28 4 40
-------------------------------------------------------------------------
Class C 1 4 1 7
-------------------------------------------------------------------------
SHARES REDEEMED
Class A (11) (116) (96) (964)
-------------------------------------------------------------------------
Class B (7) (73) (18) (184)
-------------------------------------------------------------------------
Class C (8) (74) (19) (192)
-------------------------------------------------------------------------
NET INCREASE (DECREASE)
FROM CAPITAL SHARE
TRANSACTIONS $ 329 $(284)
-------------------------------------------------------------------------
</TABLE>
30
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997
-------------------- --------------------
OHIO SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 100 $1,035 423 $ 4,247
---------------------------------------------------------------------------
Class B 111 1,162 287 2,896
---------------------------------------------------------------------------
Class C 32 332 28 280
---------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 55 572 95 953
---------------------------------------------------------------------------
Class B 14 151 23 231
---------------------------------------------------------------------------
Class C 1 10 1 15
---------------------------------------------------------------------------
SHARES REDEEMED
Class A (152) (1,580) (559) (5,624)
---------------------------------------------------------------------------
Class B (69) (706) (152) (1,536)
---------------------------------------------------------------------------
Class C (1) (11) (19) (190)
---------------------------------------------------------------------------
CONVERSION OF SHARES
Class A -- -- 1 11
---------------------------------------------------------------------------
Class B -- -- (1) (11)
---------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL SHARE
TRANSACTIONS $ 965 $ 1,272
---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997
-------------------- --------------------
TEXAS SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 52 $ 548 87 $ 897
---------------------------------------------------------------------------
Class B 67 710 56 573
---------------------------------------------------------------------------
Class C 1 2 15 135
---------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 25 268 59 613
---------------------------------------------------------------------------
Class B 1 17 2 16
---------------------------------------------------------------------------
Class C 1 8 1 12
---------------------------------------------------------------------------
SHARES REDEEMED
Class A (118) (1,253) (333) (3,448)
---------------------------------------------------------------------------
Class B (11) (129) (1) (9)
---------------------------------------------------------------------------
Class C (2) (3) (1) (1)
---------------------------------------------------------------------------
NET INCREASE
(DECREASE) FROM
CAPITAL SHARE
TRANSACTIONS $ 168 $(1,212)
---------------------------------------------------------------------------
</TABLE>
31
<PAGE> 32
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------
CLASS A
--------------------------------------------
SIX MONTHS YEAR
ENDED ENDED
FEBRUARY 28, AUGUST 31,
-----------------------------
CALIFORNIA 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $7.52 7.31 7.35 7.22 8.01
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .18 .38 .39 .39 .39
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .18 .25 .04 .17 (.44)
- ---------------------------------------------------------------------------------------
Total from investment operations .36 .63 .43 .56 (.05)
- ---------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .18 .38 .39 .39 .39
- ---------------------------------------------------------------------------------------
Distribution from net realized gain .13 .04 .08 .04 .35
- ---------------------------------------------------------------------------------------
Total dividends .31 .42 .47 .43 .74
- ---------------------------------------------------------------------------------------
Net asset value, end of period $7.57 7.52 7.31 7.35 7.22
- ---------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.85% 8.78 5.92 8.13 (.74)
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses .73% .79 .78 .74 .74
- ---------------------------------------------------------------------------------------
Net investment income 4.82% 5.08 5.18 5.53 5.30
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------
CLASS B
---------------------------------------------------
SIX MONTHS YEAR MAY 31
ENDED ENDED TO
FEBRUARY 28, AUGUST 31, AUGUST 31,
------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.52 7.32 7.35 7.22 7.23
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .15 .32 .32 .33 .08
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .19 .24 .05 .17 (.01)
- ---------------------------------------------------------------------------------------------
Total from investment operations .34 .56 .37 .50 .07
- ---------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .15 .32 .32 .33 .08
- ---------------------------------------------------------------------------------------------
Distribution from net realized gain .13 .04 .08 .04 --
- ---------------------------------------------------------------------------------------------
Total dividends .28 .36 .40 .37 .08
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $7.58 7.52 7.32 7.35 7.22
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.55% 7.73 5.16 7.17 1.05
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses 1.59% 1.62 1.63 1.60 1.60
- ---------------------------------------------------------------------------------------------
Net investment income 4.82% 4.25 4.33 4.67 4.48
- ---------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------------
CLASS C
---------------------------------------------------
SIX MONTHS YEAR ENDED AUGUST MAY 31
ENDED 31, TO
FEBRUARY 28, ------------------ AUGUST 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.50 7.31 7.34 7.22 7.23
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .15 .32 .32 .33 .08
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .16 .23 .05 .16 (.01)
- ---------------------------------------------------------------------------------------------
Total from investment operations .31 .55 .37 .49 .07
- ---------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .15 .32 .32 .33 .08
- ---------------------------------------------------------------------------------------------
Distribution from net realized gain .13 .04 .08 .04 --
- ---------------------------------------------------------------------------------------------
Total dividends .28 .36 .40 .37 .08
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $7.53 7.50 7.31 7.34 7.22
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.12% 7.59 5.15 7.08 .96
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses 1.59% 1.60 1.64 1.56 1.56
- ---------------------------------------------------------------------------------------------
Net investment income 4.82% 4.27 4.32 4.71 4.76
- ---------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, -------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $1,008,487 1,007,907 1,040,538 1,087,232 1,168,449
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 67% 79 100 69 37
- --------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES FOR ALL FUNDS: Total return does not reflect the effect of sales charges.
Data for the period ended February 28, 1998 is unaudited.
33
<PAGE> 34
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------
CLASS A
--------------------------------------------
SIX MONTHS YEAR ENDED MARCH 15
ENDED AUGUST 31, TO
FEBRUARY 28, ------------ AUGUST 31,
MICHIGAN 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $10.19 9.92 9.76 9.50
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .21 .43 .44 .22
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain .32 .38 .16 .26
- ---------------------------------------------------------------------------------------
Total from investment operations .53 .81 .60 .48
- ---------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .21 .43 .44 .22
- ---------------------------------------------------------------------------------------
Distribution from net realized gain .18 .11 -- --
- ---------------------------------------------------------------------------------------
Total dividends .39 .54 .44 .22
- ---------------------------------------------------------------------------------------
Net asset value, end of period $10.33 10.19 9.92 9.76
- ---------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.27% 8.35 6.19 5.00
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses absorbed by the Fund .93% 1.13 1.21 .41
- ---------------------------------------------------------------------------------------
Net investment income 4.15% 4.31 4.36 4.82
- ---------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses .93% 1.29 1.53 .96
- ---------------------------------------------------------------------------------------
Net investment income 4.15% 4.15 4.04 4.27
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------
CLASS B
---------------------------------------------
SIX MONTHS YEAR ENDED MARCH 15
ENDED AUGUST 31, TO
FEBRUARY 28, ------------ AUGUST 31,
1998 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $10.18 9.91 9.77 9.50
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .18 .36 .36 .18
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain .33 .38 .14 .27
- ---------------------------------------------------------------------------------------
Total from investment operations .51 .74 .50 .45
- ---------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .18 .36 .36 .18
- ---------------------------------------------------------------------------------------
Distribution from net realized gain .18 .11 -- --
- ---------------------------------------------------------------------------------------
Total dividends .36 .47 .36 .18
- ---------------------------------------------------------------------------------------
Net asset value, end of period $10.33 10.18 9.91 9.77
- ---------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.99% 7.53 5.19 4.72
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.71% 1.89 1.94 1.21
- ---------------------------------------------------------------------------------------
Net investment income 3.37% 3.55 3.63 4.02
- ---------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses 1.80% 2.05 2.26 1.76
- ---------------------------------------------------------------------------------------
Net investment income 3.28% 3.39 3.31 3.47
- ---------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 35
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------
CLASS C
---------------------------------------------
SIX MONTHS YEAR ENDED MARCH 15
ENDED AUGUST 31, TO
FEBRUARY 28, ------------ AUGUST 31,
1998 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $10.18 9.91 9.76 9.50
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .18 .35 .37 .18
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain .33 .38 .15 .26
- ---------------------------------------------------------------------------------------
Total from investment operations .51 .73 .52 .44
- ---------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .18 .35 .37 .18
- ---------------------------------------------------------------------------------------
Distribution from net realized gain .18 .11 -- --
- ---------------------------------------------------------------------------------------
Total dividends .36 .46 .37 .18
- ---------------------------------------------------------------------------------------
Net asset value, end of period $10.33 10.18 9.91 9.76
- ---------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.98% 7.54 5.36 4.63
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.70% 1.78 1.64 1.21
- ---------------------------------------------------------------------------------------
Net investment income 3.38% 3.66 3.93 4.02
- ---------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses 1.79% 1.94 1.96 1.76
- ---------------------------------------------------------------------------------------
Net investment income 3.29% 3.50 3.61 3.47
- ---------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS MARCH 15
ENDED YEAR ENDED AUGUST 31, TO
FEBRUARY 28, ---------------------- AUGUST 31,
1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at end of period (in thousands) $3,463 3,091 3,286 3,079
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 61% 69 135 161
- -------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE FOR MICHIGAN FUND:
- -------------------------------------------------------------------------------
Scudder Kemper 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, Scudder Kemper agreed to absorb
certain operating expenses of the Fund. "Other ratios to average net assets" are
computed without expense waiver or absorption.
35
<PAGE> 36
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------
CLASS A
---------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, ------------------------------
OHIO 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------
Net asset value, beginning of period $10.22 9.93 9.81 9.56 9.98
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .23 .47 .48 .50 .53
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .29 .32 .12 .25 (.41)
- ----------------------------------------------------------------------------------------
Total from investment operations .52 .79 .60 .75 .12
- ----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .23 .47 .48 .50 .53
- ----------------------------------------------------------------------------------------
Distribution from net realized gain .07 .03 -- -- .01
- ----------------------------------------------------------------------------------------
Total dividends .30 .50 .48 .50 .54
- ----------------------------------------------------------------------------------------
Net asset value, end of period $10.44 10.22 9.93 9.81 9.56
- ----------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.09% 8.17 6.16 8.20 1.23
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------
Expenses absorbed by the Fund .92% .89 .91 .63 .02
- ----------------------------------------------------------------------------------------
Net investment income 4.38% 4.69 4.78 5.27 5.44
- ----------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------
Expenses .92% .89 .91 .83 .82
- ----------------------------------------------------------------------------------------
Net investment income 4.38% 4.69 4.78 5.07 4.64
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------
CLASS B
---------------------------------------------------
SIX MONTHS YEAR ENDED AUGUST MAY 31
ENDED 31, TO
FEBRUARY 28, ------------------- AUGUST 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.22 9.93 9.81 9.56 9.54
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .18 .39 .39 .44 .14
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain .29 .32 .12 .25 .02
- ----------------------------------------------------------------------------------------------
Total from investment operations .47 .71 .51 .69 .16
- ----------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .18 .39 .39 .44 .14
- ----------------------------------------------------------------------------------------------
Distribution from net realized gain .07 .03 -- -- --
- ----------------------------------------------------------------------------------------------
Total dividends .25 .42 .39 .44 .14
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $10.44 10.22 9.93 9.81 9.56
- ----------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.67% 7.29 5.30 7.57 1.55
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.74% 1.70 1.73 1.32 .22
- ----------------------------------------------------------------------------------------------
Net investment income 3.56% 3.88 3.96 4.58 4.72
- ----------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------
Expenses 1.74% 1.70 1.73 1.75 1.72
- ----------------------------------------------------------------------------------------------
Net investment income 3.56% 3.88 3.96 4.15 3.22
- ----------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 37
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------------
CLASS C
-----------------------------------------------------
SIX MONTHS YEAR ENDED AUGUST MAY 31
ENDED 31, TO
FEBRUARY 28, ------------------- AUGUST 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.22 9.93 9.81 9.56 9.54
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .18 .39 .39 .44 .14
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain .29 .32 .12 .25 .02
- ----------------------------------------------------------------------------------------------
Total from investment operations .47 .71 .51 .69 .16
- ----------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .18 .39 .39 .44 .14
- ----------------------------------------------------------------------------------------------
Distribution from net realized gain .07 .03 -- -- --
- ----------------------------------------------------------------------------------------------
Total dividends .25 .42 .39 .44 .14
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $10.44 10.22 9.93 9.81 9.56
- ----------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.67% 7.32 5.28 7.56 1.55
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.74% 1.68 1.74 1.27 .21
- ----------------------------------------------------------------------------------------------
Net investment income 3.56% 3.90 3.95 4.63 5.04
- ----------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------
Expenses 1.74% 1.68 1.74 1.69 1.67
- ----------------------------------------------------------------------------------------------
Net investment income 3.56% 3.90 3.95 4.21 3.58
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, -------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $41,271 39,468 37,100 31,450 23,769
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 27% 52 86 90 103
- ---------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE FOR OHIO FUND:
- -------------------------------------------------------------------------------
Certain expenses of the Ohio Fund were waived or absorbed by Scudder Kemper 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.
37
<PAGE> 38
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> ------------------------------------------------
CLASS A
------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, -----------------------------
TEXAS 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.42 10.36 10.42 10.14 10.69
- -------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .24 .51 .51 .54 .56
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .28 .32 .21 .36 (.42)
- -------------------------------------------------------------------------------------------
Total from investment operations .52 .83 .72 .90 .14
- -------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .24 .51 .51 .54 .56
- -------------------------------------------------------------------------------------------
Distribution from net realized gain .12 .26 .27 .08 .13
- -------------------------------------------------------------------------------------------
Total dividends .36 .77 .78 .62 .69
- -------------------------------------------------------------------------------------------
Net asset value, end of period $10.58 10.42 10.36 10.42 10.14
- -------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.10% 8.28 7.04 9.28 1.28
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------
Expenses absorbed by the Fund .91% .92 .92 .70 .36
- -------------------------------------------------------------------------------------------
Net investment income 4.61% 4.90 4.88 5.37 5.38
- -------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------
Expenses .91% .92 .92 .89 .90
- -------------------------------------------------------------------------------------------
Net investment income 4.61% 4.90 4.88 5.18 4.82
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------
CLASS B
-------------------------------------------------
SIX MONTHS MAY 31
ENDED YEAR ENDED AUGUST 31, TO
FEBRUARY 28, --------------------- AUGUST 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.42 10.36 10.42 10.15 10.17
- -------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .20 .42 .42 .45 .12
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .28 .32 .21 .35 (.02)
- -------------------------------------------------------------------------------------------------
Total from investment operations .48 .74 .63 .80 .10
- -------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .20 .42 .42 .45 .12
- -------------------------------------------------------------------------------------------------
Distribution from net realized gain .12 .26 .27 .08 --
- -------------------------------------------------------------------------------------------------
Total dividends .32 .68 .69 .53 .12
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $10.58 10.42 10.36 10.42 10.15
- -------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.68% 7.41 6.11 8.16 .92
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.73% 1.73 1.79 1.54 1.24
- -------------------------------------------------------------------------------------------------
Net investment income 3.79% 4.09 4.01 4.53 4.44
- -------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses 1.73% 1.73 1.79 1.73 1.78
- -------------------------------------------------------------------------------------------------
Net investment income 3.79% 4.09 4.01 4.34 3.90
- -------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------------------
CLASS C
------------------------------------------------------
SIX MONTHS MAY 31
ENDED YEAR ENDED AUGUST 31, TO
FEBRUARY 28, --------------------- AUGUST 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.42 10.36 10.42 10.15 10.17
- -------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .20 .42 .42 .46 .12
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .28 .32 .21 .35 (.02)
- -------------------------------------------------------------------------------------------------
Total from investment operations .48 .74 .63 .81 .10
- -------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .20 .42 .42 .46 .12
- -------------------------------------------------------------------------------------------------
Distribution from net realized gain .12 .26 .27 .08 --
- -------------------------------------------------------------------------------------------------
Total dividends .32 .68 .69 .54 .12
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $10.58 10.42 10.36 10.42 10.15
- -------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.68% 7.43 6.13 8.27 .88
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.72% 1.71 1.76 1.50 1.23
- -------------------------------------------------------------------------------------------------
Net investment income 3.80% 4.11 4.04 4.57 3.96
- -------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses 1.72% 1.71 1.76 1.69 1.77
- -------------------------------------------------------------------------------------------------
Net investment income 3.80% 4.11 4.04 4.38 3.42
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, -------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $12,838 12,469 13,595 14,877 15,409
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 34% 62 112 75 58
- --------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
NOTE FOR TEXAS FUND:
- ------------------------------------------------------------------------------
Certain expenses of the Texas Fund were waived or absorbed by Scudder Kemper
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.
39
<PAGE> 40
TRUSTEES AND OFFICERS
TRUSTEES
DANIEL PIERCE
Chairman and Trustee
DAVID W. BELIN
Trustee
LEWIS A. BURNHAM
Trustee
DONALD L. DUNAWAY
Trustee
ROBERT B. HOFFMAN
Trustee
DONALD R. JONES
Trustee
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
EDMOND D. VILLANI
Trustee
OFFICERS
MARK S. CASADY
President
PHILIP J. COLLORA
Vice President,
Secretary and Treasurer
ELEANOR R. BRENNAN
Vice President
JERALD K. HARTMAN
Vice President
THOMAS W. LITTAUER
Vice President
ANN M. MCCREARY
Vice President
CHRISTOPHER J. MIER
Vice President
ROBERT C. PECK, JR.
Vice President
KATHRYN L. QUIRK
Vice President
LINDA J. WONDRACK
Vice President
JOHN R. HEBBLE
Assistant Treasurer
MAUREEN E. KANE
Assistant Secretary
CAROLINE PEARSON
Assistant Secretary
ELIZABETH C. WERTH
Assistant Secretary
- -------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- -------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- -------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania
Kansas City, MO 64105
- -------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Tax-Free Income Funds prospectus.
KSTIS - 3 (4/98) 1045800
Printed in the U.S.A. [KEMPER FUNDS LOGO]
