<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED AUGUST 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
CALIFORNIA TAX-FREE INCOME FUND
FLORIDA TAX-FREE INCOME FUND
NEW YORK TAX-FREE INCOME FUND
OHIO TAX-FREE INCOME FUND
Kemper State Tax-Free
Income Series
"... Despite an environment of rising interest rates,
municipal bonds held up relatively well. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
4
Economic Overview
6
Management Team
7
Performance Update
9
Terms to Know
10
California's Performance Update, Portfolio Statistics and Portfolio
of Investments
21
Florida's Performance Update, Portfolio Statistics and Portfolio of Investments
27
New York'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, 1999
(UNADJUSTED FOR SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A -1.07%
CLASS B -1.90%
CLASS C -1.91%
LIPPER CALIFORNIA TAX-FREE
INCOME FUNDS CATEGORY AVERAGE* -1.49%
- --------------------------------------------------------------------------------
</TABLE>
[BAR GRAPH]
- --------------------------------------------------------------------------------
FLORIDA
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A -2.13%
CLASS B -2.85%
CLASS C -2.84%
LIPPER FLORIDA TAX-FREE
INCOME FUNDS CATEGORY AVERAGE* -1.48%
- --------------------------------------------------------------------------------
</TABLE>
[BAR GRAPH]
- --------------------------------------------------------------------------------
NEW YORK
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A -1.52%
CLASS B -2.44%
CLASS C -2.33%
LIPPER NEW YORK TAX-FREE
INCOME FUNDS CATEGORY AVERAGE* -1.64%
- --------------------------------------------------------------------------------
</TABLE>
[BAR GRAPH]
- --------------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A -0.66%
CLASS B -1.55%
CLASS C -1.48%
LIPPER OHIO TAX-FREE
INCOME FUNDS CATEGORY AVERAGE* -0.97%
</TABLE>
Returns are historical and do not guarantee future results. Investment return
and principal value will fluctuate so that shares, when redeemed, may be worth
more or less than original cost.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/99 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS A $7.10 $7.65
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS B $7.11 $7.66
- --------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE
INCOME FUND CLASS C $7.05 $7.60
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
FLORIDA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
8/31/99 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER FLORIDA TAX-FREE
INCOME FUND CLASS A $9.72 $10.62
- --------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE
INCOME FUND CLASS B $9.71 $10.60
- --------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE
INCOME FUND CLASS C $9.71 $10.60
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NEW YORK
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
8/31/99 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS A $10.22 $11.11
- --------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS B $10.23 $11.13
- --------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS C $10.21 $11.10
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
8/31/99 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER OHIO TAX-FREE INCOME
FUND CLASS A $9.97 $10.54
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME
FUND CLASS B $9.97 $10.54
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME
FUND CLASS C $9.97 $10.54
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
CONTENTS
34
Ohio's Performance Update, Portfolios Statistics and Portfolio of Investments
40
Report of Independent Auditors
41
Financial Statements
44
Notes to Financial Statements
50
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME FUNDS'
LIPPER RANKINGS AS OF 8/31/99*
- --------------------------------------------------------------------------------
CALIFORNIA MUNICIPAL DEBT FUND CATEGORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #32 of 106 funds #72 of 106 funds #73 of 106 funds
- --------------------------------------------------------------------------------
5-YEAR #29 of 72 funds #54 of 72 funds #59 of 72 funds
- --------------------------------------------------------------------------------
10-YEAR #13 of 35 funds N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
FLORIDA MUNICIPAL DEBT FUND CATEGORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #49 of 63 funds #61 of 63 funds #60 of 63 funds
- --------------------------------------------------------------------------------
5-YEAR #16 of 40 funds #36 of 40 funds #35 of 40 funds
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NEW YORK MUNICIPAL DEBT FUND CATEGORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #47 of 97 funds #84 of 97 funds #82 of 97 funds
- --------------------------------------------------------------------------------
5-YEAR #28 of 65 funds #57 of 65 funds #58 of 65 funds
- --------------------------------------------------------------------------------
10-YEAR #9 of 32 funds N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
OHIO MUNICIPAL DEBT FUND CATEGORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #20 of 51 funds #39 of 51 funds #38 of 51 funds
- --------------------------------------------------------------------------------
5-YEAR #6 of 38 funds #27 of 38 funds #26 of 38 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, 1999.
- --------------------------------------------------------------------------------
CALIFORNIA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.3433 $0.2800 $0.2809
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0271 $0.0221 $0.0203
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.30% 3.50% 3.24%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.03% 3.38% 3.19%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 7.06% 5.92% 5.59%
- --------------------------------------------------------------------------------
BASED ON A MARGINAL TAX RATE OF 42.9%
(COMBINED CALIFORNIA STATE AND FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
FLORIDA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4721 $0.3870 $0.3887
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0386 $0.0319 $0.0320
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.47% 3.69% 3.70%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.19% 3.44% 3.45%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.66% 5.47% 5.48%
- --------------------------------------------------------------------------------
BASED ON A MARGINAL TAX RATE OF 37.1%
(COMBINED FLORIDA STATE AND FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NEW YORK
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4852 $0.3928 $0.3968
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0377 $0.0301 $0.0304
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.15% 3.31% 3.35%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.10% 3.40% 3.46%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 7.35% 6.09% 6.20%
- --------------------------------------------------------------------------------
BASED ON A MARGINAL INCOME TAX RATE OF 44.2%
(COMBINED NEW YORK STATE AND FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
OHIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4583 $0.3756 $0.3713
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0371 $0.0305 $0.0288
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.19% 3.44% 3.25%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.06% 3.47% 3.29%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.90% 5.90% 5.60%
- --------------------------------------------------------------------------------
BASED ON A MARGINAL INCOME TAX RATE OF 41.2%
(COMBINED OHIO STATE AND 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, 1999. 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, 1999 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
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
Interest rates have consumed investors' attention for the past six months, but
immediate concerns of rate hikes came to a halt in October when the Federal
Reserve Board declined to raise its key interest rate, the overnight bank
lending rate, for a third time this year. To gain a better understanding of how
the Fed's recent interest rate decisions affect the economic outlook for the
remainder of 1999, let's review some of the economic events of the past few
months.
Talk of rising interest rates began last spring, and on June 30 the Fed
boosted its key interest rate -- the overnight bank lending rate -- one quarter
of a point (0.25%). With this move the Fed said it was not inclined to increase
rates again soon, although it noted that it was alert to the potential emergence
of inflationary pressures that could undermine economic growth.
Talk of a second hike began in July after Fed Chairman Alan Greenspan's
commentary to the House Banking Committee, which was part of the Fed's
twice-yearly outlook report required by the Humphrey-Hawkins Full Employment and
Balanced Growth Act of 1978. While Greenspan didn't say that the Fed definitely
would raise the overnight bank lending rate at its next meeting, the tone of his
report included more warnings than expected about the need to follow the June
rate increase with another. Speculation became reality at the Aug. 24 Fed
meeting, when the Fed once again raised the overnight bank lending rate by one
quarter of a point (0.25%).
While many investors were frustrated by the rate hikes when there were no
signs of inflation, Fed policymakers looked at the situation another way: If the
earlier increases were not enough to bring inflation risks into balance, a
"euphoric" rise in stocks could fuel increased consumer spending, which could
necessitate a more disruptive adjustment later. In its June and August rate
hikes, the Fed was acting promptly to prevent such an adjustment. In other
words, the Fed strongly believes that "a stitch in time saves nine" -- it wants
to be preemptive by raising interest rates and slowing the economy before an
inflation problem arises.
With two rate hikes behind them, investors began speculating about the
possibility of a third hike at the Fed's Oct. 5 meeting. There are some
indications that inflationary pressures still exist.
To start, the Fed forecasts that the consumer price index (CPI), the average
value of an imaginary "basket" of goods and services in the economy, could rise
as much as 2.5 percent this year, up from 1.6 percent in 1998. Because CPI is
the standard measure of inflation, the Fed has to take any acceleration
seriously.
Employment growth also has the Fed worried. Job creation has exceeded the
growth of the labor force since 1993, bringing the unemployment rate down to its
lowest level since 1970. The Fed believes that if the pool of job seekers
shrinks sufficiently, upward pressures on wage costs are likely. One of the core
beliefs of modern economics is that rising wages will produce price inflation as
companies seek to pass their rising costs along to their customers. Thus far in
this economic expansion, this hasn't happened, but the Fed does not feel it can
take a chance that such good luck will last.
Gross domestic product (GDP), the value of all goods and services produced in
the United States, has been growing faster than the Fed believes it can without
causing inflation. The Fed believes that GDP can grow slightly faster than 3.0
percent per year without generating inflation. Actual 1998 GDP growth was 3.9
percent and we expect about the same in 1999.
Rapid productivity growth is the antidote to inflation. After languishing at
an average annual increase of about 1 percent in the 1970s and 1980s,
productivity growth has recently accelerated. Over the past four quarters it has
increased 2.8 percent in the entire economy and even faster in the business
sector. However, when growth slowed to under 2 percent in the second quarter,
productivity dropped back sharply. While a one-quarter dip in productivity is no
cause for worry, the Fed will be watching developments closely. Should the gains
in technology that have fostered the productivity growth slow, inflationary red
flags would go up.
Improving economic conditions around the world mean that the U.S. economy will
no longer experience declines in basic commodity and import prices that have
helped curtail inflation in recent years. Crude oil -- one of the most important
and visible commodities, used to make everything from gasoline to plastic bags
- -- is up nearly 90 percent from its February lows.
Despite these inflationary suggestions, however, signs of actual inflation
remain few and far between, and in its Oct. 5 decisions, the Fed left rates
unchanged.
The Fed did, however, shift its policy bias from neutral toward tightening.
The accompanying press release softened that a bit by noting that "such a
directive did not signify a commitment to near-term action."
Clearly the Fed is nervous, but it is willing to wait on incoming data --
including two employment reports and
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 (9/30/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.94 5.00 5.34 6.30
PRIME RATE(2) 8.06 7.75 8.50 8.50
INFLATION RATE(3)* 2.00 1.60 1.68 2.16
THE U.S. DOLLAR(4) -6.36 -1.53 8.17 10.10
CAPITAL GOODS ORDERS(5)* 11.84 5.11 3.05 10.30
INDUSTRIAL PRODUCTION(5)* 3.58 1.55 2.71 5.59
EMPLOYMENT GROWTH(6)* 2.17 2.37 2.67 2.39
</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 8/30/99.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
several inflation reports -- before moving again. We expect that the Fed would
prefer to hold off from further rate hikes because of the Y2K issue: It would
prefer not to add to any potential Y2K fears or appear responsible for
Y2K-related volatility in the financial markets.
The long-term possibility of interest rate hikes is likely to be affected by
political considerations. Election primaries begin in February 2000. Will
candidates be talking about tax cuts? Medicare reform? Social Security reform?
These will be the issues to consider when we look at the economy in early- to
mid-2000.
Hopefully it will be as easy for investors to obtain information about Fed
policies at that time as it is today. The Humphrey-Hawkins hearings were created
to give Congress and the public some idea of economic growth and inflation. But
this round of Humphrey-Hawkins hearings could be the last, because the
Humphrey-Hawkins law expires this year. Although Greenspan has said he thinks it
is important for the Fed to report to Congress, and House Banking Committee
Chairman Jim Leach intends to press for a new law, there has been no move to
enact a new reporting requirement. Although the Fed could still provide
hearings, without a law forcing it to do so within a certain framework, we would
likely have no consistent basis for analyzing monetary policy.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF OCTOBER 5, 1999, AND MAY NOT ACTUALLY COME TO PASS. THIS
INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS AN
INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
5
<PAGE> 6
MANAGEMENT TEAM
KEMPER STATE TAX-FREE INCOME SERIES
PORTFOLIO MANAGEMENT TEAM
[BRENNAN PHOTO]
ELEANOR R. BRENNAN IS LEAD PORTFOLIO MANAGER FOR KEMPER CALIFORNIA TAX-FREE
INCOME FUND, KEMPER FLORIDA TAX-FREE INCOME FUND AND KEMPER OHIO TAX-FREE INCOME
FUND. SHE IS ALSO A PORTFOLIO MANAGER ON KEMPER NEW YORK TAX-FREE INCOME FUND.
SHE JOINED SCUDDER KEMPER INVESTMENTS, INC. IN MARCH 1995 AND IS A VICE
PRESIDENT.
[CAGGIANO PHOTO]
MATTHEW J. CAGGIANO IS A PORTFOLIO MANAGER FOR KEMPER CALIFORNIA TAX-FREE INCOME
FUND. HE IS A CHARTERED FINANCIAL ANALYST AND JOINED THE FIRM IN 1991.
[ASHTON PHOTO]
ASHTON P. GOODFIELD IS LEAD PORTFOLIO MANAGER OF KEMPER NEW YORK TAX-FREE INCOME
FUND. SHE JOINED SCUDDER KEMPER INVESTMENTS IN 1990, AND IS A SENIOR VICE
PRESIDENT AND CHARTERED FINANCIAL ANALYST.
[WILSON PHOTO]
REBECCA WILSON IS PORTFOLIO MANAGER FOR KEMPER FLORIDA TAX-FREE INCOME FUND AND
KEMPER OHIO TAX-FREE INCOME FUND. SHE JOINED THE ORGANIZATION IN 1986 AND IS A
VICE PRESIDENT.
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.
6
<PAGE> 7
PERFORMANCE UPDATE
AS THE FISCAL YEAR BEGAN, INVESTOR FOCUS SHIFTED FROM TURBULENCE OVERSEAS TO
STRONG ECONOMIC GROWTH IN THE UNITED STATES. FEARS OF POTENTIALLY HIGHER
INFLATION PUSHED INTEREST RATES UP AND BOND PRICES DOWN THROUGH MOST OF THE
FUNDS' FISCAL YEAR. IN THE FOLLOWING Q&A, THE MANAGEMENT TEAM DISCUSSES THE
MARKET'S PERFORMANCE AND HOW THEY POSITIONED THE FUNDS.
Q BEFORE WE GET INTO THE PERFORMANCE OF THE FUNDS, COULD YOU PROVIDE SOME
BACKGROUND ON HOW GOVERNMENT BONDS PERFORMED OVER THE LAST 12 MONTHS?
A The last 12 months were characterized by a nearly continuous rise in
interest rates across all maturities. At the very start of the fiscal year last
fall, the market was in the grip of a "flight to quality" brought on by
turbulence in international markets. Russia had defaulted on part of its debt,
Asian economies and currency markets were battered by uncertainty, and the
stability of Latin American markets was coming into question. Against this
backdrop, much of Europe was converting to the euro at year-end. For nervous
investors, about the only safe bet in town was U.S. Treasury bonds. As a result,
money poured into the U.S. Treasury market, and the demand pushed yields down to
historically low levels. In fact, for much of October 1998, the yield on 30-year
U.S. Treasury bonds was actually below 5 percent for the first time in recent
memory.
To help combat the uncertainty and ward off a worsening of the situation,
the Federal Reserve cut interest rates three times in the last quarter of 1998.
The Fed's plan, in part, was to inject liquidity into the global financial
system by stimulating the U.S. economy -- and thereby other economies -- and
make the yields on foreign bonds look more attractive in comparison with U.S.
securities.
Q DID THE FED'S PLAN WORK?
A Yes, it did. In fact, it worked almost too well. Investors gained
confidence that foreign economies could bring their problems under control, and
assets shifted from the U.S. to other markets. At the same time, some investors
feared that the Fed's stimulus, which was uncharacteristically applied during a
time of strong U.S. economic growth, would ignite inflation. Both these factors
acted to push interest rates up in the U.S. from the end of October 1998 to the
end of August 1999.
Because bond prices fall when interest rates rise, these last 12 months
have been a challenging period for bond investors. It's been tough to try to
create positive returns for shareholders when fighting the constant headwind of
rising rates. This difficulty is reflected in the returns of bond indices. For
example, the Lehman Brothers Aggregate Bond Index*, which is a broad proxy for
the bond market as a whole, eked out only a 0.80 percent return for the 12-month
period ended August 31, 1999. High-quality corporate bonds experienced similar
performance, with the Lipper A-Rated Bond Fund average posting a -0.43 percent
return. Longer term bonds were hit hardest; the Lehman Brothers Long-Term
Government Bond Index** was down 4.99 percent for the same period.
* THE LEHMAN BROTHERS AGGREGATE BOND INDEX IS A TOTAL RETURN INDEX INCLUDING
FIXED RATE DEBT ISSUES RATED INVESTMENT GRADE OR BETTER. IT CONTAINS
GOVERNMENT, CORPORATE AND MORTGAGE SECURITIES, AND IS GENERALLY CONSIDERED
REPRESENTATIVE OF THE MARKET FOR INVESTMENT-GRADE BONDS. INVESTORS CANNOT
INVEST IN THIS INDEX.
** THE LEHMAN BROTHERS LONG-TERM GOVERNMENT BOND INDEX IS A TOTAL RETURN INDEX
GENERALLY CONSIDERED REPRESENTATIVE OF THE MARKET FOR TREASURIES AND
GOVERNMENT AGENCY SECURITIES WITH MATURITIES GREATER THAN TEN YEARS.
INVESTORS CANNOT INVEST IN THIS INDEX.
Q HOW DID MUNICIPAL BONDS FARE IN COMPARISON?
A Despite an environment of rising interest rates, municipal bonds held up
relatively well. The Lehman Brothers 10-Year Municipal Bond Index+ managed to
end the period with a positive total return of 0.68 percent. Certainly not a
jaw-dropping return, but in comparison with how long-term government bonds
performed, municipals held their own.
+ THE LEHMAN BROTHERS 10-YEAR MUNICIPAL BOND INDEX IS A TOTAL RETURN INDEX
GENERALLY CONSIDERED REPRESENTATIVE OF THE MARKET FOR INTERMEDIATE-MATURITY
MUNICIPAL BONDS. INVESTORS CANNOT INVEST IN THIS INDEX.
Q WHY DID MUNICIPAL BONDS SEEM TO BE IMMUNE TO ALL THIS?
A "Immune" is probably too strong a word. THE BOND BUYER 25-Bond Revenue
Index (see Terms To Know, on page 9), which measures yields on A-rated municipal
bonds, increased from 5.25 percent at the start of the fiscal year to 5.89
percent at the end of the fiscal year. Clearly, that isn't as dramatic as what
took place in the Treasury market, where yields on 30-year T-bonds rose from
5.30 percent to 6.13 percent. But municipal bond prices declined nonetheless.
7
<PAGE> 8
PERFORMANCE UPDATE
However, the turbulence had less of an impact because different forces
were acting to limit a municipal sell-off. Several factors were operating in
favor of municipal bonds. The primary one was a positive supply/ demand
situation. Municipal bond issuance year-to-date through August 1999 was down
more than 20 percent from the same period last year. With demand remaining
strong and fewer bonds from which to choose, investors were willing to settle
for slightly less yield, and that helped provide a ceiling on how far up yields
would go.
Second, government bond yields were very low earlier in the year. Usually,
a municipal bond will yield about 10-15 percent less than a similar-maturity
government bond, because the tax advantage of a municipal is discounted in its
price. But when government bond yields were so low, the Revenue Bond Index
actually OUTYIELDED 30-year Treasuries, which is very unusual. As a result, a
lot of "crossover buyers" -- investors who wouldn't normally buy municipal
bonds -- entered the market and helped boost demand.
According to THE REVENUE BOND Index, A-rated municipal bonds now yield
about 96 percent of what similar-maturity Treasuries do -- a very attractive
value.
Finally, a solid credit situation has helped support municipal bond
prices. The economy is growing well, and that translates to solid tax revenues
for municipalities. A good revenue stream means an increase in high-quality
bonds, which tend to have lower yields, because buyers don't need to be
compensated to take extra risk.
Q HOW DID THE KEMPER STATE TAX-FREE FUNDS PERFORM?
A As did nearly all municipal bond funds, our funds lagged the 0.50 percent
return of the Lehman Brothers Municipal Bond Index* for the 12-month period
ended August 31. Mutual funds lagged because funds have to contend with trading
charges and operating expenses that an index does not. Normally, our active
management can take advantage of discrepancies in the market to overcome this
difference. But a challenging market like that of the past year requires
shifting and restructuring just to stay even.
However, as you can see from the accompanying charts (see page 2)
comparing the Kemper funds with their Lipper peer group, three of the four
Kemper state tax-free income portfolios outperformed their Lipper peer group
average for the year. An isolated credit problem with one issue hindered
performance in the Kemper Florida Tax-Free Income Fund.
* 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 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 COUPONS BONDS ARE EXCLUDED FROM THE INDEX. INVESTORS
CANNOT INVEST IN THIS INDEX.
Q YOU'VE SAID IN THE PAST THAT YOU NORMALLY MANAGE THE FUNDS BY KEEPING
CLOSE TO A NEUTRAL DURATION AND THEN TRYING TO TAKE ADVANTAGE OF DISLOCATIONS IN
THE MARKET TO INCREMENTALLY BOOST RETURNS. DID YOU DO ANYTHING IN ADDITION TO
THAT DURING THE COURSE OF THE YEAR?
A We've been concentrating purchases in the five- to twelve-year maturity
range. We believe this area of the yield curve currently offers the best
trade-off of risk and return. We've also been selectively selling bonds and
taking losses to help offset gains in other areas. Our goal is to neutralize any
big taxable capital gain distribution to our shareholders at the end of the
year. We believe we've been successful at that. And one added advantage is that
we can reinvest the proceeds of our bond sales at today's higher rates.
Q WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET FROM HERE?
A We think municipals should perform relatively well for several reasons.
First, the municipal market should continue to be more stable than the
government and corporate bond markets. As the fiscal year drew to a close, it
appeared that investors were expecting the Federal Reserve to raise rates at
least once. If the Fed does tighten, Treasuries and corporate bonds would likely
remain volatile as most investors try to interpret the ramifications of higher
rates on both the domestic and global economies. Meanwhile, municipal investors
tend not to pay close attention to global markets or corporate profits. They are
typically more reliable buyers, and their steady demand should
8
<PAGE> 9
PERFORMANCE UPDATE
help dampen volatility in the municipal bond market.
Second, the municipal market continues to offer attractive value, with
long-maturity yields still attractive relative to Treasuries. As we mentioned,
A-rated municipals now yield more than 96 percent of similar-maturity
Treasuries, even without factoring in the tax advantage. Third, strong municipal
finances should help alleviate credit concerns. And finally, issuance has so far
remained more than 20 percent below last year's levels, and that lack of supply
should help support prices.
For these reasons, we think that municipal bonds will continue to offer
fixed-income investors an attractive option.
TERMS TO KNOW
BOND RATINGS Grades assigned by credit-rating agencies to corporate and
municipal debt securities, based on the borrower's expected ability to repay.
The higher the grade, the lower the interest rate a borrower will usually pay.
The two major credit rating firms are Moody's Investors Service, Inc. and
Standard & Poor's.
DURATION A measure, in years, of the interest rate sensitivity of a portfolio,
incorporating time-to-maturity and coupon size. The longer a portfolio's
duration, the greater its sensitivity to interest rate changes.
REVENUE BOND INDEX (RBI) The RBI is the average yield on 25 revenue bonds with
30-year maturities generally rated single "A," compiled by The Bond Buyer, a
newspaper that reports on the municipal bond market.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
9
<PAGE> 10
PERFORMANCE UPDATE
KEMPER CALIFORNIA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
For periods ended August 31, 1999 (adjusted for the maximum sales charge)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
KEMPER CALIFORNIA TAX-FREE INCOME FUND CLASS A -5.51% 5.03% 6.40% 8.13% (since 2/17/83)
- -----------------------------------------------------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND CLASS B -4.69 4.96 N/A 4.93 (since 5/31/94)
- -----------------------------------------------------------------------------------------------------------------------------
KEMPER CALIFORNIA TAX-FREE INCOME FUND CLASS C -1.91 4.96 N/A 4.91 (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 2/28/83 to
8/31/99
<TABLE>
<CAPTION>
KEMPER CALIFORNIA TAX-
FREE INCOME FUND CLASS LEHMAN BROTHERS
A(1) MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
---------------------- --------------------- ---------------------
<S> <C> <C> <C>
2/28/83 10000 10000 10000
12/31/86 15428 16216 11293
12/31/90 20540 21553 13667
12/31/94 26360 28016 15291
8/31/99 36390 39425 17078
</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
8/31/99
<TABLE>
<CAPTION>
KEMPER CALIFORNIA TAX-
FREE INCOME FUND CLASS LEHMAN BROTHERS
B(1) MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
---------------------- --------------------- ---------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
12/31/96 11818 12099 10753
8/31/99 12871 13886 11336
</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
8/31/99
<TABLE>
<CAPTION>
KEMPER CALIFORNIA TAX-
FREE INCOME FUND CLASS LEHMAN BROTHERS
C(1) MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
---------------------- --------------------- ---------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
12/31/96 11782 12099 10753
8/31/99 12854 13886 11336
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN
AND PRINCIPAL VALUE 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 RETURN REFLECTS ANNUALIZED CHANGE WHILE TOTAL RETURN
REFLECTS AGGREGATE CHANGE. DURING THE PERIODS NOTED, SECURITIES PRICES
FLUCTUATED. FOR ADDITIONAL INFORMATION, SEE THE PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION AND THE FINANCIAL HIGHLIGHTS AT THE END OF THIS
REPORT.
(1) PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A SHARES AND THE CONTINGENT DEFERRED SALES
CHARGE IN EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES. IN COMPARING
THE KEMPER STATE TAX-FREE INCOME FUNDS TO THE LEHMAN BROTHERS MUNICIPAL
BOND INDEX, YOU SHOULD NOTE THAT THE FUNDS' PERFORMANCE REFLECTS THE
MAXIMUM SALES CHARGES, WHILE NO SUCH CHARGES ARE REFLECTED IN THE
PERFORMANCE OF THE INDEX.
+ THE LEHMAN BROTHERS MUNICIPAL BOND INDEX INCLUDES APPROXIMATELY 15,000
BONDS. TO BE INCLUDED IN THE INDEX A MUNICIPAL BOND MUST MEET THE FOLLOWING
CRITERIA: A MINIMUM CREDIT RATING OF BBB, HAVE BEEN ISSUED AS A PART OF AN
ISSUE OF AT LEAST $50 MILLION, HAVE BEEN ISSUED WITHIN THE LAST 5 YEARS,
AND HAVE A MATURITY OF AT LEAST 2 YEARS. BONDS SUBJECT TO ALTERNATIVE
MINIMUM TAX (AMT), VARIABLE RATE BONDS AND ZERO COUPON BONDS ARE EXCLUDED
FROM THE INDEX. SOURCE IS CDA WIESENBERGER.
++ 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 CDA WIESENBERGER.
10
<PAGE> 11
KEMPER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION*
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 77% 69%
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 11 11
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 12 20
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 65% 60%
- --------------------------------------------------------------------------------
AA 7 9
- --------------------------------------------------------------------------------
A 13 15
- --------------------------------------------------------------------------------
BBB 10 12
- --------------------------------------------------------------------------------
NOT RATED 5 4
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 48% 13%
- --------------------------------------------------------------------------------
11-20 YEARS 43 55
- --------------------------------------------------------------------------------
+21 YEARS 9 32
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE MATURITY
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
14.2 years 16.8 years
- --------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
CALIFORNIA TAX-FREE INCOME FUND
Portfolio of Investments at August 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL INVESTMENTS
- -----------------------------------------------------------------------------------------------------------
Alameda, CA, Corridor Transportation Authority, Senior Lien,
Revenue, Series A, 5.125%, 10/01/2015 $10,920 $ 10,662
--------------------------------------------------------------------------------------
Benicia, CA, Unified School District, General Obligation,
Series A:
zero coupon, 08/01/2017 1,735 635
zero coupon, 08/01/2018 1,510 520
--------------------------------------------------------------------------------------
Big Bear Lake, CA, Water Revenue:
6.000%, 04/01/2015 3,405 3,650
6.000%, 04/01/2022 13,500 14,339
--------------------------------------------------------------------------------------
Burbank, CA, Unified School District, General Obligation,
Series B:
zero coupon, 08/01/2011 3,070 1,658
zero coupon, 08/01/2012 1,500 758
zero coupon, 08/01/2013 3,225 1,527
zero coupon, 08/01/2014 3,000 1,333
--------------------------------------------------------------------------------------
(b)California Economic Development Financing Authority,
California Independent System Project, Revenue, Series C,
2.550%, 04/01/2008 6,500 6,500
--------------------------------------------------------------------------------------
California Education Facilities Authority, zero coupon,
10/01/2011 1,465 785
--------------------------------------------------------------------------------------
California Educational Facilities Authority, Claremont
McKenna College, Revenue, 5.100%, 11/01/2017 800 764
--------------------------------------------------------------------------------------
California Educational Facilities Authority, Mill College,
Revenue, 6.875%, 09/01/2022 1,775 1,947
--------------------------------------------------------------------------------------
California Educational Facilities Authority, University of
San Diego, Revenue:
zero coupon, 10/01/2012 1,000 501
zero coupon, 10/01/2014 1,470 647
--------------------------------------------------------------------------------------
California Educational Facilities Authority, University of
San Francisco, Revenue, 6.000%, 10/01/2016 6,640 6,820
--------------------------------------------------------------------------------------
California Educational Facilities Authority, Santa Clara
University, Revenue, 5.250%, 09/01/2018 1,000 970
--------------------------------------------------------------------------------------
California Health Facilities Financing Authority, Adventist
Health System West, Revenue Series B:
6.500%, 03/01/2007 3,750 3,943
6.500%, 03/01/2011 2,000 2,096
--------------------------------------------------------------------------------------
California Health Facilities Finance Authority, Catholic
Health Facilities, Revenue, Series A:
5.750%, 07/01/2010 11,970 12,582
6.000%, 07/01/2025 5,000 5,132
--------------------------------------------------------------------------------------
California Health Facilities Financing Authority, Eskaton
Properties Health Facilities, Revenue, 7.450%, 05/01/2011 4,800 5,015
--------------------------------------------------------------------------------------
California Health Facilities Financing Authority, Insured
Health Facilities, Small Facilities Loan, Revenue, Series
A, 6.700%, 03/01/2011 1,200 1,272
--------------------------------------------------------------------------------------
California Health Facilities Finance, Authority, Kaiser
Permanente, Revenue, Series A:
zero coupon, 10/01/2009 7,140 4,312
7.000%, 12/01/2010 3,550 3,756
--------------------------------------------------------------------------------------
California Health Facilities Financing Authority, San
Francisco Children's Hospital, Revenue, Series A, 7.500%,
10/01/2020 3,600 3,815
--------------------------------------------------------------------------------------
California Health Facilities Financing Authority, Southern
California Presbyterian, Revenue, 6.700%, 06/01/2011 2,000 2,127
--------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Health Facilities Finance Authority, Sutter
Health, Revenue:
Series C, 5.500%, 08/15/2012 $ 5,410 $ 5,516
Series A, 5.000%, 08/15/2018 1,820 1,688
Series A, 5.000%, 08/15/2019 1,605 1,478
--------------------------------------------------------------------------------------
California Housing Finance Agency, Home Mortgage Revenue:
Series D, 7.750%, 08/01/2010 3,230 3,341
Series F-1, 6.875%, 08/01/2015 10,905 11,495
Series C, 7.600%, 08/01/2030 1,215 1,238
--------------------------------------------------------------------------------------
(b)California Pollution Control Financing Authority,
Variable Rate Demand Note, Series 1996C, 2.650%,
11/01/2026 2,000 2,000
--------------------------------------------------------------------------------------
(b)California Pollution Control Revenue, Southern California
Edison Co., Daily Demand Note, Series 1986 B, 2.600%,
02/28/2008 6,000 6,000
--------------------------------------------------------------------------------------
California Residence Efficiency Financing Authority, Capital
Improvements Program, Certificates of Participation:
6.000%, 04/01/2012 1,685 1,822
5.500%, 04/01/2017 4,285 4,289
--------------------------------------------------------------------------------------
California State Colleges and Universities, College and
University Improvements, Revenue, 6.750%, 11/01/2009 1,515 1,593
--------------------------------------------------------------------------------------
California State Colleges and Universities, Housing System,
Revenue:
5.650%, 11/01/2012 8,110 8,391
5.700%, 11/01/2013 5,000 5,159
--------------------------------------------------------------------------------------
California State Colleges and Universities, San Diego State
University, Revenue, Series C, 5.625%, 11/01/2024 4,210 4,204
--------------------------------------------------------------------------------------
California State Public Works Board, California Science
Center, Lease Revenue, Series A, 5.250%, 10/01/2017 1,000 964
--------------------------------------------------------------------------------------
California State Public Works Board, California State
University, Lease Revenue, Series C, 5.375%, 10/01/2016 6,115 6,021
--------------------------------------------------------------------------------------
California State Public Works, Department of Corrections,
Lease Revenue, Series A:
7.400%, 09/01/2010 3,365 4,039
5.750%, 01/01/2012 5,145 5,350
5.250%, 12/01/2013 3,400 3,405
5.500%, 01/01/2015 7,075 7,128
5.250%, 09/01/2015 2,340 2,289
5.000%, 09/01/2018 11,000 10,204
--------------------------------------------------------------------------------------
California State Public Works Board, Trustees of California
State University, Lease Revenue, Series A:
5.250%, 10/01/2012 6,305 6,307
5.000%, 10/01/2017 3,255 3,040
--------------------------------------------------------------------------------------
California Statewide Communities Development Authority, Arc
of San Diego, Certificates of Participation, 5.625%,
05/01/2021 3,055 2,987
--------------------------------------------------------------------------------------
California Statewide Communities Development Authority,
Cedars-Sinai Medical Center, Certificates of
Participation, 6.500%, 08/01/2012 20,205 22,029
--------------------------------------------------------------------------------------
California Statewide Communities Development Authority,
Eastfield Ming Quong Inc., Certificates of Participation,
5.625%, 06/01/2020 3,420 3,314
--------------------------------------------------------------------------------------
California Statewide Communities Development Authority,
Health Facilities, Certificates of Participation, 5.500%,
09/01/2014 6,750 6,795
--------------------------------------------------------------------------------------
California Statewide Communities Development Authority,
Mount Diablo Health Systems, Certificates of
Participation, 5.500%, 08/15/2012 4,000 4,118
--------------------------------------------------------------------------------------
California Statewide Communities Development Authority,
Triad Healthcare, Certificates of Participation, 5.800%,
08/01/2000 4,205 4,287
--------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Carlsbad, CA, Unified School District, General Obligation:
zero coupon, 11/01/2008 $ 1,000 $ 641
zero coupon, 11/01/2009 1,140 688
zero coupon, 11/01/2010 2,520 1,431
zero coupon, 11/01/2011 1,625 867
zero coupon, 11/01/2012 2,685 1,339
zero coupon, 11/01/2013 2,740 1,280
zero coupon, 11/01/2018 3,050 1,036
--------------------------------------------------------------------------------------
Carson, CA, Redevelopment Agency, Redevelopment Project No.
1, Tax Allocation, Series B, 6.000%, 10/01/2016 3,350 3,378
--------------------------------------------------------------------------------------
Central Valley, CA, Financing Authority, Cogeneration
Project, Revenue, 6.100%, 07/01/2013 8,700 9,413
--------------------------------------------------------------------------------------
Central Valley, CA, School Districts Financing Authority,
School District, General Obligation, Series A, zero
coupon, 08/01/2009 6,000 3,668
--------------------------------------------------------------------------------------
Concord, CA, Redevelopment Agency, Tax Allocation, Series 3,
8.000%, 07/01/2018 40 41
--------------------------------------------------------------------------------------
Contra Costa County, CA, GNMA Mortgage Backed Securities
Program, Home Mortgage Revenue, 7.750%, 05/01/2022 2,715 3,373
--------------------------------------------------------------------------------------
Corona, CA, Community Facilities District, Special Tax,
Series 90-1-A, 5.500%, 09/01/2015 9,240 9,423
--------------------------------------------------------------------------------------
Corona-Norco, CA, Unified School District Public Financing
Authority, Community Facilities District, Special Tax
Revenue, Series A, 5.750%, 09/01/2014 2,750 2,835
--------------------------------------------------------------------------------------
Coronado, CA, Community Development Agency, Coronado
Community Development Project, Tax Allocation, 7.250%,
09/01/2012 4,500 4,590
--------------------------------------------------------------------------------------
Duarte, CA, Certificate of Participation, Series A, 5.250%,
04/01/2024 3,750 3,290
--------------------------------------------------------------------------------------
El Dorado County, CA, Public Agency Financing Authority,
Revenue, 5.600%, 02/15/2012 6,000 6,193
--------------------------------------------------------------------------------------
Emeryville, CA, Public Financing Authority, Redevelopment
Project, Revenue Series A:
(a) Prerefunded 05/01/2002 @ 102, 6.500%, 05/01/2021 3,940 4,253
6.500%, 05/01/2021 6,315 6,588
--------------------------------------------------------------------------------------
Escondido, CA, Unified High School District, General
Obligation:
zero coupon, 05/01/2015 3,165 1,335
zero coupon, 05/01/2016 3,335 1,319
--------------------------------------------------------------------------------------
Fontana, CA, Public Financing Authority, Tax Allocation
Revenue, 7.050%, 09/01/2021 3,900 4,088
--------------------------------------------------------------------------------------
Foothill-DeAnza, CA, Community College District, DeAnza
Campus Center Project, Certificates of Participation:
7.350%, 03/01/2007 1,700 1,896
7.875%, 06/01/2021 4,055 4,397
--------------------------------------------------------------------------------------
Foothill/Eastern Corridor Agency, Senior Lien, Toll Road
Revenue:
5.375%, 01/15/2015 3,750 3,750
Series A, 6.000%, 01/01/2016 11,000 11,966
zero coupon, 01/15/2017 4,500 1,637
zero coupon, 01/15/2026 3,750 1,997
Series A, 6.500%, 01/01/2032 10,000 11,128
(a) Series A, Prerefunded 01/01/2007 @ 100, 6.00%,
01/01/2034 3,350 3,640
5.750%, 01/15/2040 6,250 6,018
--------------------------------------------------------------------------------------
Foster City, CA, Public Financing Authority, Community
Development Project, Series A:
5.600%, 09/01/2012 1,225 1,234
5.800%, 09/01/2016 1,000 1,011
--------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fresno, CA, Health Facilities Authority, Holy Cross Health
System, Revenue:
6.500%, 06/01/2011 $ 1,500 $ 1,622
6.625%, 06/01/2021 2,000 2,169
--------------------------------------------------------------------------------------
Fresno, CA, Unified School District, General Obligation,
Series A, 6.400%, 08/01/2016 2,000 2,217
--------------------------------------------------------------------------------------
Hawthorne, CA, Community Redevelopment Agency, Redevelopment
Project Area 2, Tax Allocation, 6.625%, 09/01/2014 2,000 2,174
--------------------------------------------------------------------------------------
Hollister, CA, Joint Powers Financing Authority, Sewer
System Improvement Project, Revenue, 5.750%, 12/01/2011 3,815 3,855
--------------------------------------------------------------------------------------
Hollister, CA, Redevelopment Agency, Community Development
Project, Tax Allocation, 5.375%, 10/01/2013 2,630 2,663
--------------------------------------------------------------------------------------
Inglewood, CA, Civic Center Improvement Project,
Certificates of Participation:
7.000%, 08/01/2011 2,500 2,683
7.000%, 08/01/2019 5,200 5,580
6.500%, 08/01/2021 1,825 1,942
--------------------------------------------------------------------------------------
Inglewood, CA, Public Financing Authority, Revenue:
Series B, 7.000%, 05/01/2022 8,140 8,774
Series C, 7.000%, 05/01/2022 905 976
--------------------------------------------------------------------------------------
Irvine, CA, Improvement Bond Act 1915, Special Assessment,
6.000%, 09/02/2022 750 729
--------------------------------------------------------------------------------------
(b)Irvine, CA, Improvement Bond Act 1915, Special
Assessment, Variable Rate, 2.400%, 09/02/2024 1,000 1,000
--------------------------------------------------------------------------------------
(b)Irvine Ranch Water District, CA, Variable Rate Demand
Note, 2.550%, 06/01/2015 3,500 3,500
--------------------------------------------------------------------------------------
(b)Irvine Ranch Water District, CA, Conservation District,
Daily Demand Note, 2.550%, 05/01/2009 6,000 6,000
--------------------------------------------------------------------------------------
Kern, CA, High School District, General Obligation, Series
A, 6.400%, 08/01/2012 3,095 3,436
--------------------------------------------------------------------------------------
Kings River, CA, Conservation District, Pine Flat Power,
Revenue, Series E:
5.125%, 01/01/2017 1,000 954
5.125%, 01/01/2018 2,185 2,070
--------------------------------------------------------------------------------------
Laguna Salada, CA, Unified School District, General
Obligation, Series B, zero coupon, 08/01/2020 2,000 608
--------------------------------------------------------------------------------------
Las Virgenes, CA, Unified School District, General
Obligation Series A:
zero coupon, 11/01/2013 2,150 1,004
zero coupon, 11/01/2014 1,050 457
zero coupon, 11/01/2015 1,550 636
zero coupon, 11/01/2015 1,275 520
--------------------------------------------------------------------------------------
Lemon Grove, CA, Community Development Agency, Lemon Grove
Redevelopment Project, Tax Allocation:
6.650%, 08/01/2006 250 272
6.900%, 08/01/2020 2,250 2,465
--------------------------------------------------------------------------------------
Loma Linda, CA, Loma Linda University Medical Center
Project, Revenue, 7.000%, 12/01/2015 2,500 2,568
--------------------------------------------------------------------------------------
Long Beach, CA, Water Revenue, Series A, 5.750%, 05/01/2015 1,725 1,804
--------------------------------------------------------------------------------------
(c)Long Beach, CA, Harbor Revenue:
7.051%, 05/15/2016 4,215 4,723
7.051%, 05/15/2019 1,300 1,444
--------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Los Angeles County, CA, Metropolitan Transportation
Authority, Sales Tax Revenue, Series A:
5.625%, 07/01/2016 $ 2,350 $ 2,379
4.750%, 07/01/2017 4,610 4,121
4.750%, 07/01/2018 4,830 4,291
4.750%, 07/01/2019 5,060 4,457
4.750%, 07/01/2020 5,300 4,640
--------------------------------------------------------------------------------------
Los Angeles, CA, Community Redevelopment Agency, Hollywood
Redevelopment Project, Tax Allocation, Series C, 5.500%,
07/01/2017 1,260 1,269
--------------------------------------------------------------------------------------
Los Angeles, CA, Convention and Exhibition Center Authority,
Certificates of Participation, 9.000%, 12/01/2020 1,000 1,248
--------------------------------------------------------------------------------------
Los Angeles, CA, Department of Airports, Ontario
International Airport, Revenue, Series A, 5.900%,
05/15/2012 3,290 3,415
--------------------------------------------------------------------------------------
Los Angeles, CA, Harbor Department Revenue:
8.700%, 09/01/2015 2,500 2,500
6.250%, 08/01/2026 2,320 2,410
--------------------------------------------------------------------------------------
Los Angeles, CA, Unified School District, General
Obligation:
Series A, 6.000%, 07/01/2012 6,340 6,844
Series A, 6.000%, 07/01/2013 2,970 3,191
Series A, 6.000%, 07/01/2014 5,820 6,237
Series C, 5.625%, 07/01/2014 3,770 3,874
Series A, 6.000%, 07/01/2015 7,120 7,613
Series B, 5.375%, 07/01/2015 3,000 3,007
--------------------------------------------------------------------------------------
Los Angeles, CA, University School District, 5.500%,
07/01/2012 1,000 1,031
--------------------------------------------------------------------------------------
Los Banos, CA, Certificates of Participation, 6.000%,
12/01/2019 2,100 2,086
--------------------------------------------------------------------------------------
Lucia Mar, CA, Unified School District, General Obligation,
Series A, zero coupon, 08/01/2016 1,000 390
--------------------------------------------------------------------------------------
Martinez, CA, Home Mortgage Revenue, 10.375%, 02/01/2002 30 33
--------------------------------------------------------------------------------------
Merced, CA, Unified School District, General Obligation,
Series A, zero coupon, 08/01/2014 2,045 903
--------------------------------------------------------------------------------------
Metropolitan Water District of Southern California,
Waterworks Revenue, Series A, 5.750%, 07/01/2021 2,000 2,062
--------------------------------------------------------------------------------------
Mill Valley, CA, The Redwoods, Certificates of
Participation, 5.750%, 12/01/2020 3,230 3,205
--------------------------------------------------------------------------------------
Modesto, CA, Irrigation District Financing Authority,
Revenue, Series A, 6.000%, 10/01/2015 7,000 7,342
--------------------------------------------------------------------------------------
Montebello, CA, Unified School District, General Obligation:
zero coupon, 08/01/2012 1,890 955
zero coupon, 08/01/2013 1,945 921
--------------------------------------------------------------------------------------
Moreno Valley, CA, Towngate Community Facilities District,
Special Tax:
6.500%, 12/01/2009 3,670 3,807
7.125%, 10/01/2023 2,810 2,909
--------------------------------------------------------------------------------------
Murrieta Valley, CA, Unified School District, General
Obligation, Series A:
zero coupon, 09/01/2013 4,320 2,036
zero coupon, 09/01/2016 2,500 970
--------------------------------------------------------------------------------------
Northern California Power Agency, Multiple Capital
Facilities Revenue, Series A, 5.250%, 08/01/2014 2,000 1,989
--------------------------------------------------------------------------------------
Northern California Power Agency, Hydroelectric Project
Number One, Revenue, Series A:
5.000%, 07/01/2017 4,530 4,277
5.000%, 07/01/2018 3,945 3,700
--------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a)Northern California Power Agency, Public Power Revenue,
Prerefunded 01/01/2016 @ 100, 7.000%, 07/01/2016 $ 210 $ 248
--------------------------------------------------------------------------------------
Oakland, CA, Building Authority, Elihu M. Harris Project,
Lease Revenue, Series A, 5.500%, 04/01/2014 6,970 7,073
--------------------------------------------------------------------------------------
Oakland, CA, Housing Finance Revenue, 7.100%, 01/01/2010 1,270 1,317
--------------------------------------------------------------------------------------
Orange County, CA, Certificates of Participation, 6.000%,
07/01/2026 13,000 13,344
--------------------------------------------------------------------------------------
Palmdale, CA, School District, School Building Project,
Certificates of Participation, zero coupon, 10/01/2019 1,420 454
--------------------------------------------------------------------------------------
Pleasanton, CA, Joint Power Financing Series A, 6.150%,
09/02/2012 8,780 9,125
--------------------------------------------------------------------------------------
Redondo Beach, CA, Public Financing Authority, South Bay
Center Redevelopment Project, Revenue:
7.000%, 07/01/2016 1,000 1,071
7.125%, 07/01/2026 2,000 2,145
--------------------------------------------------------------------------------------
Reedley, CA, Sierra View Homes, Certificates of
Participation:
5.850%, 03/01/2021 2,325 2,333
(a) Prerefunded 03/01/2001 @ 102, 7.600%, 03/01/2021 3,895 4,139
--------------------------------------------------------------------------------------
Richmond, CA, Redevelopment Agency, Harbour Redevelopment
Project, Tax Allocation, Series A, 5.500%, 07/01/2018 2,350 2,346
--------------------------------------------------------------------------------------
Sacramento County, CA, Community Facilities District Number
1, Special Tax:
5.500%, 12/01/2010 1,090 1,068
6.000%, 09/01/2011 850 860
6.125%, 09/01/2014 605 610
5.700%, 12/01/2020 2,000 1,894
6.300%, 09/01/2021 1,500 1,510
--------------------------------------------------------------------------------------
Sacramento, CA, City Financing Authority, Convention Center
Hotel, Revenue, Series A, 6.250%, 01/01/2030 10,000 9,641
--------------------------------------------------------------------------------------
Sacramento, CA, City Financing Authority Lease Revenue
Refunding, AMBAC Insured, 5.400%, 11/01/2020 5,000 4,931
--------------------------------------------------------------------------------------
Sacramento, CA, Financing Authority, California EPA
Building, Lease Revenue, Series A, 5.250%, 05/01/2015 7,565 7,473
--------------------------------------------------------------------------------------
Sacramento, CA, Financing Authority Lease Revenue, Series
1993B, 5.000%, 11/01/2014 10,000 9,574
--------------------------------------------------------------------------------------
Sacramento, CA, Cogeneration Authority, Procter and Gamble
Project, Revenue:
6.375%, 07/01/2010 2,300 2,510
(a) Prerefunded 07/01/2005 @ 102, 6.375%, 07/01/2010 2,700 3,004
6.500%, 07/01/2021 7,750 8,671
--------------------------------------------------------------------------------------
Sacramento, CA, Cogeneration Authority, Cogeneration Project
Revenue:
5.250%, 07/01/2014 5,500 5,469
5.250%, 07/01/2015 5,755 5,685
--------------------------------------------------------------------------------------
Sacramento, CA, Municipal Utility District, Electric
Revenue:
Series A, 6.200%, 08/15/2006 1,000 1,069
Series G, 6.500%, 09/01/2013 1,270 1,432
Series L, 5.125%, 07/01/2015 10,000 9,766
Series K, 5.700%, 07/01/2017 3,105 3,202
--------------------------------------------------------------------------------------
Sacramento, CA, Power Authority, Cogeneration Project,
Revenue, 6.000%, 07/01/2022 5,000 5,022
--------------------------------------------------------------------------------------
Saddleback Valley Unified School District, Public Financing
Authority, Special Tax Revenue:
Series 1997A, 6.000%, 09/01/2014 1,195 1,285
Series 1997A, FSA Insured, 6.000%, 09/01/2013 1,025 1,105
Series A, 6.000%, 09/01/2012 1,860 2,015
--------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salinas, CA, Capital Improvement Projects, Certificates of
Participation, Series A, 5.625%, 10/01/2017 $ 2,000 $ 1,951
--------------------------------------------------------------------------------------
San Bernardino County, CA, West Valley Detention Center,
Certificates of Participation, 6.500%, 11/01/2012 8,000 8,546
--------------------------------------------------------------------------------------
San Bernardino, CA, Joint Powers Financing Authority, Public
Facilities Lease Revenue, Series A, 7.150%, 09/01/2013 4,250 4,335
--------------------------------------------------------------------------------------
(a)San Bernardino, CA, School Health Care System, Sisters of
Charity, Revenue, Series A, Prerefunded 07/01/2001 @ 102,
7.000%, 07/01/2011 5,000 5,360
--------------------------------------------------------------------------------------
San Bruno Park, CA, School District, General Obligation:
zero coupon, 08/01/2014 1,010 449
zero coupon, 08/01/2015 1,080 449
zero coupon, 08/01/2016 1,000 390
zero coupon, 08/01/2017 1,000 366
zero coupon, 08/01/2019 1,100 355
--------------------------------------------------------------------------------------
San Diego, CA, Detention Facility, Certificates of
Participation, Revenue, 8.000%, 06/01/2002 3,425 3,580
--------------------------------------------------------------------------------------
San Diego, CA, Certificate of Participation, Water Utility
Funding Revenue, Series 1998, 5.375%, 08/01/2013 4,000 4,053
--------------------------------------------------------------------------------------
San Diego, CA, Public Facilities Financing Authority, Sewer
Revenue:
Series A, 5.000%, 05/15/2018 3,000 2,824
Series B, 5.000%, 05/15/2018 2,000 1,883
--------------------------------------------------------------------------------------
San Diego, CA, Redevelopment Agency, Horton Project, Tax
Allocation, Series B, 6.625%, 11/01/2017 2,000 2,137
--------------------------------------------------------------------------------------
San Francisco, CA, Building Authority, San Francisco Civic
Center Complex, Lease Revenue, Series A, 5.250%,
12/01/2016 6,775 6,665
--------------------------------------------------------------------------------------
San Francisco, CA, City and County Airport Communication,
International Airport Revenue:
Series 12A, 5.700%, 05/01/2013 5,470 5,539
Series 16A, 5.500%, 05/01/2014 4,065 4,094
Series 12A, 5.700%, 05/01/2014 6,795 6,851
Series 16A, 5.500%, 05/01/2015 4,285 4,293
--------------------------------------------------------------------------------------
San Francisco, CA, City and County Educational Facilities,
Unified School District, General Obligation, Series B:
5.500%, 06/15/2010 2,970 3,096
5.500%, 06/15/2011 1,605 1,661
5.250%, 06/15/2016 3,955 3,875
5.250%, 06/15/2017 4,165 4,054
--------------------------------------------------------------------------------------
San Francisco, CA, City and County Redevelopment Agency,
George R. Moscone Convention Center, Lease Revenue,
6.750%, 07/01/2015 2,200 2,422
--------------------------------------------------------------------------------------
San Joaquin Hills, CA, Transportation Corridor Agency, Toll
Road Revenue, Capital Appreciation, Series 1997 A, zero
coupon, 01/15/2012 22,920 11,862
--------------------------------------------------------------------------------------
San Joaquin Hills, CA, Transportation Corridor Agency, Toll
Road Revenue, Series A:
zero coupon, 01/15/2011 5,450 3,018
zero coupon, 01/15/2016 3,485 1,392
zero coupon, 01/15/2017 3,965 1,487
zero coupon, 01/15/2018 2,640 931
zero coupon, 01/15/2019 3,185 1,053
--------------------------------------------------------------------------------------
San Jose, CA, Redevelopment Agency, Merged Area
Redevelopment Project, Tax Allocation:
5.500%, 08/01/2014 3,420 3,468
5.500%, 08/01/2015 3,145 3,172
5.500%, 08/01/2016 2,955 2,967
--------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
San Jose, CA, Unified School District, General Obligation,
Series A:
zero coupon, 08/01/2015 $ 2,570 $ 1,069
zero coupon, 08/01/2017 1,350 494
--------------------------------------------------------------------------------------
San Juan, CA, M-S-R Public Power Agency, San Juan Project,
Revenue, Series D, 6.750%, 07/01/2020 2,000 2,269
--------------------------------------------------------------------------------------
San Mateo County, CA, Transportation District, Sales Tax
Revenue, Series A:
5.250%, 06/01/2012 3,000 3,033
5.250%, 06/01/2015 4,000 3,972
--------------------------------------------------------------------------------------
San Ysidro, CA, School District, General Obligation, 6.125%,
08/01/20/21 1,400 1,495
--------------------------------------------------------------------------------------
Santa Clara, CA, Electric Revenue, Series A, 5.250%,
07/01/2014 3,325 3,316
--------------------------------------------------------------------------------------
Santa Clara, CA, Redevelopment Agency, Bayshore North
Project, Tax Allocation, 7.000%, 07/01/2010 1,300 1,485
--------------------------------------------------------------------------------------
Santa Cruz County, CA, Housing Authority, Multi-Family
Revenue, Series A, 7.750%, 07/01/2023 2,000 2,072
--------------------------------------------------------------------------------------
Santa Margarita/Dana Point, CA, Authority, Improvement
Districts, Revenue, Series B:
7.250%, 08/01/2012 3,675 4,401
7.250%, 08/01/2013 3,400 4,074
--------------------------------------------------------------------------------------
Snowline, CA, Joint Unified School District, Certificates of
Participation:
6.300%, 07/01/2011 2,500 2,729
6.400%, 07/01/2018 1,195 1,309
--------------------------------------------------------------------------------------
South Orange County, CA, Public Financing Authority, Senior
Lien, Special Tax Revenue, Series A, 7.000%, 09/01/2008 1,000 1,160
--------------------------------------------------------------------------------------
South San Francisco, CA, Capital Improvements Financing
Authority, South San Francisco Conference Center, Revenue,
6.125%, 09/01/2018 3,925 3,984
--------------------------------------------------------------------------------------
South San Francisco, CA, Conference Center Financing,
Certificates of Participation, 5.000%, 04/01/2019 1,500 1,358
--------------------------------------------------------------------------------------
Southern California Home Finance Authority, Single Family
Mortgage Revenue, Series A:
6.750%, 09/01/2022 650 670
7.350%, 09/01/2024 475 493
--------------------------------------------------------------------------------------
State of California, General Obligation:
5.500%, 04/01/2010 5,500 5,763
6.250%, 09/01/2012 6,000 6,623
5.250%, 10/01/2012 2,000 2,020
--------------------------------------------------------------------------------------
Stockton, CA, Community Facilities District, Brookside
Estates, Special Tax Revenue:
5.650%, 08/01/2007 1,640 1,649
5.950%, 08/01/2010 1,000 1,010
6.200%, 08/01/2015 2,000 2,012
--------------------------------------------------------------------------------------
Sunnyvale, CA, Financing Authority, Wastewater, Refuse and
Sludge, Utilities Revenue, 6.300%, 10/01/2017 4,000 4,160
--------------------------------------------------------------------------------------
Temecula Valley, CA, Unified School District, General
Obligation, Series F, 5.800%, 09/01/2014 2,430 2,520
--------------------------------------------------------------------------------------
Temple City, CA, Unified School District, General
Obligation, Series A, zero coupon, 08/01/2015 1,250 520
--------------------------------------------------------------------------------------
Torrance, CA, Redevelopment Agency, Downtown Redevelopment,
Tax Allocation, Series A, 5.600%, 09/01/2028 1,400 1,299
--------------------------------------------------------------------------------------
Torrance, CA, Torrance Memorial Hospital Medical Center,
Revenue, 6.750%, 01/01/2012 5,000 5,011
--------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Township California Health Care, Revenue Bond,
5.125%, 07/01/2023 $ 1,500 $ 1,352
--------------------------------------------------------------------------------------
Westminster, CA, Redevelopment Agency, Tax Allocation
Revenue, Community Development, Project #1, Series A,
7.300%, 08/01/2021 2,500 2,702
--------------------------------------------------------------------------------------
Yosemite, CA, Community College District, Certificates of
Participation, 7.750%, 07/01/2011 1,470 1,567
--------------------------------------------------------------------------------------
Puerto Rico Commonwealth, General Obligation, 6.500%,
07/01/2015 4,000 4,499
--------------------------------------------------------------------------------------
Puerto Rico Commonwealth, Highway and Transportation
Authority Revenue:
Series Z, 6.250%, 07/01/2015 5,650 6,204
(c) 7.149%, 07/01/2018 3,000 3,403
--------------------------------------------------------------------------------------
Puerto Rico Commonwealth, Industrial, Tourist, Educational,
Medical and Environmental Control Facilities,
Inter-American University, Revenue, 5.500%, 10/01/2014 1,000 1,019
--------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $854,971) $ 869,942
--------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Prerefunded: Bonds which are prerefunded are collateralized by U.S. Treasury
securities which are held in escrow and are used to pay principal and
interest on tax-exempt issues and to retire the bonds in full at the
earliest refunding date.
(b) Variable rate demand notes are securities whose yields are periodically
reset at levels that are generally comparable to exempt commercial paper.
These securities are payable on demand within seven calendar days and
normally incorporate an irrevocable letter of credit from a major bank.
These notes are carried, for purposes of calculating average weighted
maturity, at the longer of the period remaining until the next rate change
or to the extent of the demand period.
(c) Inverse floating rate notes are instruments whose yields may change based on
the change in the relationship between long-term and short-term interest
rates and which may exhibit added interest rate sensitivity compared to
other bonds with a similar maturity. These securities are shown at their
rates as of August 31, 1999.
Based on the cost of investments of $855,361,000 for federal income tax purposes
at August 31, 1999, the gross unrealized appreciation was $26,763,000, the gross
unrealized depreciation was $12,182,000 and the net unrealized appreciation on
investments was $14,581,000.
See accompanying Notes to Financial Statements.
20
<PAGE> 21
PERFORMANCE UPDATE
KEMPER FLORIDA TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED AUGUST 31, 1999 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR LIFE OF CLASS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER FLORIDA TAX-FREE
INCOME FUND CLASS A -6.53% 4.73% 6.43% (since 4/25/91)
- -----------------------------------------------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE
INCOME FUND CLASS B -5.60 4.67 4.59 (since 5/31/94)
- -----------------------------------------------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE
INCOME FUND CLASS C -2.84 4.87 4.77 (since 5/31/94)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from 4/30/91 to
8/31/99
<TABLE>
<CAPTION>
KEMPER FLORIDA TAX-FREE LEHMAN BROTHERS
INCOME FUND CLASS A(1) MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
----------------------- -------------------- --------------------
<S> <C> <C> <C>
4/30/91 10000 10000 10000
12/31/94 12464 12543 11072
8/31/99 16774 17651 12367
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 5/31/94 to
8/31/99
<TABLE>
<CAPTION>
KEMPER FLORIDA TAX-FREE LEHMAN BROTHERS
INCOME FUND CLASS B(1) MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
----------------------- --------------------- ---------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
12/31/96 11773 12099 10753
8/31/99 12648 13886 11336
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 5/31/94 to
8/31/99
<TABLE>
<CAPTION>
KEMPER FLORIDA TAX-FREE LEHMAN BROTHERS
INCOME FUND CLASS C(1) MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
----------------------- --------------------- ---------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
12/31/96 11795 12099 10753
8/31/99 12773 13886 11336
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE 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 RETURN REFLECTS ANNUALIZED CHANGE WHILE TOTAL RETURN REFLECTS
AGGREGATE CHANGE. DURING THE PERIODS NOTED, SECURITIES PRICES FLUCTUATED.
FOR ADDITIONAL INFORMATION, SEE THE PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION AND THE FINANCIAL HIGHLIGHTS AT THE END OF THIS REPORT.
(1)PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A SHARES AND THE CONTINGENT DEFERRED SALES
CHARGE IN EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES. IN COMPARING
THE KEMPER STATE TAX-FREE INCOME FUNDS TO THE LEHMAN BROTHERS MUNICIPAL BOND
INDEX, YOU SHOULD NOTE THAT THE FUNDS' PERFORMANCE REFLECTS THE MAXIMUM
SALES CHARGES, WHILE NO SUCH CHARGES ARE REFLECTED IN THE PERFORMANCE OF THE
INDEX.
+THE LEHMAN BROTHERS MUNICIPAL BOND INDEX INCLUDES APPROXIMATELY 15,000
BONDS. TO BE INCLUDED IN THE INDEX A MUNICIPAL BOND MUST MEET THE FOLLOWING
CRITERIA: A MINIMUM CREDIT RATING OF BBB, HAVE BEEN ISSUED AS A PART OF AN
ISSUE OF AT LEAST $50 MILLION, HAVE BEEN ISSUED WITHIN THE LAST 5 YEARS, AND
HAVE A MATURITY OF AT LEAST 2 YEARS. BONDS SUBJECT TO ALTERNATIVE MINIMUM
TAX (AMT), VARIABLE RATE BONDS AND ZERO COUPON BONDS ARE EXCLUDED FROM THE
INDEX. SOURCE IS CDA WIESENBERGER.
++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 CDA WIESENBERGER.
21
<PAGE> 22
PORTFOLIO STATISTICS
KEMPER FLORIDA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION*
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 79% 77%
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 8 13
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 13 9
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS -- 1
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 69% 59%
- --------------------------------------------------------------------------------
AA 11 13
- --------------------------------------------------------------------------------
A 8 7
- --------------------------------------------------------------------------------
BBB 2 10
- --------------------------------------------------------------------------------
NOT RATED 10 11
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 41% 11%
- --------------------------------------------------------------------------------
11-20 YEARS 52 57
- --------------------------------------------------------------------------------
+21 YEARS 7 32
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE MATURITY
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 13.3 years 17.0 years
- --------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
22
<PAGE> 23
PORTFOLIO OF INVESTMENTS
FLORIDA TAX-FREE INCOME FUND
Portfolio of Investments at August 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Broward County, FL, Resource Recovery, Waste Energy Company,
Revenue:
7.950%, 12/01/2008 $ 775 $ 804
7.950%, 12/01/2008 825 856
----------------------------------------------------------------------------------
Broward County, FL, Port Facilities Revenue, Series C,
5.375%, 09/01/2012 1,500 1,502
----------------------------------------------------------------------------------
Broward County, FL, Airport Systems Revenue, Series E,
5.250%, 10/01/2012 1,000 990
----------------------------------------------------------------------------------
(a)Charlotte County, FL, Utility Revenue, Prerefunded
10/01/2003 @ 102, 6.750%, 10/01/2013 250 277
----------------------------------------------------------------------------------
Cocoa, FL, Water and Sewer Revenue, 5.250%, 10/01/2013 1,005 1,005
----------------------------------------------------------------------------------
(b)Collier County Florida Health Facilities Authority, Hospital
Revenue, 3.10%, 01/01/2033 1,600 1,600
----------------------------------------------------------------------------------
Dade City, FL, Certificate of Participation, Governmental
Leasing Corp., Series C, 9.000%, 04/01/2020 1,025 1,061
----------------------------------------------------------------------------------
Dade County, FL, Water and Sewer System Revenue:
6.250%, 10/01/2007 1,165 1,281
6.250%, 10/01/2011 500 549
----------------------------------------------------------------------------------
Dade County, FL, Aviation Revenue, Series B, 6.550%,
10/01/2013 2,000 2,133
----------------------------------------------------------------------------------
Dade County, FL, Aviation Revenue, Miami International
Airport, Series B, 5.125%, 10/01/2014 1,000 959
----------------------------------------------------------------------------------
Dade County, FL, Single Family Mortgage Revenue, Housing
Finance Authority, Series B, 7.250%, 09/01/2023 315 326
----------------------------------------------------------------------------------
(a)Dunedin, FL, Hospital Revenue, Mease Health Care,
Prerefunded 11/15/2001 @ 102, 6.750%, 11/15/2011 750 805
----------------------------------------------------------------------------------
Duval County, FL, Single Family Mortgage Revenue, Housing
Finance Authority, 7.250%, 07/01/2019 260 271
----------------------------------------------------------------------------------
Escambia County, FL, Single Family Mortgage Revenue, Housing
Finance Authority, Series A, 6.900%, 04/01/2020 690 714
----------------------------------------------------------------------------------
(b)Florida Department of Environmental Preservation, General
Services Revenue, Series A, 7.200%, 07/01/2011 1,680 1,755
----------------------------------------------------------------------------------
Florida Department of Natural Resources, General Services
Revenue, Preservation 2000:
Series A, 6.000%, 07/01/2011 2,370 2,547
Series B, 5.250%, 07/01/2011 1,000 1,008
----------------------------------------------------------------------------------
(a)Florida Department of Natural Resources, General Services
Revenue, Preservation 2000, Series A, Prerefunded
07/01/2013 @ 102, 6.750%, 07/01/2013 1,000 1,065
----------------------------------------------------------------------------------
Florida Housing Finance Agency, GNMA Collateral Home
Ownership Revenue, 7.900%, 03/01/2022 670 696
----------------------------------------------------------------------------------
Gainesville, FL, Utility System Revenue, Series B, 6.500%,
10/01/2010 1,370 1,535
----------------------------------------------------------------------------------
Greater Orlando Aviation Authority, Airport Facilities
Revenue:
5.750%, 10/01/2011 1,690 1,756
5.125%, 10/01/2017 1,000 936
----------------------------------------------------------------------------------
(a)Hillsborough County, FL, Aviation Authority Revenue, Tampa
International Airport:
Series A, Prerefunded 10/01/99 @ 102, 6.900%, 10/01/2011 585 598
Series A, Prerefunded 10/01/99 @ 102, 6.900%, 10/01/2011 665 680
----------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b)Hillsborough County, FL, Industrial Development Authority,
2.700%, 09/01/2025 $3,000 $ 3,000
----------------------------------------------------------------------------------
Hillsborough County, FL, Utility Revenue, Series A, 7.000%,
08/01/2014 1,325 1,393
----------------------------------------------------------------------------------
Hillsborough County, FL, Industrial Development Revenue,
University Community Hospital, 6.500%, 08/15/2019 1,000 1,111
----------------------------------------------------------------------------------
Hillsborough County, FL, Industrial Development Authority
Revenue, University Community Hospital Project, 5.625%,
08/15/2023 1,770 1,650
----------------------------------------------------------------------------------
Hillsborough County, FL, Single Family Mortgage Revenue,
Housing Finance Authority, Series A, 7.300%, 04/01/2022 265 274
----------------------------------------------------------------------------------
Jacksonville, FL, Electric Authority Revenue, Series 7, zero
coupon, 10/01/2011 1,140 602
----------------------------------------------------------------------------------
Jacksonville, FL, Water and Sewer Revenue, 5.000%,
10/01/2020 1,000 1,000
----------------------------------------------------------------------------------
Key West, FL, Utility Board Electricity Revenue, zero
coupon, 10/01/2014 4,975 2,169
----------------------------------------------------------------------------------
Lakeland, FL, Electricity and Water Revenue, zero coupon,
10/01/2009 2,000 1,198
----------------------------------------------------------------------------------
Lakeland, FL, Electricity and Water Revenue, Series A, zero
coupon, 10/01/2010 1,755 987
----------------------------------------------------------------------------------
Marion County, FL, Hospital District Revenue, 5.625%,
10/01/2019 1,000 960
----------------------------------------------------------------------------------
Miami-Dade County, FL, General Obligation, School District,
5.375%, 10/01/2014 1,000 1,008
----------------------------------------------------------------------------------
Miami-Dade County, FL, Special Obligation Revenue, Series A,
zero coupon, 10/01/2014 2,000 857
----------------------------------------------------------------------------------
Nassau County, Amelia Island Care Center Project, Revenue,
9.750%, 01/01/2023 980 1,091
----------------------------------------------------------------------------------
North Miami, FL, Education Facilities Revenue, Johnson &
Wales University Project, Series A:
6.100%, 04/01/2013 1,285 1,294
6.125%, 04/01/2020 1,500 1,517
----------------------------------------------------------------------------------
Orange County, FL, Health Facilities Authority Revenue,
Orlando Regional Healthcare, Series A:
6.250%, 10/01/2016 3,000 3,252
6.250%, 10/01/2018 500 541
----------------------------------------------------------------------------------
Orlando, FL, Expressway Authority Revenue, 6.500%,
07/01/2012 1,000 1,122
----------------------------------------------------------------------------------
Orlando, FL, Special Assessment Revenue, Conroy Road
Interchange, Series A, 5.800%, 05/01/2026 1,280 1,188
----------------------------------------------------------------------------------
Orlando, FL, Utility Water and Electricity Revenue, 6.750%,
10/01/2017 3,000 3,434
----------------------------------------------------------------------------------
Palm Beach County, FL, Criminal Justice Facilities Revenue,
7.200%, 06/01/2015 110 131
----------------------------------------------------------------------------------
Palm Beach County, FL, General Obligation, 5.500%,
12/01/2014 1,000 1,023
----------------------------------------------------------------------------------
Palm Beach County, FL, Solid Waste Authority Revenue, Series
A, zero coupon, 10/01/2013 2,865 1,329
----------------------------------------------------------------------------------
Pensacola, FL, Health Facilities Revenue, Daughters of
Charity National Healthcare, 5.250%, 01/01/2011 2,200 2,192
----------------------------------------------------------------------------------
Pinellas County, FL, Pollution Control Revenue, Florida
Power Corporation, 7.200%, 12/01/2014 2,000 2,123
----------------------------------------------------------------------------------
Port Palm Beach, FL, Revenue, Series A, 5.375%, 09/01/2012 1,100 1,113
----------------------------------------------------------------------------------
Port St. Lucie, FL, Special Assessment Revenue, Utility
Service Area No. 3 & 4, Series A, 5.000%, 10/01/2013 1,000 974
----------------------------------------------------------------------------------
Port St. Lucie, FL, Special Assessment Revenue, Assessment
No. 1 -- Phase II, 5.400%, 10/01/2016 2,000 1,981
----------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
St Johns County, FL, Water and Sewer Revenue, Series A, zero
coupon, 06/01/2016 $ 440 $ 172
----------------------------------------------------------------------------------
(a)St Petersburg, FL, Health Facilities Authority Revenue,
Allegheny Health Systems, Series A, Prerefunded 12/01/01 @
102, 7.000%, 12/01/2015 500 539
----------------------------------------------------------------------------------
(a)St Petersburg, FL, Health Facilities Authority Revenue,
Allegheny Health Systems, Prerefunded 12/01/03 @ 100,
6.750%, 12/01/2021 1,000 1,093
----------------------------------------------------------------------------------
State of Florida Board of Education Capital Outlay, General
Obligation:
Series F, 5.125%, 06/01/2014 1,000 980
Series A, 7.250%, 06/01/2023 390 406
----------------------------------------------------------------------------------
State of Florida Board of Education, Lottery Revenue, Series
C, 5.125%, 07/01/2015 2,000 1,943
----------------------------------------------------------------------------------
(b)Sunrise, FL, Utility Systems Revenue, 5.966%, 10/01/2018 1,250 1,263
----------------------------------------------------------------------------------
Tampa Bay, FL, Sports Authority Revenue, Tampa Bay Arena,
5.750%, 10/01/2020 2,075 2,135
----------------------------------------------------------------------------------
Tampa Bay, FL, Utility Tax Revenue:
zero coupon, 10/01/2014 3,165 1,380
zero coupon, 10/01/2016 375 144
----------------------------------------------------------------------------------
Village Center Community Development Center, Utility
Revenue, 6.000%, 11/01/2018 1,250 1,328
----------------------------------------------------------------------------------
(a)Volusia County, FL, Health Facilities Authority, Memorial
Health Systems Project, Revenue, Prerefunded 6/1/00 @ 102,
8.250%, 06/01/2020 1,940 2,040
----------------------------------------------------------------------------------
Westchase, FL, Special Assessment Revenue, Community
Development District, 5.800%, 05/01/2012 2,975 3,066
----------------------------------------------------------------------------------
Foothill Eastern Transportation Corridor Agency, CA, Toll
Road Revenue, 5.750%, 01/15/2040 550 530
----------------------------------------------------------------------------------
Puerto Rico Commonwealth, General Obligation:
6.250% 07/01/2013 850 937
6.000%, 07/01/2016 2,000 2,139
zero coupon, 07/01/2017 3,500 1,291
----------------------------------------------------------------------------------
(b)Puerto Rico Commonwealth, Highway and Transportation
Authority Revenue, 7.15%, 07/01/2018 625 709
----------------------------------------------------------------------------------
Virgin Islands, Public Finance Authority, Matching Fund Loan
Notes, Series A, 7.250%, 10/01/2018 2,125 2,347
----------------------------------------------------------------------------------
TOTAL MUNICIPAL INVESTMENTS--100%
(Cost: $92,785) $92,665
----------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
PORTFOLIO OF INVESTMENTS
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Prerefunded: Bonds which are prerefunded are collateralized by U.S. Treasury
securities which are held in escrow and are used to pay principal and
interest on tax-exempt issues and to retire the bonds in full at the
earliest refunding date.
(b) Variable rate demand notes are securities whose yields are periodically
reset at levels that are generally comparable to exempt commercial paper.
These securities are payable on demand within seven calendar days and
normally incorporate an irrevocable letter of credit from a major bank.
These notes are carried, for purposes of calculating average weighted
maturity, at the longer of the period remaining until the next rate change
or to the extent of the demand period.
Based on the cost of investments of $92,785,000 for federal income tax purposes
at August 31, 1999, the gross unrealized appreciation was $2,172,000, the gross
unrealized depreciation was $2,292,000 and the net unrealized depreciation on
investments was $120,000.
See accompanying Notes to Financial Statements.
26
<PAGE> 27
PERFORMANCE UPDATE
KEMPER NEW YORK TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED AUGUST 31, 1999 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS A -5.92% 4.67% 6.51% 6.78% (since 12/31/85)
- ------------------------------------------------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS B -5.20 4.60 N/A 4.53 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS C -2.33 4.76 N/A 4.66 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from 12/31/85 to
8/31/99
<TABLE>
<CAPTION>
KEMPER NEW YORK TAX- LEHMAN BROTHERS
FREE INCOME FUND CLASS A(1) MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
------------------------- --------------------- ---------------------
<S> <C> <C> <C>
12/31/85 10000 10000 10000
12/31/89 12837 14779 11535
12/31/94 18117 20613 13693
8/31/99 24508 29008 15294
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 5/31/94 to
8/31/99
<TABLE>
<CAPTION>
KEMPER NEW YORK TAX- LEHMAN BROTHERS
FREE INCOME FUND CLASS B(1) MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
------------------------- --------------------- ---------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
12/31/96 11626 12099 10753
8/31/99 12612 13886 11336
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 5/31/94 to
8/31/99
<TABLE>
<CAPTION>
KEMPER NEW YORK TAX- LEHMAN BROTHERS
FREE INCOME FUND CLASS C(1) MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
------------------------- --------------------- ---------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
12/31/96 11611 12099 10753
8/31/99 12701 13886 11336
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE 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 RETURN REFLECTS ANNUALIZED CHANGE WHILE TOTAL RETURN REFLECTS
AGGREGATE CHANGE. DURING THE PERIODS NOTED, SECURITIES PRICES FLUCTUATED.
FOR ADDITIONAL INFORMATION, SEE THE PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION AND THE FINANCIAL HIGHLIGHTS AT THE END OF THIS REPORT.
(1)PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A SHARES AND THE CONTINGENT DEFERRED SALES
CHARGE IN EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES. IN COMPARING
THE KEMPER STATE TAX-FREE INCOME FUNDS TO THE LEHMAN BROTHERS MUNICIPAL BOND
INDEX, YOU SHOULD NOTE THAT THE FUNDS' PERFORMANCE REFLECTS THE MAXIMUM
SALES CHARGES, WHILE NO SUCH CHARGES ARE REFLECTED IN THE PERFORMANCE OF THE
INDEX.
+THE LEHMAN BROTHERS MUNICIPAL BOND INDEX INCLUDES APPROXIMATELY 15,000
BONDS. TO BE INCLUDED IN THE INDEX A MUNICIPAL BOND MUST MEET THE FOLLOWING
CRITERIA: A MINIMUM CREDIT RATING OF BBB, HAVE BEEN ISSUED AS A PART OF AN
ISSUE OF AT LEAST $50 MILLION, HAVE BEEN ISSUED WITHIN THE LAST 5 YEARS, AND
HAVE A MATURITY OF AT LEAST 2 YEARS. BONDS SUBJECT TO ALTERNATIVE MINIMUM
TAX (AMT), VARIABLE RATE BONDS AND ZERO COUPON BONDS ARE EXCLUDED FROM THE
INDEX. SOURCE IS CDA WIESENBERGER.
++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 CDA WIESENBERGER.
27
<PAGE> 28
PORTFOLIO STATISTICS
KEMPER NEW YORK TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 80% 73%
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 18 14
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 2 11
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS -- 2
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 56% 42%
- --------------------------------------------------------------------------------
AA 11 12
- --------------------------------------------------------------------------------
A 17 23
- --------------------------------------------------------------------------------
BBB 10 16
- --------------------------------------------------------------------------------
BB 1 --
- --------------------------------------------------------------------------------
B -- 1
- --------------------------------------------------------------------------------
NOT RATED 5 6
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 42% 14%
- --------------------------------------------------------------------------------
11-20 YEARS 48 51
- --------------------------------------------------------------------------------
+21 YEARS 10 35
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE MATURITY ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
13.8 years 17.6 years
- --------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
28
<PAGE> 29
PORTFOLIO OF INVESTMENTS
NEW YORK TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MUNICIPAL INVESTMENTS
- --------------------------------------------------------------------------------------------------------
(a)Battery Park City Authority, Housing Revenue, Prerefunded
06/01/2005 @ 100, 8.625%, 06/01/2023 $ 10 $ 12
-----------------------------------------------------------------------------------
Long Island Power Authority, Electric System Revenue, Series
A:
5.500%, 12/01/2013 1,075 1,096
5.500%, 12/01/2023 3,500 3,357
5.500%, 12/01/2029 5,000 4,881
-----------------------------------------------------------------------------------
(b)Long Island, NY, Power Authority, Series 6, 3.100%,
05/01/2033 5,000 5,000
-----------------------------------------------------------------------------------
Monroe County, NY, General Obligation, 6.000%, 03/01/2018 1,130 1,203
-----------------------------------------------------------------------------------
Nassau County, NY, Sewer Districts, Series A:
6.000%, 07/01/2012 705 751
6.000%, 07/01/2013 710 755
-----------------------------------------------------------------------------------
New York City, NY, City Transportation Authority, Triborough
Bridge, Series A, 5.625%, 01/01/2010 1,000 1,041
-----------------------------------------------------------------------------------
New York City, NY, General Obligation:
7.750%, 03/15/2002 15 16
(a) Prerefunded 03/15/2000 @ 101.5, 7.750%, 03/15/2002 50 52
Series L, 5.625%, 08/01/2007 5,550 5,791
Series F, zero coupon, 08/01/2008 6,755 4,334
Series C, 5.500%, 11/15/2009 3,060 3,148
Series H, 6.000%, 08/01/2010 3,725 3,952
Series C, 5.250%, 08/15/2013 3,000 2,923
Series H, 6.000%, 08/01/2014 2,500 2,592
Series J, 5.000%, 05/15/2017 2,000 1,850
Series H, 6.125%, 08/01/2025 3,000 3,074
-----------------------------------------------------------------------------------
(b)New York City, NY, General Obligation Unlimited, 2.700%,
08/15/2005 1,100 1,100
-----------------------------------------------------------------------------------
New York City, NY, Housing Development Corporation, Series
A, 7.300%, 06/01/2010 8,800 9,341
-----------------------------------------------------------------------------------
New York City, NY, Municipal Water Finance Authority, Water
and Sewer System Revenue, Series B:
5.250%, 06/15/2010 7,000 7,077
5.875%, 06/15/2026 3,000 3,016
-----------------------------------------------------------------------------------
New York City, NY, Transitional Finance Authority, Revenue:
Series A, 5.250%, 11/15/2013 500 496
Series C, 5.000%, 05/01/2016 2,125 2,007
-----------------------------------------------------------------------------------
New York State Dormitory Authority, City University System,
Revenue:
Series D, 7.000%, 07/01/2009 2,200 2,441
Series A, 5.750%, 07/01/2013 1,000 1,046
5.750%, 07/01/2013 4,100 4,289
5.000%, 07/01/2016 2,000 1,865
Series A, 5.750%, 07/01/2018 2,000 2,066
5.750%, 07/01/2018 2,250 2,325
-----------------------------------------------------------------------------------
New York State Dormitory Authority, Colgate University,
Revenue:
6.000%, 07/01/2016 900 960
6.000%, 07/01/2021 850 901
-----------------------------------------------------------------------------------
New York State Dormitory Authority, Cornell University,
Revenue, Series A, 7.375%, 07/01/2020 2,000 2,092
-----------------------------------------------------------------------------------
New York State Dormitory Authority, Department of Health,
Revenue, 5.750%, 07/01/2007 1,500 1,569
-----------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York State Dormitory Authority, Fordham University,
Revenue, 7.200%, 07/01/2015 $ 790 $ 825
-----------------------------------------------------------------------------------
New York State Dormitory Authority, Judicial Facilities,
Revenue, 7.375%, 07/01/2016 120 143
-----------------------------------------------------------------------------------
New York State Dormitory Authority, Mental Health Services
Facilities Improvements, Revenue, Series D:
5.000%, 02/15/2012 1,160 1,175
5.000%, 08/15/2012 1,160 1,175
-----------------------------------------------------------------------------------
New York State Dormitory Authority, New York University,
Revenue, Series A, 5.750%, 07/01/2014 1,000 1,044
-----------------------------------------------------------------------------------
New York State Dormitory Authority, Office Facilities, Lease
Revenue, 5.250%, 04/01/2014 745 727
-----------------------------------------------------------------------------------
New York State Dormitory Authority, Pace University,
Revenue:
6.500%, 07/01/2011 760 850
6.500%, 07/01/2012 500 561
-----------------------------------------------------------------------------------
New York State Dormitory Authority, Special Activity School
Districts, Revenue:
5.250%, 07/01/2011 2,545 2,550
5.250%, 07/01/2012 1,350 1,339
5.250%, 07/01/2013 370 363
5.250%, 07/01/2015 1,000 969
-----------------------------------------------------------------------------------
New York State Dormitory Authority, State University
Dormitory Facilities, Lease Revenue, Series A, 5.250%,
07/01/2012 1,000 999
-----------------------------------------------------------------------------------
New York State Dormitory Authority, State University
Educational Facilities, Revenue:
Series C, 7.375%, 05/15/2010 1,000 1,147
Series B, 7.500%, 05/15/2011 1,000 1,159
5.000%, 05/15/2013 1,845 1,754
5.875%, 05/15/2017 2,325 2,437
(a)Prerefunded 5/15/2002 @ 102, 7.25%, 05/15/2018 155 170
-----------------------------------------------------------------------------------
New York State Dormitory Authority, St. Joseph's Hospital
Health Center, Revenue, 6.000%, 07/01/2009 1,000 1,067
-----------------------------------------------------------------------------------
New York State Dormitory Authority, St. Vincents's Hospital
and Medical Center, 7.375%, 08/01/2011 2,320 2,479
-----------------------------------------------------------------------------------
New York State Dormitory Authority, Upstate Community
Colleges, Revenue, Series A:
5.000%, 07/01/2014 1,500 1,434
5.875%, 07/01/2016 3,555 3,602
-----------------------------------------------------------------------------------
New York State Dormitory Authority, Westchester County Court
Facilities, Lease Revenue:
5.250%, 08/01/2013 2,685 2,668
5.250%, 08/01/2014 2,555 2,525
-----------------------------------------------------------------------------------
New York State Dormitory Authority, Wyndham Schools,
Revenue, Series C, 5.000%, 07/01/2018 1,500 1,380
-----------------------------------------------------------------------------------
(b)New York State Energy Research and Development Authority,
2.950%, 12/01/2025 2,500 2,500
-----------------------------------------------------------------------------------
New York State Energy Research and Development Authority,
Lilco Project, Revenue, Series A, 5.150%, 03/01/2016 2,500 2,335
-----------------------------------------------------------------------------------
(b)New York State Energy Research and Development Authority,
PCR, Niagara Mohawk Power Co., Daily Demand Note:
3.100%, 12/01/2023 800 800
3.100%, 07/01/2027 4,800 4,800
-----------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 31
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York State Environmental Facilities Corporation,
RiverBank State Park, Special Obligation Revenue, 6.250%,
04/01/2012 $3,695 $ 4,041
-----------------------------------------------------------------------------------
New York State Environmental Facilities Corporation, State
Water Pollution Control, Revolving Fund Revenue:
Series A, 7.250%, 06/15/2010 100 107
(a) Series A, Prerefunded 06/15/2001 @ 102, 7.250%, 06/15/2010 900 966
Series E, 6.500%, 06/15/2014 90 95
-----------------------------------------------------------------------------------
New York State, General Obligation:
Series F, 5.500%, 09/15/2008 2,000 2,093
Series 1998 F, 5.250%, 09/15/2013 1,275 1,261
5.000%, 09/15/2014 2,480 2,370
-----------------------------------------------------------------------------------
New York State Housing Finance Agency, Multi-Family Mortgage
Housing, Revenue, Series A:
6.950%, 08/15/2012 1,500 1,597
6.000%, 08/15/2027 1,195 1,227
-----------------------------------------------------------------------------------
New York State Housing Finance Agency, Service Contract
Obligation, Revenue:
Series A, 7.250%, 09/15/2012 185 199
Series C, 7.300%, 09/15/2012 75 80
-----------------------------------------------------------------------------------
New York State Housing Finance Agency, State University
Construction, Revenue, Series A, 8.000%, 05/01/2011 200 247
-----------------------------------------------------------------------------------
New York State Housing Finance Agency, West-H.E.L.P.
Housing, Revenue, Series A, 7.550%, 11/01/2002 1,815 1,836
-----------------------------------------------------------------------------------
New York State Local Assistance Corporation, Capital
Appreciation, Series B, zero coupon, 04/01/2009 5,980 3,687
-----------------------------------------------------------------------------------
New York State Medical Care Facilities Finance Agency,
Revenue, 7.875%, 08/15/2015 380 385
-----------------------------------------------------------------------------------
New York State Medical Care Facilities Finance Agency,
Mental Health Service Facilities Improvement, Revenue,
Series D:
7.400%, 02/15/2018 755 823
7.400%, 02/15/2018 300 322
7.700%, 02/15/2018 55 56
(a) Prerefunded 02/15/2000 @ 102, 7.750%, 02/15/2020 365 379
(a) Prerefunded 02/15/2000 @ 102, 7.750%, 02/15/2020 140 145
-----------------------------------------------------------------------------------
New York State Metropolitan Transportation Authority,
Commuter Facilities Revenue, Series E, 5.000%, 07/01/2015 3,000 2,844
-----------------------------------------------------------------------------------
New York State Metropolitan Transportation Authority,
Transportation Facilities Revenue:
Series Q, 5.125%, 07/01/2012 7,000 6,890
6.000%, 07/01/2016 7,750 7,998
-----------------------------------------------------------------------------------
(b) New York State Metropolitan Transportation Authority,
Transportation Facilities, Revenue, 5.304%, 07/01/2011 2,000 1,906
-----------------------------------------------------------------------------------
New York State Mortgage Agency, Homeownership Mortgage
Revenue:
Series KK, 7.800%, 10/01/2020 1,000 1,021
Series 56, 6.450%, 10/01/2021 4,000 4,161
Series HH, 7.850%, 04/01/2022 700 715
-----------------------------------------------------------------------------------
New York State Thruway Authority, Highway and Bridges Trust
Fund, Revenue, Series A, 5.125%, 04/01/2015 1,500 1,446
-----------------------------------------------------------------------------------
New York State Thruway Authority, Local Highway and Bridges,
Service Contract Revenue:
6.000%, 04/01/2011 5,000 5,243
5.250%, 04/01/2014 2,000 1,957
-----------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 32
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York State Urban Development Corporation, Community
Enhancement Facilities, Revenue, 5.125%, 04/01/2014 $1,000 $ 965
-----------------------------------------------------------------------------------
New York State Urban Development Corporation, Correctional
Facilities Service Contract Revenue, Series B:
5.250%, 01/01/2012 350 348
5.250%, 01/01/2013 1,700 1,675
-----------------------------------------------------------------------------------
New York State Urban Development Corporation, State
Facilities, Revenue, 5.600%, 04/01/2015 2,260 2,266
-----------------------------------------------------------------------------------
New York State Urban Development Corporation, Sub Lien
Corporation Purpose, 5.500%, 07/01/2022 5,000 4,820
-----------------------------------------------------------------------------------
New York State Urban Development Corp, Syracuse University
Center for Science and Technology, Revenue:
5.500%, 01/01/2015 4,500 4,465
5.500%, 01/01/2017 4,890 4,801
-----------------------------------------------------------------------------------
New York Triborough Bridge and Tunnel Authority, General
Purpose Revenue, Series Y, 6.125%, 01/01/2021 7,205 7,742
-----------------------------------------------------------------------------------
(b)Niagara Falls, NY, Toll Revenue, 5.518%, 10/01/2015 5,360 5,285
-----------------------------------------------------------------------------------
Niagara Falls, NY, Water Treatment Plant, General
Obligation:
7.250%, 11/01/2011 215 253
7.000%, 11/01/2012 1,000 1,100
-----------------------------------------------------------------------------------
Orange County, NY, Industrial Development Agency, The Glen
Arden Project:
5.625%, 01/01/2018 1,000 944
5.700%, 01/01/2028 2,500 2,321
-----------------------------------------------------------------------------------
Port Authority of New York and New Jersey, JFK International
Airport Terminal 6, Special Obligation Revenue, 6.250%,
12/01/2015 8,000 8,679
-----------------------------------------------------------------------------------
Port Authority of New York and New Jersey, La Guardia
Airport Passenger Terminal, Revenue, 9.125%, 12/01/2015 2,550 2,717
-----------------------------------------------------------------------------------
Suffolk County, NY, Water Authority, Waterworks Revenue,
6.000%, 06/01/2014 3,000 3,208
-----------------------------------------------------------------------------------
Ulster County, NY, Resource Recovery Agency, Solid Waste
System Revenue, 6.000%, 03/01/2014 3,000 3,030
-----------------------------------------------------------------------------------
Yonkers, NY, General Obligation, Series A, 5.250%,
12/01/2012 1,250 1,240
-----------------------------------------------------------------------------------
(b)Puerto Rico Commonwealth, Highway and Transportation
Authority Revenue, 7.15%, 07/01/2018 1,375 1,560
-----------------------------------------------------------------------------------
Puerto Rico Commonwealth, Highway and Transportation
Authority, Highway Revenue, Series Y, 5.500%, 07/01/2026 2,000 1,936
-----------------------------------------------------------------------------------
Puerto Rico Commonwealth, Public Improvements, General
Obligation, zero coupon, 07/01/2008 1,000 642
-----------------------------------------------------------------------------------
TOTAL MUNICIPAL INVESTMENTS--100%
(Cost: $250,018) $249,490
-----------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
PORTFOLIO OF INVESTMENTS
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Prerefunded: Bonds which are prerefunded are collateralized by U.S. Treasury
securities which are held in escrow and are used to pay principal and
interest on tax-exempt issues and to retire the bonds in full at the
earliest refunding date.
(b) Variable rate demand notes are securities whose yields are periodically
reset at levels that are generally comparable to exempt commercial paper.
These securities are payable on demand within seven calendar days and
normally incorporate an irrevocable letter of credit from a major bank.
These notes are carried, for purposes of calculating average weighted
maturity, at the longer of the period remaining until the next rate change
or to the extent of the demand period.
Based on the cost of investments of $250,018,000 for federal income tax purposes
at August 31, 1999, the gross unrealized appreciation was $5,007,000, the gross
unrealized depreciation was $5,535,000 and the net unrealized depreciation on
investments was $528,000.
At August 31, 1999, open futures contracts purchased are as follows (in
thousands):
<TABLE>
<CAPTION>
EXPIRATION AGGREGATE MARKET
FUTURES MONTH CONTRACTS FACE VALUE ($) VALUE ($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bond Index September '99 42 4,829 5,040
- -----------------------------------------------------------------------------------------------------------------
Municipal Bond Index December '99 58 6,612 6,574
- -----------------------------------------------------------------------------------------------------------------
Total unrealized appreciation on open future contracts purchased 173
=====
</TABLE>
See accompanying Notes to Financial Statements.
33
<PAGE> 34
PERFORMANCE UPDATE
KEMPER OHIO TAX-FREE INCOME FUND AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED AUGUST 31, 1999 (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 -5.16% 5.06% 5.28% (since 3/22/93)
- -----------------------------------------------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS B -4.39 5.04 5.10 (since 5/31/94)
- -----------------------------------------------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS C -1.48 5.22 5.27 (since 5/31/94)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from
3/31/93 to 8/31/99
<TABLE>
<CAPTION>
KEMPER OHIO TAX-FREE LEHMAN BROTHERS
INCOME FUND CLASS A(1) MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
-------------------- --------------------- ----------------------
<S> <C> <C> <C>
3/31/93 10000 10000 10000
12/31/96 12447 12593 11045
8/31/99 14018 14453 11643
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from
5/31/94 to 8/31/99
<TABLE>
<CAPTION>
KEMPER OHIO TAX-FREE LEHMAN BROTHERS
INCOME FUND CLASS B(1) MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
-------------------- --------------------- ----------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
12/31/96 11873 12099 10753
8/31/99 12983 13886 11336
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER OHIO TAX-FREE INCOME FUND CLASS C
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER OHIO TAX-FREE LEHMAN BROTHERS
INCOME FUND CLASS C(1) MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
-------------------- --------------------- ----------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
12/31/96 11874 12099 10753
8/31/99 13086 13886 11336
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAYE 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 RETURN REFLECTS ANNUALIZED CHANGE WHILE TOTAL RETURN REFLECTS
AGGREGATE CHANGE. DURING THE PERIODS NOTED, SECURITIES PRICES FLUCTUATED.
FOR ADDITIONAL INFORMATION, SEE THE PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION AND THE FINANCIAL HIGHLIGHTS AT THE END OF THIS REPORT.
(1)PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A SHARES AND THE CONTINGENT DEFERRED
SALES CHARGE IN EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES. IN
COMPARING THE KEMPER STATE TAX-FREE INCOME FUNDS TO THE LEHMAN BROTHERS
MUNICIPAL BOND INDEX, YOU SHOULD NOTE THAT THE FUNDS' PERFORMANCE
REFLECTS THE MAXIMUM SALES CHARGES, WHILE NO SUCH CHARGES ARE REFLECTED IN
THE PERFORMANCE OF THE INDEX.
+ THE LEHMAN BROTHERS MUNICIPAL BOND INDEX INCLUDES APPROXIMATELY 15,000
BONDS. TO BE INCLUDED IN THE INDEX A MUNICIPAL BOND MUST MEET THE FOLLOWING
CRITERIA: A MINIMUM CREDIT RATING OF BBB, HAVE BEEN ISSUED AS A PART OF AN
ISSUE OF AT LEAST $50 MILLION, HAVE BEEN ISSUED WITHIN THE LAST 5 YEARS, AND
HAVE A MATURITY OF AT LEAST 2 YEARS. BONDS SUBJECT TO ALTERNATIVE MINIMUM
TAX (AMT), VARIABLE RATE BONDS AND ZERO COUPON BONDS ARE EXCLUDED FROM THE
INDEX. SOURCE IS CDA WIESENBERGER.
++ 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 CDA WIESENBERGER.
34
<PAGE> 35
PORTFOLIO STATISTICS
KEMPER OHIO TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 49% 48%
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 34 35
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 17 15
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS -- 2
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
QUALITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 67% 64%
- --------------------------------------------------------------------------------
AA 13 11
- --------------------------------------------------------------------------------
A 3 3
- --------------------------------------------------------------------------------
BBB 6 8
- --------------------------------------------------------------------------------
BB 3 3
- --------------------------------------------------------------------------------
NOT RATED 8 11
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 64% 26%
- --------------------------------------------------------------------------------
11-20 YEARS 32 52
- --------------------------------------------------------------------------------
+21 YEARS 4 22
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
12.2 years 13.9 years
- -------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
35
<PAGE> 36
PORTFOLIO OF INVESTMENTS
OHIO TAX-FREE INCOME FUND
Portfolio of Investments at August 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Akron, OH, Sewer System, Revenue, 5.900%, 12/01/2011 $ 385 $ 405
----------------------------------------------------------------------------------
Athens, OH, General Obligation, 6.250%, 11/01/2011 500 511
----------------------------------------------------------------------------------
Avon, OH, Local School District, General Obligation, 6.500%,
12/01/2015 940 1,059
----------------------------------------------------------------------------------
Batavia, OH, Local School District, General Obligation,
7.000%, 12/01/2014 500 574
----------------------------------------------------------------------------------
Beavercreek, OH, Local School District, General Obligation,
Series 1996, 6.600%, 12/01/2015 500 568
----------------------------------------------------------------------------------
Big Walnut, OH, Local School District, General Obligation,
zero coupon, 12/01/2012 420 210
----------------------------------------------------------------------------------
Clermont County, OH, Sewer System Revenue, 7.200%,
12/01/2005 500 530
----------------------------------------------------------------------------------
Cleveland, OH, Public Power System Revenue, 1st Mortgage:
7.000%, 11/15/2017 750 803
7.000%, 11/15/2024 600 680
----------------------------------------------------------------------------------
Cleveland, OH, Revenue Bond, Cleveland Stadium:
zero coupon, 12/01/2008 825 483
zero coupon, 12/01/2012 815 364
zero coupon, 12/01/2020 820 237
----------------------------------------------------------------------------------
Cleveland, OH, Waterworks Revenue:
6.250%, 01/01/2015 615 654
6.250%, 01/01/2015 25 26
----------------------------------------------------------------------------------
Columbus, OH, Municipal Airport Authority, Revenue, 6.000%,
01/01/2014 250 255
----------------------------------------------------------------------------------
Crawford County, OH, General Obligation, 6.750%, 12/01/2019 700 787
----------------------------------------------------------------------------------
Cuyahoga County, OH, General Obligation, 5.650%, 05/15/2018 500 512
----------------------------------------------------------------------------------
Cuyahoga County, OH, Hospital Revenue, 6.250%, 08/15/2014 950 1,047
----------------------------------------------------------------------------------
Cuyahoga County, OH, Multifamily Housing Revenue, 6.500%,
10/20/2020 1,000 1,055
----------------------------------------------------------------------------------
Cuyahoga County, Port Authority Revenue, Port Revenue Docks
PS-1, Series 1997, 6.000%, 03/01/2007 500 497
----------------------------------------------------------------------------------
Dublin, OH, City School District, General Obligation,
zero coupon, 12/01/2010 500 279
zero coupon, 12/01/2011 1,095 575
----------------------------------------------------------------------------------
Edon Township, OH, Local School District, General
Obligation, 6.000%, 12/01/2019 475 506
----------------------------------------------------------------------------------
Fayette County, OH, Rattlesnake Improvement Area, General
Obligation, 5.900%, 12/01/2013 155 162
----------------------------------------------------------------------------------
Finneytown, OH, Local School District, General Obligation,
6.200%, 12/01/2017 320 348
----------------------------------------------------------------------------------
Franklin, OH, Muskingum County Local School District,
General Obligation, 6.500%, 12/01/2013 500 564
----------------------------------------------------------------------------------
Gateway Economic Development Corporation of Cuyahoga County,
OH, Excise Tax, Series 1990, 7.500%, 09/01/2005 1,000 1,064
----------------------------------------------------------------------------------
Green Springs, OH, Health Care Facilities Revenue, 7.000%,
05/15/2014 400 375
----------------------------------------------------------------------------------
Highland Heights, OH, General Obligation, 6.150%, 12/01/2012 145 154
----------------------------------------------------------------------------------
Lakeview, OH, Local School District, General Obligation,
6.900%, 12/01/2014 700 792
----------------------------------------------------------------------------------
Lakota, OH, Local School District, General Obligation,
7.000%, 12/01/2008 500 577
----------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 37
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liberty, OH, Local School District, General Obligation:
zero coupon, 12/01/2011 $ 250 $ 131
zero coupon, 12/01/2012 255 125
zero coupon, 12/01/2014 570 252
----------------------------------------------------------------------------------
Lucas County, OH, General Obligation:
6.050%, 12/01/2013 130 137
6.500%, 12/01/2016 250 270
----------------------------------------------------------------------------------
Lucas County, OH, Toledo Port Authority Development, Revenue
Bond, Northwest Ohio Bond Fund, Series A, 5.400%,
05/15/2019 500 458
----------------------------------------------------------------------------------
Marion County, OH, Health Care Facilities, United Church
Homes, Revenue:
6.375%, 11/15/2010 300 303
6.300%, 11/15/2015 400 402
----------------------------------------------------------------------------------
Medina, OH, City School District, General Obligation:
zero coupon, 12/01/2006 840 590
zero coupon, 12/01/2010 1,045 583
----------------------------------------------------------------------------------
Napoleon, OH, Health Care Facility, Lutheran Orphans' and
Old Folks' Home Society, Revenue, 6.875%, 08/01/2023 455 486
----------------------------------------------------------------------------------
Northeast Ohio Regional Sewer District, Wastewater Revenue,
AMBAC, 6.500%, 11/15/2016 300 318
----------------------------------------------------------------------------------
(b)Ohio Air Quality Development Authority, Cincinnati Gas
and Electric, Daily Demand Note:
3.000%, 12/01/2015 200 200
2.700%, 09/01/2030 1,800 1,800
----------------------------------------------------------------------------------
Ohio Higher Education Facility Commission, University of
Findlay Project, Revenue, 6.125%, 09/01/2016 400 401
----------------------------------------------------------------------------------
Ohio Housing Finance Agency, GNMA Single Family Mortgage
Revenue, zero coupon, 01/15/2015 1,000 394
----------------------------------------------------------------------------------
Ohio Housing Finance Agency, Multifamily Housing, Westlake
Apartments Project, Revenue, 5.850%, 12/01/2016 500 508
----------------------------------------------------------------------------------
Ohio Housing Finance Agency, GNMA Single Family Mortgage
Revenue, 7.850%, 09/01/2021 165 171
----------------------------------------------------------------------------------
Ohio Housing Finance Agency Mortgage, Residential B-2,
Revenue, 6.100%, 09/01/2028 250 252
----------------------------------------------------------------------------------
Ohio State Building Authority, Administration Building,
Series A, 5.375%, 10/01/2012 500 503
----------------------------------------------------------------------------------
Ohio State Building Authority, Administrative Building Funds
Project Revenue, 6.300%, 10/01/2011 140 151
----------------------------------------------------------------------------------
Ohio State Building Authority, Adult Correctional Building
Fund, Revenue, 6.125%, 10/01/2012 310 326
----------------------------------------------------------------------------------
Ohio State Building Authority, Juvenile Correctional
Building Authority, 6.600%, 10/01/2014 200 223
----------------------------------------------------------------------------------
Ohio State Building Authority, Revenue Bond, Adult
Correctional Facilities, Series A, 5.500%, 10/01/2010 250 259
----------------------------------------------------------------------------------
Ohio State Building Authority, Revenue, 6.250%, 06/01/2011 215 227
----------------------------------------------------------------------------------
Ohio State Higher Education Facility, Xavier University,
Revenue, 6.000%, 05/15/2011 240 254
----------------------------------------------------------------------------------
Ohio State Higher Education Facility, Dominican College,
Revenue, 6.625%, 12/01/2014 600 633
----------------------------------------------------------------------------------
Ohio State Higher Education Facility, University of Dayton,
Revenue, 6.600%, 12/01/2017 430 465
----------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ohio State Higher Educational Facilities Commission, Higher
Educational Facilities-Oberlin College, Revenue Bonds,
5.25%, 10/01/2014 $ 750 $ 746
----------------------------------------------------------------------------------
Ohio State Turnpike, Revenue, 6.000%, 02/15/2007 1,000 1,076
----------------------------------------------------------------------------------
Ohio State Water Development Authority, Pollution Control,
Revenue, 6.000%, 12/01/2006 550 594
----------------------------------------------------------------------------------
Ohio State Water Development Authority, Pollution Control,
Revenue, 6.100%, 08/01/2020 1,000 976
----------------------------------------------------------------------------------
Ohio State Water Development Authority, 5.875%, 09/01/2020 200 192
----------------------------------------------------------------------------------
Olentangy, OH, Local School District, General Obligation:
5.850%, 12/01/2007 400 430
(a)Prerefunded 12/01/2001, 6.350%, 12/01/2017 150 160
----------------------------------------------------------------------------------
(a)Olmstead Falls, OH, City School District, General
Obligation, Prerefunded 12/15/2004, 6.850%, 12/15/2011 250 282
----------------------------------------------------------------------------------
Sandusky County, OH, General Obligation, 6.200%, 12/01/2013 500 537
----------------------------------------------------------------------------------
South Euclid-Lyndhurst, OH, City School District, General
Obligation, 6.400%, 12/01/2018 535 571
----------------------------------------------------------------------------------
Springboro, OH, Community City School District, School
Improvement, General Obligation, 6.000%, 12/01/2011 500 540
----------------------------------------------------------------------------------
Springdale, OH, Hospital Facilities, 1st Mortgage, Revenue,
6.000%, 11/01/2018 750 747
----------------------------------------------------------------------------------
Strongsville, OH, General Obligation, 6.700%, 12/01/2011 500 559
----------------------------------------------------------------------------------
Toledo, OH, General Obligation:
6.100%, 12/01/2014 250 265
6.350%, 12/01/2025 1,000 1,046
----------------------------------------------------------------------------------
Trumbull County, OH, Sewer Improvement, General Obligation,
6.200%, 12/01/2014 500 536
----------------------------------------------------------------------------------
Tuscarawas Valley, OH, Local School District, General
Obligation, 6.600%, 12/01/2015 365 410
----------------------------------------------------------------------------------
University of Akron, General Receipts, Revenue, 5.750%,
01/01/2013 1,000 1,034
----------------------------------------------------------------------------------
University of Cincinnati, Revenue, 5.500%, 06/01/2013 620 627
----------------------------------------------------------------------------------
Wayne, OH, Local School District, General Obligation:
6.450%, 12/01/2011 155 175
6.600%, 12/01/2016 200 228
----------------------------------------------------------------------------------
Westlake, OH, City School District, General Obligation,
6.150%, 12/01/2005 500 542
----------------------------------------------------------------------------------
Willoughby, OH, Industrial Development, Revenue, 6.875%,
07/01/2016 575 613
----------------------------------------------------------------------------------
Wooster, OH, City School District, General Obligation, zero
coupon, 12/01/2013 930 429
----------------------------------------------------------------------------------
Wyoming, OH, City School District, General Obligation,
Series 1998 B, 5.750%, 12/01/2013 500 524
----------------------------------------------------------------------------------
Youngstown, OH, General Obligation, 6.125%, 12/01/2014 110 117
----------------------------------------------------------------------------------
Puerto Rico, Municipal Finance Agency, Revenue, 6.000%,
07/01/2014 250 263
----------------------------------------------------------------------------------
Puerto Rico, Ports Authority, American Airlines, Inc.,
Project, Revenue, 7.149%, 06/01/2026 360 369
----------------------------------------------------------------------------------
(c)Puerto Rico, Highway and Transportation Authority, Inverse
Floater, 7.149%, 07/01/2016 375 449
----------------------------------------------------------------------------------
Virgin Islands, Public Finance Authority, Matching Fund Loan
Notes, Series A, 7.250%, 10/01/2018 225 249
----------------------------------------------------------------------------------
TOTAL MUNICIPAL INVESTMENTS
(Cost: $41,678) $42,761
----------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Prerefunded: Bonds which are prerefunded are collateralized by U.S. Treasury
securities which are held in escrow and are used to pay principal and
interest on tax-exempt issues and to retire the bonds in full at the
earliest refunding date.
(b) Variable rate demand notes are securities whose yields are periodically
reset at levels that are generally comparable to exempt commercial paper.
These securities are payable on demand within seven calendar days and
normally incorporate an irrevocable letter of credit from a major bank.
These notes are carried, for purposes of calculating average weighted
maturity, at the longer of the period remaining until the next rate change
or to the extent of the demand period.
(c) Inverse floating rate notes are instruments whose yields may change based on
the change in the relationship between long-term and short-term interest
rates and which may exhibit added interest rate sensitivity compared to
other bonds with a similar maturity. These securities are shown at their
rates as of August 31, 1999.
Based on the cost of investments of $41,678,000 for federal income tax purposes
at August 31, 1999, the gross unrealized appreciation was $1,539,000, the gross
unrealized depreciation was $456,000 and the net unrealized appreciation on
investments was $1,083,000.
See accompanying Notes to Financial Statements.
39
<PAGE> 40
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 Florida Tax-Free Income Fund, Kemper New York Tax-Free Income Fund
and Kemper Ohio Tax-Free Income Fund comprising Kemper State Tax-Free Income
Series (the Trust), as of August 31, 1999, 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 1995. 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, 1999, by correspondence with the custodian and broker. 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, 1999, 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 1995, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 19, 1999
40
<PAGE> 41
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA NEW YORK OHIO
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------------
Investments at value (Cost: $854,971, $92,785,
$250,018 and $41,678, respectively) $869,942 92,665 249,490 42,761
- -------------------------------------------------------------------------------------------------------------
Cash 355 21 28 146
- -------------------------------------------------------------------------------------------------------------
Receivable for:
Investments sold 19,618 1,137 1,166 1,434
- -------------------------------------------------------------------------------------------------------------
Fund shares sold 154 13 151 50
- -------------------------------------------------------------------------------------------------------------
Interest 12,161 1,477 3,129 574
- -------------------------------------------------------------------------------------------------------------
Daily variation margin on open futures contracts -- -- 31 --
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 902,230 95,313 253,995 44,965
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
LIABILITIES
- -------------------------------------------------------------------------------------------------------------
Payable for:
Dividends 667 51 166 64
- -------------------------------------------------------------------------------------------------------------
Investments purchased 4,170 2,571 -- --
- -------------------------------------------------------------------------------------------------------------
Fund shares redeemed 744 145 179 --
- -------------------------------------------------------------------------------------------------------------
Management fee 342 35 104 17
- -------------------------------------------------------------------------------------------------------------
Distribution services fee 24 4 10 8
- -------------------------------------------------------------------------------------------------------------
Administrative services fee 146 17 32 9
- -------------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 22 6 6 --
- -------------------------------------------------------------------------------------------------------------
Trustees' fees and other 177 4 56 3
- -------------------------------------------------------------------------------------------------------------
Total liabilities 6,292 2,833 553 101
- -------------------------------------------------------------------------------------------------------------
NET ASSETS $895,938 92,480 253,442 44,864
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------------------
Net assets consist of:
- -------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investments 14,971 (120) (528) 1,083
- -------------------------------------------------------------------------------------------------------------
Futures -- -- 173 --
- -------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (10,509) (660) (1,529) (391)
- -------------------------------------------------------------------------------------------------------------
Paid-in-capital 891,476 93,260 255,326 44,172
- -------------------------------------------------------------------------------------------------------------
NET ASSETS, AT MARKET VALUE $895,938 92,480 253,442 44,864
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $854,921 84,757 235,800 30,324
- -------------------------------------------------------------------------------------------------------------
Shares outstanding 120,475 8,720 23,080 3,041
- -------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $ 7.10 9.72 10.22 9.97
- -------------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or 4.50% of
offering price) $ 7.43 10.18 10.70 10.44
- -------------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $ 37,070 6,474 13,674 12,658
- -------------------------------------------------------------------------------------------------------------
Shares outstanding 5,216 667 1,337 1,270
- -------------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $ 7.11 9.71 10.23 9.97
- -------------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net shares applicable to shares outstanding $ 3,947 1,249 3,968 1,882
- -------------------------------------------------------------------------------------------------------------
Shares outstanding 560 129 389 189
- -------------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $ 7.05 9.71 10.21 9.97
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
41
<PAGE> 42
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended August 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA NEW YORK OHIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------------------------------------
Interest income $ 53,221 5,619 14,807 2,463
- ------------------------------------------------------------------------------------------------------
Expenses:
Management fee 5,147 563 1,505 252
- ------------------------------------------------------------------------------------------------------
Distribution services fee 319 57 130 102
- ------------------------------------------------------------------------------------------------------
Administrative services fee 1,874 204 530 102
- ------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 555 66 211 38
- ------------------------------------------------------------------------------------------------------
Trustees' fees 27 5 9 6
- ------------------------------------------------------------------------------------------------------
Reports to shareholders 275 37 136 10
- ------------------------------------------------------------------------------------------------------
Auditing 116 15 32 14
- ------------------------------------------------------------------------------------------------------
Legal 22 5 10 3
- ------------------------------------------------------------------------------------------------------
Other 51 18 10 12
- ------------------------------------------------------------------------------------------------------
Total expenses 8,386 970 2,573 533
- ------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 44,835 4,649 12,234 1,924
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
- ------------------------------------------------------------------------------------------------------
Investments 2,883 547 2,451 (62)
- ------------------------------------------------------------------------------------------------------
Futures (411) (39) 295 1
- ------------------------------------------------------------------------------------------------------
Options 774 42 216 (9)
- ------------------------------------------------------------------------------------------------------
3,246 550 2,962 (70)
- ------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) on:
- ------------------------------------------------------------------------------------------------------
Investments (56,400) (7,290) (19,464) (2,331)
- ------------------------------------------------------------------------------------------------------
Futures -- -- 173 --
- ------------------------------------------------------------------------------------------------------
(56,400) (7,290) (19,291) (2,331)
- ------------------------------------------------------------------------------------------------------
Net gain (loss) on investments (53,154) (6,740) (16,329) (2,401)
- ------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ (8,319) (2,091) (4,095) (477)
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
42
<PAGE> 43
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended August 31, 1999 and 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA
------------------------- --------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------------------
Net investment income (loss) $ 44,835 48,730 4,649 4,838
- -----------------------------------------------------------------------------------------------------------
Net realized gain (loss) 3,246 16,460 550 1,887
- -----------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation
(depreciation) (56,400) 17,885 (7,290) 1,508
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (8,319) 83,075 (2,091) 8,233
- -----------------------------------------------------------------------------------------------------------
Distribution from net investment income (44,835) (48,730) (4,649) (4,838)
- -----------------------------------------------------------------------------------------------------------
Distribution from net realized gain (17,889) (16,813) (2,248) (1,420)
- -----------------------------------------------------------------------------------------------------------
Total dividends to shareholders (62,724) (65,543) (6,897) (6,258)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (57,291) (1,167) (6,063) 1,711
- -----------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (128,334) 16,365 (15,051) 3,686
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------------------
Beginning of year 1,024,272 1,007,907 107,531 103,845
- -----------------------------------------------------------------------------------------------------------
END OF YEAR $ 895,938 1,024,272 92,480 107,531
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NEW YORK OHIO
------------------------- --------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------------------
Net investment income (loss) $ 12,234 13,502 1,924 1,774
- -----------------------------------------------------------------------------------------------------------
Net realized gain (loss) 2,962 4,639 (70) 219
- -----------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation
(depreciation) (19,291) 4,612 (2,331) 1,308
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (4,095) 22,753 (477) 3,301
- -----------------------------------------------------------------------------------------------------------
Distribution from net investment income (12,234) (13,502) (1,924) (1,774)
- -----------------------------------------------------------------------------------------------------------
Distribution from net realized gain (6,490) (4,612) (183) (250)
- -----------------------------------------------------------------------------------------------------------
Total dividends to shareholders (18,724) (18,114) (2,107) (2,024)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (8,059) (6,253) 3,607 3,096
- -----------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (30,878) (1,614) 1,023 4,373
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------------------
Beginning of year 284,320 285,934 43,841 39,468
- -----------------------------------------------------------------------------------------------------------
END OF YEAR $ 253,442 284,320 44,864 43,841
- -----------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUNDS Kemper California Tax-Free Income Fund, Kemper
Florida Tax Free Income Fund, Kemper New York
Tax-Free Income Fund and Kemper Ohio Tax-Free
Income Fund (the "funds") are a non-diversified
series of Kemper State Tax-Free Income Series (the
"trust") which is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"),
as an open-end management investment company. The
Trust is organized as a Massachusetts business
trust.
Each fund offers multiple classes of shares. Class
A shares are offered to investors subject to an
initial sales charge. Class B shares are offered
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 offered 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.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. Each share of a fund has equal
rights with respect to voting subject to class
specific arrangements.
Each fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by each fund in the
preparation of its financial statements.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES SECURITY VALUATION. Investments are stated at
value. Portfolio debt securities purchased with an
original maturity greater than sixty days are
valued by pricing agents approved by the officers
of the trust, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the
calculated mean between the most recent bid and
asked quotation supplied by a bona fide market
maker shall be used. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
OPTIONS. An option contract is a contract in which
the writer of the option grants the buyer of the
option the right to purchase from (call option), or
sell to (put option), the writer a designated
instrument at a specified price within a specified
period of time. Certain options, including options
on indices, will require cash settlement by the
fund if the option is exercised. During the period,
the fund purchased put options other financial
instruments. In addition, during the period, the
fund purchased call options or other financial
instruments.
The liability representing the fund's obligation
under an exchange traded written option or
investment in a purchased option is valued at the
last sale price or,
44
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS
in the absence of a sale, the mean between the
closing bid and asked prices or at the most recent
asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter
written or purchased options are valued using
dealer supplied quotations. Gain or loss is
recognized when the option contract expires or is
closed.
If the fund writes a covered call option, the fund
foregoes, in exchange for the premium, the
opportunity to profit during the option period from
an increase in the market value of the underlying
security above the exercise price. If the fund
writes a put option it accepts the risk of a
decline in the market value of the underlying
security below the exercise price. Over-the-counter
options have the risk of the potential inability of
counterparties to meet the terms of their
contracts. The fund's maximum exposure to purchased
options is limited to the premium initially paid.
In addition, certain risks may arise upon entering
into option contracts including the risk that an
illiquid secondary market will limit the fund's
ability to close out an option contract prior to
the expiration date and that a change in the value
of the option contract may not correlate exactly
with changes in the value of the securities or
currencies hedged.
FUTURES CONTRACTS. A futures contract is an
agreement between a buyer or seller and an
established futures exchange or its clearinghouse
in which the buyer or seller agrees to take or make
a delivery of a specific amount of a financial
instrument at a specified price on a specific date
(settlement date). During the period, the fund
purchased interest rate futures to manage the
duration of the portfolio. In addition, the fund
also sold interest rate futures to hedge against
declines in the value of portfolio securities.
Upon entering into a futures contract, the fund is
required to deposit with a financial intermediary
an amount ("initial margin") equal to a certain
percentage of the face value indicated in the
futures contract. Subsequent payments ("variation
margin") are made or received by the fund dependent
upon the daily fluctuations in the value of the
underlying security and are recorded for financial
reporting purposes as unrealized gains or losses by
the fund. When entering into a closing transaction,
the fund will realize a gain or loss equal to the
difference between the value of the futures
contract to sell and the futures contract to buy.
Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures
contracts, including the risk that an illiquid
secondary market will limit the fund's ability to
close out a futures contract prior to the
settlement date and that a change in the value of a
futures contract may not correlate exactly with the
changes in the value of the securities or
currencies hedged. When utilizing futures contracts
to hedge, the fund gives up the opportunity to
profit from favorable price movements in the hedged
positions during the term of the contract.
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 and tax-exempt income to its
shareholders. Accordingly, each fund paid no
federal income taxes and no federal income tax
provision was required.
From November 1 through August 31, 1999, the
California, Florida, New York and Ohio fund's
incurred approximately $5,277,000, $145,000,
$913,000 and $182,000 of net realized capital
losses, respectively. As permitted by tax
45
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS
regulations, each fund intends to elect to defer
these losses and treat them as arising in the
fiscal year ended August 31, 2000.
DISTRIBUTION OF INCOME AND GAINS. All of the net
investment income of each fund is declared as a
daily dividend and is distributed to shareholders
monthly. Net realized gains from investment
transactions, in excess of available capital loss
carryforwards, would be taxable to each fund if not
distributed, and, therefore, will be distributed to
shareholders at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, each fund may periodically
make reclassifications among certain of its capital
accounts without impacting the net asset value of
each fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Realized gains and losses from
investment transactions are recorded on an
identified cost basis. All premiums and original
issue discounts are amortized/accreted for both tax
and financial reporting purposes.
EXPENSES. Expenses arising in connection with a
specific fund are allocated to that fund. Other
trust expenses are allocated between the funds in
proportion to their relative net assets.
- --------------------------------------------------------------------------------
3 TRANSACTIONS
WITH AFFILIATES MANAGEMENT AGREEMENT. The trust has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper). Under the trust's management
agreement each fund 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, 1999 are as
follows:
California $5,147,000
Florida 563,000
New York 1,505,000
Ohio 252,000
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,
1999 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY KDI BY KDI TO AFFILIATES
--------------- --------------------
<S> <C> <C>
California $92,000 --
Florida 26,000 --
New York 22,000 3,000
Ohio 5,000 --
</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 addition, KDI receives any contingent deferred
sales charges (CDSC) from redemptions of
46
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS
Class B and Class C shares. Distribution fees and
CDSC for the year ended August 31, 1999 are as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES AND
CDSC RECEIVED BY KDI
---------------------
<S> <C>
California $423,000
Florida 75,000
New York 152,000
Ohio 129,000
</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, 1999 are as follows:
<TABLE>
<CAPTION>
ASF PAID BY ASF PAID BY
THE FUND TO KDI KDI TO AFFILIATES
--------------- -----------------
<S> <C> <C>
California $1,874,000 --
Florida 204,000 1,000
New York 530,000 9,000
Ohio 102,000 --
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the trust. Under the agreement,
for the year ended August 31, 1999, KSvC received
transfer agency fees as follows:
California $402,000
Florida 46,000
New York 143,000
Ohio 27,000
OFFICERS AND TRUSTEES. Certain officers or trustees
of the trust are also officers or directors of
Scudder Kemper. For the year ended August 31, 1999,
the funds made no payments to their officers and
incurred trustees' fees aggregating $47,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended August 31, 1999, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA NEW YORK OHIO
---------- ------- -------- ------
<S> <C> <C> <C> <C>
Purchases $603,220 53,452 187,429 13,127
Proceeds from sales 713,298 63,627 215,278 12,952
</TABLE>
Options transactions are as follows (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA NEW YORK
-------------------- -------------------- --------------------
CONTRACTS PREMIUMS CONTRACTS PREMIUMS CONTRACTS PREMIUMS
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year -- -- -- -- -- --
Written 892 $ 259 92 27 248 72
Closed (892) (259) (92) (27) (248) (72)
---- ----- --- ---- ---- ----
End of year -- $ -- -- -- -- --
==== ===== === ==== ==== ====
<CAPTION>
OHIO
--------------------
CONTRACTS PREMIUMS
--------- --------
<S> <C> <C>
Beginning of year -- --
Written -- --
Closed -- --
-- --
End of year -- --
== ==
</TABLE>
47
<PAGE> 48
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,
1999 1998
----------------------- -----------------------
CALIFORNIA SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 45,978 $ 342,247 23,569 $ 178,026
--------------------------------------------------------------------------------
CLASS B 1,639 12,319 1,683 12,734
--------------------------------------------------------------------------------
Class C 17,067 127,179 11,621 87,312
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 4,854 36,260 5,163 38,989
--------------------------------------------------------------------------------
Class B 178 1,328 138 1,042
--------------------------------------------------------------------------------
Class C 22 160 19 142
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (58,929) (438,610) (30,796) (232,622)
--------------------------------------------------------------------------------
Class B (1,113) (8,321) (567) (4,288)
--------------------------------------------------------------------------------
Class C (17,410) (129,853) (10,960) (82,502)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 121 903 200 1,508
--------------------------------------------------------------------------------
Class B (121) (903) (200) (1,508)
--------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ (57,291) $ (1,167)
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1999 1998
----------------------- -----------------------
FLORIDA SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,524 $ 15,773 1,067 $ 11,250
--------------------------------------------------------------------------------
Class B 232 2,416 308 3,227
--------------------------------------------------------------------------------
Class C 70 718 13 142
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 331 3,413 290 3,052
--------------------------------------------------------------------------------
Class B 15 150 11 117
--------------------------------------------------------------------------------
Class C 1 12 1 10
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (2,625) (26,882) (1,419) (14,927)
--------------------------------------------------------------------------------
Class B (151) (1,553) (104) (1,149)
--------------------------------------------------------------------------------
Class C (10) (110) (1) (11)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 29 323 19 201
--------------------------------------------------------------------------------
Class B (31) (323) (19) (201)
--------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ (6,063) $ 1,711
--------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 49
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1999 1998
--------------------- ---------------------
NEW YORK SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 867 $ 9,422 1,255 $ 13,685
------------------------------------------------------------------------------
Class B 392 4,259 295 3,244
------------------------------------------------------------------------------
Class C 92 1,000 212 2,324
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 1,037 11,209 948 10,538
------------------------------------------------------------------------------
Class B 46 494 36 402
------------------------------------------------------------------------------
Class C 17 183 12 139
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES REDEEMED
Class A (3,003) (32,159) (3,067) (33,718)
------------------------------------------------------------------------------
Class B (169) (1,829) (105) (1,155)
------------------------------------------------------------------------------
Class C (60) (638) (156) (1,712)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 46 499 43 467
------------------------------------------------------------------------------
Class B (46) (499) (43) (467)
------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ (8,059) $ (6,253)
------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1999 1998
--------------------- ---------------------
OHIO SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 384 $ 4,034 319 $ 3,297
------------------------------------------------------------------------------
Class B 359 3,738 258 2,688
------------------------------------------------------------------------------
Class C 115 1,167 59 611
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 92 956 99 1,027
------------------------------------------------------------------------------
Class B 30 310 27 282
------------------------------------------------------------------------------
Class C 3 35 3 28
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES REDEEMED
Class A (449) (4,653) (337) (3,501)
------------------------------------------------------------------------------
Class B (168) (1,724) (127) (1,297)
------------------------------------------------------------------------------
Class C (25) (256) (4) (39)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 4 47 -- --
------------------------------------------------------------------------------
Class B (4) (47) -- --
------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ 3,607 $ 3,096
------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 50
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------
CLASS A
---------------------------------------
YEAR ENDED AUGUST 31,
---------------------------------------
CALIFORNIA 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------
Net asset value, beginning of year $ 7.65 7.52 7.31 7.35 7.22
- ------------------------------------------------------ -------------------------------
Income from investment operations:
Net investment income (loss) .34 .36 .38 .39 .39
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.41) .26 .25 .04 .17
- --------------------------------------------------------------------------------------
Total from investment operations (.07) .62 .63 .43 .56
- ------------------------------------------------------- ------------------------------
Less dividends:
Distribution from net investment income .34 .36 .38 .39 .39
- --------------------------------------------------------------------------------------
Distribution from net realized gain .14 .13 .04 .08 .04
- --------------------------------------------------------------------------------------
Total dividends .48 .49 .42 .47 .43
- --------------------------------------------------------------------------------------
Net asset value, end of year $ 7.10 7.65 7.52 7.31 7.35
- --------------------------------------------------------------------------------------
TOTAL RETURN (1.07)% 8.56 8.78 5.92 8.13
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------
Expenses .82% .78 .79 .78 .74
- --------------------------------------------------------------------------------------
Net investment income 4.60% 4.82 5.08 5.18 5.53
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------
CLASS B
---------------------------------------
YEAR ENDED AUGUST 31,
---------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------
Net asset value, beginning of year $ 7.66 7.52 7.32 7.35 7.22
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .28 .30 .32 .32 .33
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.41) .27 .24 .05 .17
- --------------------------------------------------------------------------------------
Total from investment operations (.13) .57 .56 .37 .50
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .28 .30 .32 .32 .33
- --------------------------------------------------------------------------------------
Distribution from net realized gain .14 .13 .04 .08 .04
- --------------------------------------------------------------------------------------
Total dividends .42 .43 .36 .40 .37
- --------------------------------------------------------------------------------------
Net asset value, end of year $ 7.11 7.66 7.52 7.32 7.35
- --------------------------------------------------------------------------------------
TOTAL RETURN (1.90)% 7.79 7.73 5.16 7.17
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------
Expenses 1.65% 1.63 1.62 1.63 1.60
- --------------------------------------------------------------------------------------
Net investment income 3.75% 3.97 4.25 4.33 4.67
- --------------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 51
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------
CLASS C
----------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of year $ 7.60 7.50 7.31 7.34 7.22
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .28 .30 .32 .32 .33
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.41) .23 .23 .05 .16
- ---------------------------------------------------------------------------------------
Total from investment operations (.13) .53 .55 .37 .49
- ---------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .28 .30 .32 .32 .33
- ---------------------------------------------------------------------------------------
Distribution from net realized gain .14 .13 .04 .08 .04
- ---------------------------------------------------------------------------------------
Total dividends .42 .43 .36 .40 .37
- ---------------------------------------------------------------------------------------
Net asset value, end of year $ 7.05 7.60 7.50 7.31 7.34
- ---------------------------------------------------------------------------------------
TOTAL RETURN (1.91)% 7.21 7.59 5.15 7.08
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------
Expenses 1.68% 1.62 1.60 1.64 1.56
- ---------------------------------------------------------------------------------------
Net investment income 3.71% 3.98 4.27 4.32 4.71
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $895,938 1,024,272 1,007,907 1,040,538 1,087,232
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 62% 61 79 100 69
- -----------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 52
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------
CLASS A
------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------
FLORIDA 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
Net asset value, beginning of year $10.62 10.42 10.21 10.27 10.11
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .47 .49 .51 .52 .53
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.68) .35 .33 .08 .30
- -----------------------------------------------------------------------------------------
Total from investment operations (.21) .84 .84 .60 .83
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .47 .49 .51 .52 .53
- -----------------------------------------------------------------------------------------
Distribution from net realized gain .22 .15 .12 .14 .14
- -----------------------------------------------------------------------------------------
Total dividends .69 .64 .63 .66 .67
- -----------------------------------------------------------------------------------------
Net asset value, end of year $ 9.72 10.62 10.42 10.21 10.27
- -----------------------------------------------------------------------------------------
TOTAL RETURN (2.13)% 8.27 8.37 5.83 8.62
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses .88% .85 .83 .84 .80
- -----------------------------------------------------------------------------------------
Net investment income 4.57% 4.65 4.92 5.00 5.30
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------
CLASS B
------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
Net asset value, beginning of year $10.60 10.40 10.19 10.26 10.10
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .39 .40 .42 .43 .44
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.67) .35 .33 .07 .30
- -----------------------------------------------------------------------------------------
Total from investment operations (.28) .75 .75 .50 .74
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .39 .40 .42 .43 .44
- -----------------------------------------------------------------------------------------
Distribution from net realized gain .22 .15 .12 .14 .14
- -----------------------------------------------------------------------------------------
Total dividends .61 .55 .54 .57 .58
- -----------------------------------------------------------------------------------------
Net asset value, end of year $ 9.71 10.60 10.40 10.19 10.26
- -----------------------------------------------------------------------------------------
TOTAL RETURN (2.85)% 7.38 7.48 4.84 7.67
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 1.69% 1.68 1.65 1.68 1.65
- -----------------------------------------------------------------------------------------
Net investment income 3.76% 3.82 4.10 4.16 4.45
- -----------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 53
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------
CLASS C
------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
Net asset value, beginning of year $10.60 10.41 10.20 10.26 10.10
- -----------------------------------------------------------------------------------------
Income from investment operations: Net
investment income (loss) .39 .40 .42 .43 .45
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.67) .34 .33 .08 .30
- -----------------------------------------------------------------------------------------
Total from investment operations (.28) .74 .75 .51 .75
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .39 .40 .42 .43 .45
- -----------------------------------------------------------------------------------------
Distribution from net realized gain .22 .15 .12 .14 .14
- -----------------------------------------------------------------------------------------
Total dividends .61 .55 .54 .57 .59
- -----------------------------------------------------------------------------------------
Net asset value, end of year $ 9.71 10.60 10.41 10.20 10.26
- -----------------------------------------------------------------------------------------
TOTAL RETURN (2.84)% 7.26 7.49 4.97 7.84
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 1.68% 1.69 1.64 1.64 1.52
- -----------------------------------------------------------------------------------------
Net investment income 3.76% 3.81 4.11 4.20 4.58
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
---------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $92,480 107,531 103,845 108,105 117,292
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate 56% 70 87 119 96
- --------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 54
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------
CLASS A
------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------
NEW YORK 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
Net asset value, beginning of year $11.11 10.93 10.66 10.80 10.73
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .49 .53 .56 .56 .58
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.63) .36 .36 -- .20
- -----------------------------------------------------------------------------------------
Total from investment operations (.14) .89 .92 .56 .78
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .49 .53 .56 .56 .58
- -----------------------------------------------------------------------------------------
Distribution from net realized gain .26 .18 .09 .14 .13
- -----------------------------------------------------------------------------------------
Total dividends .75 .71 .65 .70 .71
- -----------------------------------------------------------------------------------------
Net asset value, end of year $10.22 11.11 10.93 10.66 10.80
- -----------------------------------------------------------------------------------------
TOTAL RETURN (1.52)% 8.44 8.77 5.26 7.62
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses .88% .84 .83 .83 .81
- -----------------------------------------------------------------------------------------
Net investment income 4.49% 4.81 5.15 5.15 5.47
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------
CLASS B
------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
Net asset value, beginning of year $11.13 10.94 10.66 10.80 10.73
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .39 .44 .47 .47 .48
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.64) .37 .37 -- .20
- -----------------------------------------------------------------------------------------
Total from investment operations (.25) .81 .84 .47 .68
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .39 .44 .47 .47 .48
- -----------------------------------------------------------------------------------------
Distribution from net realized gain .26 .18 .09 .14 .13
- -----------------------------------------------------------------------------------------
Total dividends .65 .62 .56 .61 .61
- -----------------------------------------------------------------------------------------
Net asset value, end of year $10.23 11.13 10.94 10.66 10.80
- -----------------------------------------------------------------------------------------
TOTAL RETURN (2.44)% 7.65 7.96 4.36 6.69
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 1.73% 1.67 1.67 1.69 1.67
- -----------------------------------------------------------------------------------------
Net investment income 3.64% 3.98 4.31 4.29 4.61
- -----------------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 55
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------
CLASS C
------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
Net asset value, beginning of year $11.10 10.92 10.65 10.79 10.73
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .40 .44 .47 .47 .48
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.63) .36 .36 -- .19
- -----------------------------------------------------------------------------------------
Total from investment operations (.23) .80 .83 .47 .67
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .40 .44 .47 .47 .48
- -----------------------------------------------------------------------------------------
Distribution from net realized gain .26 .18 .09 .14 .13
- -----------------------------------------------------------------------------------------
Total dividends .66 .62 .56 .61 .61
- -----------------------------------------------------------------------------------------
Net asset value, end of year $10.21 11.10 10.92 10.65 10.79
- -----------------------------------------------------------------------------------------
TOTAL RETURN (2.33)% 7.56 7.87 4.38 6.64
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 1.71% 1.67 1.65 1.67 1.62
- -----------------------------------------------------------------------------------------
Net investment income 3.65% 3.98 4.33 4.31 4.66
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $253,442 284,320 285,934 302,346 319,477
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate 69% 77 92 104 112
- ---------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE> 56
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------
CLASS A
-----------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------
OHIO 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------
Net asset value, beginning of year $10.54 10.22 9.93 9.81 9.56
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .46 .47 .47 .48 .50
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.53) .39 .32 .12 .25
- ----------------------------------------------------------------------------------------
Total from investment operations (.07) .86 .79 .60 .75
- ----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .46 .47 .47 .48 .50
- ----------------------------------------------------------------------------------------
Distribution from net realized gain .04 .07 .03 -- --
- ----------------------------------------------------------------------------------------
Total dividends .50 .54 .50 .48 .50
- ----------------------------------------------------------------------------------------
Net asset value, end of year $ 9.97 10.54 10.22 9.93 9.81
- ----------------------------------------------------------------------------------------
TOTAL RETURN (.66)% 8.57 8.17 6.16 8.20
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses .94% .87 .89 .91 .63
- ----------------------------------------------------------------------------------------
Net investment income 4.38% 4.51 4.69 4.78 5.07
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
CLASS B
-----------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------
Net asset value, beginning of year $10.54 10.22 9.93 9.81 9.56
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .38 .38 .39 .39 .44
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.53) .39 .32 .12 .25
- ----------------------------------------------------------------------------------------
Total from investment operations (.15) .77 .71 .51 .69
- ----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .38 .38 .39 .39 .44
- ----------------------------------------------------------------------------------------
Distribution from net realized gain .04 .07 .03 -- --
- ----------------------------------------------------------------------------------------
Total dividends .42 .45 .42 .39 .44
- ----------------------------------------------------------------------------------------
Net asset value, end of year $ 9.97 10.54 10.22 9.93 9.81
- ----------------------------------------------------------------------------------------
TOTAL RETURN (1.55)% 7.69 7.29 5.30 7.57
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 1.74% 1.69 1.70 1.73 1.32
- ----------------------------------------------------------------------------------------
Net investment income 3.57% 3.69 3.88 3.96 4.58
- ----------------------------------------------------------------------------------------
</TABLE>
56
<PAGE> 57
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------
CLASS C
------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
Net asset value, beginning of year $10.54 10.22 9.93 9.81 9.56
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .37 .38 .39 .39 .44
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.53) .39 .32 .12 .25
- -----------------------------------------------------------------------------------------
Total from investment operations (.16) .77 .71 .51 .69
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .37 .38 .39 .39 .44
- -----------------------------------------------------------------------------------------
Distribution from net realized gain .04 .07 .03 -- --
- -----------------------------------------------------------------------------------------
Total dividends .41 .45 .42 .39 .44
- -----------------------------------------------------------------------------------------
Net asset value, end of year $ 9.97 10.54 10.22 9.93 9.81
- -----------------------------------------------------------------------------------------
TOTAL RETURN (1.48)% 7.70 7.32 5.28 7.56
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 1.77% 1.67 1.68 1.74 1.27
- -----------------------------------------------------------------------------------------
Net investment income 3.53% 3.71 3.90 3.95 4.63
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $44,864 43,841 39,468 37,100 31,450
- ----------------------------------------------------------------------------------------------
Portfolio turnover rate 29% 15 52 86 90
- ----------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR OHIO FUND:
Scudder Kemper Investments, Inc. agreed to temporarily waive and absorb certain
operating expenses of the fund for the fiscal year ended August 31, 1995. Absent
this waiver, the ratios of expenses to average net assets would have increased
and the ratios of net investment income to average net assets would have
decreased by the following amounts:
0.20% for Class A, 0.43% for Class B and 0.42% for Class C, respectively.
- --------------------------------------------------------------------------------
NOTE FOR ALL FUNDS:
- --------------------------------------------------------------------------------
Total return does not reflect the effect of sales charges.
- --------------------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
Please consult a tax adviser if you have questions about federal or state income
tax laws, or how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
57
<PAGE> 58
NOTES
58
<PAGE> 59
NOTES
59
<PAGE> 60
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY MAUREEN E. KANE
Trustee President Assistant Secretary
LEWIS A. BURNHAM PHILIP J. COLLORA CAROLINE PEARSON
Trustee Vice President and Secretary Assistant Secretary
DONALD L. DUNAWAY JOHN R. HEBBLE BRENDA LYONS
Trustee Treasurer Assistant Treasurer
ROBERT B. HOFFMAN ANN M. MCCREARY
Trustee Vice President
DONALD R. JONES ROBERT C. PECK, JR.
Trustee Vice President
THOMAS W. LITTAUER KATHRYN L. QUIRK
Trustee and Vice President Vice President
SHIRLEY D. PETERSON LINDA J. WONDRACK
Trustee Vice President
CORNELIA SMALL
Trustee
WILLIAM P. SOMMERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
- --------------------------------------------------------------------------------
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
- --------------------------------------------------------------------------------
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 (10/25/99) 1090140
