<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED AUGUST 31, 1998
LONG TERM INVESTING IN A SHORT-TERM WORLD(SM)
California Tax-Free Income Fund
Michigan Tax-Free Income Fund
Ohio Tax-Free Income Fund
Texas Tax-Free Income Fund
Kemper State Tax-Free
Income Series
"...In a year marked by rapid changes
across the globe in financial asset prices,
municipal bonds performed well, and they still
represent an extremely attractive investment. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
4
ECONOMIC OVERVIEW
6
PERFORMANCE UPDATE
8
TERMS TO KNOW
9
CALIFORNIA'S
PERFORMANCE UPDATE,
PORTFOLIO STATISTICS
AND PORTFOLIO
OF INVESTMENTS
17
MICHIGAN'S
PERFORMANCE UPDATE,
PORTFOLIO STATISTICS
AND PORTFOLIO
OF INVESTMENTS
21
OHIO'S
PERFORMANCE UPDATE,
PORTFOLIO STATISTICS
AND PORTFOLIO
OF INVESTMENTS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME FUNDS' TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 31, 1998 (UNADJUSTED FOR ANY SALES CHARGE)
- --------------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------------
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.56%
CLASS B 7.79%
CLASS C 7.21%
LIPPER CALIFORNIA TAX-FREE INCOME FUNDS CATEGORY AVERAGE* 8.51%
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
MICHIGAN
- --------------------------------------------------------------------------------
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.91%
CLASS B 8.16%
CLASS C 8.18%
LIPPER MICHIGAN TAX-FREE INCOME FUNDS CATEGORY AVERAGE* 8.02%
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------------
[BAR GRPAH]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CLASS A 8.57%
CLASS B 7.69%
CLASS C 7.70%
LIPPER OHIO TAX-FREE INCOME FUNDS CATEGORY AVERAGE* 7.82%
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TEXAS
- --------------------------------------------------------------------------------
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.65%
CLASS B 7.67%
CLASS C 7.79%
LIPPER TEXAS TAX-FREE INCOME FUNDS CATEGORY AVERAGE* 7.81%
- --------------------------------------------------------------------------------
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS
AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES WHEN REDEEMED MAY BE WORTH
MORE OR LESS THAN ORIGINAL COST.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/98 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS A $7.65 $7.52
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS B $7.66 $7.52
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS C $7.60 $7.50
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
MICHIGAN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/98 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS A $10.46 $10.19
- --------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS B $10.46 $10.18
- --------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE
INCOME FUND CLASS C $10.46 $10.18
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/98 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER OHIO TAX-FREE INCOME
FUND CLASS A $10.54 $10.22
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME
FUND CLASS B $10.54 $10.22
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME
FUND CLASS C $10.54 $10.22
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TEXAS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/98 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER TEXAS TAX-FREE INCOME
FUND CLASS A $10.68 $10.42
- --------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME
FUND CLASS B $10.67 $10.42
- --------------------------------------------------------------------------------
KEMPER TEXAS TAX-FREE INCOME
FUND CLASS C $10.68 $10.42
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
CONTENTS
26
TEXAS'
PERFORMANCE UPDATE,
PORTFOLIO STATISTICS
AND PORTFOLIO
OF INVESTMENTS
30
REPORT OF
INDEPENDENT AUDITORS
31
FINANCIAL STATEMENTS
34
NOTES TO
FINANCIAL STATEMENTS
39
FINANCIAL HIGHLIGHTS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME FUNDS' LIPPER RANKINGS AS OF 8/31/98*
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CALIFORNIA MUNICIPAL DEBT CATEGORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #49 of #86 of #100 of
104 funds 104 funds 104 funds
- --------------------------------------------------------------------------------
5-YEAR #19 of N/A N/A
58 funds
- --------------------------------------------------------------------------------
10-YEAR #9 of N/A N/A
30 funds
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
MICHIGAN MUNICIPAL DEBT CATEGORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #7 of #30 of #29 of
55 funds 55 funds 55 funds
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
OHIO MUNICIPAL DEBT CATEGORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #7 of #30 of #30 of
51 funds 51 funds 51 funds
- --------------------------------------------------------------------------------
5-YEAR #1 of N/A N/A
33 funds
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TEXAS MUNICIPAL DEBT CATEGORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #5 of #15 of #12 of
20 funds 20 funds 20 funds
- --------------------------------------------------------------------------------
5-YEAR #1 of N/A N/A
8 funds
- --------------------------------------------------------------------------------
</TABLE>
* Lipper Analytical Services, Inc. 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. Rankings are
historical and do not reflect future performance.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLES SHOW PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUNDS
AS OF AUGUST 31, 1998.
- --------------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $.3641 $.3014 $.2962
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $.0277 $.0231 $.0228
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.21% 3.50% 3.49%
- --------------------------------------------------------------------------------
SEC YIELD+: 3.75% 3.07% 3.17%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.57% 5.38% 5.55%
- --------------------------------------------------------------------------------
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>
ONE-YEAR INCOME: $.4332 $.3509 $.3522
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $.0348 $.0275 $.0287
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 3.86% 3.05% 3.18%
- --------------------------------------------------------------------------------
SEC YIELD+: 3.60% 2.97% 3.00%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 5.99% 4.94% 4.99%
- --------------------------------------------------------------------------------
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>
ONE-YEAR INCOME: $.4668 $.3824 $.3828
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $.0400 $.0332 $.0336
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.41% 3.66% 3.70%
- --------------------------------------------------------------------------------
SEC YIELD+: 3.79% 3.15% 3.17%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.45% 5.36% 5.39%
- --------------------------------------------------------------------------------
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>
ONE-YEAR INCOME: $.4919 $.4055 $.4084
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $.0404 $.0331 $.0338
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.39% 3.60% 3.67%
- --------------------------------------------------------------------------------
SEC YIELD+: 3.81% 3.17% 3.17%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.06% 5.04% 5.04%
- --------------------------------------------------------------------------------
BASED ON A 37.1% MARGINAL FEDERAL INCOME
TAX RATE
- --------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on August 31, 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 August 31, 1998 shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with the
standardized method prescribed by the Securities and Exchange Commission. Tax
equivalent yield is based on the fund's yield and the applicable federal and
state marginal tax rate. Income may be subject to state and local taxes and,
for some investors, a portion may be subject to the alternative minimum tax.
Yields and distribution rates are historical and will fluctuate.
<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.
SILVIA HOLDS BACHELOR OF ARTS AND PH.D. DEGREES 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 MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $239 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
The third quarter of 1998 ended on a mildly positive note with the Federal
Reserve Board (the Fed) reducing interest rates by 1/4 of a point to 5.25
percent. While some investors were disappointed by the small size of the
adjustment, it nevertheless provided a moment of relief after several stormy
months. Economic and political instability in Russia, terrorist bombings and
U.S. retaliation overseas, lingering effects of the "contagion" in Asia, not to
mention weak corporate profits and political scandal in the United States were
responsible for considerable uncertainty and market volatility. A series of
market dips and drops continued to fuel the debate about whether we would
finally see the end of our long-running bull market -- or even plummet into a
recession.
The Fed's mid-September bank credit survey indicated that domestic banks
are tightening credit standards for both large and small borrowers. This
suggests a reduction in the supply of credit going forward with subsequent
negative impacts on employment growth and capital spending. In this sense, there
is the beginning of a credit crunch starting in U.S. bank credit markets.
But investors should find comfort in the fact that economic fundamentals
continue to favor financial assets in the U.S. -- particularly Treasury bonds.
In a nutshell, the nation's economy remains strong despite its slowdown in the
second half of the year. Short-term interest rates are expected to remain low
for the remainder of the year. There are no major tax or regulatory threats
waiting in the wings. And our economy continues to draw investors from around
the world, although perhaps not as fervently as last year.
The nation's gross domestic product (GDP), which represents the total value
of all goods and services produced within the U.S. economy, is expected to have
grown at an annualized rate of 2 percent in the third quarter of 1998. Faster
growth can be attributed to several one-time factors, including a domestic
correction in inventory levels and the end of the General Motors strike.
Real capital spending and employment growth have remained solid. Consumer
confidence remains fairly high. Home sales remain robust. Economic policy
continues to support the nation's fiscal budget surplus projection of $65
billion.
As far as inflation goes, there are two tales to be told. Prices for
consumer goods, as measured by the consumer price index (CPI), are steady.
Compare this to prices for services, which have risen between 2.5 and 3.5
percent. For investors, this difference in pricing flexibility translates into a
difference in profit expectations. Profits of domestic service firms should be
much stronger than commodity producers dependent on export markets.
Across the Atlantic, Europe's economy appears to be growing at an even pace
as the region progresses toward the Economic and Monetary Union (EMU) slated for
January 1, 1999. One effect of the union may be a slight rise in short-term
interest rates in Europe -- not because there will be an overt change in policy,
but simply because of the convergence of some very disparate interest rates. The
average rate will likely be higher than the relatively attractive rate the
German Central Bank currently offers, for example.
In Asia, which has been making headlines around the world for more than a
year now, the latest news is from Japan, which recently installed a new prime
minister as well as a new finance minister. Much discussion will be focused on
changes in Japan's economic policy, particularly in terms of taxation and
banking reform -- and patience is in order. Most of the changes in taxation will
impact Japan in the first half of 1999. But as far as banking reform goes, those
of us familiar with bank reform in the U.S. know that this will be a two- to
five-year process. Certainly, investors are looking to Japan to spark recovery
for Asia as a whole, which continues to suffer from the "contagion" of low
currency values, seriously reduced consumer spending and general economic
malaise.
Indeed, while its full effects remain to be seen -- and felt -- by the
majority of American businesses and individuals, the Asian economic crisis has
contributed to the general uncertainty of the emotion-driven U.S. markets.
Whether it's an economic crisis abroad or political scandal at home, current
events move the investors who move the markets.
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 (9/30/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.46 5.57 6.3 6.64
PRIME RATE (2) 8.5 8.5 8.5 8.25
INFLATION RATE(3)* 1.68 1.44 2.22 2.88
THE U.S. DOLLAR(4) 8.19 4.88 8.76 3.32
CAPITAL GOODS ORDERS(5)* 2.81 8.1 8.2 8.2
INDUSTRIAL PRODUCTION(5)* 1.82 4.31 5.03 3.3
EMPLOYMENT GROWTH(6) 2.68 2.57 2.6 2.13
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. in the last five years,
inflation has been as high as 6 percent. the low, moderate inflation of the
last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of August 31, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
One might conclude that, as a result of 1998's slow corporate profit growth
and turmoil in Russia and Asia, the psychology of the markets is
shifting -- even some of Wall Street's most resolute bulls appear to be
reconsidering their long-held convictions. But with the economy's strong
fundamentals in place, the outlook for a bear market is premature. In any case,
prudent investors are wise to watch for the following economic warning signs:
inflation in the form of rising wages and/or prices; residual fallout from Asia,
which could appear in the form of reduced sales and earnings for American
businesses; and a continued widening of our trade deficit, an imbalance caused
by heightened American demand for foreign goods and services. In the months to
come, investors are likely to maintain their bias in favor of investments that
have historically been considered more conservative: larger capitalization
stocks, U.S. Treasuries and only the highest-grade corporate bonds.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ John E. Silvia
JOHN E. SILVIA
October 9, 1998
5
<PAGE> 6
PERFORMANCE UPDATE
[MIER PHOTO]
CHRISTOPHER MIER JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1986 AND IS THE
MANAGING DIRECTOR. MIER IS THE LEAD PORTFOLIO MANAGER OF KEMPER CALIFORNIA
TAX-FREE INCOME FUND, KEMPER OHIO TAX- FREE INCOME FUND AND KEMPER TEXAS
TAX-FREE INCOME FUND. MIER RECEIVED A B.A. DEGREE IN ECONOMICS FROM THE
UNIVERSITY OF MICHIGAN AND WENT ON TO RECEIVE HIS M.M. IN FINANCE FROM THE
KELLOGG GRADUATE SCHOOL OF MANAGEMENT AT NORTHWESTERN UNIVERSITY. HE IS A
CHARTERED FINANCIAL ANALYST.
[BRENNAN PHOTO]
ELEANOR R. BRENNAN IS THE LEAD PORTFOLIO MANAGER OF KEMPER MICHIGAN TAX-FREE
INCOME FUND. BRENNAN JOINED SCUDDER KEMPER INVESTMENTS 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.
MUNICIPAL BONDS IN GENERAL AND THE KEMPER STATE TAX-FREE INCOME SERIES IN
PARTICULAR PERFORMED WELL DURING THE PAST TWELVE MONTHS. BELOW, CO-PORTFOLIO
MANAGER CHRIS MIER DISCUSSES THE FORCES THAT AFFECTED THE MUNICIPAL BOND MARKET,
AND HOW THE FUNDS WERE POSITIONED IN RESPONSE.
Q CHRIS, THE LAST YEAR APPEARS TO HAVE BEEN A PERIOD OF UNUSUALLY STRONG
PERFORMANCE FOR MUNICIPAL BONDS. IN FACT, THE AVERAGE MUNICIPAL BOND FUND
RETURNED 8.20 PERCENT AS MEASURED BY THE LIPPER GENERAL MUNICIPAL DEBT CATEGORY,
WHICH WAS EVEN BETTER THAN THE STOCK MARKET'S 8.12 PERCENT AS MEASURED BY THE
S&P 500*. WHAT FACTORS WERE RESPONSIBLE FOR THIS PERFORMANCE?
A The last year was somewhat unusual because factors outside the U.S. played
a significant role in the performance of municipal bonds. The market was
impacted first by developments in Asia, then in Latin America and Russia.
Before the fiscal year began, news about potential economic and currency
problems in Asian countries had been circulating for a while. Investors began to
realize that the outsized growth experienced by these countries -- particularly
Hong Kong, Thailand, Malaysia and Indonesia -- was fueled largely by intense
speculation by investors worldwide. This support reversed itself in the summer
of 1997 and came to a head in October as the Hong Kong stock market imploded. A
series of foreign currency devaluations followed.
However, the problems abroad led to strong performance by government bonds
here in the U.S. Investors opted for the relatively safe haven of Treasuries,
and demand drove Treasury bond prices sharply higher. At the same time,
investors expected cheaper foreign goods to put a damper on U.S. inflation, and
lower exports to impede U.S. economic growth. This suggested lower interest
rates in the future, a positive for bonds.
In 1998, Latin American countries also started to experience problems, and
most recently, Russia effectively devalued the ruble. This continuing turmoil
further increased demand for U.S. government bonds, and the result was that
Treasuries staged a powerful rally in August as the fiscal year drew to a close.
* THE STANDARD AND POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
CONSIDERED REPRESENTATIVE OF THE U.S. STOCK MARKET.
Q DID MUNICIPAL BONDS ENJOY THE SAME KIND OF RALLY?
A To an extent, yes. But one factor that impeded the muni market's progress
was very heavy issuance. Lower interest rates increased the supply of municipal
bonds in two ways:
1) New issues -- new bond offerings flooded the market as local governments
tried to capitalize on low interest rates to beef up infrastructure such
as highways and water/sewer projects.
2) Refinancing bonds -- when rates decline, municipal issuers look to
refinance their debt, just like private homeowners refinance their
mortgages when rates fall. So municipal governments issued new
lower-yielding bonds to replace the higher-yielding ones.
If the current rate of issuance keeps up, 1998 will be a record year in
terms of municipal bond issuance.
Much of this supply has been sopped up by hedge funds and "crossover"
buyers, primarily
6
<PAGE> 7
PERFORMANCE UPDATE
investors who usually buy taxable bonds, but who have recognized the outstanding
value in municipals. Such "non-traditional" buyers have helped offset the glut
of issuance.
Q HOW DID YOU RESPOND TO THE MARKET'S CONDITIONS?
A Primarily, we adjusted the duration of the funds to help position them to
perform. Duration, as you may know, is an indication of a portfolio's
sensitivity to changes in interest rates. If you expect the market to rally and
interest rates go down, you want to lengthen duration to help the funds
participate as much as possible. If you expect interest rates to trend up, you
want to shorten duration to help lessen the negative effects.
As the fiscal year began, we had been keeping the duration of the funds
neutral. That continued through October, when global stock markets went into a
tailspin. After that, we began to lengthen duration because we expected a flight
to quality to increase demand for government bonds and to force interest rates
lower.
In January, market yields appeared to be near a low, so we moved back to a
neutral stance until late into the summer of 1998. During the first half of the
year, the domestic economy still appeared strong, and the Federal Reserve's
policy reflected a bias to keep interest rates stable to help guard against
inflation. But in June, investors began to see signs that U.S. economic growth
was slowing and that troubles abroad would likely impede strong domestic growth.
So we lengthened durations of the funds through July and August, which put us in
a position to benefit when the market rallied strongly in August.
Overall, we did well adjusting duration in advance of the market's moves,
which helped us post good returns despite an overabundance of supply. In fact,
all four funds (Class A shares, unadjusted for any sales charge) covered in this
report significantly outpaced their Lipper category average for the year. (See
page 2 for one-year Total Returns).
Q YOU MENTIONED THAT CROSSOVER BUYERS HAVE BEGUN TO "RECOGNIZE THE
OUTSTANDING VALUE IN MUNICIPALS." WHAT OUTSTANDING VALUE DO YOU MEAN?
A Municipal bonds offer attractive value right now for several reasons.
First, the heavy supply of municipal bonds has kept yields from declining as
fast as Treasuries. Thus, at the end of August, municipal bonds offered nearly
the same yield as Treasuries. Second, that relatively high yield doesn't even
take into account the tax advantage. And third, because municipal bonds give you
a better real return, that is, what you have left after taking into account the
effects of inflation.
Finally, municipal bonds are not currently experiencing some of the credit
problems other markets -- such as those for corporate bonds or emerging markets
bonds -- are facing.
Q SO YOUR OUTLOOK FOR THE MUNI MARKET IS PRETTY BRIGHT AT THIS POINT.
A We're very optimistic about the prospects for municipal bonds. Municipal
bonds not only performed well during the year, they still represent an extremely
attractive investment. Their value versus other fixed income securities is only
one reason. There are others. For example, the strong economy and low interest
rates have increased tax revenues and allowed municipal government to strengthen
their balance sheets. In our experience, credit quality has never been better
for many states.
In addition, the Federal Reserve may lower interest rates in the near
future if the U.S. economy appears to be stalling. That would mean lower rates
for money market fund investors, and investors who currently have billions of
dollars in assets on the sidelines may recognize that munis appear to be the
best value in the fixed-income market right now. Demand from such investors
could spark a significant rally.
And finally, the volatility in other markets over the last 12 months has
shown the importance of diversification. Because the stock market has advanced
strongly over the last three years, many investors' portfolios may have become a
little stock-heavy. They may want to take some money out of stocks and put it in
bonds to rebalance their portfolios, and muni bonds right now may be a smart
choice for many such investors.
7
<PAGE> 8
TERMS TO KNOW
FLIGHT-TO-QUALITY BUYING A term describing when investors move assets from
foreign equity and foreign bond securities to U.S. Treasuries and other high
quality securities in times of global economic uncertainty.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period. Total return assumes the
reinvestment of all dividends and represents the aggregate percentage or dollar
value change over the period.
CROSSOVER BUYERS Newcomers to a particular market who do not usually buy
securities in that market, but who are drawn by attractive, often temporary
values.
NOTES
8
<PAGE> 9
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS A 3.73% 5.09% 7.76% 8.75% (since 2/17/83)
- ------------------------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS B 4.79 N/A N/A 6.41 (since 5/31/94)
- ------------------------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS C 7.21 N/A N/A 6.57 (since 5/31/94)
- ------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Kemper California Tax-Free Income Fund Class A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class A shares from 2/17/83 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
California Lehman
Tax-Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) A(1) Index+ Index++
<S> <C> <C> <C>
2/17/83 10000 10000 10000
9602 9994 10000
9550 10043 10163
9893 10322 10286
9880 10243 10347
10138 10523 10480
9767 10128 10592
10174 10818 10725
10672 11323 10756
11127 11779 10868
12236 12767 10991
12123 12575 11062
13019 13591 11164
14090 14967 11113
14122 14875 11185
14759 15674 11256
15407 16217 11287
15752 16609 11450
15630 16158 11593
15130 15757 11747
16053 16460 11788
16244 17027 11900
16603 17357 12053
16902 17802 12237
17259 18133 12308
17389 18254 12492
18732 19334 12676
18653 19347 12768
12/31/89 19238 20090 12880
19239 20179 13146
19696 20651 13269
19458 20662 13555
20526 21554 13667
20890 22041 13790
21342 22512 13892
22260 23387 14014
22870 24171 14086
22912 24242 14229
23795 25162 14321
24314 25832 14433
24755 26302 14494
25786 27278 14668
26705 28171 14750
27752 29124 14821
12/31/93 27870 29533 14893
26614 27911 15036
26714 28226 15117
26783 28412 15260
26341 28006 15291
28364 29985 15465
28900 30708 15577
29563 31590 15649
31471 32894 15679
30505 32499 15904
30777 32747 16006
31617 33498 16118
32409 34351 16200
32153 34269 16343
33286 35450 16374
34294 36518 16466
35194 37509 16476
35536 37941 16568
35965 38519 16650
8/31/98 36774 39212 16670
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Kemper California Tax-Free Income Fund Class B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class B shares from 5/31/94 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
California Lehman
Tax-Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) B(1) Index+ Index++
<S> <C> <C> <C>
5/31/94 10000 10000 10000
10041.8 9942 10034
9961 10007 10129
9717.1 9864 10149
10486.7 10561 10264
10852.1 10816 10339
10838.1 11126 10386
12/31/95 11575.9 11586 10407
11196.6 11446 10556
11180 11534 10624
11461.2 11798 10698
12/31/96 11817.6 12099 10753
11766.9 12070 10847
12137.4 12486 10868
12411.9 12862 10929
12726.8 13211 10936
12840.1 13363 10997
12968.4 13567 11051
8/31/98 13025 13811 11064
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Kemper California Tax-Free Income Fund Class C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class C shares from 5/31/94 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
California Lehman
Tax-Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) C(1) Index+ Index++
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9933 9942 10034
9938 10007 10129
9754 9864 10149
10481 10561 10264
10658 10816 10339
10877 11126 10386
12/31/95 11556 11586 10407
11161 11446 10556
11237 11534 10624
11518 11798 10698
12/31/96 11782 12099 10753
11666 12070 10847
12052 12486 10868
12357 12862 10929
12653 13211 10936
12732 13363 10997
12857 13567 11051
8/31/98 13112 13811 11064
</TABLE>
Past performance is not a guarantee of future results. Investment returns and
principal values will fluctuate so that shares when redeemed may be worth more
or less than original cost.
* Average annual total return and total return measure net investment income
and capital gain or loss from portfolio investments over the periods
specified, assuming reinvestment of dividends and, where indicated,
adjustment for the maximum sales charge. The maximum sales charge for Class
A shares is 4.5%. For Class B shares, the maximum contingent deferred sales
charge is 4%. Class C shares have no sales adjustment, but redemptions
within one year of purchase may be subject to a contingent deferred sales
charge of 1%. Share classes invest in the same underlying portfolio. Average
annual total return reflects annualized change while total return reflects
aggregate change. During the periods noted, securities prices fluctuated.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred sales
charge in effect at the end of the period for Class B shares. In comparing
the Kemper State Tax-Free Income Funds to the Lehman Brothers Municipal Bond
Index, you should note that the funds' performance reflects the maximum
sales charges, while no such charges are reflected in the performance of the
index.
+ The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the following
criteria: a minimum credit rating of BBB, have been issued as a part of an
issue of at least $50 million, have been issued within the last 5 years, and
have a maturity of at least 2 years. Bonds subject to Alternative Minimum
Tax (AMT), variable rate bonds and zero coupon bonds are excluded from the
index. Source is Towers Data Systems.
++ The Consumer Price Index is a statistical measure of change, over time,
in the prices of goods and services in major expenditure groups for all
urban consumers. It is generally considered to be a measure of inflation.
Source is Towers Data Systems.
9
<PAGE> 10
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
KEMPER CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 69% 79%
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 11 9
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 20 5
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS -- 7
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/98 ON 8/31/97
QUALITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 60% 44%
- --------------------------------------------------------------------------------
AA 9 12
- --------------------------------------------------------------------------------
A 15 20
- --------------------------------------------------------------------------------
BBB 12 18
- --------------------------------------------------------------------------------
BB -- 2
- --------------------------------------------------------------------------------
NOT RATED 4 4
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/98 ON 8/31/97
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 13% 12%
- --------------------------------------------------------------------------------
11-20 YEARS 55 44
- --------------------------------------------------------------------------------
+21 YEARS 32 44
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/98 ON 8/31/97
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 16.8 years 17.7 years
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- -----------------------------------------------------------------------------------------------------------
Fullerton Redev. Agcy., Local Government Finance Auth.,
Rev., 7.70%, to be called 2-1-99 @ 102 $ 4,360 $ 4,524
--------------------------------------------------------------------------------------
Orange County, Unified School District, Certificates of
Participation, Rev., 6.875%, to be called 6-1-99 @ 102 2,620 2,739
--------------------------------------------------------------------------------------
City of Los Angeles, Harbor Department, Rev., 8.70%, to be
called 9-1-99 @ 100 2,500 2,631
--------------------------------------------------------------------------------------
City of San Bernardino, Joint Powers Financing Auth., Lease
Rev., 7.15%, to be called 9-1-99 @ 102 4,250 4,491
--------------------------------------------------------------------------------------
Coronado Community Dev. Agcy., Tax Allocation, Rev., 7.25%,
to be called 9-1-99 @ 102 4,500 4,760
--------------------------------------------------------------------------------------
Health Facilities Financing Auth.:
Eskaton Properties, Inc., Rev., 7.45%, to be called 5-1-00
@ 102 4,800 5,187
Children's Hospital, Rev., 7.50%, to be called 10-1-00 @
102 3,600 3,950
--------------------------------------------------------------------------------------
University of California, Housing System Rev., 6.75%, to be
called 11-1-00 @ 102 1,515 1,640
--------------------------------------------------------------------------------------
City and County of San Francisco, Gen. Oblig., 6.50%, to be
called 12-15-00 @ 100 1,000 1,064
--------------------------------------------------------------------------------------
City of Reedley, Sierra View Homes, Inc., Insured
Certificates of Participation, Rev., 7.60%, to be called
3-1-01 @ 102 3,965 4,359
--------------------------------------------------------------------------------------
Foothill-DeAnza Community College District, Santa Clara,
Rev., 7.875%, to be called 6-1-01 @ 102 4,055 4,565
--------------------------------------------------------------------------------------
City of San Bernardino, Sisters of Charity Health Care
System Rev., 7.00%, to be called 7-1-01 @ 102 14,500 16,047
--------------------------------------------------------------------------------------
Yosemite Community College District, Certificates of
Participation, Rev., 7.75%, to be called 7-1-01 @ 102 1,540 1,689
--------------------------------------------------------------------------------------
Westminster Redev. Agcy., Westminster Commercial Redev.
Proj., Tax Allocation, Rev., 7.30%, to be called 8-1-01 @
102 2,500 2,798
--------------------------------------------------------------------------------------
City of Sacramento, Municipal Utility District, Electric,
Rev., 6.75%, to be called 9-1-01 @ 102 6,020 6,662
--------------------------------------------------------------------------------------
Santa Clarita Public Financing Auth., Local Agcy., Rev.,
6.75%, to be called 10-1-01 @ 102 2,750 3,042
--------------------------------------------------------------------------------------
Riverside County, Public Facilities Financing, Certificates
of Participation, Rev., 6.875%, to be called 11-1-01 @ 102 3,000 3,338
--------------------------------------------------------------------------------------
Fresno Health Facilities, Holy Cross Health Systems, St.
Agnes Medical Center, Rev., 6.50% and 6.625%, to be called
6-1-02 @ 102 3,500 3,906
--------------------------------------------------------------------------------------
Lemon Grove Community Dev. Agcy., Tax Allocation, Rev.,
6.65% and 6.90%, to be called 8-1-02 @ 102 2,500 2,822
--------------------------------------------------------------------------------------
Educational Facilities Auth., Mills College Rev., 6.875%, to
be called 9-1-02 @ 102 1,775 2,009
--------------------------------------------------------------------------------------
Central Valley Financing Auth., Carson Ice-Gen. Proj., Rev.,
6.10%, to be called 7-1-03 @ 102 8,700 9,702
--------------------------------------------------------------------------------------
Snowline Joint Unified School District, Certificates of
Participation, Rev., 6.30% and 6.40%, to be called 7-1-03
@ 102 3,695 4,158
--------------------------------------------------------------------------------------
City and County of San Francisco, Redev. Agcy., Hotel Tax
Rev., 6.75%, to be called 7-1-04 @ 102 3,705 4,320
--------------------------------------------------------------------------------------
City of Sacramento, Cogeneration Auth., Procter & Gamble
Proj., Rev., 6.50%, to be called 7-1-05 @ 102 7,750 9,009
--------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
City of Los Angeles, Convention and Exhibit Center,
Certificates of Participation, Rev., 9.00%, to be called
12-1-05 @ 100 $ 1,000 $ 1,317
--------------------------------------------------------------------------------------
Northern California Power Agcy., Hydroelectric No. 1, 7.00%,
to be called 1-1-16 @ 100 210 266
--------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--10.8% 110,995
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------
Department of Water, Project Rev., 4.75%, 2029 11,040 10,588
--------------------------------------------------------------------------------------
Education Facilities Auth.:
Chiropractic College, 5.10% to 5.75%, 2005 through 2017 2,570 2,714
Pooled College and University Project, Rev., 5.50%, 2011 2,790 3,043
Stanford University, Rev., 5.20%, 2027 10,000 10,178
University of San Francisco, Rev., 6.00%, 2016 6,640 7,337
--------------------------------------------------------------------------------------
Gen. Oblg., 5.00% to 6.50%, 2010 through 2016 12,780 14,586
--------------------------------------------------------------------------------------
Health Facilities Financing Auth.:
Adventist Health System West, Rev., 6.50%, 2007 and 2011 5,750 6,197
Catholic Healthcare Facilities Finance Auth., Rev., 5.75%
and 6.00%, 2010 and 2025 16,970 18,684
Kaiser Permanante, Rev., zero coupon to 7.00%, 2009
through 2025 19,090 16,799
Small Facilities Loan, Insured Health Facility Rev.,
6.70%, 2011 1,200 1,305
Southern California Presbyterian Homes, Rev., 6.70%, 2011 2,000 2,149
Sutter Health Series, Rev., 5.50%, 2012 5,410 5,852
Unihealth America, Rev., 7.625%, 2015 745 762
--------------------------------------------------------------------------------------
Housing Finance Agcy., Home Mortgage Rev., 6.875% to 8.00%,
2010 through 2030 22,800 24,384
--------------------------------------------------------------------------------------
Residential Efficiency Financing Auth., Rev., 5.50% and
6.00%, 2017 and 2012 5,970 6,476
--------------------------------------------------------------------------------------
State Colleges and Universities:
San Diego State University, Rev., 5.625%, 2024 4,210 4,498
University of California, Housing System Rev., 5.65% and
5.70%, 2012 and 2013 13,110 14,270
--------------------------------------------------------------------------------------
State Public Works Board of the State of California:
California Science Center, Rev., 5.25%, 2022 3,000 3,047
California State University, Rev., 5.375% and 5.00%, 2016
and 2017 8,115 8,375
Department of Corrections, 5.50% to 7.40%, 2010 through
2015 19,585 21,955
University of California, Rev., 5.50%, 2014 8,915 9,738
--------------------------------------------------------------------------------------
Statewide Communities Dev. Auth.:
Arc of San Diego, Certificates of Participation, Rev.,
5.625%, 2020 and 2021 6,475 6,797
Cedars-Sinai Medical Center, Rev., 6.50%, 2012 20,205 23,305
Diablo Health Systems, Certificates of Participation,
5.50%, 2012 4,000 4,374
San Gabriel Valley Medical Center, Rev., 5.50%, 2014 6,750 7,207
Triad Healthcare, Rev., 5.80%, 2000 4,205 4,376
--------------------------------------------------------------------------------------
Alameda Public Financing Auth., Rev., 6.375%, 2014 2,000 2,060
--------------------------------------------------------------------------------------
Anaheim Public Financing Auth., Lease Rev., zero coupon,
2018 through 2021 31,760 10,943
--------------------------------------------------------------------------------------
Bellflower Certificates of Participation, Civic Center and
Capital Improvement, Rev., 7.20%, 2019 1,880 1,981
--------------------------------------------------------------------------------------
Benicia Unified School District, Gen. Oblg., zero coupon,
2017 through 2022 23,785 7,919
--------------------------------------------------------------------------------------
Big Bear Lake, Water Rev., 6.00%, 2015 and 2022 15,405 17,796
--------------------------------------------------------------------------------------
Burbank Unified School District, Gen. Oblg., zero coupon,
2011 through 2014 10,795 5,399
--------------------------------------------------------------------------------------
Cabrillo Unified School District, Gen. Oblg., zero coupon,
2019 and 2021 9,500 3,169
--------------------------------------------------------------------------------------
Campbell Unified School District, Gen. Oblg., zero coupon,
2018 3,000 1,119
--------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Carlsbad County Unified School District, Gen Oblg., zero
coupon, 2007 through 2022 $36,130 $ 15,897
--------------------------------------------------------------------------------------
City of Carson Redev. Agcy., Proj. No. 1, Tax Allocation,
Rev., 6.00%, 2016 3,350 3,528
--------------------------------------------------------------------------------------
City of Concord Redev. Agcy., Central Concord Proj., Tax
Allocation, Rev., 8.00%, 2018 40 41
--------------------------------------------------------------------------------------
City of Fresno:
Unified School District, Gen. Oblg., 6.40%, 2016 2,000 2,383
Sewer Rev., 4.75%, 2026 5,705 5,512
--------------------------------------------------------------------------------------
City of Long Beach, Water Rev., 5.75%, 2015 1,725 1,935
--------------------------------------------------------------------------------------
City of Los Angeles:
Community Redev. Agcy., Tax Allocation, Rev., 5.50%, 2017 1,260 1,364
Department of Airports, Ontario International Airport,
Rev., 5.90%, 2012 3,290 3,585
Harbor Department, Rev., 5.375% and 6.25%, 2023 and 2026 8,845 9,283
Wastewater System, Rev., 5.00%, 2015 5,580 5,666
--------------------------------------------------------------------------------------
City of Oakland:
Building Auth., Lease Rev., 5.50%, 2014 6,970 7,505
Housing Finance Rev., 7.10%, 2010 1,455 1,539
--------------------------------------------------------------------------------------
City of Reedley, Sierra View Homes, Inc., Insured
Certificates of Participation, Rev., 5.85%, 2021 2,325 2,483
--------------------------------------------------------------------------------------
City of Sacramento:
Cogeneration Auth., Cogeneration Proj. Rev., 5.25%, 2015 5,755 5,984
Cogeneration Auth., Power Auth., Rev., 6.00%, 2022 5,000 5,374
Cogeneration Auth., Procter & Gamble Proj., Rev., 6.375%,
2010 5,000 5,651
Finance Auth., Lease Rev., 5.00% and 5.40%, 2014 and 2020 15,000 15,685
Municipal Utility District, Electric Rev., 6.20% and
6.50%, 2006 and 2013 2,270 2,629
--------------------------------------------------------------------------------------
City of Salinas, Certificates of Participation, Rev.,
5.625%, 2017 2,000 2,082
--------------------------------------------------------------------------------------
City of San Diego:
Certificates of Participation, Rev., 8.00%, 2002 4,225 4,549
Industrial Development, Gas and Electric Company, Rev.,
6.10%, 2018 5,000 5,461
Redev. Agcy., Tax Allocation, Rev., 6.625%, 2017 2,000 2,256
San Ysidro School District, Gen. Oblg., 6.125%, 2021 1,400 1,614
Water Utility Funding System, Rev., 5.00%, 2016 through
2018 15,685 15,730
--------------------------------------------------------------------------------------
City of San Jose:
Redev. Agcy., Merged Area Redev. Proj., Tax Allocation,
Rev., 5.50%, 2014 through 2016 9,520 10,216
Unified School District, Gen. Oblg., zero coupon, 2015 and
2017 3,920 1,654
--------------------------------------------------------------------------------------
City of Torrance:
Memorial Hospital Medical Center, Rev., 6.75%, 2012 5,000 5,053
Redev. Agcy., 5.60% and 5.625%, 2028 2,400 2,420
--------------------------------------------------------------------------------------
City and County of San Francisco:
Civic Center Complex, Building Auth., Rev., 5.25%, 2016
and 2021 22,210 22,818
Rapid Transit Bay Area, Sales Tax Rev., 4.75%, 2023 10,000 9,681
Redev. Agcy., Horton Plaza Redev. Proj. Rev., 6.75%, 2015 2,200 2,523
San Francisco International Airport, Rev., 5.50% and
5.70%, 2011 through 2015 20,010 21,339
--------------------------------------------------------------------------------------
Contra Costa County:
County Public Facilities Corp., Certificates of
Participation, Rev., 7.80%, 2005 1,250 1,313
Home Mortgage, Rev., 7.75%, 2022 2,715 3,628
--------------------------------------------------------------------------------------
Corona-Norco University, Special Tax, Rev., 5.75%, 2014 2,750 3,012
--------------------------------------------------------------------------------------
Duarte, City of Hope National Medical Center, Certificates
of Participation, Rev., 6.25%, 2023 4,000 4,247
--------------------------------------------------------------------------------------
East Bay Municipal Utility District, Wastewater System Rev.,
5.25%, 2017 through 2019 3,335 3,439
--------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Eldorado Public Agcy., Financial Auth., Rev., 5.60%, 2012 $ 6,000 $ 6,521
--------------------------------------------------------------------------------------
Emeryville, Public Financing Auth., Redev. Proj., Rev.,
6.50%, 2021 10,255 11,098
--------------------------------------------------------------------------------------
Escondido Union High School District, Gen. Oblg., zero
coupon, 2015 through 2018 15,225 6,146
--------------------------------------------------------------------------------------
Fontana Public Financing Auth., Tax Allocation, Rev., 7.00%,
2021 3,900 4,218
--------------------------------------------------------------------------------------
Foothill-DeAnza Community College District, DeAnza Campus
Center Proj., Certificates of Participation, Rev., 7.35%,
2007 1,700 1,883
--------------------------------------------------------------------------------------
Foothill/Eastern, Transit Corridor Agcy., Toll Road, Rev.,
6.00% and 6.50%, 2016 through 2034 24,350 26,629
--------------------------------------------------------------------------------------
Foster County Public Financing Auth., Rev., 5.60% and 5.80%,
2012 and 2016 2,225 2,373
--------------------------------------------------------------------------------------
Hawthorne Community Redev. Agcy., Tax Allocation, Rev.,
6.625%, 2014 2,000 2,258
--------------------------------------------------------------------------------------
Hollister Joint Powers Financing Auth., Sewer System
Improvement Proj., Rev., 5.75%, 2011 3,815 4,031
--------------------------------------------------------------------------------------
Hollister Redev. Agcy., Tax Allocation, Community Dev.
Proj., Rev., 5.375%, 2013 2,630 2,823
--------------------------------------------------------------------------------------
Inglewood Civic Center:
Improvement Proj., Certificates of Participation, Rev.,
6.50% to 7.00%, 2011 through 2021 9,525 10,238
Public Financing Auth., Rev., 7.00%, 2022 9,210 10,031
--------------------------------------------------------------------------------------
Kern High School District, Gen. Oblg., 6.40%, 2012 3,095 3,651
--------------------------------------------------------------------------------------
Laguna Salada Unified School District, zero coupon, 2017
through 2020 8,215 2,958
--------------------------------------------------------------------------------------
Las Virgenes, Unified School District, Gen. Oblg., zero
coupon, 2013 through 2015 5,890 2,696
--------------------------------------------------------------------------------------
Loma Linda, University Medical Center, Rev., 7.00%, 2015 2,500 2,641
--------------------------------------------------------------------------------------
Los Angeles County:
Metropolitan Transportation Auth., Sales Tax Rev., 5.625%
to 6.00%, 2015 through 2023 15,785 17,209
Transportation Commission, Sales Tax Rev., 7.00% to 7.40%,
2019 and 2015 18,405 19,297
Unified School District, Gen. Oblg., 5.375 to 6.00%, 2012
through 2016 29,260 33,066
--------------------------------------------------------------------------------------
Los Banos, Certificates of Participation, Rev., 6.00%, 2019 2,100 2,178
--------------------------------------------------------------------------------------
Lucia Mar Unified School District, Gen. Oblg., zero coupon,
2016 1,000 415
--------------------------------------------------------------------------------------
Manhattan Beach Unified School District, Gen. Oblg., zero
coupon, 2021 and 2022 9,320 2,894
--------------------------------------------------------------------------------------
Martinez, Multiple Lenders, Home Mortgage, Rev., 10.375%,
2002 30 33
--------------------------------------------------------------------------------------
Metropolitan Water District of Southern California, Rev.,
5.75%, 2021 2,000 2,248
--------------------------------------------------------------------------------------
Midpeninsula Regulatory Open Space, Financial Auth., Rev.,
5.75%, 2011 1,950 2,140
--------------------------------------------------------------------------------------
Mill Valley Certificates of Participation, The Redwoods,
Rev., 5.75%, 2020 3,230 3,435
--------------------------------------------------------------------------------------
Modesto Irrigation District Financing Auth., Domestic Water
Proj., Rev., 5.12% and 6.00%, 2014 and 2015 11,395 12,277
--------------------------------------------------------------------------------------
Mojave, Water Improvement District, Morongo Basin, Rev.,
5.60%, 2012 2,500 2,724
--------------------------------------------------------------------------------------
Montebello:
Community Redev. Agcy., Montebello Hills Redev., Tax
Allocation, Rev., 7.50%, 2010 3,750 3,895
Unified School District, Rev., zero coupon, 2012 and 2013 3,835 1,918
--------------------------------------------------------------------------------------
Moreno Valley, Towngate Community Facilities:
District 87-1, Improvement Area No. 1, Special Tax Rev.,
7.125%, 2023 2,810 2,966
Special Tax, Rev., 6.50%, 2009 3,670 3,949
--------------------------------------------------------------------------------------
Murrieta Valley Unified School District, Gen. Oblg., zero
coupon, 2015 3,530 1,536
--------------------------------------------------------------------------------------
Northern California Power Agcy., Hydroelectric No. 1, Rev.,
5.00%, 2017 and 2018 8,475 8,501
--------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Orange County, Recovery Certificates of Participation, Rev.,
5.70% and 6.00%, 2010 and 2026 $17,000 $ 18,708
--------------------------------------------------------------------------------------
Palmdale School District, Certificates of Participation,
Gen. Oblg., zero coupon, 2019 through 2023 4,420 1,402
--------------------------------------------------------------------------------------
Paramount, Unified School District, Gen. Oblg., 5.125%, 2019 3,000 3,030
--------------------------------------------------------------------------------------
Pleasanton Junction Power, Finance Auth., Reassessment Rev.,
6.15%, 2012 8,850 9,550
--------------------------------------------------------------------------------------
Port of Oakland, Port Auth., Rev., 6.40%, 2022 12,000 13,140
--------------------------------------------------------------------------------------
Redondo Beach, South Bay, Redev. Proj., Rev., 7.00% and
7.125%, 2016 and 2026 3,000 3,364
--------------------------------------------------------------------------------------
Richmond Redev. Tax Allocation, Rev., 5.50%, 2018 2,350 2,496
--------------------------------------------------------------------------------------
Riverside County, Temecula Valley Unified School District,
Gen. Oblg., 5.80%, 2014 2,430 2,675
--------------------------------------------------------------------------------------
Sacramento County, Community Facilities, Special Tax Rev.,
5.50% to 6.30%, 2010 through 2021 6,045 6,249
--------------------------------------------------------------------------------------
Saddleback Valley Unified School District, Gen. Oblg.,
6.00%, 2012 through 2014 4,080 4,698
--------------------------------------------------------------------------------------
San Bernardino County, West Valley Detention Center,
Certificates of Participation, Rev., 6.50%, 2012 8,000 8,822
--------------------------------------------------------------------------------------
San Bruno Park School District, Gen. Oblg., zero coupon,
2014 through 2019 5,190 2,133
--------------------------------------------------------------------------------------
San Joaquin Hills Transportation Corridor Agcy., Toll Road
Rev., zero coupon, 2011 through 2026 70,415 28,740
--------------------------------------------------------------------------------------
San Juan, M-S-R Public Power Agcy., Rev., 6.75%, 2020 2,000 2,425
--------------------------------------------------------------------------------------
Santa Clara County:
Redev. Agcy., Tax Allocation, Rev., 7.00%, 2010 1,300 1,594
Santa Clara, Electric Rev, 5.25%, 2014 3,325 3,506
Transit District Sales Tax Rev., 5.25%, 2021 8,500 8,643
Whisman School District, Gen. Oblg., zero coupon, 2020 and
2022 3,000 943
--------------------------------------------------------------------------------------
Santa Cruz County Housing Auth., Multi-Family Housing, Rev.,
7.75%, 2023 2,000 2,122
--------------------------------------------------------------------------------------
Santa Margarita/Dana Point Auth., Rev., 7.25%, 2012 and 2013 7,075 9,045
--------------------------------------------------------------------------------------
South Orange County Public Finance Auth., Rev., 7.00%, 2008 1,000 1,223
--------------------------------------------------------------------------------------
South San Francisco, Capital Improvement Financing Auth.,
Conference Center Proj., Rev., 6.125%, 2018 3,925 4,173
--------------------------------------------------------------------------------------
Southern California Home Financing Auth., Single Family
Mortgage, Rev., 6.75% and 7.35%, 2022 and 2024 1,425 1,505
--------------------------------------------------------------------------------------
Stockton Community Facilities, Special Tax Rev., 5.65% to
6.20%, 2007 through 2015 4,640 4,855
--------------------------------------------------------------------------------------
Sunnyvale, Financing Auth., Wastewater, Refuge and Sludge,
Management Facilities, Rev., 6.30%, 2017 4,000 4,265
--------------------------------------------------------------------------------------
Temple City, Unified School District, Gen. Oblg., zero
coupon, 2015 1,250 546
--------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Gen. Oblg., 6.50%, 2015 $ 4,000 $ 4,844
Highway and Transportation Auth., Rev., 6.00%, 2018 6,000 6,927
Medical and Environmental Facilities, Rev., 5.00% and
5.50% 2014 and 2015 2,000 2,097
Public Improvement, Gen. Oblg., zero coupon, 2015 and 2018 9,000 3,710
--------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--87.6% 896,767
--------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--98.4%
(Cost: $936,391) 1,007,762
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--3.00% to 3.15%
INSTRUMENTS Due--September 1998
- --.8% (Cost: $8,140) 8,140 8,140
--------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.2%
(Cost: $944,531) 1,015,902
--------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.8% 8,370
--------------------------------------------------------------------------------------
NET ASSETS--100% $1,024,272
--------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $944,531,000 for federal income tax purposes
at August 31, 1998, the gross unrealized appreciation was $71,405,000, the gross
unrealized depreciation was $34,000 and the net unrealized appreciation on
investments was $71,371,000.
See accompanying Notes to Financial Statements.
16
<PAGE> 17
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS A 4.01% 6.80% (since 3/15/95)
- -------------------------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS B 5.16 6.92 (since 3/15/95)
- -------------------------------------------------------------------------------------------------
KEMPER MICHIGAN TAX-FREE INCOME FUND CLASS C 8.18 7.44 (since 3/15/95)
- -------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Kemper Michigan Tax-Free Income Fund Class A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class A shares from 3/15/95 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Michigan Lehman
Tax-Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) A(1) Index+ Index++
<S> <C> <C> <C>
3/15/95 10000 10000 10000
9639 10115 10033
9814 10359 10106
10096 10656 10152
10734 11096 10172
10459 10963 10318
10460 11047 10384
10737 11300 10457
12/31/96 11026 11588 10510
11013 11560 10603
11364 11958 10623
11691 12319 10683
12/31/97 12016 12653 10689
12134 12799 10749
12309 12994 10802
8/31/98 12563 13227 10815
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Kemper Michigan Tax-Free Income Fund Class B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class B shares from 3/15/95 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Michigan Lehman
Tax-Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) B(1) Index+ Index++
<S> <C> <C> <C>
3/15/95 10000 10000 10000
10000 10115 10033
10509.9 10359 10106
10452.9 10656 10152
11172.4 11096 10172
10867.4 10963 10318
10769 11047 10384
11025.4 11300 10457
12/31/96 11392.5 11588 10510
11342.3 11560 10603
11741.8 11958 10623
11997.6 12319 10683
12/31/97 12321.2 12653 10689
12428.5 12799 10749
12582.5 12994 10802
8/31/98 12612.2 13227 10815
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Kemper Michigan Tax-Free Income Fund Class C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class C shares from 3/15/95 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Michigan Lehman
Tax-Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) C(1) Index+ Index++
<S> <C> <C> <C>
3/15/95 10000 10000 10000
10094 10115 10033
10257 10359 10106
10529 10656 10152
11174 11096 10172
10857 10963 10318
10847 11047 10384
11113 11300 10457
12/31/96 11387 11588 10510
11342 11560 10603
11693 11958 10623
12008 12319 10683
12/31/97 12320 12653 10689
12439 12799 10749
12593 12994 10802
8/31/98 12825 13227 10815
</TABLE>
Past performance is not a guarantee of future results. Investment returns and
principal values will fluctuate so that shares when redeemed may be worth more
or less than original cost.
* Average annual total return and total return measure net investment income
and capital gain or loss from portfolio investments over the periods
specified, assuming reinvestment of dividends and, where indicated,
adjustment for the maximum sales charge. The maximum sales charge for Class
A shares is 4.5%. For Class B shares, the maximum contingent deferred sales
charge is 4%. Class C shares have no sales adjustment, but redemptions
within one year of purchase may be subject to a contingent deferred sales
charge of 1%. Share classes invest in the same underlying portfolio. Average
annual total return reflects annualized change while total return reflects
aggregate change. During the periods noted, securities prices fluctuated.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred sales
charge in effect at the end of the period for Class B shares. In comparing
the Kemper State Tax-Free Income Funds to the Lehman Brothers Municipal Bond
Index, you should note that the funds' performance reflects the maximum
sales charges, while no such charges are reflected in the performance of the
index.
+ The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the following
criteria: a minimum credit rating of BBB, have been issued as a part of an
issue of at least $50 million, have been issued within the last 5 years, and
have a maturity of at least 2 years. Bonds subject to Alternative Minimum
Tax (AMT), variable rate bonds and zero coupon bonds are excluded from the
index. Source is Towers Data Systems.
++ The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source
is Towers Data Systems.
17
<PAGE> 18
PORTFOLIO STATISTICS
KEMPER MICHIGAN TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 58% 59%
- --------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 20 29
- --------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 16 6
- --------------------------------------------------------------------------
CASH AND EQUIVALENTS 6 6
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
QUALITY ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------
<S> <C> <C>
AAA 69% 78%
- --------------------------------------------------------------------------
AA 8 6
- --------------------------------------------------------------------------
A 2 1
- --------------------------------------------------------------------------
BBB 11 12
- --------------------------------------------------------------------------
NOT RATED 10 3
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
YEARS TO MATURITY ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 32% 24%
- --------------------------------------------------------------------------
11-20 YEARS 38 45
- --------------------------------------------------------------------------
+21 YEARS 30 31
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/98 ON 8/31/97
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------
<S> <C> <C>
14.7 years 14.6 years
- ------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
MICHIGAN TAX-FREE INCOME FUND
(Portfolio of Investments at August 31, 1998)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- ----------------------------------------------------------------------------------------------------
Virgin Islands, Public Finance Auth., Matching Fund Loan, Rev.,
7.25%, to be called 10-1-02 @ 102 $ 75 $ 86
-------------------------------------------------------------------------------
Marysville Public School District,
5.75%, to be called 5-1-04 @ 101 50 55
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
Kalamazoo, Hospital Finance Auth., Rev.,
6.25%, to be called 5-15-05 @ 100 50 55
-------------------------------------------------------------------------------
Kent Hospital Finance Auth., Health Care, Rev.,
5.75%, to be called 1-15-06 @ 102 100 112
-------------------------------------------------------------------------------
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--13.4% 602
-------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ----------------------------------------------------------------------------------------------------
Building Auth., Rev., zero coupon to 6.25%, 2005 through
2020 235 183
-------------------------------------------------------------------------------
Higher Education:
Calvin College Facilities Project Auth., Rev., 5.55%, 2017 75 77
Student Loan Auth., Rev., 5.75%, 2013 50 54
-------------------------------------------------------------------------------
Hospital Finance Auth.:
Chelsea Community, Hospital, Rev., 5.375%, 2019 50 50
Gratiot Community Hospital, Rev., 6.10%, 2007 50 54
St. John Hospital and Medical Center, Rev., 6.00%, 2010 100 114
-------------------------------------------------------------------------------
Housing Dev. Auth.:
Limited Oblg., Green Hill Proj., Rev., 5.45%, 2011 20 21
Rental Housing Rev., 5.75%, 2014 15 15
Rev., 6.05%, 2027 50 52
-------------------------------------------------------------------------------
Municipal Bond Auth.:
Drinking Water Revolving Fund, Rev., 5.25%, 2016 75 78
Local Government Bond Rev., 6.00%, 2013 10 11
-------------------------------------------------------------------------------
Regents of the University of Michigan:
Construction and Renovation Proj., Student Fee Bonds,Rev.,
5.50%, 2013 10 11
Housing Rev., 5.50%, 2014 50 53
-------------------------------------------------------------------------------
Trunk Line Fund, Rev., zero coupon and 5.50%, 2010 and 2018 175 139
-------------------------------------------------------------------------------
Underground Storage Tank Financial Assurance Auth., Rev.,
5.75%, 2010 50 55
-------------------------------------------------------------------------------
Allegan Public Schools, Gen. Oblg., 6.50%, 2007 100 116
-------------------------------------------------------------------------------
Brandon School District, Gen. Oblg., 5.125%, 2008 55 59
-------------------------------------------------------------------------------
Caledonia Community Schools, Gen. Oblg., 5.75% and 5.50%,
2012 and 2022 100 105
-------------------------------------------------------------------------------
Chippewa County, Hospital Finance Auth., Rev., 5.625%, 2014 80 82
-------------------------------------------------------------------------------
Clarkston Community Schools, Gen. Oblg., 6.25%, 2005 50 56
-------------------------------------------------------------------------------
Clinton Water & Sewer Disposal System, Rev., 5.00%, 2013 50 51
-------------------------------------------------------------------------------
Detroit:
Economic Improvements Auth., Gen. Oblg., 5.50%, 2007 50 54
Local Dev. Finance Auth., Rev., 5.20%, 2010 70 73
Sewer Disposal Supply System, Rev., 5.00%, 2022 50 50
Water Supply System, Rev., 6.25%, 2012 50 55
-------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Economic Dev. Corp. of Dickinson County, Pollution Control,
Rev., 5.85%, 2018 $ 50 $ 52
-------------------------------------------------------------------------------
Genessee County, Sewage Disposal System No. 3, Rev., 7.00%,
2005 60 70
-------------------------------------------------------------------------------
Grand Rapids:
Community College, Gen. Oblg., 5.00%, 2022 50 50
Downtown Dev. Auth., Rev., zero coupon, 2013 10 5
Sewer, Dev. Auth., Rev., 5.50%, 2022 75 82
-------------------------------------------------------------------------------
Greater Detroit Resource Recovery Auth., Rev., 6.25%, 2008 85 99
-------------------------------------------------------------------------------
Grosse Ile Township Schools, Gen. Oblg., 6.25%, 2006 100 114
-------------------------------------------------------------------------------
Gull Lake Community Schools, Gen. Oblg., 5.25%, 2021 5 5
-------------------------------------------------------------------------------
Hillsdale Hospital, Finance Auth., Rev., 5.25%, 2026 50 49
-------------------------------------------------------------------------------
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 49
-------------------------------------------------------------------------------
Livonia Public Schools, Gen. Oblg., zero coupon, 2006 20 14
-------------------------------------------------------------------------------
Macomb County, L'Anse Creuse Public Schools, Gen. Oblg.,
5.50%, 2007 50 55
-------------------------------------------------------------------------------
Marquette City Hospital Finance Auth., Rev., 5.875%, 2011 85 93
-------------------------------------------------------------------------------
Michigan Strategic Fund Ltd. Rev., 5.75%, 2018 100 100
-------------------------------------------------------------------------------
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 80
Birmingham Public Schools, Gen. Oblg., 5.75%, 2011 15 16
Drainage District, Rev., 6.40%, 2016 15 17
-------------------------------------------------------------------------------
Ottawa County, Spring Lake Public Schools, Gen. Oblg.,
5.625%, 2017 50 53
-------------------------------------------------------------------------------
Redford Union Schools, District No. 1, Gen. Oblg., 6.375%,
2010 100 118
-------------------------------------------------------------------------------
Richmond Community School District, Gen. Oblg., 5.60%, 2022 25 26
-------------------------------------------------------------------------------
Romulus Community Schools, Gen. Oblg., zero coupon, 2005 15 11
-------------------------------------------------------------------------------
Saginaw Valley State University, Rev., 5.25%, 2019 50 51
-------------------------------------------------------------------------------
Tawas, Hospital Finance Auth., Rev., 5.75%, 2023 75 76
-------------------------------------------------------------------------------
Wayne Charter County Airport, Rev., 5.00%, 2022 50 49
-------------------------------------------------------------------------------
Wyandotte, Electric Rev., 6.25%, 2017 45 49
-------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Electric Power Auth., Rev., 6.50% and zero coupon, 2006
and 2017 225 147
Facilities Financing Auth., Mennonite General Hospital
Project, Rev.,
6.50%, 2018 75 82
Gen. Oblg., 5.50%, 2009 15 17
Highway and Transportation Auth., Rev., 6.25%, 2016 75 89
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 30 33
-------------------------------------------------------------------------------
Virgin Islands, Public Finance Auth., Matching Fund Loan,
Rev., 6.00%, 2022 75 78
-------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--82.9% 3,717
-------------------------------------------------------------------------------
TOTAL INVESTMENTS--96.3%
(Cost: $4,056) 4,319
-------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--3.7% 168
-------------------------------------------------------------------------------
NET ASSETS--100% $4,487
-------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $4,056,000 for federal income tax purposes
at August 31, 1998, the gross unrealized and net appreciation on investments was
$263,000.
See accompanying Notes to Financial Statements.
20
<PAGE> 21
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR LIFE OF CLASS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER OHIO TAX-FREE INCOME FUND CLASS A
3.70% 5.45% 6.40% (since 3/22/93)
- ---------------------------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS B
4.69 N/A 6.53 (since 5/31/94)
- ---------------------------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS C
7.70 N/A 6.91 (since 5/31/94)
- ---------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Kemper Ohio Tax-Free Income Fund Class A
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class A shares from 3/22/93 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Ohio Tax- Lehman
Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) A(1) Index+ Index++
- --------------------------------------------------------------
<S> <C> <C> <C>
3/22/93 10000 10000 10000
10012 10327 10056
10424 10676 10104
10509 10826 10153
9981 10232 10251
10165 10348 10306
10189 10416 10404
12/31/94 10124 10267 10425
10869 10992 10543
11059 11257 10620
11324 11581 10669
11983 12059 10689
11644 11914 10843
11721 12005 10912
12036 12280 10989
12/31/96 12359 12593 11045
12290 12563 11142
12703 12996 11163
13067 13387 11226
13439 13750 11233
13587 13909 11295
13781 14121 11351
8/31/98 14021 14375 11365
</TABLE>
- --------------------------------------------------------------------------------
Kemper Ohio Tax-Free Income Fund Class B
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class B shares from 5/31/94 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Ohio Tax- Lehman
Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) B(1) Index+ Index++
- -------------------------------------------------------------
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
10091.50 9942.00 10034.00
9974.10 10007.00 10129.00
9881.10 9864.00 10149.00
10582.70 10561.00 10264.00
10945.60 10816.00 10339.00
10937.50 11126.00 10386.00
11609.70 11586.00 10407.00
11248.10 11446.00 10556.00
11216.40 11534.00 10624.00
11506.30 11798.00 10698.00
12/31/96 11873.70 12099.00 10753.00
11857.60 12070.00 10847.00
12204.20 12486.00 10868.00
12467.00 12862.00 10929.00
12/31/97 12795.80 13211.00 10936.00
12935.70 13363.00 10997.00
13093.30 13567.00 11051.00
8/31/98 13090.70 13811.00 11064.00
</TABLE>
- --------------------------------------------------------------------------------
Kemper Ohio Tax-Free Income Fund Class C
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class C shares from 5/31/94 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Ohio Tax- Lehman
Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) C(1) Index+ Index++
- --------------------------------------------------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9933 9942 10034
9952 10007 10129
9880 9864 10149
10593 10561 10264
10758 10816 10339
10993 11126 10386
11608 11586 10407
11255 11446 10556
11305 11534 10624
11585 11798 10698
12/31/96 11874 12099 10753
11786 12070 10847
12156 12486 10868
12479 12862 10929
12/31/97 12808 13211 10936
12923 13363 10997
13080 13567 11051
8/31/98 13291 13811 11064
</TABLE>
Past performance is not a guarantee of future results. Investment returns
and principal values will fluctuate so that shares when redeemed may be
worth more or less than original cost.
* Average annual total return and total return measure net investment income
and capital gain or loss from portfolio investments over the periods
specified, assuming reinvestment of dividends and, where indicated,
adjustment for the maximum sales charge. The maximum sales charge for Class
A shares is 4.5%. For Class B shares, the maximum contingent deferred sales
charge is 4%. Class C shares have no sales adjustment, but redemptions
within one year of purchase may be subject to a contingent deferred sales
charge of 1%. Share classes invest in the same underlying portfolio.
Average annual total return reflects annualized change while total return
reflects aggregate change. During the periods noted, securities prices
fluctuated.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred sales
charge in effect at the end of the period for Class B shares. In comparing
the Kemper State Tax-Free Income Funds to the Lehman Brothers Municipal
Bond Index, you should note that the funds' performance reflects the
maximum sales charges, while no such charges are reflected in the
performance of the index.
+ The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the following
criteria: a minimum credit rating of BBB, have been issued as a part of an
issue of at least $50 million, have been issued within the last 5 years,
and have a maturity of at least 2 years. Bonds subject to Alternative
Minimum Tax (AMT), variable rate bonds and zero coupon bonds are excluded
from the index. Source is Towers Data Systems.
++ The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source
is Towers Data Systems.
21
<PAGE> 22
PORTFOLIO STATISTICS
KEMPER OHIO TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 48% 50%
- --------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 35 35
- --------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 15 6
- --------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 9
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
QUALITY ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------
<S> <C> <C>
AAA 64% 66%
- --------------------------------------------------------------------------
AA 11 11
- --------------------------------------------------------------------------
A 3 3
- --------------------------------------------------------------------------
BBB 8 10
- --------------------------------------------------------------------------
BB 3 3
- --------------------------------------------------------------------------
NOT RATED 11 7
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
YEARS TO MATURITY ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 26% 16%
- --------------------------------------------------------------------------
11-20 YEARS 52 54
- --------------------------------------------------------------------------
+21 YEARS 22 30
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
AVERAGE MATURITY ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------
<S> <C> <C>
13.9 years 15.5 years
- -----------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
22
<PAGE> 23
PORTFOLIO OF Investments
OHIO TAX-FREE INCOME FUND
Portfolio of Investments at August 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
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 $ 1,093
----------------------------------------------------------------------------------
Northeast Ohio Regional Sewer District, Wastewater
Improvement, Rev., 6.50%, to be called 11-15-01 @ 101 300 327
----------------------------------------------------------------------------------
Olentangy Local School District, Gen. Oblg., 6.35%, to be
called 12-12-01 @ 102 150 165
----------------------------------------------------------------------------------
Virgin Islands, Public Finance Auth., Rev., 7.25%, to be
called 10-12-02 @ 102 225 258
----------------------------------------------------------------------------------
Cleveland Public Power, First Mortgage, Rev., 7.00%, to be
called 11-15-04 @ 102 600 708
----------------------------------------------------------------------------------
Lakeview Local School District, Gen. Oblg., 6.90%, to be
called 12-12-04 @ 102 700 824
----------------------------------------------------------------------------------
Olmstead Falls City School District, Gen. Oblg., 6.85%, to
be called 12-15-04 @ 102 250 293
----------------------------------------------------------------------------------
Cuyahoga County, Merida Health System, Rev., 6.25%, to be
called 8-15-05 @ 102 950 1,090
----------------------------------------------------------------------------------
Batavia Local School District, Gen. Oblg., 7.00%, to be
called 12-1-05 @ 102 500 600
----------------------------------------------------------------------------------
Ohio Housing Finance Agency, Single Family Mortgage, Rev.,
zero coupon, to be called 1-15-13 @ 82 1,000 416
----------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--13.2% 5,774
----------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -------------------------------------------------------------------------------------------------------
Building Auth.:
Administrative Building Funds Proj., Rev., 6.30%, 2011 140 152
Adult Correctional Building Fund Proj., Rev., 6.125%, 2012 310 339
James A. Rhodes State Office Tower, Rev., 6.25%, 2011 215 229
Juvenile Correctional Building Proj., Rev., 6.60%, 2014 200 228
----------------------------------------------------------------------------------
Higher Education Facility:
Dayton University, Rev., 6.60%, 2017 430 486
Dominican College, Rev., 6.625%, 2014 600 664
Rev., 6.00% and 6.125%, 2011 and 2016 640 690
----------------------------------------------------------------------------------
Housing Finance Agency:
Rev., 5.85% and 6.10%, 2016 and 2028 750 791
Single Family Mortgage, Rev., 7.85%, 2021 225 238
----------------------------------------------------------------------------------
State Turnpike, Rev., 6.00%, 2007 1,000 1,127
----------------------------------------------------------------------------------
Water Development Auth.:
Pollution Control, Rev., 6.00% and 6.10%, 2006 and 2020 1,550 1,668
Solid Waste Disposal, Rev., 5.875%, 2020 750 767
----------------------------------------------------------------------------------
Akron, Sewer System., Rev., 5.90%, 2011 385 427
----------------------------------------------------------------------------------
Athens, Gen. Oblg., 6.25%, 2011 500 539
----------------------------------------------------------------------------------
Avon Local School District, Gen. Oblg., 6.50%, 2015 940 1,138
----------------------------------------------------------------------------------
Beavercreek Local School District, Gen. Oblg., 6.60%, 2015 500 615
----------------------------------------------------------------------------------
Big Walnut Local School District, Gen. Oblg., zero coupon,
2012 420 218
----------------------------------------------------------------------------------
City of Springdale, Hospital Facilities First Mortgage,
Southwestern Ohio Seniors Services, Rev., 6.00%, 2018 750 785
----------------------------------------------------------------------------------
Cleveland Public Power, First Mortgage, Rev., 7.00%, 2017 750 828
----------------------------------------------------------------------------------
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 700 806
----------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cuyahoga County:
Gen. Oblg., 5.65%, 2018 $ 500 $ 554
Multi-Family Housing, Rev., 6.50%, 2020 1,000 1,088
Sewer System, Rev., 6.00%, 2007 500 518
----------------------------------------------------------------------------------
Dublin City School District, Gen. Oblg., zero coupon, 2010
and 2011 1,595 876
----------------------------------------------------------------------------------
Edon Township Local School District, Gen. Oblg., 6.00%, 2019 475 549
----------------------------------------------------------------------------------
Fayette County, Gen. Oblg., 5.90%, 2013 160 172
----------------------------------------------------------------------------------
Finneytown Local School District, Gen. Oblg., 6.20%, 2017 320 376
----------------------------------------------------------------------------------
Franklin County Local School District, Gen. Oblg., 6.50%,
2013 500 601
----------------------------------------------------------------------------------
Gateway Economic Development Corp., Rev., 7.50%, 2005 1,000 1,101
----------------------------------------------------------------------------------
Green Springs, St. Francis Healthcare, Rev., 7.00%, 2014 400 399
----------------------------------------------------------------------------------
Highland Heights, Gen. Oblg., 6.15%, 2012 145 157
----------------------------------------------------------------------------------
Hillard School District, Gen. Oblg., 6.00%, 2006 500 564
----------------------------------------------------------------------------------
Kent State University, Rev., 5.00%, 2023 510 507
----------------------------------------------------------------------------------
Lakota, Gen. Oblg., 7.00%, 2008 500 611
----------------------------------------------------------------------------------
Liberty Benton Local School District, Gen. Oblg., zero
coupon, 2011 through 2016 1,360 649
----------------------------------------------------------------------------------
Lucas County, Public Improvement Water Utility, Rev., 6.05%
and 6.50%, 2013 and 2016 380 435
----------------------------------------------------------------------------------
Marion County, United Church Homes Proj., Rev., 6.30% and
6.375%, 2015 and 2010 700 745
----------------------------------------------------------------------------------
Medina Local School District, Gen. Oblg., zero coupon, 2010 1,045 596
----------------------------------------------------------------------------------
Napoleon, Health Care Facility, Lutheran Orphans' and Old
Folks' Home Society, Rev., 6.875%, 2023 465 516
----------------------------------------------------------------------------------
Olentangy Local School District, Gen. Oblg., 5.85%, 2007 400 441
----------------------------------------------------------------------------------
Sandusky County, Gen. Oblg., 6.20%, 2013 500 561
----------------------------------------------------------------------------------
South Euclid-Lyndhurst City School District, Gen. Oblg.,
6.40%, 2018 535 616
----------------------------------------------------------------------------------
Springboro Community City School District, School
Improvement, Gen. Oblg., 6.00%, 2011 500 575
----------------------------------------------------------------------------------
Strongsville, Gen. Oblg., 6.70%, 2011 500 587
----------------------------------------------------------------------------------
Toledo, Gen. Oblg., 6.10% and 6.35%, 2014 and 2025 1,250 1,404
----------------------------------------------------------------------------------
Trumbull County Sewer Improvement, Gen. Oblg., 6.20%, 2014 500 561
----------------------------------------------------------------------------------
Tuscarawas Valley Local School District, Gen. Oblg., 6.60%,
2015 365 422
----------------------------------------------------------------------------------
University of Cincinnati, Rev., 5.50%, 2013 620 673
----------------------------------------------------------------------------------
Wayne Local School District, Gen Oblg., 6.45% and 6.60%,
2011 and 2016 355 429
----------------------------------------------------------------------------------
West Lake Local School District, Gen. Oblg., 6.15%, 2005 500 564
----------------------------------------------------------------------------------
Willoughby Industrial Development, Rev., 6.875%, 2016 575 644
----------------------------------------------------------------------------------
Wooster City School District, Gen. Oblg., zero coupon, 2013 930 448
----------------------------------------------------------------------------------
Youngstown, Gen. Oblg., 6.125%, 2014 110 123
----------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev., 6.50%, 2018 750 820
Highway and Transportation Auth., Rev., 6.25%, 2016 750 887
Industrial, Tourist, Educational, Medical, Environmental
Control Facilities, Rev., 5.00%, 2015 685 695
Municipal Financing Agency, Rev., 6.00%, 2014 250 275
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 360 392
----------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Virgin Islands:
Public Finance Auth., Rev., 6.00%, 2022 $ 840 $ 878
Water and Power Auth., Electric System, Rev., 5.30%, 2018 500 505
----------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--84.9% 37,214
----------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--98.1%
(Cost: $39,574) 42,988
----------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--3.45% to 3.85%
INSTRUMENTS Due--September 1998
- --.6% (Cost: $300) 300 300
----------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.7%
(Cost: $39,874) 43,288
----------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.3% 553
----------------------------------------------------------------------------------
NET ASSETS--100% $43,841
----------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $39,874,000 for federal income tax purposes
at August 31, 1998, the gross unrealized and net appreciation on investments was
$3,414,000.
See accompanying Notes to Financial Statements.
25
<PAGE> 26
PERFORMANCE UPDATE
KEMPER TEXAS TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED AUGUST 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR LIFE OF CLASS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER TEXAS TAX-FREE INCOME FUND CLASS A 3.77% 5.89% 7.78% (since 11/1/91)
......................................................................................................
KEMPER TEXAS TAX-FREE INCOME FUND CLASS B 4.67 n/a 6.73 (since 5/31/94)
......................................................................................................
KEMPER TEXAS TAX-FREE INCOME FUND CLASS C 7.79 n/a 7.16 (since 5/31/94)
......................................................................................................
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Kemper Texas Tax-Free Income Fund Class A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class A shares from 11/1/91 to 8/31/98
- ---------------------------------------------------------------------------------------------------
Kemper
Texas Tax- Lehman
Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) A(1) Index+ Index++
<S> <C> <C> <C>
11/1/91 10000 10000 10000
9785 10243 10036
9843 10273 10138
10295 10663 10204
10546 10947 10284
10752 11146 10328
11192 11560 10451
11669 11938 10509
12118 12342 10560
12271 12515 10611
11714 11828 10713
11911 11962 10771
11945 12041 10873
12/31/94 11952 11868 10895
12757 12707 11019
13032 13013 11099
13345 13387 11150
14158 13940 11172
13797 13772 11332
13912 13878 11405
14345 14196 11485
14702 14557 11543
14632 14522 11645
15125 15023 11667
15546 15476 11732
12/31/97 16000 15895 11739
16157 16079 11805
16392 16323 11863
8/31/98 16692 16617 11878
</TABLE>
[LINE GRAPH]
Kemper Texas Tax-Free Income Fund Class B
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class B shares from 11/1/91 to 8/31/98
- ---------------------------------------------------------------------------------------------------
Kemper
Texas Tax- Lehman
Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) B(1) Index+ Index++
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
10031.90 9942.00 10034.00
9951.90 10007.00 10129.00
9906.20 9864.00 10149.00
10537.10 10561.00 10264.00
10921.60 10816.00 10339.00
10918.90 11126.00 10386.00
11614.60 11586.00 10407.00
11303.80 11446.00 10556.00
11296.50 11534.00 10624.00
11624.90 11798.00 10698.00
12/31/96 11959.70 12099.00 10753.00
11948.80 12070.00 10847.00
12299.40 12486.00 10868.00
12556.50 12862.00 10929.00
12/31/97 12908.70 13211.00 10936.00
13033.00 13363.00 10997.00
13196.80 13567.00 11051.00
8/31/98 13195.20 13811.00 11064.00
</TABLE>
[LINE GRAPH]
Kemper Texas Tax-Free Income Fund Class C
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class C shares from 11/1/91 to 8/31/98
- ---------------------------------------------------------------------------------------------------
Kemper
Texas Tax- Lehman
Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) C(1) Index+ Index++
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9922 9942 10034
9928 10007 10129
9913 9864 10149
10546 10561 10264
10753 10816 10339
10989 11126 10386
11634 11586 10407
11312 11446 10556
11381 11534 10624
11713 11798 10698
12/31/96 11981 12099 10753
11901 12070 10847
12265 12486 10868
12594 12862 10929
12/31/97 12935 13211 10936
13035 13363 10997
13199 13567 11051
8/31/98 13424 13811 11064
</TABLE>
Past performance is not a guarantee of
future results. Investment returns and
principal values will fluctuate so that
shares when redeemed may be worth more
or less than original cost.
*Average annual total return and total
return measure net investment income
and capital gain or loss from
portfolio investments over the periods
specified, assuming reinvestment of
dividends and, where indicated,
adjustment for the maximum sales
charge. The maximum sales charge for
Class A shares is 4.5%. For Class B
shares, the maximum contingent
deferred sales charge is 4%. Class C
shares have no sales adjustment, but
redemptions within one year of
purchase may be subject to a
contingent deferred sales charge of
1%. Share classes invest in the same
underlying portfolio. Average annual
total return reflects annualized
change while total return reflects
aggregate change. During the periods
noted, the securities prices
fluctuated.
(1)Performance includes reinvestment of
dividends and adjustment for the
maximum sales charge for Class A
shares and the contingent deferred
sales charge in effect at the end of
the period for Class B shares. In
comparing the Kemper State Tax-Free
Income Funds to the Lehman Brothers
Municipal Bond Index, you should
note that the funds' performance
reflects the maximum sales charges,
while no such charges are reflected
in the performance of the index.
+The Lehman Brothers Municipal Bond
Index includes approximately 15,000
bonds. To be included in the index a
municipal bond must meet the following
criteria: a minimum credit rating of
BBB, have been issued as a part of an
issue of at least $50 million, have
been issued within the last 5 years,
and have a maturity of at least 2
years. Bonds subject to Alternative
Minimum Tax (AMT), variable rate bonds
and zero coupon bonds are excluded
from the index. Source is Towers Data
Systems.
++The Consumer Price Index is a
statistical measure of change, over
time, in the prices of goods and
services in major expenditure groups
for all urban consumers. It is
generally considered to be a measure
of inflation. Source is Towers Data
Systems.
26
<PAGE> 27
PORTFOLIO STATISTICS
KEMPER TEXAS TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 52% 58%
- --------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 28 30
- --------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 16 8
- --------------------------------------------------------------------------
CASH AND EQUIVALENTS 4 4
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
QUALITY ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------
<S> <C> <C>
AAA 72% 71%
- --------------------------------------------------------------------------
AA 9 7
- --------------------------------------------------------------------------
A 6 8
- --------------------------------------------------------------------------
BBB 13 14
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
YEARS TO MATURITY ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 22% 9%
- --------------------------------------------------------------------------
11-20 YEARS 62 61
- --------------------------------------------------------------------------
+21 YEARS 16 30
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/98 ON 8/31/97
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------
<S> <C> <C>
14.8 years 16.8 years
- --------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
27
<PAGE> 28
PORTFOLIO OF INVESTMENTS
TEXAS TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1998
(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
- -------------------------------------------------------------------------------------------------
Lockhart Correctional Facilities Financing Corp., Rev.,
6.625% to be called 4-1-01 @ 100 $200 $ 214
----------------------------------------------------------------------------
Travis County Housing Finance Corp., Gen. Oblg., 6.75%,
to be called 9-1-01 @ 100 75 81
----------------------------------------------------------------------------
Ector County Hospital District, Rev., 7.30%, to be called
4-15-02 @ 102 450 509
----------------------------------------------------------------------------
Socorro Independent School District, Gen. Oblg., 6.625%, to
be called 8-15-02 @ 100 90 99
----------------------------------------------------------------------------
Denton, Utility System Rev., 6.50%, to be called 12-1-04 @
100 150 170
----------------------------------------------------------------------------
Spring Independent School District, Gen. Oblg., 6.375%, to
be called 8-15-05 @ 100 400 456
----------------------------------------------------------------------------
Dripping Springs, Independent School District, Gen. Oblg.,
5.80%, to be called 8-15-07 @ 100 280 314
----------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--14.2% 1,843
----------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -------------------------------------------------------------------------------------------------
Department of Housing and Community Affairs:
NHP Foundation, Asmara Proj., Rev., 6.40%, 2027 150 162
Single Family Mortgage Rev., 6.00%, 2017 235 250
----------------------------------------------------------------------------
Housing Agcy., Single Family Mortgage Rev., 7.15%, 2012 50 53
----------------------------------------------------------------------------
Municipal Power Agency Rev., zero coupon, 2015 620 269
----------------------------------------------------------------------------
Public Financing Auth., Gen. Oblg., 7.00%, 2012 213 229
----------------------------------------------------------------------------
State Veterans' Land, Gen. Oblg., 6.40%, 2024 350 384
----------------------------------------------------------------------------
Turnpike Auth., Dallas North Tollway Rev., zero coupon, 2010 250 148
----------------------------------------------------------------------------
Abilene Higher Education Facilities Corp., Abilene Christian
University Proj., Rev., 6.25%, 2011 300 324
----------------------------------------------------------------------------
Argyle Independent School District, Gen. Oblg., zero coupon,
2014 500 230
----------------------------------------------------------------------------
Austin:
Airport System Rev., 6.20%, 2015 585 645
Utilities System Rev., zero coupon, 2011 100 54
----------------------------------------------------------------------------
Bexar County Housing Finance Dev. Corp., Multi-Family
Housing Rev., 6.875%, 2012 245 257
----------------------------------------------------------------------------
Brazos River Auth., Texas Utilities Electric Company Proj.,
Rev., 8.125%, 2020 350 374
----------------------------------------------------------------------------
Cameron County Housing Finance Corp., Single Family
Mortgage, Rev., 6.75%, 2025 365 398
----------------------------------------------------------------------------
Canadian River Municipal Water Auth., Rev., 5.875%, 2016 250 271
----------------------------------------------------------------------------
Circle C, Utility System, District No. 3, Rev., 6.50%, 2009 250 270
----------------------------------------------------------------------------
Dallas-Fort Worth International Airport, Rev., 6.00%, 2014 125 133
----------------------------------------------------------------------------
Denison Hospital Auth., Texonna Medical Center, Inc. Proj.,
Rev., 6.125%, 2027 250 266
----------------------------------------------------------------------------
El Paso Independent School District, Gen. Oblg., zero
coupon, 2011 340 177
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harris County:
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 73
Toll Road Auth., Rev., 5.00%, 2014 250 254
----------------------------------------------------------------------------
Houston:
Higher Education Finance Corp., University of St. Thomas
Proj., Rev., 7.25%, 2007 300 329
Independent School District, Gen. Oblg., 6.30%, 2014 500 591
----------------------------------------------------------------------------
Keller Independent School District, Gen. Oblg., zero coupon,
2010 530 305
----------------------------------------------------------------------------
Lower Colorado River Auth., Junior Lien Rev., 5.25%, 2015 150 159
----------------------------------------------------------------------------
North Central Health Facilities Dev. Corp.:
Health Resources System, Rev., 5.75%, 2011 250 276
Presbyterian Healthcare System, Rev., 6.625%, 2011 100 116
----------------------------------------------------------------------------
North Forest Independent School District, Gen. Oblg., 6.00%,
2011 300 343
----------------------------------------------------------------------------
Red River Auth., Public Service Utilities Company Rev.,
6.00%, 2020 150 164
----------------------------------------------------------------------------
Spring Independent School District, Gen. Oblg., 6.875%, 2009 300 359
----------------------------------------------------------------------------
Texarkana, Wadley Regional Medical Center Rev., 6.00%, 2016 300 343
----------------------------------------------------------------------------
Travis County Housing Finance Corp.:
Residential Mortgage, Senior Rev., 7.00%, 2011 200 214
Single Family Mortgage, Rev., 6.75%, 2014 75 81
----------------------------------------------------------------------------
Trinity River Auth., Denton Creek Wastewater System Rev.,
6.45%, 2015 390 436
----------------------------------------------------------------------------
United Independent School District, Gen. Oblg., zero coupon,
2016 500 206
----------------------------------------------------------------------------
Waco Health Facilities Dev. Corp., Hillcrest Baptist Medical
Center Proj., Rev., 7.125%, 2014 90 97
----------------------------------------------------------------------------
Waxahachie:
Community Dev. Corp. Sales Tax Rev., zero coupon, 2023 565 146
Independent School District, Gen. Oblg., zero coupon, 2009 350 213
----------------------------------------------------------------------------
Wylie Independent School District, Gen. Oblg., 6.90%, 2012 50 62
----------------------------------------------------------------------------
Puerto Rico Commonwealth:
Gen. Oblg., 6.25%, 2013 150 177
Industrial Tourist, Educational, Medical and Environmental
Control Facilities Financing Auth., Rev., 5.625%, 2017 250 255
----------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--84.3% 10,903
----------------------------------------------------------------------------
TOTAL INVESTMENTS--98.5%
(Cost: $11,769) 12,746
----------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.5% 198
----------------------------------------------------------------------------
NET ASSETS--100% $12,944
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $11,769,000 for federal income tax purposes
at August 31, 1998, gross unrealized and net appreciation on investments was
$977,000.
See accompanying Notes to Financial Statements.
29
<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER STATE TAX-FREE INCOME SERIES
We have audited the accompanying statement of assets and liabilities,
including the portfolios of investments, of Kemper California Tax-Free Income
Fund, Kemper Michigan Tax-Free Income Fund, Kemper Ohio Tax-Free Income Fund,
and Kemper Texas Tax-Free Income Fund, four of the eight investment portfolios
comprising Kemper State Tax-Free Income Series (the Trust), as of August 31,
1998, the related statements of operations for the year then ended and changes
in net assets for each of the two years in the period then ended and the
financial highlights for each of the fiscal periods since 1994. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
August 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the above mentioned Funds of the Kemper State Tax-Free Income Series at
August 31, 1998, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and the financial highlights for each of the fiscal periods since 1994, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1998
30
<PAGE> 31
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------
Investments, at value (Cost: $944,531,
$4,056, $39,874 and $11,769, respectively) $1,015,902 4,319 43,288 12,746
- -----------------------------------------------------------------------------------------------------
Cash 6 111 -- 72
- -----------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 531 -- 81 1
- -----------------------------------------------------------------------------------------------------
Investments sold 3,716 -- 35 5
- -----------------------------------------------------------------------------------------------------
Interest 13,513 65 612 147
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,033,668 4,495 44,016 12,971
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------------------------------------
Cash overdraft -- -- 75 --
- -----------------------------------------------------------------------------------------------------
Payable for:
Dividends 767 2 32 9
- -----------------------------------------------------------------------------------------------------
Fund shares redeemed 442 -- 18 --
- -----------------------------------------------------------------------------------------------------
Investments purchased 7,351 -- -- --
- -----------------------------------------------------------------------------------------------------
Management fee 461 -- 20 6
- -----------------------------------------------------------------------------------------------------
Administrative services fee 145 -- 8 3
- -----------------------------------------------------------------------------------------------------
Distribution services fee 26 1 7 1
- -----------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 64 1 9 3
- -----------------------------------------------------------------------------------------------------
Trustees' fees and other 140 4 6 5
- -----------------------------------------------------------------------------------------------------
Total liabilities 9,396 8 175 27
- -----------------------------------------------------------------------------------------------------
NET ASSETS $1,024,272 4,487 43,841 12,944
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------------------------------------
Paid-in capital $ 949,700 4,241 40,575 11,915
- -----------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments 3,201 (17) (148) 52
- -----------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 71,371 263 3,414 977
- -----------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $1,024,272 4,487 43,841 12,944
- -----------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $ 982,113 2,499 31,731 11,210
- -----------------------------------------------------------------------------------------------------
Shares outstanding 128,451 239 3,010 1,050
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $7.65 10.46 10.54 10.68
- -----------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $8.01 10.95 11.04 11.18
- -----------------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $ 35,466 1,834 11,100 1,382
- -----------------------------------------------------------------------------------------------------
Shares outstanding 4,633 175 1,053 130
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $7.66 10.46 10.54 10.67
- -----------------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $ 6,693 154 1,010 352
- -----------------------------------------------------------------------------------------------------
Shares outstanding 881 15 96 33
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $7.60 10.46 10.54 10.68
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
31
<PAGE> 32
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended August 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------------------------------------------
Interest income $56,889 183 2,226 721
- ------------------------------------------------------------------------------------------------------------
Expenses:
Management fee 5,352 19 226 70
- ------------------------------------------------------------------------------------------------------------
Administrative services fee 1,793 9 90 27
- ------------------------------------------------------------------------------------------------------------
Distribution services fee 259 11 80 13
- ------------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 553 3 35 13
- ------------------------------------------------------------------------------------------------------------
Professional fees 27 1 1 1
- ------------------------------------------------------------------------------------------------------------
Reports to shareholders 128 1 5 2
- ------------------------------------------------------------------------------------------------------------
Trustees' fees and other 47 11 15 8
- ------------------------------------------------------------------------------------------------------------
Total expenses before expense waiver 8,159 55 452 134
- ------------------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment manager -- 9 -- --
- ------------------------------------------------------------------------------------------------------------
Total expenses after expense waiver 8,159 46 452 134
- ------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 48,730 137 1,774 587
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments 17,249 20 239 142
- ------------------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (789) (4) (20) (6)
- ------------------------------------------------------------------------------------------------------------
Net realized gain 16,460 16 219 136
- ------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 17,885 139 1,308 331
- ------------------------------------------------------------------------------------------------------------
Net gain on investments 34,345 155 1,527 467
- ------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $83,075 292 3,301 1,054
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
32
<PAGE> 33
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
For the years ended August 31, 1998 and 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 $ 48,730 52,100 137 129
- --------------------------------------------------------------------------------------------------------------
Net realized gain 16,460 20,425 16 40
- --------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 17,885 13,073 139 84
- --------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 83,075 85,598 292 253
- --------------------------------------------------------------------------------------------------------------
Distribution from net investment income (48,730) (52,100) (137) (129)
- --------------------------------------------------------------------------------------------------------------
Distribution from net realized gain (16,813) (5,606) (53) (35)
- --------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (65,543) (57,706) (190) (164)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (1,167) (60,523) 1,294 (284)
- --------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 16,365 (32,631) 1,396 (195)
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------------------------
Beginning of year 1,007,907 1,040,538 3,091 3,286
- --------------------------------------------------------------------------------------------------------------
END OF YEAR $1,024,272 1,007,907 4,487 3,091
- --------------------------------------------------------------------------------------------------------------
OHIO TEXAS
------------------------- ------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------------------------
Net investment income $ 1,774 1,740 587 632
- --------------------------------------------------------------------------------------------------------------
Net realized gain 219 61 136 158
- --------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 1,308 1,149 331 254
- --------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,301 2,950 1,054 1,044
- --------------------------------------------------------------------------------------------------------------
Distribution from net investment income (1,774) (1,740) (587) (632)
- --------------------------------------------------------------------------------------------------------------
Distribution from net realized gain (250) (114) (147) (326)
- --------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (2,024) (1,854) (734) (958)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions 3,096 1,272 155 (1,212)
- --------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 4,373 2,368 475 (1,126)
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------------------------
Beginning of year 39,468 37,100 12,469 13,595
- --------------------------------------------------------------------------------------------------------------
END OF YEAR $43,841 39,468 12,944 12,469
- --------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1
DESCRIPTION OF THE
FUNDS Kemper California Tax-Free Income Fund, Kemper
Michigan Tax-Free Income Fund, Kemper Ohio Tax-Free
Income Fund and Kemper Texas Tax-Free Income Fund
(collectively the Funds) are four of eight
investment portfolios comprising the Kemper State
Tax-Free Income Series (the Trust). The remaining
portfolios are Kemper Florida, Kemper New Jersey,
Kemper New York and Kemper Pennsylvania Tax-Free
Income Funds. The Trust is an open-end management
investment company organized as a business trust
under the laws of Massachusetts.
Each Fund offers three classes of shares. Class A
shares are sold to investors subject to an initial
sales charge. Class B shares are sold without an
initial sales charge but are subject to higher
ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial 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. Interest income is recorded on
the accrual basis and includes premium and original
issue discount amortization on fixed income
securities. Realized gains and losses from
investment transactions are reported on an
identified cost basis.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated among the Funds in
proportion to their relative net assets.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the close of the Exchange. The net
asset value per share is determined separately for
each class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. Each Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies, and to distribute
all of its taxable income to its
34
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
shareholders. Accordingly, each Fund paid no
federal income taxes and no federal income tax
provision was required.
DIVIDENDS TO SHAREHOLDERS. Each Fund declares and
records a daily dividend equal to its net
investment income for that day, to holders of
shares for which payment has been received. Income
dividends are distributed monthly. Net realized
capital gains, if any, are distributed at least
annually. Dividends are determined in accordance
with income tax principles which may treat certain
transactions differently from generally accepted
accounting principles.
- --------------------------------------------------------------------------------
3
TRANSACTIONS
WITH AFFILIATES MANAGEMENT AGREEMENT. Each Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the annual rate of .55%
of the first $250 million of average daily net
assets declining to .40% of average daily net
assets in excess of $12.5 billion. Management fees
incurred for the year ended August 31, 1998 are as
follows:
<TABLE>
<S> <C>
California $5,352,000
Michigan (after expense waiver) 16,000
Ohio 226,000
Texas 70,000
</TABLE>
For the year ended August 31, 1998, Scudder Kemper
has agreed to waive a portion of its management fee
and to absorb certain operating expenses of the
Michigan Fund. Under this arrangement, Scudder
Kemper waived and absorbed expenses of $9,000 for
the year ended August 31, 1998.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's businesses to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, each Fund's
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Trustees of each Fund has
approved new investment management agreements with
Scudder Kemper, which are substantially identical
to the former investment management agreements,
except for the dates of execution and termination.
The Board of Trustees of each Fund will seek
shareholder approval of the new investment
management agreements through a proxy solicitation
that is currently scheduled to conclude in mid-
December.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Trust has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of each Fund's Class A shares
for the year ended August 31, 1998 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS
RETAINED BY KDI ALLOWED BY KDI TO FIRMS
--------------- -----------------------
<S> <C> <C>
California $134,000 793,000
Michigan 1,000 9,000
Ohio 8,000 44,000
Texas 2,000 13,000
</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 separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares of each Fund.
In
35
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS
addition, KDI receives any contingent deferred
sales charges (CDSC) from redemptions of Class B
and Class C shares. Distribution fees, CDSC and
commissions related to Class B and Class C shares
for the year ended August 31, 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 $313,000 418,000
Michigan (after expense waiver) 13,000 37,000
Ohio 104,000 99,000
Texas 19,000 30,000
</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
year ended August 31, 1998 are as follows:
<TABLE>
<CAPTION>
ASF PAID BY ASF PAID BY
THE FUND TO KDI KDI TO FIRMS
--------------- -------------
<S> <C> <C>
California $1,793,000 1,806,000
Michigan (after expense waiver) 4,000 10,000
Ohio 90,000 92,000
Texas 27,000 25,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds' transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Trust. Under the agreement,
for the year ended August 31, 1998, KSvC received
shareholder services fees as follows:
<TABLE>
<S> <C>
California $331,000
Michigan 2,000
Ohio 23,000
Texas 7,000
</TABLE>
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of
Scudder Kemper. For the year ended August 31, 1998,
the Funds made no payments to their officers and
incurred trustees' fees aggregating $30,000 to
independent trustees.
- --------------------------------------------------------------------------------
4
INVESTMENT
TRANSACTIONS For the year ended August 31, 1998, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA MICHIGAN OHIO TEXAS
---------- -------- ------ -----
<S> <C> <C> <C> <C>
Purchases $633,181 2,277 11,385 4,274
Proceeds from sales 602,264 1,036 6,045 3,988
</TABLE>
36
<PAGE> 37
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5
CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the Funds (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
----------------------- -----------------------
CALIFORNIA SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------
SHARES SOLD
-------------------------------------------------------------------------------
Class A 23,569 $ 178,026 14,893 $ 110,663
-------------------------------------------------------------------------------
Class B 1,683 12,734 1,616 12,006
-------------------------------------------------------------------------------
Class C 11,621 87,312 929 6,969
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-------------------------------------------------------------------------------
Class A 5,163 38,989 4,458 33,067
-------------------------------------------------------------------------------
Class B 138 1,042 84 621
-------------------------------------------------------------------------------
Class C 19 142 8 59
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES REDEEMED
-------------------------------------------------------------------------------
Class A (30,796) (232,622) (28,797) (213,817)
-------------------------------------------------------------------------------
Class B (567) (4,288) (493) (3,662)
-------------------------------------------------------------------------------
Class C (10,960) (82,502) (853) (6,429)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CONVERSION OF SHARES
-------------------------------------------------------------------------------
Class A 200 1,508 22 169
-------------------------------------------------------------------------------
Class B (200) (1,508) (23) (169)
-------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $ (1,167) $ (60,523)
-------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
-------------------- -------------------
MICHIGAN SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------
SHARES SOLD
-------------------------------------------------------------------------
Class A 68 $ 703 59 $ 594
-------------------------------------------------------------------------
Class B 99 1,021 10 103
-------------------------------------------------------------------------
Class C 10 105 24 232
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-------------------------------------------------------------------------
Class A 7 76 8 80
-------------------------------------------------------------------------
Class B 5 53 4 40
-------------------------------------------------------------------------
Class C 1 6 1 7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SHARES REDEEMED
-------------------------------------------------------------------------
Class A (23) (246) (96) (964)
-------------------------------------------------------------------------
Class B (34) (346) (18) (184)
-------------------------------------------------------------------------
Class C (8) (78) (19) (192)
-------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $1,294 $(284)
-------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
-------------------- --------------------
OHIO SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------
SHARES SOLD
--------------------------------------------------------------------------
Class A 319 $3,297 423 $ 4,247
--------------------------------------------------------------------------
Class B 258 2,688 287 2,896
--------------------------------------------------------------------------
Class C 59 611 28 280
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
--------------------------------------------------------------------------
Class A 99 1,027 95 953
--------------------------------------------------------------------------
Class B 27 282 23 231
--------------------------------------------------------------------------
Class C 3 28 1 15
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SHARES REDEEMED
--------------------------------------------------------------------------
Class A (337) (3,501) (559) (5,624)
--------------------------------------------------------------------------
Class B (127) (1,297) (152) (1,536)
--------------------------------------------------------------------------
Class C (4) (39) (19) (190)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
CONVERSION OF SHARES
--------------------------------------------------------------------------
Class A -- -- 1 11
--------------------------------------------------------------------------
Class B -- -- (1) (11)
--------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $3,096 $ 1,272
--------------------------------------------------------------------------
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
-------------------- --------------------
TEXAS SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------
SHARES SOLD
--------------------------------------------------------------------------
Class A 127 $1,293 87 $ 897
--------------------------------------------------------------------------
Class B 78 841 56 573
--------------------------------------------------------------------------
Class C 2 25 15 135
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
--------------------------------------------------------------------------
Class A 42 437 59 613
--------------------------------------------------------------------------
Class B 3 27 2 16
--------------------------------------------------------------------------
Class C 2 17 1 12
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SHARES REDEEMED
--------------------------------------------------------------------------
Class A (194) (2,005) (333) (3,448)
--------------------------------------------------------------------------
Class B (43) (474) (1) (9)
--------------------------------------------------------------------------
Class C (1) (6) (1) (1)
--------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ 155 $(1,212)
--------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------
CLASS A
---------------------------------
YEAR ENDED AUGUST 31,
---------------------------------
CALIFORNIA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------
Net asset value, beginning of year $7.52 7.31 7.35 7.22 8.01
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .36 .38 .39 .39 .39
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .26 .25 .04 .17 (.44)
- --------------------------------------------------------------------------------
Total from investment operations .62 .63 .43 .56 (.05)
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .36 .38 .39 .39 .39
- --------------------------------------------------------------------------------
Distribution from net realized gain .13 .04 .08 .04 .35
- --------------------------------------------------------------------------------
Total dividends .49 .42 .47 .43 .74
- --------------------------------------------------------------------------------
Net asset value, end of year $7.65 7.52 7.31 7.35 7.22
- --------------------------------------------------------------------------------
TOTAL RETURN 8.56% 8.78 5.92 8.13 (.74)
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Expenses .78% .79 .78 .74 .74
- --------------------------------------------------------------------------------
Net investment income 4.82% 5.08 5.18 5.53 5.30
- --------------------------------------------------------------------------------
<CAPTION>
-------------------------------------------
CLASS B
-------------------------------------------
MAY 31
YEAR ENDED AUGUST 31, TO
-------------------------- AUGUST 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
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 .30 .32 .32 .33 .08
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .27 .24 .05 .17 (.01)
- --------------------------------------------------------------------------------------
Total from investment operations .57 .56 .37 .50 .07
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .30 .32 .32 .33 .08
- --------------------------------------------------------------------------------------
Distribution from net realized gain .13 .04 .08 .04 --
- --------------------------------------------------------------------------------------
Total dividends .43 .36 .40 .37 .08
- --------------------------------------------------------------------------------------
Net asset value, end of period $7.66 7.52 7.32 7.35 7.22
- --------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.79% 7.73 5.16 7.17 1.05
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------
Expenses 1.63% 1.62 1.63 1.60 1.60
- --------------------------------------------------------------------------------------
Net investment income 3.97% 4.25 4.33 4.67 4.48
- --------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------------
CLASS C
---------------------------------------------------
MAY 31
YEAR ENDED AUGUST 31, TO
---------------------------------- 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 .30 .32 .32 .33 .08
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .23 .23 .05 .16 (.01)
- ----------------------------------------------------------------------------------------------
Total from investment operations .53 .55 .37 .49 .07
- ----------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .30 .32 .32 .33 .08
- ----------------------------------------------------------------------------------------------
Distribution from net realized gain .13 .04 .08 .04 --
- ----------------------------------------------------------------------------------------------
Total dividends .43 .36 .40 .37 .08
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $7.60 7.50 7.31 7.34 7.22
- ----------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.21% 7.59 5.15 7.08 .96
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------
Expenses 1.62% 1.60 1.64 1.56 1.56
- ----------------------------------------------------------------------------------------------
Net investment income 3.98% 4.27 4.32 4.71 4.76
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $1,024,272 1,007,907 1,040,538 1,087,232 1,168,449
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 61% 79 100 69 37
- -------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR ALL FUNDS: Total return does not reflect the effect of sales charges.
40
<PAGE> 41
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> -------------------------------------
CLASS A
-------------------------------------
MARCH 15
YEAR ENDED AUGUST 31, TO
--------------------- 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 .43 .43 .44 .22
- --------------------------------------------------------------------------------
Net realized and unrealized gain .45 .38 .16 .26
- --------------------------------------------------------------------------------
Total from investment operations .88 .81 .60 .48
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .43 .43 .44 .22
- --------------------------------------------------------------------------------
Distribution from net realized gain .18 .11 -- --
- --------------------------------------------------------------------------------
Total dividends .61 .54 .44 .22
- --------------------------------------------------------------------------------
Net asset value, end of period $10.46 10.19 9.92 9.76
- --------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.91% 8.35 6.19 5.00
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------
Expenses absorbed by the Fund .96% 1.13 1.21 .41
- --------------------------------------------------------------------------------
Net investment income 4.21% 4.31 4.36 4.82
- --------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------
Expenses 1.28% 1.29 1.53 .96
- --------------------------------------------------------------------------------
Net investment income 3.89% 4.15 4.04 4.27
- --------------------------------------------------------------------------------
<CAPTION> -------------------------------------
CLASS B
-------------------------------------
MARCH 15
YEAR ENDED AUGUST 31, TO
--------------------- 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 .35 .36 .36 .18
- --------------------------------------------------------------------------------
Net realized and unrealized gain .46 .38 .14 .27
- --------------------------------------------------------------------------------
Total from investment operations .81 .74 .50 .45
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .35 .36 .36 .18
- --------------------------------------------------------------------------------
Distribution from net realized gain .18 .11 -- --
- --------------------------------------------------------------------------------
Total dividends .53 .47 .36 .18
- --------------------------------------------------------------------------------
Net asset value, end of period $10.46 10.18 9.91 9.77
- --------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.16% 7.53 5.19 4.72
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.76% 1.89 1.94 1.21
- --------------------------------------------------------------------------------
Net investment income 3.41% 3.55 3.63 4.02
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.94% 2.05 2.26 1.76
- --------------------------------------------------------------------------------
Net investment income 3.23% 3.39 3.31 3.47
- --------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 42
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> -------------------------------------
CLASS C
-------------------------------------
MARCH 15
YEAR ENDED AUGUST 31, TO
--------------------- 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 .35 .35 .37 .18
- --------------------------------------------------------------------------------
Net realized and unrealized gain .45 .38 .15 .26
- --------------------------------------------------------------------------------
Total from investment operations .80 .73 .52 .44
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .35 .35 .37 .18
- --------------------------------------------------------------------------------
Distribution from net realized gain .17 .11 -- --
- --------------------------------------------------------------------------------
Total dividends .52 .46 .37 .18
- --------------------------------------------------------------------------------
Net asset value, end of period $10.46 10.18 9.91 9.76
- --------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.18% 7.54 5.36 4.63
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.73% 1.78 1.64 1.21
- --------------------------------------------------------------------------------
Net investment income 3.44% 3.66 3.93 4.02
- --------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------
Expenses 1.92% 1.94 1.96 1.76
- --------------------------------------------------------------------------------
Net investment income 3.25% 3.50 3.61 3.47
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 15
YEAR ENDED AUGUST 31, TO
----------------------- AUGUST 31,
1998 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at end of period (in thousands) $4,487 3,091 3,286 3,079
- --------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 30% 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. The "Other ratios to average net assets"
are computed without this expense waiver or absorption.
42
<PAGE> 43
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> -------------------------------------
CLASS A
-------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------
OHIO 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------
Net asset value, beginning of year $10.22 9.93 9.81 9.56 9.98
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .47 .47 .48 .50 .53
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .39 .32 .12 .25 (.41)
- --------------------------------------------------------------------------------
Total from investment operations .86 .79 .60 .75 .12
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .47 .47 .48 .50 .53
- --------------------------------------------------------------------------------
Distribution from net realized gain .07 .03 -- -- .01
- --------------------------------------------------------------------------------
Total dividends .54 .50 .48 .50 .54
- --------------------------------------------------------------------------------
Net asset value, end of year $10.54 10.22 9.93 9.81 9.56
- --------------------------------------------------------------------------------
TOTAL RETURN 8.57% 8.17 6.16 8.20 1.23
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Expenses absorbed by the Fund .87% .89 .91 .63 .02
- --------------------------------------------------------------------------------
Net investment income 4.51% 4.69 4.78 5.27 5.44
- --------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Expenses .87% .89 .91 .83 .82
- --------------------------------------------------------------------------------
Net investment income 4.51% 4.69 4.78 5.07 4.64
- --------------------------------------------------------------------------------
<CAPTION> ----------------------------------
CLASS B
----------------------------------
MAY 31
YEAR ENDED AUGUST 31, TO
---------------------------- 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 .38 .39 .39 .44 .14
- ------------------------------------------------------------------------------------
Net realized and unrealized gain .39 .32 .12 .25 .02
- ------------------------------------------------------------------------------------
Total from investment operations .77 .71 .51 .69 .16
- ------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .38 .39 .39 .44 .14
- ------------------------------------------------------------------------------------
Distribution from net realized gain .07 .03 -- -- --
- ------------------------------------------------------------------------------------
Total dividends .45 .42 .39 .44 .14
- ------------------------------------------------------------------------------------
Net asset value, end of period $10.54 10.22 9.93 9.81 9.56
- ------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.69% 7.29 5.30 7.57 1.55
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.69% 1.70 1.73 1.32 .22
- ------------------------------------------------------------------------------------
Net investment income 3.69% 3.88 3.96 4.58 4.72
- ------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------
Expenses 1.69% 1.70 1.73 1.75 1.72
- ------------------------------------------------------------------------------------
Net investment income 3.69% 3.88 3.96 4.15 3.22
- ------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 44
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> ----------------------------------------
CLASS C
----------------------------------------
MAY 31
YEAR ENDED AUGUST 31, TO
---------------------------- 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 .38 .39 .39 .44 .14
- ------------------------------------------------------------------------------------
Net realized and unrealized gain .39 .32 .12 .25 .02
- ------------------------------------------------------------------------------------
Total from investment operations .77 .71 .51 .69 .16
- ------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .38 .39 .39 .44 .14
- ------------------------------------------------------------------------------------
Distribution from net realized gain .07 .03 -- -- --
- ------------------------------------------------------------------------------------
Total dividends .45 .42 .39 .44 .14
- ------------------------------------------------------------------------------------
Net asset value, end of period $10.54 10.22 9.93 9.81 9.56
- ------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.70% 7.32 5.28 7.56 1.55
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.67% 1.68 1.74 1.27 .21
- ------------------------------------------------------------------------------------
Net investment income 3.71% 3.90 3.95 4.63 5.04
- ------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------
Expenses 1.67% 1.68 1.74 1.69 1.67
- ------------------------------------------------------------------------------------
Net investment income 3.71% 3.90 3.95 4.21 3.58
- ------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $43,841 39,468 37,100 31,450 23,769
- ------------------------------------------------------------------------------------------
Portfolio turnover rate 15% 52 86 90 103
- ------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR OHIO FUND:
During the fiscal years ended in 1994 and 1995, certain operating expenses were
waived and absorbed by Scudder Kemper. The "Other ratios to average net assets"
are computed without this expense waiver or absorption.
44
<PAGE> 45
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> --------------------------------------
CLASS A
--------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------
TEXAS 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------
Net asset value, beginning of year $10.42 10.36 10.42 10.14 10.69
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .49 .51 .51 .54 .56
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .38 .32 .21 .36 (.42)
- ----------------------------------------------------------------------------------------
Total from investment operations .87 .83 .72 .90 .14
- ----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .49 .51 .51 .54 .56
- ----------------------------------------------------------------------------------------
Distribution from net realized gain .12 .26 .27 .08 .13
- ----------------------------------------------------------------------------------------
Total dividends .61 .77 .78 .62 .69
- ----------------------------------------------------------------------------------------
Net asset value, end of year $10.68 10.42 10.36 10.42 10.14
- ----------------------------------------------------------------------------------------
TOTAL RETURN 8.65% 8.28 7.04 9.28 1.28
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses absorbed by the Fund .93% .92 .92 .70 .36
- ----------------------------------------------------------------------------------------
Net investment income 4.68% 4.90 4.88 5.37 5.38
- ----------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses .93% .92 .92 .89 .90
- ----------------------------------------------------------------------------------------
Net investment income 4.68% 4.90 4.88 5.18 4.82
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION> --------------------------------------
CLASS B
--------------------------------------
MAY 31
YEAR ENDED AUGUST 31, TO
------------------------------ 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 .41 .42 .42 .45 .12
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .37 .32 .21 .35 (.02)
- -------------------------------------------------------------------------------------------
Total from investment operations .78 .74 .63 .80 .10
- -------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .41 .42 .42 .45 .12
- -------------------------------------------------------------------------------------------
Distribution from net realized gain .12 .26 .27 .08 --
- -------------------------------------------------------------------------------------------
Total dividends .53 .68 .69 .53 .12
- -------------------------------------------------------------------------------------------
Net asset value, end of period $10.67 10.42 10.36 10.42 10.15
- -------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.67% 7.41 6.11 8.16 .92
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.75% 1.73 1.79 1.54 1.24
- -------------------------------------------------------------------------------------------
Net investment income 3.86% 4.09 4.01 4.53 4.44
- -------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------
Expenses 1.75% 1.73 1.79 1.73 1.78
- -------------------------------------------------------------------------------------------
Net investment income 3.86% 4.09 4.01 4.34 3.90
- -------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 46
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> -----------------------------------------
CLASS C
-----------------------------------------
MAY 31
YEAR ENDED AUGUST 31, TO
------------------------------------ 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 .41 .42 .42 .46 .12
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .38 .32 .21 .35 (.02)
- --------------------------------------------------------------------------------------------
Total from investment operations .79 .74 .63 .81 .10
- --------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .41 .42 .42 .46 .12
- --------------------------------------------------------------------------------------------
Distribution from net realized gain .12 .26 .27 .08 --
- --------------------------------------------------------------------------------------------
Total dividends .53 .68 .69 .54 .12
- --------------------------------------------------------------------------------------------
Net asset value, end of period $10.68 10.42 10.36 10.42 10.15
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.79% 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 3.89% 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 3.89% 4.11 4.04 4.38 3.42
- --------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $12,944 12,469 13,595 14,877 15,409
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate 32% 82 112 75 58
- ------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR TEXAS FUND:
During the fiscal years ended in 1994 and 1995, a portion of the management fee
and certain operating expenses were waived and absorbed by Scudder Kemper. The
"Other ratios to average net assets" are computed without this expense waiver or
absorption.
- --------------------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
California, Michigan, Ohio and Texas Funds paid distributions of $.04, $.03,
$.03 and $.015 per share, respectively, from net long-term capital gains during
the year ended August 31, 1998, of which 0%, 0%, 33% and 100% represent 20% rate
gains, respectively.
Pursuant to Section 852 of the Internal Revenue Code, the California, Michigan,
Ohio and Texas Funds designate $8,472,000, $2,000, $138,000 and $88,000,
respectively, as capital gain dividends for the year ended August 31, 1998, of
which 100%, 100%, 100% and 83% represent 20% rate gains, respectively.
Of the dividends paid from net investment income by each Fund for the year ended
August 31, 1998, 100% are designated as exempt interest dividends for federal
income tax purposes. However, a portion of the dividends may be includable in
the alternative minimum tax calculation.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
46
<PAGE> 47
NOTES
47
<PAGE> 48
TRUSTEES & OFFICERS
<TABLE>
<CAPTION>
TRUSTEES OFFICERS
<S> <C> <C>
DANIEL PIERCE MARK S. CASADY CHRISTOPHER J. MIER
Chairman and Trustee President Vice President
DAVID W. BELIN PHILIP J. COLLORA ROBERT C. PECK, JR.
Trustee Vice President and Vice President
Secretary
LEWIS A. BURNHAM KATHRYN L. QUIRK
Trustee JOHN R. HEBBLE Vice President
Treasurer
DONALD L. DUNAWAY LINDA J. WONDRACK
Trustee ELEANOR R. BRENNAN Vice President
Vice President
ROBERT B. HOFFMAN MAUREEN E. KANE
Trustee PHILIP G. CONDON Assistant Secretary
Vice President
DONALD R. JONES CAROLINE PEARSON
Trustee JERARD K. HARTMAN Assistant Secretary
Vice President
SHIRLEY D. PETERSON ELIZABETH C. WERTH
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
WILLIAM P. SOMMERS BRENDA LYONS
Trustee ANN M. MCCREARY Assistant Treasurer
Vice President
EDMOND D. VILLANI
Trustee
</TABLE>
................................................................................
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 Avenue
Kansas City, MO 64105
................................................................................
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
................................................................................
PRINCIPAL UNDERWRITER
KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Tax-Free Income Funds prospectus.
KSTIS - 2 (10/98) 1057610
