<PAGE> 1
KEMPER
STATE TAX-FREE
INCOME SERIES
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED AUGUST 31, 1996
FLORIDA TAX-FREE
INCOME FUND
NEW JERSEY TAX-FREE
INCOME FUND
NEW YORK TAX-FREE
INCOME FUND
PENNSYLVANIA TAX-FREE
INCOME FUND
" . . . Our primary course of action
was to shorten the durations of the funds as it
became apparent that rates were on
the rise . . ."
KEMPER LOGO
<PAGE> 2
KEMPER STATE TAX-FREE INCOME FUNDS TOTAL RETURNS
For the year ended August 31, 1996 (unadjusted for sales charge)
FLORIDA
LOGO
NEW JERSEY
LOGO
NEW YORK
LOGO
PENNSYLVANIA
LOGO
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
NET ASSET VALUE
FLORIDA
<TABLE>
<CAPTION>
AS OF AS OF
8/31/96 8/31/95
----------------------------------------
<S> <C> <C>
KEMPER FLORIDA TAX-FREE INCOME
FUND CLASS A $10.21 $10.27
- -------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME
FUND CLASS B $10.19 $10.26
- -------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME
FUND CLASS C $10.20 $10.26
- -------------------------------------------------
</TABLE>
NEW JERSEY
<TABLE>
<CAPTION>
AS OF AS OF
8/31/96 8/31/95
----------------------------------------
<S> <C> <C>
KEMPER NEW JERSEY TAX-FREE
INCOME FUND CLASS A $9.85 $9.75
- -------------------------------------------------
KEMPER NEW JERSEY TAX-FREE
INCOME FUND CLASS B $9.88 $9.77
- -------------------------------------------------
KEMPER NEW JERSEY TAX-FREE
INCOME FUND CLASS C $9.88 $9.77
- -------------------------------------------------
</TABLE>
NEW YORK
<TABLE>
<CAPTION>
AS OF AS OF
8/31/96 8/31/95
----------------------------------------
<S> <C> <C>
KEMPER NEW YORK TAX-FREE INCOME
FUND CLASS A $10.66 $10.80
- -------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME
FUND CLASS B $10.66 $10.80
- -------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME
FUND CLASS C $10.65 $10.79
- -------------------------------------------------
</TABLE>
PENNSYLVANIA
<TABLE>
<CAPTION>
AS OF AS OF
8/31/96 8/31/95
----------------------------------------
<S> <C> <C>
KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS A $9.95 $9.81
- -------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS B $9.95 $9.80
- -------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS C $9.95 $9.81
- -------------------------------------------------
</TABLE>
CONTENTS
3
Economic Overview
AT A GLANCE
6
Performance Update
8
Terms to Know
10
Portfolio Statistics
11
Portfolio of
Investments
26
Report of
Independent Auditors
27
Financial Statements
30
Notes to
Financial Statements
36
Financial Highlights
<PAGE> 3
KEMPER TAX-FREE INCOME FUND LIPPER RANKINGS*
Compared to all other funds in their respective Lipper categories
FLORIDA
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------------
<S> <C> <C> <C>
1-YEAR #14 OF #50 OF #47 OF
79 FUNDS 79 FUNDS 79 FUNDS
- ------------------------------------------------
5-YEAR #2 OF 16 N/A N/A
FUNDS
- ------------------------------------------------
</TABLE>
NEW JERSEY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------------
<S> <C> <C> <C>
1-YEAR #6 OF #22 OF #16 OF
53 FUNDS 53 FUNDS 53 FUNDS
- ------------------------------------------------
</TABLE>
NEW YORK
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------------
<S> <C> <C> <C>
1-YEAR #18 OF #56 OF #55 OF
98 FUNDS 98 FUNDS 98 FUNDS
- ------------------------------------------------
5-YEAR #11 OF N/A N/A
43 FUNDS
- ------------------------------------------------
10-YEAR #3 OF N/A N/A
18 FUNDS
- ------------------------------------------------
</TABLE>
PENNSYLVANIA
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------------
<S> <C> <C> <C>
1-YEAR #4 OF #19 OF #23 OF
65 FUNDS 65 FUNDS 65 FUNDS
- ------------------------------------------------
</TABLE>
*Lipper Analytical Services, Inc. returns and rankings are based upon changes in
net asset value with all dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable. Returns
and rankings are historical and do not reflect future performance. The funds are
compared to their respective Lipper categories as follows: Florida Municipal
Debt, New Jersey Municipal Debt, New York Municipal Debt and Pennsylvania
Municipal Debt.
DIVIDEND REVIEW
The following tables show per share dividend and yield information for the funds
as of August 31, 1996.
FLORIDA
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
--------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.5161 $0.4283 $0.4312
- -----------------------------------------------------------------------
AUGUST DIVIDEND: $0.0420 $0.0336 $0.0348
- -----------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE+: 4.94% 3.96% 4.09%
- -----------------------------------------------------------------------
SEC YIELD+: 4.73% 4.10% 4.18%
- -----------------------------------------------------------------------
TAX EQUIVALENT YIELD+: 7.52% 6.52% 6.65%
BASED ON A MARGINAL TAX RATE OF 37.1% (COMBINED FLORIDA STATE AND
FEDERAL INCOME TAX RATE)
- -----------------------------------------------------------------------
</TABLE>
NEW JERSEY
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
--------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4314 $0.3559 $0.3642
- -----------------------------------------------------------------------
AUGUST DIVIDEND: $0.0307 $0.0241 $0.0302
- -----------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE+: 3.74% 2.93% 3.67%
- -----------------------------------------------------------------------
SEC YIELD+:
(AFTER EXPENSE WAIVER) 4.04% 3.37% 3.57%
- -----------------------------------------------------------------------
SEC YIELD+:
(BEFORE EXPENSE WAIVER) 3.98% 3.31% 3.51%
- -----------------------------------------------------------------------
TAX EQUIVALENT YIELD+: 6.84% 5.70% 6.04%
BASED ON A MARGINAL TAX RATE OF 40.9% (COMBINED NEW JERSEY STATE AND
FEDERAL INCOME TAX RATE)
- -----------------------------------------------------------------------
</TABLE>
NEW YORK
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
--------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.5585 $0.4650 $0.4657
- -----------------------------------------------------------------------
AUGUST DIVIDEND: $0.0455 $0.0376 $0.0377
- -----------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE+: 5.12% 4.23% 4.25%
- -----------------------------------------------------------------------
SEC YIELD+: 4.68% 4.01% 4.04%
- -----------------------------------------------------------------------
TAX EQUIVALENT YIELD+: 8.40% 7.20% 7.25%
BASED ON A MARGINAL TAX RATE OF 44.3% (COMBINED NEW YORK STATE, NEW
YORK CITY AND FEDERAL INCOME TAX RATE)
- -----------------------------------------------------------------------
</TABLE>
PENNSYLVANIA
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
--------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4446 $0.3650 $0.3663
- -----------------------------------------------------------------------
AUGUST DIVIDEND: $0.0321 $0.0258 $0.0258
- -----------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE+: 3.87% 3.11% 3.11%
- -----------------------------------------------------------------------
SEC YIELD+:
(AFTER EXPENSE WAIVER) 4.10% 3.49% 3.52%
- -----------------------------------------------------------------------
SEC YIELD+:
(BEFORE EXPENSE WAIVER) 4.04% 3.43% 3.46%
- -----------------------------------------------------------------------
TAX EQUIVALENT YIELD+: 6.71% 5.71% 5.76%
BASED ON A MARGINAL TAX RATE OF 38.9% (COMBINED PENNSYLVANIA 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, 1996. 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, 1996 shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with a
standardized method prescribed by the Securities and Exchange Commission. Tax
equivalent yield is based on the fund's yield and the applicable federal and
state marginal tax rate. Income may be subject to state and local taxes and, for
some investors, a portion may be subject to the alternative minimum tax.
3
AT A GLANCE
<PAGE> 4
ECONOMIC OVERVIEW
[STEPHEN B. TIMBERS PH0T0]
Stephen B. Timbers is president, chief investment and executive officer of
Zurich Kemper Investments, Inc. (ZKI). ZKI and its affiliates manage
approximately $79 billion in assets, including $45 billion in retail
mutual funds. Timbers is a graduate of Yale University and holds an M.B.A. from
Harvard University.
DEAR SHAREHOLDER,
Concerns about rising interest rates, the possibility of higher price inflation
and Federal Reserve tightening of credit continue to contribute to considerable
market volatility. But while the professional traders tend to debate over every
economic release, individuals who invest in mutual funds for the long term have
been wise to stay the course. Indeed, several recent economic measures are quite
reassuring and argue in favor of a continued healthy economy with low inflation.
The economy expanded at a 4.2% annual rate in the second quarter, the
fastest pace since the second quarter of 1994. This robust growth is welcome in
general but has tended to roil markets, which fear strong growth will lead to
overheating and inflationary pressures. So far, however, such fears have been
largely unwarranted. With the exception of food prices, whose increases were
weather-related, there have been no significant signs of inflationary
pressures. As it has so often recently, the economy is in the process of
slowing itself down. While the Federal Reserve Board stands by ready to attempt
to moderate economic growth with either interest rate cuts or
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 (9/30/96) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10-year Teasury rate(1) 6.83 6.51 6.04 7.74
Prime rate(2) 8.25 8.25 8.75 7.75
Inflation rate(3) 3 2.9 2.81 2.61
The U.S. dollar(4) 3.32 8.94 -1.05 -5.28
Capital goods orders(5) 6.12 3.98 13.61 15.74
Industrial production(5) 3.5 2.56 1.92 6.77
Employment growth(6) 2.01 1.76 2.16 3.3
</TABLE>
(1) Falling interest rates in recent years have been a big plus for
financial assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. The low, moderate inflation of the
last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and
the value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of August 31, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
4
<PAGE> 5
ECONOMIC OVERVIEW
increases, such intervention can run the risk of going too far in one direction.
It appears that our economy today is self-regulating.
Based on these snapshots of the economy, then, we look for a relatively calmer
remainder of the year. Our forecast calls for growth to slow down in the fourth
quarter, to result in an advance of about 2.5% for the entire year. Assuming
that bond and stock market investors concur that there is no chance of an
overheating economy or significantly rising interest rates, the markets should
relax, as well.
Our market forecast 10 months into the year is not much different from what we
forecasted in January. The bond market, which is climbing back from a decline
this year, may produce a 5% total return in 1996. The stock market, after the
correction is completed, may advance 10% to 15% for the year. Naturally, future
market conditions cannot be predicted with assurance.
In addition, we are projecting that long-term (30-year) interest rates will
hover in the 6.5% to 7.0% range. Short-term interest rates may drop below their
current levels. Finally, we would be surprised if the Federal Reserve Board
moved to adjust interest rates more than 25 basis points either way for the
remainder of the year.
Given the economic environment, we do not look for an upset in the upcoming
presidential election. Much more interesting will be which party wins the most
congressional seats. If the Democrats regain control of Congress, a bond market
sell-off could occur.
While U.S. markets are expected to provide modest returns, we continue to
advocate the benefits of diversification into alternate markets. Many overseas
markets are forecasted to grow at a rate well above our 2.5% growth expectation
for the U.S., and there are many equity and fixed-income opportunities abroad.
The value of the U.S. dollar, always a concern to international investors, will
probably not strengthen much against other currencies for the foreseeable
future.
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including an interview with your fund's portfolio
management. Thank you for your continued support. We appreciate the opportunity
to serve your investment needs.
Sincerely,
Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
October 15, 1996
5
<PAGE> 6
PERFORMANCE UPDATE
[CHRIS MIER PHOTO]
CHRIS MIER JOINED ZURICH KEMPER INVESTMENTS, INC. IN 1986 AND IS NOW SENIOR VICE
PRESIDENT. HE IS ALSO A VICE PRESIDENT AND PORTFOLIO MANAGER OF THE KEMPER STATE
TAX-FREE INCOME SERIES. MIER RECEIVED A B.A. DEGREE IN ECONOMICS FROM THE
UNIVERSITY OF MICHIGAN AND AN M.M. IN FINANCE FROM THE KELLOGG GRADUATE SCHOOL
OF MANAGEMENT AT NORTHWESTERN UNIVERSITY. HE IS A CHARTERED FINANCIAL ANALYST.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
FOR THE YEAR ENDED AUGUST 31, 1996, A PERIOD OF SHIFTING INTEREST RATES AND
POLITICAL RHETORIC, KEMPER STATE TAX-FREE INCOME SERIES FUNDS WERE ABLE TO
OUTPERFORM THEIR RESPECTIVE LIPPER CATEGORY AVERAGES (CLASS A SHARES,
UNADJUSTED FOR SALES CHARGE). PORTFOLIO MANAGER CHRIS MIER EXPLAINS HOW THE
STRUCTURE OF THE PORTFOLIO WAS USED TO BUOY PERFORMANCE DURING A RELATIVELY
DIFFICULT PERIOD FOR MUNICIPAL BONDS.
Q. DURING THE LAST YEAR, MUNICIPAL BOND YIELDS HAVE FLUCTUATED QUITE A BIT.
WHAT WAS BEHIND THE STEADY DECLINE IN YIELDS AND THEN THEIR SHARP RISE?
A. Expectations of slow economic growth pushed rates lower during the
first four months of the period. Conversely, signs of a resurgence in economic
growth pulled rates back up in 1996. Here's what occurred during the fiscal
year, September 1995 through August 1996.
During the first four months of the period, there was optimism that a
federal budget resolution would occur and inflation would remain low. In
addition, economic indicators suggested that the economy, while growing,
was slowing down somewhat. This created a favorable climate for the municipal
market, and bond yields fell (prices appreciated). THE BOND BUYER 25-Bond Index
(RBI) -- a gauge of municipal bond interest rates -- began the fiscal year at
6.26 percent on August 31, 1995, and then fell to a low of 5.63 percent on
January 4, 1996.
Later in January, however, data was released that indicated the
economic slowdown may have been related mostly to the impact of severe
weather as opposed to any fundamental weakness. Moreover, with the start of the
Republican party presidential primaries, focus moved away from the federal
budget and deficit reduction proposals toward other issues. As optimism about
deficit reduction began to fade, yields began to rise.
This rise in yields was propelled in early March, when the U.S.
Department of Labor announced an unanticipated and dramatic increase in
employment growth. Many bond investors saw this data as evidence that the
economy was re-establishing a firm footing. The news caused a sell-off in the
market because more rapid growth is often associated with higher inflation,
which erodes the value of fixed-income investments. Yields jumped from 5.88
percent on March 7, to 6.13 percent on March 14, as measured by the RBI.
The municipal market traded in an irregular pattern during the
remainder of the period as economic indicators gave mixed signals about the
pace of economic growth. The RBI yield was 6.09 percent at the close of the
fiscal year.
6
<PAGE> 7
PERFORMANCE UPDATE
Q. HOW WAS PERFORMANCE IMPACTED BY THE CHANGES IN INTEREST RATES?
A. The municipal market, along with the overall bond market, was adversely
affected by the upward tick in interest rates that began occurring in January
1996. When interest rates rise, the prices of bonds fall. However, the good news
for Kemper shareholders is that all Class A shares of the Kemper State Tax-Free
Income Series still outperformed the average returns of their individual Lipper
peer groups for the fiscal year period (unadjusted for sales charge).
Q. HOW DID YOU ALTER YOUR MANAGEMENT OF THE FUNDS AS RATES SHIFTED DIRECTION
IN EARLY 1996?
A. Our primary course of action was to shorten the durations of the funds as
it became apparent that rates were on the rise. Remember, the shorter a
fund's duration, the less sensitive it is to interest rate changes. We
shortened durations by reducing the average maturities of the portfolios, using
futures and increasing cash reserves. We attempted to keep the funds' durations
approximately equal to, or at certain times shorter than, their peer group
competitors.
Q. WHAT TYPES OF PORTFOLIO ADJUSTMENTS DID YOU MAKE DURING THE PERIOD?
A. In addition to our continual adjustment of the funds' durations, we focused
on three areas. First, we continued to selectively add A and BBB rated bonds
throughout the period. These bonds tended to perform marginally better than
higher quality and insured issues as interest rates rose and provided higher
levels of income.
We also focused on maintaining or improving the call protection of the
portfolios and in some cases favored non-callable issues. As interest rates
fall, issuers will generally call back bonds and refinance the debt at lower
interest rates. When this occurs the funds must reinvest the proceeds at lower
prevailing market rates. But better call protection or non-callable bonds can
preclude that from happening.
Finally, we increased the level of issue diversification within the funds. We
did this by adding a variety of issues that mature at different points in time
and have a somewhat wider range of coupon rates. We also looked for bonds with
shorter maturities that offered attractive yields relative to those of longer
maturity issues.
Q. WERE THERE ANY SIGNIFICANT TRENDS THAT AFFECTED INDIVIDUAL STATES WITHIN
KEMPER'S STATE TAX-FREE INCOME SERIES?
A. The Florida economy expanded at a rate slightly faster than the national
economy. The growth was fueled by increases in tourism and service industries.
Florida's unemployment was below the national average, although much of the
employment comes from lower paying service jobs due to the tourism industry. The
state's general fund balance reached $0.5 billion in 1996.
Both population growth and the economy have stabilized in New Jersey. In 1996,
the state ranked second in the nation in per capita income, which was about 129
percent above the national average. This is the final year for tax cuts
initiated three years ago. New Jersey closed its fiscal year with a budget
surplus and its general fund balance remains at about $1 billion.
The economy in New York continues to expand but at a slower rate than the
national economy. Unemployment was ahead of the national average but the
disparity is somewhat offset by higher income levels within the state. Fiscal
management of the state has improved and a $0.5 billion budget surplus was
reported. However, an accumulated budget deficit of $2.9 billion still remains.
Pennsylvania maintained its A1 rating from Moody's Investors Service, Inc. and
its AA- rating from Standard & Poor's. New municipal issuance in the
Pennsylvania market increased by 50 percent during the fund's fiscal year. This
increase in issuance was primarily in state general obligation bonds and
intergovernmental programs. During the period, Pennsylvania implemented a solid
fiscal policy which includes a slight increase in revenues and lower spending
levels.
7
<PAGE> 8
PERFORMANCE UPDATE
Q. WHAT CAN YOU TELL US ABOUT THE LEVEL OF MUNICIPAL SUPPLY?
A. Supply and demand within the municipal bond market has been close to an
equilibrium during the year. At this point in 1996, supply is mirroring the
lower levels of 1995 and demand has remained firm and at times very strong. As a
result, municipal bonds have outperformed Treasuries. This outperformance is
documented by the decline in the municipal to Treasury yield ratio from about 94
percent at the start of the period to approximately 87 percent at the close of
the fiscal year.
Q. ARE MUNICIPAL BOND FUNDS A GOOD INVESTMENT IN THE CURRENT ECONOMIC
ENVIRONMENT?
A. Municipal bonds can play an important role in rounding out a
well-diversified portfolio of investments. The tax-exempt income that municipal
bond funds provide may be especially helpful now as many investors are
underinvested in tax-exempt assets. Municipal bonds and equities are both
important components of a balanced portfolio. If your exposure to municipals has
declined on a relative basis, now may be the right time to review your long-term
goals and rebalance your portfolio of investments.
Q. WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET GIVEN THE UPCOMING U.S.
PRESIDENTIAL ELECTION?
A. If President Clinton is re-elected, the chance of any severe tax reform is
unlikely, which would be positive for the municipal market. If Robert Dole is
elected, a flatter tax structure may be proposed. And, if it passed, it could
impact municipal performance. However, over the last 20 years, municipals have
shown the ability to perform well despite marginal tax-rate changes.
TERMS TO KNOW
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income investment or portfolio. The longer the duration, the greater the
interest rate risk.
REVENUE BOND INDEX (RBI) The average yield on 25 revenue bonds with 30-year
maturities compiled by THE BOND BUYER, a newspaper that covers the municipal
bond market.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period. Total return assumes the
reinvestment of all dividends and it represents the aggregate percentage or
dollar value change over the period.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
8
<PAGE> 9
PERFORMANCE UPDATE
KEMPER FLORIDA TAX-FREE INCOME FUND
Average Annual Total Returns*
For Periods Ended August 31, 1996 (Adjusted for the maximum sales charge)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR LIFE OF CLASS
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS A 1.10% 7.05% 7.39% (SINCE 4/25/91)
- -----------------------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS B 1.86% N/A 4.61% (SINCE 5/31/94)
- -----------------------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS C 4.97% N/A 5.99% (SINCE 5/31/94)
- -----------------------------------------------------------------------------------------------
</TABLE>
Past performance is not predictive of future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
*Average annual total return and total return measure net investment income and
capital gain or loss from portfolio investments, assuming reinvestment of all
dividends and for A shares adjustment for the maximum sales charge of 4.5% and
for B shares adjustment for the applicable contingent deferred sales charge as
follows: 1-year, 3%; 5-year, 1%; since inception, 0%. For C shares purchased
after 4/1/96 there is a 1% CDSC on certain redemptions within the first year of
purchase. Average annual total return reflects annualized change while total
return reflects aggregate change. During the periods noted, securities prices
fluctuated. For additional information, see the Prospectus and Statement of
Additional Information and the Financial Highlights at the end of this report.
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER FLORIDA TAX-FREE
INCOME FUND CLASS A FROM 4/25/91 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
4/25/91 12/31/92 12/31/94 8/31/96
<S> <C> <C> <C> <C>
- - KEMPER FLORIDA TAX-FREE INCOME FUND(1) $10,000 $11,464 $12,502 $14,658
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10,000 11,776 12,539 14,791
- - CONSUMER PRICE INDEX++ 10,000 10,496 11,072 11,635
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER FLORIDA TAX-FREE
INCOME FUND CLASS B FROM 5/31/94 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 8/31/96
<S> <C> <C> <C> <C>
- - KEMPER FLORIDA TAX-FREE INCOME FUND(1) $10,000 $ 9,837.6 $11,531 $11,072
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10,000 9,864 11,586 11,636
- - CONSUMER PRICE INDEX++ 10,000 10,149 11,407 10,664
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER FLORIDA TAX-FREE
INCOME FUND CLASS C FROM 5/31/94 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 8/31/96
<S> <C> <C> <C> <C>
- - KEMPER FLORIDA TAX-FREE INCOME FUND(1) $10,000 $ 9,845 $11,573 $11,404
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10,000 9,864 11,586 11,636
- - CONSUMER PRICE INDEX++ 10,000 10,149 10,407 10,664
</TABLE>
(1)Performance includes reinvestment of dividends and adjustment for the maximum
sales charge for A shares and the contingent deferred sales charge in effect at
the end of the period for B shares. In comparing the Kemper State Tax-Free
Income Funds to the Lehman Brothers Municipal Bond Index, you should note that
the funds' performance reflects the maximum sales charges, while no such charges
are reflected in the performance of the index.
+The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the following
criteria: a minimum credit rating of BBB, have been issued as a part of an issue
of at least $50 million, have been issued within the last 5 years, and have a
maturity of at least 2 years. Bonds subject to Alternative Minimum Tax (AMT),
variable rate bonds and zero coupon bonds are excluded from the index. Source is
Towers Data Systems.
++The Consumer Price Index is a statistical measure of change, over time, in the
prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source is
Towers Data Systems.
9
<PAGE> 10
PORTFOLIO STATISTICS
KEMPER FLORIDA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION* ON 8/31/96 ON 8/31/95
<S> <C> <C>
REVENUE BONDS 86% 87%
- ---------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 11 11
- ---------------------------------------------------------------------------------
CASH AND EQUIVALENTS 3 2
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
<TABLE>
<CAPTION>
QUALITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
AAA 56% 56%
- ---------------------------------------------------------------------------------
AA 17 13
- ---------------------------------------------------------------------------------
A 8 12
- ---------------------------------------------------------------------------------
BBB 11 11
- ---------------------------------------------------------------------------------
NOT RATED 8 8
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
<TABLE>
<CAPTION>
YEARS TO MATURITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
1-10 YEARS 7% 6%
- ---------------------------------------------------------------------------------
11-20 YEARS 44 44
- ---------------------------------------------------------------------------------
+21 YEARS 49 50
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
<TABLE>
<CAPTION>
AVERAGE MATURITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
16.0 YEARS 19.8 YEARS
- ---------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
FLORIDA TAX-FREE INCOME FUND
Portfolio of Investments at August 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL
AMOUNT VALUE
------------------------------------------------------------------------------------------------
<S> <C> <C>
ADVANCE Charlotte County, Utility System, Rev., 6.75%, to be called 10-01-03
REFUNDED @ 102 $ 250 $ 281
OBIGATIONS ------------------------------------------------------------------------------------------------
SECURED AS TO Dunedin, Mease Health Care, Hospital Rev., 6.75%, to be called
PRINCIPAL AND 11-15-01 @ 102 750 831
INTEREST BY ------------------------------------------------------------------------------------------------
OBLIGATIONS Halifax Hospital Medical Center, Rev., 6.75%, to be called 10-01-01 @
OF THE 102 2,000 2,212
UNITED STATES ------------------------------------------------------------------------------------------------
GOVERNMENT Jacksonville Health Facilities Auth., Memorial Medical Center Proj.,
Rev., 6.75%, to be called 05-01-01 @ 102 2,000 2,199
------------------------------------------------------------------------------------------------
Volusia County Health Facilities Auth., Memorial Health Systems,
Hospital Facilities Rev., 8.25%, to be called 6-01-00 @ 102 1,940 2,202
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--7.1% 7,725
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
OTHER Board of Education, Public Education Capital Outlay, Gen. Oblg.,
MUNICIPAL 4.75% to 7.25%, 2018 through 2023 3,980 3,685
OBLIGATIONS
------------------------------------------------------------------------------------------------
Department of Environmental Protection, Preservation 2000,
Rev., 5.25%, 2011 1,000 968
------------------------------------------------------------------------------------------------
Department of Natural Resources, Preservation 2000,
Rev., 4.90% and 6.75%, 2013 2,000 2,003
------------------------------------------------------------------------------------------------
Housing Finance Agcy., GNMA Collateralized Home Ownership,
Rev., 7.90%, 2022 1,390 1,465
------------------------------------------------------------------------------------------------
Alachua County, Public Improvement Rev., 5.125%, 2021 3,000 2,722
------------------------------------------------------------------------------------------------
Belle Glade, Water and Sewer Improvement, Rev., 5.125%, 2015 1,540 1,425
------------------------------------------------------------------------------------------------
Boynton Beach, Utility System Rev., 5.50%, 2012 1,500 1,477
------------------------------------------------------------------------------------------------
Brevard County, Limited Ad Valorem Tax and Improvement,
Gen. Oblg., 5.375%, 2010 and 2011 2,370 2,347
------------------------------------------------------------------------------------------------
Broward County:
North Site Proj., Resource Recovery Rev., 7.95%, 2008 885 975
School District, Gen. Oblg., 6.00%, 2007 4,000 4,217
South Site Proj., Resource Recovery Rev., 7.95%, 2008 940 1,036
------------------------------------------------------------------------------------------------
Charlotte County, Utility System Rev., 5.50%, 2010 1,150 1,145
------------------------------------------------------------------------------------------------
Citrus County, Capital Improvement Rev., 5.00%, 2016 2,000 1,820
------------------------------------------------------------------------------------------------
Dade City Governmental Leasing Corp., Department of Health and
Rehabilitation Services, Rev., 9.00%, 2020 1,025 1,090
------------------------------------------------------------------------------------------------
Dade County:
Housing Finance Auth., Single Family Mortgage Rev., 7.25%, 2023 370 384
Miami International Airport, Aviation Rev., 5.75%, 2011 2,500 2,500
Seaport, Gen. Oblg., 5.125%, 2016 1,000 924
------------------------------------------------------------------------------------------------
Duval County Housing Finance Auth., Single Family Mortgage
Rev., 7.25%, 2019 550 580
------------------------------------------------------------------------------------------------
Escambia County Housing Finance Auth., Single Family Mortgage
Rev., 6.90%, 2020 805 832
------------------------------------------------------------------------------------------------
First Florida Governmental Financing Commission,
Rev., 5.75%, 2016 1,475 1,457
------------------------------------------------------------------------------------------------
Gainesville, Utilities System Rev., 6.50% and 5.20%, 2022 and 2010 3,870 3,789
------------------------------------------------------------------------------------------------
Hillsborough County:
Aviation Auth., Tampa International Airport,
Rev., 6.90% and 5.875%, 2011 and 2015 2,250 2,325
Housing Finance Auth., Single Family Mortgage Rev., 7.30%, 2022 345 359
Utility Rev., 7.00%, 2014 1,325 1,419
------------------------------------------------------------------------------------------------
Jacksonville:
District Water and Sewer, Rev., 5.00%, 2020 2,000 1,788
Health Facilities Auth., Hospital Rev., 5.00%, 2015 1,700 1,537
------------------------------------------------------------------------------------------------
Lakeland:
Electric and Water, Rev., 5.625%, 2019 2,000 1,934
Regional Medical Center, Rev., 5.25%, 2025 2,000 1,823
------------------------------------------------------------------------------------------------
Lake Wales Florida, Capital Improvement Rev., 5.75%, 2016 1,000 988
------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
ISSUER PRINCIPAL
AMOUNT VALUE
---------------------------------------------------------------------------------------------
<S> <C> <C>
Manatee County:
Gen. Oblg., 4.75%, 2013 $ 1,000 $ 878
Meditrust Proj., First Mortgage, Rev., 7.35%, 2015 1,700 1,749
---------------------------------------------------------------------------------------------
Martin County, Industrial Dev. Auth., Indiantown Cogeneration,
L.P. Proj., Rev., 7.875%, 2025 2,325 2,604
---------------------------------------------------------------------------------------------
Miami Beach Redev. Agcy., Tax Increment Rev., 5.875%, 2022 3,150 2,943
---------------------------------------------------------------------------------------------
Nassau County, GF/Amelia Island Properties, Inc. Proj.,
Rev., 9.75%, 2023 995 1,092
---------------------------------------------------------------------------------------------
North Miami, Johnson and Wales University Proj., Educational
Facilities
Rev., 6.10% and 6.125%, 2013 and 2020 4,785 4,681
---------------------------------------------------------------------------------------------
Orange County, Sales Tax Rev., 5.375%, 2024 3,000 2,766
---------------------------------------------------------------------------------------------
Orlando -- Orange County Expressway Auth., Junior Lien,
Rev., 6.50%, 2012 1,000 1,106
---------------------------------------------------------------------------------------------
Palm Beach County:
Criminal Justice Facilities, Rev., 7.20%, 2015 110 129
Solid Waste Auth., Rev., 8.75%, 2010 245 260
---------------------------------------------------------------------------------------------
Pasco County Solid Waste Disposal and Resource Recovery System,
Rev., 7.80%, 2011 345 369
---------------------------------------------------------------------------------------------
Pensacola, Health Facilities Auth., Rev., 5.25%, 2011 2,200 2,105
---------------------------------------------------------------------------------------------
Pinellas County, Pollution Control, Rev., 7.20%, 2014 2,000 2,143
---------------------------------------------------------------------------------------------
Pinnellas Park, Public Improvement Rev., 5.00%, 2018 3,805 3,444
---------------------------------------------------------------------------------------------
Port Orange, Water and Sewer, Rev., 5.25%, 2021 2,100 1,929
---------------------------------------------------------------------------------------------
St. Petersburg Health Facilities Auth., Allegheny Health System,
Rev., 7.00% and 6.75%, 2015 and 2021 1,500 1,631
---------------------------------------------------------------------------------------------
Sarasota:
Manatee Airport Auth., Rev., 5.375%, 2014 1,500 1,442
Solid Waste System, Rev., 5.50%, 2021 2,500 2,387
---------------------------------------------------------------------------------------------
South Broward Hospital District, Rev., 5.25%, 2021 2,000 1,836
---------------------------------------------------------------------------------------------
Tampa Sports Auth., Special Purpose, Rev., 5.75%, 2020 1,825 1,831
---------------------------------------------------------------------------------------------
Westchase Community Dev. District, Rev., 5.80%, 2012 3,000 3,008
---------------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Facilities Financing Auth., Mennonite General Hospital Proj., Rev.,
6.50%, 2018 2,000 1,975
Highway and Transportation Auth., Rev., 5.50% and 6.00%, 2013 and
2018 2,750 2,777
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%, 2026 1,030 1,026
---------------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, 2018 2,100 2,232
---------------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--90.1% 97,357
---------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--97.2%
(Cost: $101,088) 105,082
---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENT--.9%
Yield--4.00%
Due--September 1996
(Cost: $1,000) $ 1,000 $ 1,000
---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.1%
(Cost: $102,088) 106,082
---------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.9% 2,023
---------------------------------------------------------------------------------------------
NET ASSETS--100% $ 108,105
---------------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $102,088,000 for federal income tax purposes
at August 31, 1996, the gross unrealized appreciation was $4,217,000, the gross
unrealized depreciation was $223,000 and the net unrealized appreciation on
investments was $3,994,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
PERFORMANCE UPDATE
KEMPER NEW JERSEY TAX-FREE INCOME FUND
Average Annual Total Returns*
For Periods Ended August 31, 1996 (Adjusted For The Maximum Sales Charge)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
KEMPER NEW JERSEY TAX-FREE INCOME FUND CLASS A 0.75% 3.82% (SINCE 3/15/95)
- ------------------------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE INCOME FUND CLASS B 1.80% 4.52% (SINCE 3/15/95)
- ------------------------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE INCOME FUND CLASS C 4.89% 6.61% (SINCE 3/15/95)
- ------------------------------------------------------------------------------------------------
</TABLE>
Past performance is not predictive of future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
*Average annual total return and total return measure net investment income and
capital gain or loss from portfolio investments, assuming reinvestment of
all dividends and for A shares adjustment for the maximum sales charge of 4.5%
and for B shares adjustment for the applicable contingent deferred sales charge
as follows: 1-year, 3%; 5-year, 1%; since inception, 0%. For C shares purchased
after 4/1/96 there is a 1% CDSC on certain redemptions within the first year of
purchase. Average annual total return reflects annualized change while total
return reflects aggregate change. During the periods noted, securities prices
fluctuated. For additional information, see the Prospectus and Statement of
Additional Information and the Financial Highlights at the end of this report.
Growth of an assumed $10,000 Investment in Kemper New Jersey Tax-Free
Income Fund Class A From 3/15/95 to 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
3/15/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 8/31/96
<S> <C> <C> <C> <C> <C> <C> <C>
- - KEMPER NEW JERSEY TAX-FREE INCOME FUND(1) $10,000 $ 9,832 $10,076 $10,700 $10,405 $10,442 $10,556
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10,000 10,359 10,656 11,096 10,963 11,047 11,144
- - CONSUMER PRICE INDEX++ 10,000 10,106 10,152 10,172 10,318 10,384 10,424
</TABLE>
Growth of an assumed $10,000 Investment in Kemper New Jersey Tax-Free
Income Fund Class B From 3/15/95 TO 8/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
3/15/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 8/31/96
<S> <C> <C> <C> <C> <C> <C> <C>
- - KEMPER NEW JERSEY TAX-FREE INCOME FUND(1) $10,000 $10,494 $10,461 $11,156 $10,827 $10,442 $10,671
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10,000 10,359 10,656 11,096 10,963 11,047 11,144
- - CONSUMER PRICE INDEX++ 10,000 10,106 10,152 10,172 10,318 10,384 10,424
</TABLE>
Growth of an assumed $10,000 investment in Kemper New Jersey Tax-Free
Income Fund Class C from 03/15/95 to 08/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
3/15/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 8/31/96
<S> <C> <C> <C> <C> <C> <C> <C>
- - KEMPER NEW JERSEY TAX-FREE INCOME FUND(1) $10,000 $10,286 $10,531 $11,161 $10,824 $10,869 $10,986
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10,000 10,359 10,656 11,096 10,963 11,047 11,144
- - CONSUMER PRICE INDEX++ 10,000 10,106 10,152 10,172 10,318 10,384 10,424
</TABLE>
(1)Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for A shares and the contingent deferred sales charge in
effect at the end of the period for B shares. In comparing the Kemper State
Tax-Free Income Funds to the Lehman Brothers Municipal Bond Index, you should
note that the funds' performance reflects the maximum sales charges, while no
such charges are reflected in the performance of the index.
+The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the following
criteria: a minimum credit rating of BBB, have been issued as a part of an issue
of at least $50 million, have been issued within the last 5 years, and have a
maturity of at least 2 years. Bonds subject to Alternative Minimum Tax (AMT),
variable rate bonds and zero coupon bonds are excluded from the index. Source is
Towers Data Systems.
++The Consumer Price Index is a statistical measure of change, over time, in the
prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source is
Towers Data Systems.
13
<PAGE> 14
PORTFOLIO STATISTICS
KEMPER NEW JERSEY TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION* ON 8/31/96 ON 8/31/95
<S> <C> <C>
REVENUE BONDS 62% 72%
- ---------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 31 26
- ---------------------------------------------------------------------------------
CASH AND EQUIVALENTS 7 2
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
<TABLE>
<CAPTION>
QUALITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
AAA 76% 70%
- ---------------------------------------------------------------------------------
AA 6 11
- ---------------------------------------------------------------------------------
A 7 13
- ---------------------------------------------------------------------------------
BBB 7 3
- ---------------------------------------------------------------------------------
NOT RATED 4 3
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
<TABLE>
<CAPTION>
YEARS TO MATURITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
1-10 YEARS 1% 0%
- ---------------------------------------------------------------------------------
11-20 YEARS 74 30
- ---------------------------------------------------------------------------------
+21 YEARS 25 70
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
<TABLE>
<CAPTION>
AVERAGE MATURITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
15.4 YEARS 22.5 YEARS
- ---------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
NEW JERSEY TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
MUNICIPAL Economic Dev. Auth.:
OBLIGATIONS
Educational Testing Service, Rev., 6.125%, 2015 $ 100 $ 103
Market Transition Facility, Rev., 5.875%, 2011 90 91
Pollution Control, Public Service Electric and Gas Company Proj., Rev.,
6.40%, 2032 90 93
---------------------------------------------------------------------------------------------
Educational Facilities Auth.:
Caldwell College, Rev., 7.25%, 2025 50 51
Montclair State University, Rev., 5.40%, 2010 100 98
Rider College, Rev., 6.20%, 2017 115 119
Rowan College, Rev., 5.875%, 2013 100 102
University of Medicine and Dentistry, Rev., 5.25%, 2014 75 71
---------------------------------------------------------------------------------------------
Health Care Facilities Financing Auth.:
Atlantic City Medical Center, Rev., 6.80%, 2011 150 160
Dover General Hospital and Medical Center, Rev., 5.875%, 2012 165 168
Hackensack Medical Center, Rev., 6.625%, 2017 15 16
Jersey Shore Medical Center, Rev., 6.25%, 2016 100 104
Southern Ocean County Hospital, Rev., 6.125%, 2013 120 116
---------------------------------------------------------------------------------------------
Sports and Exposition Auth., Rev., 6.00%, 2013 100 103
---------------------------------------------------------------------------------------------
Transportation Trust Fund Auth., Rev., 5.25%, 2008 100 99
---------------------------------------------------------------------------------------------
Turnpike Auth., Rev., 6.50%, 2016 125 137
---------------------------------------------------------------------------------------------
Wastewater Treatment Trust, Rev., 7.00%, 2007 100 115
---------------------------------------------------------------------------------------------
Atlantic City Board of Education, Gen. Oblg., 6.15%, 2015 150 155
---------------------------------------------------------------------------------------------
Bayshore Regional Sewerage Auth., Rev., 5.50%, 2012 100 99
---------------------------------------------------------------------------------------------
Cape May County, Municipal Utilities Auth., Rev., 6.00%, 2011 15 15
---------------------------------------------------------------------------------------------
Chatham Borough, Gen. Oblg., 5.80%, 2015 32 32
---------------------------------------------------------------------------------------------
Delaware River and Bay Auth., Rev., 5.25%, 2026 100 92
---------------------------------------------------------------------------------------------
Essex County:
Gen. Oblg., 5.50%, 2015 100 97
Improvement Auth., Rev., 5.35% and 7.00%, 2024 90 88
---------------------------------------------------------------------------------------------
Evesham Township, Gen. Oblg., 5.55%, 2013 100 99
---------------------------------------------------------------------------------------------
Jackson Township, Gen. Oblg., 6.60%, 2012 100 112
---------------------------------------------------------------------------------------------
Jersey City, Gen. Oblg., 6.60% and 6.25%, 2011 and 2012 90 97
---------------------------------------------------------------------------------------------
Merchantville Board of Education, Gen. Oblg., 5.80%, 2014 100 100
---------------------------------------------------------------------------------------------
Monroe Township, Gen. Oblg., 5.20%, 2015 125 118
---------------------------------------------------------------------------------------------
Morristown, Gen. Oblg., 5.05%, 2011 100 95
---------------------------------------------------------------------------------------------
Newark Board of Education, Gen. Oblg., 6.00%, 2010 15 16
---------------------------------------------------------------------------------------------
North Brunswick Township, Gen. Oblg., 6.10% and 6.30%, 2010 and 2015 135 141
---------------------------------------------------------------------------------------------
Paulsboro Borough, Gen. Oblg., 5.80%, 2014 15 15
---------------------------------------------------------------------------------------------
Rutgers State University, Rev., 5.25%, 2015 15 14
---------------------------------------------------------------------------------------------
Western Monmouth Utilities Auth., Rev., 5.60%, 2014 100 99
---------------------------------------------------------------------------------------------
Salem County, Gen. Oblg., 5.35%, 2015 100 96
---------------------------------------------------------------------------------------------
Summit, Gen. Oblg., 5.00%, 2010 45 43
---------------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Facilities Financing Auth., Mennonite General Hospital Proj., Rev.,
6.50%, 2026 100 98
Highway and Transportation Auth., Rev., 6.25%, 2016 120 129
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%, 2026 40 40
---------------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Matching Fund Loan, Rev., 7.25%, 2018 75 80
------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--93.3%
(Cost: $3,667) 3,716
------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
ISSUER PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET INSTRUMENTS--5.0%
Yield--3.35% to 3.55%
Due--September 1996
Economic Dev. Auth. $ 200 $ 200
(Cost: $200)
--------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.3%
(Cost: $3,867) 3,916
--------------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.7% 66
--------------------------------------------------------------------------------------------------
NET ASSETS--100% $3,982
--------------------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $3,867,000 for federal income tax purposes
at August 31, 1996, the gross unrealized appreciation was $64,000, the gross
unrealized depreciation was $15,000 and the net unrealized appreciation on
investments was $49,000.
See accompanying Notes to Financial Statements.
16
<PAGE> 17
PERFORMANCE UPDATE
KEMPER NEW YORK TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED AUGUST 31, 1996 (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 7.25%
CLASS A 0.51% 6.43% 6.88% (SINCE 12/31/85)
- ---------------------------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME FUND 3.96%
CLASS B 1.40% N/A N/A (SINCE 5/31/94)
- ---------------------------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME FUND 5.18%
CLASS C 4.38% N/A N/A (SINCE 5/31/94)
- ---------------------------------------------------------------------------------------------------
</TABLE>
Past performance is not predictive of future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
*Average annual total return and total return measure net investment income and
capital gain or loss from portfolio investments, assuming reinvestment of all
dividends and for A shares adjustment for the maximum sales charge of 4.5% and
for B shares adjustment for the applicable contingent deferred sales charge as
follows: 1-year, 3%; 5-year, 1%; since inception, 0%. For C shares purchased
after 4/1/96 there is a 1% CDSC on certain redemptions within the first year of
purchase. Average annual total return reflects annualized change while total
return reflects aggregate change. During the periods noted, securities prices
fluctuated. For additional information, see the Prospectus and Statement of
Additional Information and the Financial Highlights at the end of this report.
[LINE GRAPH]
<TABLE>
<CAPTION>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS A FROM 12/31/85 TO 8/31/96
12/31/85 12/31/88 12/31/91 12/31/94 8/31/96
<S> <C> <C> <C> <C> <C>
- - KEMPER NEW YORK TAX-FREE INCOME FUND(1) $10,000 $11,461 $15,419 $18,117 $21,009
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10,000 13,342 17,784 20,606 24,306
- - CONSUMER PRICE INDEX++ 10,000 11,025 12,617 13,696 14,392
</TABLE>
[LINE GRAPH]
<TABLE>
<CAPTION>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS B FROM 5/31/94 TO 8/31/96
5/31/94 12/31/94 12/31/95 8/31/96
<S> <C> <C> <C> <C>
- - KEMPER NEW YORK TAX-FREE INCOME FUND(1) $10,000 $ 9,771 $11,426 $10,916
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10,000 9,864 11,586 11,636
- - CONSUMER PRICE INDEX++ 10,000 10,149 10,407 10,664
</TABLE>
[LINE GRAPH]
<TABLE>
<CAPTION>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS C FROM 5/31/94 TO 8/31/96
5/31/94 12/31/94 12/31/95 8/31/96
<S> <C> <C> <C> <C>
- - KEMPER NEW YORK TAX-FREE INCOME FUND(1) $10,000 $ 9,770 $11,420 $11,209
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10,000 9,864 11,586 11,636
- - CONSUMER PRICE INDEX++ 10,000 10,149 10,407 10,664
</TABLE>
(1)Performance includes reinvestment of dividends and adjustment for the maximum
sales charge for A shares and the contingent deferred sales charge in effect at
the end of the period for B shares. In comparing the Kemper State Tax-Free
Income Funds to the Lehman Brothers Municipal Bond Index, you should note that
the funds' performance reflects the maximum sales charges, while no such charges
are reflected in the performance of the index.
+The Lehman Brothers Municipal Bond Index includes approximately 15,000 bonds.
To be included in the index a municipal bond must meet the following criteria: a
minimum credit rating of BBB, have been issued as a part of an issue of at least
$50 million, have been issued within the last 5 years, and have a maturity of at
least 2 years. Bonds subject to Alternative Minimum Tax (AMT), variable rate
bonds and zero coupon bonds are excluded from the index. Source is Towers Data
Systems.
++The Consumer Price Index is a statistical measure of change, over time, in the
prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source is
Towers Data Systems.
17
<PAGE> 18
PORTFOLIO STATISTICS
KEMPER NEW YORK TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION* ON 8/31/96 ON 8/31/95
<S> <C> <C>
REVENUE BONDS 94% 92%
- ----------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 4 6
- ----------------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 2
- ----------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
<TABLE>
<CAPTION>
QUALITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
AAA 43% 53%
- ----------------------------------------------------------------------------------
AA 25 28
- ----------------------------------------------------------------------------------
A 8 9
- ----------------------------------------------------------------------------------
BBB 21 8
- ----------------------------------------------------------------------------------
NOT RATED 3 2
- ----------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
<TABLE>
<CAPTION>
YEARS TO MATURITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
1-10 YEARS 7% 7%
- ----------------------------------------------------------------------------------
11-20 YEARS 51 36
- ----------------------------------------------------------------------------------
+21 YEARS 42 57
- ----------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
<TABLE>
<CAPTION>
AVERAGE MATURITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
17.6 YEARS 20.9 YEARS
- ----------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
NEW YORK TAX-FREE INCOME FUND
Portfolio of Investments at August 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
ADVANCE Battery Park City Auth., Rev., 8.625%, to be called
REFUNDED 6-1-05 @ 100 $ 10 $ 12
OBLIGATIONS --------------------------------------------------------------------------------------------
SECURED AS TO Dormitory Auth., State University Educational Facilities, Rev.,
PRINCIPAL AND 7.25%, to be called 5-15-02 @ 102 155 177
INTEREST BY --------------------------------------------------------------------------------------------
OBLIGATIONS
OF THE Medical Care Facilities Finance Agcy.:
UNITED STATES Albany Medical Center Hospital, Rev., 8.00%, to be called 8-15-98 @
GOVERNMENT 102 1,085 1,166
Long Beach Memorial Hospital Proj., Rev., 7.80%, to be called
8-15-98 @ 102 1,000 1,085
Presbyterian Hospital Proj., 7.70%, to be called 8-15-00 @ 102 4,000 4,522
--------------------------------------------------------------------------------------------
New York City, Gen. Oblg., 7.75%, to be called
3-15-00 @ 101.50 1,105 1,229
--------------------------------------------------------------------------------------------
Port Auth. of New York and New Jersey, Consolidation Bonds, Rev.,
8.00%, to be called 9-15-96 @ 102 1,475 1,507
--------------------------------------------------------------------------------------------
Power Auth. Electrical, Gen. Purpose, Rev., 8.00%, to be called
1-1-98 @ 102 5,320 5,690
--------------------------------------------------------------------------------------------
Thruway Auth., Local Highway and Bridge Service Contract, Rev.,
7.25%, to be called 1-1-01 @ 102 1,890 2,111
--------------------------------------------------------------------------------------------
Urban Dev. Corp., Syracuse University, Center for Science and
Technology, Rev., 7.75%, to be called 1-1-98 @ 102 200 213
------------------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--5.8% 17,712
------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
OTHER Dormitory Auth.:
MUNICIPAL Bishop Henry B. Hucles Nursing Home, Inc., Rev., 5.625%, 2018 5,890 5,612
OBLIGATIONS City University System, Rev., 5.75% to 7.00%, 2009 through 2018 11,550 11,513
Colgate University, Rev., 6.00%, 2016 and 2021 1,300 1,350
Cornell University, Rev., 7.375%, 2020 2,000 2,218
Fordham University, Rev., 7.20%, 2015 790 867
Ideal Senior Living Center, Rev., 7.625%, 2028 400 426
Judicial Lease Facility, Rev., 7.375%, 2016 120 141
Menorah Campus Inc., Rev., 7.30% and 7.40%, 2016 and 2031 3,865 4,249
Special Art School Districts Program, Rev., 7.00%, 2013 1,300 1,415
State University Educational Facilities, Rev., 5.25% to 7.50%, 2010
through 2019 14,125 13,974
St. Vincent's Hospital and Medical Center, Rev., 7.375%, 2011 2,500 2,774
--------------------------------------------------------------------------------------------
Energy Research and Dev. Auth.:
Brooklyn Union Gas Company Proj., Rev., 5.50% to 7.125%,
2020 and 2021 9,175 8,911
Consolidated Edison Company of New York, Inc. Proj., Rev.,
5.375% to 7.75%, 2020 through 2025 15,700 15,991
--------------------------------------------------------------------------------------------
Environmental Facilities Corp.:
Huntington Resource Recovery Proj., Rev., 7.50%, 2012 3,745 4,130
State Water Pollution Control, Revolving Fund Rev., 5.75% and
7.25%, 2010 and 2015 14,490 14,882
--------------------------------------------------------------------------------------------
Housing Finance Agcy.:
Multi-Family Mortgage Rev., 6.95%, 2012 1,500 1,589
Service Contract Oblg., Rev., 7.25% and 7.30%, 2012 4,000 4,365
State University Construction, Rev., 8.00%, 2011 200 246
West-H.E.L.P. Housing, Rev., 7.55%, 2002 3,500 3,658
--------------------------------------------------------------------------------------------
Local Government Assistance Corp., Rev., 5.50% and 5.80%, 2010 and
2017 16,085 15,669
--------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
ISSUER PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
Medical Care Facilities Finance Agcy.:
Columbian Presbyterian Hospital, Rev., 7.875%, 2007 $ 500 $ 524
Good Samaritan Hospital, Rev., 7.625%, 2023 1,000 1,056
Hospital and Nursing Home, Rev., 7.60%, 2029 2,000 2,153
Mental Health Service Facilities Improvement, Rev., 5.375% to
7.875%, 2014 through 2020 7,070 7,366
Montefiore Medical Center, Rev., 7.25%, 2024 2,000 2,130
--------------------------------------------------------------------------------------------
Metropolitan Transportation Auth., Commuter Facilities, Rev., 5.75%
and 6.00%, 2011 and 2016 17,280 17,398
--------------------------------------------------------------------------------------------
Mortgage Agcy., Homeowner Mortgage, Rev., 6.45% to 8.30%, 2009
through 2022 10,235 10,597
--------------------------------------------------------------------------------------------
Port Auth. of New York and New Jersey, Rev., 6.00%, 2014 4,340 4,370
--------------------------------------------------------------------------------------------
Thruway Auth., Highway and Bridge Trust Fund, 5.25% and 5.50%, 2015 10,250 9,746
--------------------------------------------------------------------------------------------
Urban Dev. Corp.:
Correctional Capital Facilities, Rev., 5.25% and 5.625%, 2014 and
2017 6,255 5,875
Correctional Facilities, Rev., 5.50%, 2014 4,500 4,206
State Facilities, Rev., 5.60% and 5.75%, 2012 and 2015 3,760 3,579
Syracuse University, Center for Science and Technology, Rev.,
5.50%, 2015 and 2017 9,390 8,728
--------------------------------------------------------------------------------------------
Babylon, Gen. Oblg., 5.875%, 2009 1,075 1,101
--------------------------------------------------------------------------------------------
Buffalo Municipal Water Finance Auth., Rev., 5.00%, 2025 2,000 1,761
--------------------------------------------------------------------------------------------
Dutchess County Resource Recovery Agcy., Solid Waste Management
System, Rev., 7.50%, 2009 2,000 2,178
--------------------------------------------------------------------------------------------
Grand Central District Management Association, Inc.,
Business Improvement District, Rev., 5.125%, 2014 4,000 3,714
--------------------------------------------------------------------------------------------
Nassau County:
Gen. Oblg., 5.70%, 2013 1,360 1,366
Sewer Districts, Rev., 5.40%, 2012 2,000 1,970
--------------------------------------------------------------------------------------------
New York City:
Gen. Oblg., 5.875% to 8.00%, 1998 through 2018 5,935 5,785
Housing Dev. Corp., Multi-Unit Mortgage Rev., 7.30%, 2010 8,800 9,369
Municipal Assistance Corp., Rev., 7.625%, 2008 4,160 4,545
Municipal Water Finance Auth., Water and Sewer System, Rev.,
5.375%, 2019 5,000 4,682
Transit Auth., Livingston Plaza Proj., Rev., 5.40%, 2018 8,680 8,334
--------------------------------------------------------------------------------------------
Niagara County, Water Treatment Plant, Gen. Oblg., 7.00% and 7.25%,
2011 and 2012 1,215 1,351
--------------------------------------------------------------------------------------------
Niagara Falls Bridge Commission, Toll Bridge System, Rev., 5.25%,
2015 1,215 1,158
--------------------------------------------------------------------------------------------
Niagara Frontier Transportation Auth., Airport Rev., 6.125%, 2014 3,000 3,037
--------------------------------------------------------------------------------------------
North Country Dev. Auth., Solid Waste Management System, Rev., 6.75%,
2012 1,430 1,471
--------------------------------------------------------------------------------------------
Suffolk County, Water Auth., Rev., 7.375%, 2012 170 183
--------------------------------------------------------------------------------------------
Syracuse, Onondaga County Airport Improvement, Gen. Oblg., 6.00% and
6.125%, 2014 2,135 2,161
--------------------------------------------------------------------------------------------
Triborough Bridge and Tunnel Auth., Gen. Purpose Rev., 5.50% and
6.125%, 2017 and 2021 9,125 9,235
--------------------------------------------------------------------------------------------
Ulster County, Resource Recovery Agcy., Solid Waste System, Rev.,
5.90% and 6.00%, 2007 and 2014 4,100 3,918
--------------------------------------------------------------------------------------------
William Floyd Union Free School District of the
Mastics-Moriches-Shirley, Gen. Oblg., 5.75%, 2014 and 2015 2,640 2,642
--------------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev., 6.50%, 2018 5,985 5,912
Highway and Transportation Auth., Rev., 6.00%, 2018 2,750 2,843
-------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
ISSUER PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
Virgin Islands:
Housing Finance Auth., GNMA Collateralized Home Mortgage,
Rev., 8.10%, 2018 $ 70 $ 73
Public Finance Auth., Matching Fund Loan, Rev., 7.25%, 2018 7,100 7,547
------------------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--92.0% 278,044
------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--97.8%
(Cost: $285,529) 295,756
------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS--1.1%
Yield--4.00% to 4.05%
Due--September 1996
(Cost: $3,350) 3,350 3,350
------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.9%
(Cost: $288,879) 299,106
------------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.1% 3,240
------------------------------------------------------------------------------------------------
NET ASSETS--100% $302,346
------------------------------------------------------------------------------------------------
</TABLE>
Note to Portfolio of Investments
Based on the cost of investments of $288,879,000 for federal income tax purposes
at August 31, 1996, the gross unrealized appreciation was $11,228,000, the gross
unrealized depreciation was $1,001,000 and the net unrealized appreciation on
investments was $10,227,000.
See accompanying Notes to Financial Statements.
21
<PAGE> 22
PERFORMANCE UPDATE
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED AUGUST 31, 1996 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND CLASS A 1.26% 4.59% (SINCE 3/15/95)
- ------------------------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND CLASS B 2.29% 5.11% (SINCE 3/15/95)
- ------------------------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND CLASS C 5.19% 7.12% (SINCE 3/15/95)
- ------------------------------------------------------------------------------------------------
</TABLE>
Past performance is not predictive of future performance. Returns and net asset
value fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
*Average annual total return and total return measure net investment income and
capital gain or loss from portfolio investments, assuming reinvestment of
all dividends and for A shares adjustment for the maximum sales charge of 4.5%
and for B shares adjustment for the applicable contingent deferred sales charge
as follows: 1-year, 3%; 5-year, 1%; since inception, 0%. For C shares purchased
after 4/1/96 there is a 1% CDSC on certain redemptions within the first year of
purchase. Average annual total return reflects annualized change while total
return reflects aggregate change. During the periods noted, securities prices
fluctuated. For additional information, see the Prospectus and Statement of
Additional Information and the Financial Highlights at the end of this report.
<TABLE>
<CAPTION>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS A FROM 3/15/95 TO 8/31/96
3/15/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 8/31/96
<S> <C> <C> <C> <C> <C> <C> <C>
- - KEMPER PENNSYLVANIA TAX-FREE INCOME FUND(1) $10,000 $ 9,834 $10,149 $10,803 $10,535 $10,567 $10,683
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ $10,000 10,359 10,656 11,096 10,963 11,047 11,144
- - CONSUMER PRICE INDEX++ $10,000 10,106 10,152 10,172 10,318 10,384 10,424
</TABLE>
<TABLE>
<CAPTION>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS B FROM 3/15/95 TO 8/31/96
3/15/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 8/31/96
<S> <C> <C> <C> <C> <C> <C> <C>
- - KEMPER PENNSYLVANIA TAX-FREE INCOME FUND(1) $10,000 $10,510 $10,498 $11,234 $10,922 $10,867 $10,760
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ $10,000 10,359 10,656 11,096 10,963 11,047 11,144
- - CONSUMER PRICE INDEX++ $10,000 10,106 10,152 10,172 10,318 10,384 10,424
</TABLE>
<TABLE>
<CAPTION>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS C FROM 3/15/95 TO 8/31/96
3/15/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 8/31/96
<S> <C> <C> <C> <C> <C> <C> <C>
- - KEMPER PENNSYLVANIA TAX-FREE INCOME FUND(1) $10,000 $10,278 $10,586 $11,245 $10,946 $10,954 $11,064
- - LEHMAN BROTHERS MUNICIPAL BOND INDEX+ $10,000 10,359 10,656 11,096 10,963 11,047 11,144
- - CONSUMER PRICE INDEX++ $10,000 10,106 10,152 10,172 10,318 10,384 10,424
</TABLE>
(1)Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for A shares and the contingent deferred sales charge in
effect at the end of the period for B shares. In comparing the Kemper State
Tax-Free Income Funds to the Lehman Brothers Municipal Bond Index, you should
note that the funds' performance reflects the maximum sales charges, while no
such charges are reflected in the performance of the index.
+The Lehman Brothers Municipal Bond Index includes approximately 15,000 bonds.
To be included in the index a municipal bond must meet the following criteria: a
minimum credit rating of BBB, have been issued as a part of an issue of at least
$50 million, have been issued within the last 5 years, and have a maturity of at
least 2 years. Bonds subject to Alternative Minimum Tax (AMT), variable rate
bonds and zero coupon bonds are excluded from the index. Source is Towers Data
Systems.
++The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source is
Towers Data Systems.
22
<PAGE> 23
PORTFOLIO STATISTICS
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION* ON 8/31/96 ON 8/31/95
<S> <C> <C>
REVENUE BONDS 68% 81%
- ---------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 28 17
- ---------------------------------------------------------------------------------
CASH AND EQUIVALENTS 4 2
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
<TABLE>
<CAPTION>
QUALITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
AAA 75% 78%
- ---------------------------------------------------------------------------------
AA 9 2
- ---------------------------------------------------------------------------------
A -- 6
- ---------------------------------------------------------------------------------
BBB 13 7
- ---------------------------------------------------------------------------------
NOT RATED 3 7
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
<TABLE>
<CAPTION>
YEARS TO MATURITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
1-10 YEARS 1% 3%
- ---------------------------------------------------------------------------------
11-20 YEARS 82 70
- ---------------------------------------------------------------------------------
+ 21 YEARS 17 27
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
<TABLE>
<CAPTION>
AVERAGE MATURITY ON 8/31/96 ON 8/31/95
<S> <C> <C>
14.9 YEARS 23.7 YEARS
- ---------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
23
<PAGE> 24
PORTFOLIO OF INVESTMENTS
PENNSYLVANIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
MUNICIPAL Commonwealth of Pennsylvania, Gen. Oblg., 5.00%, 2007 $ 125 $ 122
OBLIGATIONS ---------------------------------------------------------------------------------------------
Convention Center Auth., Rev., 6.75%, 2019 55 58
---------------------------------------------------------------------------------------------
Higher Educational Facilities Auth.:
Allegheny General Hospital, Rev., 7.00%, 2011 100 109
Philadelphia College of Textiles & Science, Rev., 6.70%, 2014 70 71
University of Pennsylvania, Rev., 5.55%, 2009 50 50
---------------------------------------------------------------------------------------------
Housing Finance Agcy., Rev., 6.30%, 2015 200 202
---------------------------------------------------------------------------------------------
Industrial Dev. Auth., Economic Dev., Rev., 6.00% and 5.50%, 2012 and 2014 210 207
---------------------------------------------------------------------------------------------
Intergovernmental Cooperation Auth., Rev., 5.50%, 2011 100 98
---------------------------------------------------------------------------------------------
Public School Building Auth., Rev., 5.50%, 2016 100 96
---------------------------------------------------------------------------------------------
Turnpike Commission, Rev., 6.25%, 2011 10 10
---------------------------------------------------------------------------------------------
Allegheny County Higher Education Building Auth., Duquesne University
Proj., Rev., 6.50%, 2011 205 227
---------------------------------------------------------------------------------------------
Bangor Area School District, Gen. Oblg., 5.375%, 2015 40 38
---------------------------------------------------------------------------------------------
Bensalem Township, Gen. Oblg., 5.75%, 2011 100 101
---------------------------------------------------------------------------------------------
Bethlehem Area School District, Gen. Oblg., 6.00%, 2016 200 203
---------------------------------------------------------------------------------------------
Boyertown School District, Gen. Oblg., 5.25%, 2012 35 34
---------------------------------------------------------------------------------------------
Bradford Area School District, Gen. Oblg., 5.80%, 2019 100 98
---------------------------------------------------------------------------------------------
Cambria County, Gen. Oblg., 5.875%, 2008 15 16
---------------------------------------------------------------------------------------------
Central Bucks School District, Gen. Oblg., 5.40%, 2014 20 19
---------------------------------------------------------------------------------------------
Delaware County, Gen. Oblg., 5.80%, 2016 125 125
---------------------------------------------------------------------------------------------
Exeter Township, Berks County Auth., Rev., 6.20%, 2022 75 77
---------------------------------------------------------------------------------------------
Fleetwood Area School Auth., Rev., 5.65%, 2011 200 200
---------------------------------------------------------------------------------------------
Hollidaysburg Area School District, Gen. Oblg., zero coupon, 2016 300 91
---------------------------------------------------------------------------------------------
Lackawanna County, Gen. Oblg., 6.00%, 2011 15 16
---------------------------------------------------------------------------------------------
Lehigh County General Purpose Auth., Lehigh Valley Hospital, Inc., Rev.,
5.625% and 5.875%, 2015 185 182
---------------------------------------------------------------------------------------------
McKean County Hospital Auth., Bradford Hospital Proj., Rev., 5.375% and
6.10%, 2003 and 2020 115 108
---------------------------------------------------------------------------------------------
McKeesport Area School District, Gen. Oblg., 5.75% and zero coupon, 2012
and 2014 200 135
---------------------------------------------------------------------------------------------
Monroeville Hospital Auth., Forbes Health System, Rev., 6.25%, 2015 125 123
---------------------------------------------------------------------------------------------
North Fayette County Municipal Auth., Rev., zero coupon, 2013 100 37
---------------------------------------------------------------------------------------------
Parkland School District, Gen. Oblg., 5.40%, 2008 100 100
---------------------------------------------------------------------------------------------
Philadelphia:
Airport System, Rev., 5.75%, 2008 200 202
Gas Works Rev., 6.375%, 2014 90 92
Hospitals and Higher Education Facilities Auth., Nazareth
Hospital/Franciscan Health System Proj., Rev., 5.00%, 2010 200 185
School District, Gen. Oblg., 6.25%, 2009 100 108
Water and Wastewater Rev., 6.25%, 2012 50 54
---------------------------------------------------------------------------------------------
Suburban Lancaster Sewer Auth., Rev., 5.80%, 2010 100 101
---------------------------------------------------------------------------------------------
Upper Merion Area School District, Gen. Oblg., 5.50%, 2016 20 19
---------------------------------------------------------------------------------------------
West Chester Area Municipal Auth., Rev., 5.45%, 2012 20 20
---------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
ISSUER PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
Westmoreland County Industrial Dev. Auth., Westmoreland Health System
Proj., Rev., 6.00%, 2011 $ 15 $ 15
---------------------------------------------------------------------------------------------
York County Industrial Dev. Auth., Public Service Electric and Gas
Company, Peach Bottom Proj., Rev., 6.45%, 2019 20 21
---------------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Facilities Financing Auth., Mennonite Gen. Hospital Proj., Rev., 6.50%,
2018 100 99
Gen. Oblg., 5.50%, 2009 15 15
Highway and Transportation Auth., Rev., 6.25%, 2016 115 123
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%, 2026 40 40
University of Puerto Rico, Rev., 5.50%, 2015 100 97
------------------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Rev., 7.25%, 2018 100 106
------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--95.6%
(Cost: $4,215) 4,250
------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENT--2.2%
Yield--3.95%
Due--September 1996
(Cost: $100) 100 100
------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--97.8%
(Cost: $4,315) 4,350
------------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--2.2% 99
------------------------------------------------------------------------------------------------
NET ASSETS--100% $4,449
------------------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $4,315,000 for federal income tax purposes
at August 31, 1996, the gross unrealized appreciation was $54,000, the gross
unrealized depreciation was $19,000 and the net unrealized appreciation on
investments was $35,000.
See accompanying Notes to Portfolios of Investments
25
<PAGE> 26
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 Florida Tax-Free Income Fund,
Kemper New Jersey Tax-Free Income Fund, Kemper New York Tax-Free Income Fund,
and Kemper Pennsylvania Tax-Free Income Fund, four of the eight investment
portfolios comprising Kemper State Tax-Free Income Series (the Trust), as of
August 31, 1996, 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,
except for the New Jersey Fund and the Pennsylvania Fund which are for the
period from March 15, 1995 (initial public offering) to August 31, 1995 and the
year ended August 31, 1996, and financial highlights for each of the fiscal
periods since 1992. 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, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the above mentioned Funds of Kemper State Tax-Free Income Series at August
31, 1996, and the results of their operations, the changes in their net assets
and the financial highlights for the periods referred to above, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1996
26
<PAGE> 27
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1996
(in thousands)
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY NEW YORK PENNSYLVANIA
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (Cost: $102,088, $3,867,
$288,879 and $4,315, respectively) $106,082 3,916 299,106 4,350
- --------------------------------------------------------------------------------------------------------
Cash 337 73 188 59
- --------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 69 108 37 86
- --------------------------------------------------------------------------------------------------------
Investments sold 127 3 68 3
- --------------------------------------------------------------------------------------------------------
Interest 1,851 46 4,273 70
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS 108,466 4,146 303,672 4,568
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
Payable for:
Dividends 108 3 316 3
- --------------------------------------------------------------------------------------------------------
Fund shares redeemed 136 -- 681 8
- --------------------------------------------------------------------------------------------------------
Investments purchased -- 152 -- 99
- --------------------------------------------------------------------------------------------------------
Management fee 51 2 135 2
- --------------------------------------------------------------------------------------------------------
Administrative services fee 16 1 44 1
- --------------------------------------------------------------------------------------------------------
Distribution services fee 2 1 5 1
- --------------------------------------------------------------------------------------------------------
Trustees' fees and other 48 5 145 5
- --------------------------------------------------------------------------------------------------------
Total liabilities 361 164 1,326 119
- --------------------------------------------------------------------------------------------------------
NET ASSETS $108,105 3,982 302,346 4,449
- --------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
Paid-in capital $104,060 3,922 293,460 4,446
- --------------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments 51 11 (1,341) (32)
- --------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 3,994 49 10,227 35
- --------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $108,105 3,982 302,346 4,449
- --------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
CLASS A SHARES
Net assets applicable to shares outstanding $105,028 1,566 294,121 2,188
- --------------------------------------------------------------------------------------------------------
Shares outstanding 10,288 159 27,591 220
- --------------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $10.21 9.85 10.66 9.95
- --------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or
4.50% of offering price) $10.69 10.31 11.16 10.42
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $ 2,752 2,395 7,007 1,731
- --------------------------------------------------------------------------------------------------------
Shares outstanding 270 243 657 174
- --------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per
share (net assets / shares outstanding) $10.19 9.88 10.66 9.95
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $ 325 21 1,218 530
- --------------------------------------------------------------------------------------------------------
Shares outstanding 32 2 114 53
- --------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per
share (net assets / shares outstanding) $10.20 9.88 10.65 9.95
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
27
<PAGE> 28
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended August 31, 1996
(in thousands)
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY NEW YORK PENNSYLVANIA
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
Interest income $6,822 243 18,868 212
- ------------------------------------------------------------------------------------------------------------
Expenses:
Management fee 642 25 1,717 21
- ------------------------------------------------------------------------------------------------------------
Administrative services fee 196 11 510 9
- ------------------------------------------------------------------------------------------------------------
Distribution services fee 22 17 47 15
- ------------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related
expenses 80 6 232 6
- ------------------------------------------------------------------------------------------------------------
Professional fees 20 12 66 5
- ------------------------------------------------------------------------------------------------------------
Reports to shareholders 22 1 63 1
- ------------------------------------------------------------------------------------------------------------
Trustees' fees and other 19 11 36 12
- ------------------------------------------------------------------------------------------------------------
Total expenses before expense waiver 1,001 83 2,671 69
- ------------------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment
manager -- 14 -- 13
- ------------------------------------------------------------------------------------------------------------
Total expenses after expense waiver 1,001 69 2,671 56
- ------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 5,821 174 16,197 156
- ------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on sales of
investments (including options purchased) 485 2 2,652 (39)
- ------------------------------------------------------------------------------------------------------------
Net realized gain from futures transactions 538 20 159 10
- ------------------------------------------------------------------------------------------------------------
Net realized gain (loss) 1,023 22 2,811 (29)
- ------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on
investments (198) (5) (2,528) 2
- ------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 825 17 283 (27)
- ------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $6,646 191 16,480 129
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
28
<PAGE> 29
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY
------------------------- ----------------------
YEAR ENDED AUGUST 31, YEAR ENDED AUGUST 31,
1996 1995 1996 1995(A)
<S> <C> <C> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
Net investment income $5,821 6,362 174 69
- ----------------------------------------------------------------------------------------------------------------
Net realized gain (loss) 1,023 1,143 22 (11)
- ----------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (198) 2,452 (5) 54
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 6,646 9,957 191 112
- ----------------------------------------------------------------------------------------------------------------
Distribution from net investment income (5,821) (6,362) (174) (69)
- ----------------------------------------------------------------------------------------------------------------
Distribution from net realized gain on
investments (1,557) (1,659) -- --
- ----------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (7,378) (8,021) (174) (69)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (8,455) (9,365) (344) 3,933
- ----------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (9,187) (7,429) (327) 3,976
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period 117,292 124,721 4,309 333
- ----------------------------------------------------------------------------------------------------------------
END OF PERIOD $108,105 117,292 3,982 4,309
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NEW YORK PENNSYLVANIA
------------------------- ----------------------
YEAR ENDED AUGUST 31, YEAR ENDED AUGUST 31,
1996 1995 1996 1995(A)
<S> <C> <C> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
Net investment income $16,197 17,467 156 30
- ----------------------------------------------------------------------------------------------------------------
Net realized gain (loss) 2,811 3,780 (29) (3)
- ----------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (2,528) 1,061 2 33
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 16,480 22,308 129 60
- ----------------------------------------------------------------------------------------------------------------
Distribution from net investment income (16,197) (17,467) (156) (30)
- ----------------------------------------------------------------------------------------------------------------
Distribution from net realized gain on
investments (4,194) (3,769) -- --
- ----------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (20,391) (21,236) (156) (30)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (13,220) (24,434) 2,358 1,755
- ----------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (17,131) (23,362) 2,331 1,785
- ------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period 319,477 342,839 2,118 333
- ----------------------------------------------------------------------------------------------------------------
END OF PERIOD $302,346 319,477 4,449 2,118
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from March 15, 1995 (commencement of operations) to August
31, 1995.
29
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUNDS Kemper Florida Tax-Free Income Fund, Kemper New
Jersey Tax-Free Income Fund, Kemper New York
Tax-Free Income Fund and Kemper Pennsylvania
Tax-Free Income Fund (collectively the Funds) are
four of eight investment portfolios comprising the
Kemper State Tax-Free Income Series (the Trust).
The remaining portfolios are Kemper California,
Kemper Michigan, Kemper Ohio and Kemper Texas
Tax-Free Income Funds. The Trust is an open-end
management investment company organized as a
business trust under the laws of Massachusetts.
Each Fund offers three classes of shares. Class A
shares are sold to investors subject to an initial
sales charge. Class B shares are sold without an
initial sales charge but are subject to higher
ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and, for shares sold on or
after April 1, 1996, a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Differences in class expenses
will result in the payment of different per share
income dividends by class. Each share of a Fund
represents an identical interest in the investments
of the Fund and has the same rights.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Exchange traded fixed income
options are valued at the last sale price unless
there is no sale price, in which event prices
provided by market makers are used.
Over-the-counter traded fixed income options are
valued based upon prices provided by market makers.
Financial futures and options thereon are valued at
the settlement price established each day by the
board of trade or exchange on which they are
traded. Other securities and assets are valued at
fair value as determined in good faith by the Board
of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes premium and original
issue discount amortization on fixed income
securities. Realized gains and losses from
investment transactions are reported on an
identified cost basis.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated among the Funds in
proportion to their relative net assets.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
30
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. Each Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies and therefore no
federal income tax provision is required.
DIVIDENDS TO SHAREHOLDERS. Each Fund declares and
records a daily dividend equal to its net
investment income for that day, to holders of
shares for which payment has been received. Income
dividends are distributed monthly. Net realized
capital gains, if any, will be distributed at least
annually. Dividends are determined in accordance
with income tax principles which may treat certain
transactions differently than generally accepted
accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS
WITH AFFILIATES MANAGEMENT AGREEMENT. The Trust has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI), and each Fund pays a management fee at an
annual rate of .55% of the first $250 million of
average daily net assets declining to .40% of
average daily net assets in excess of $12.5
billion.
The Florida and New York Funds paid a management
fee of $642,000, and $1,717,000, respectively, for
the year ended August 31, 1996.
ZKI waived the management fees of the New Jersey
and Pennsylvania Funds from their inception, March
15, 1995, through September 15, 1995. Thereafter,
the management fees were gradually reinstated. For
the year ended August 31, 1996, the New Jersey and
Pennsylvania Funds paid management fees of $11,000
and $8,000, respectively, after the waiver.
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,
1996 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS -------------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Florida $21,000 81,000 3,000
New Jersey 2,000 12,000 --
New York 45,000 248,000 14,000
Pennsylvania 1,000 10,000 --
</TABLE>
For services under the distribution services
agreement, each Fund pays KDI a fee of .75% of
average daily net assets of 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 Class B and Class C
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
shares. Distribution fees and commissions paid in
connection with the sale of each Fund's Class B and
Class C shares and the CDSC received in connection
with the redemption of such shares for the year
ended August 31, 1996 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES
DISTRIBUTION PAID BY KDI
FEES AND CDSC -----------------------------
RECEIVED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Florida $27,000 39,000 --
New Jersey 34,000 42,000 --
New York 67,000 152,000 69,000
Pennsylvania 17,000 32,000 11,000
</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 that the firms service.
Administrative services fees (ASF) paid for the
year ended August 31, 1996 are as follows:
<TABLE>
<CAPTION>
ASF ASF PAID BY KDI
PAID BY THE -----------------------------------
FUND TO KDI TO ALL FIRMS TO AFFILIATES
----------- ------------ --------------------
<S> <C> <C> <C>
Florida $ 196,000 194,000 8,000
New Jersey 11,000 10,000 --
New York 510,000 510,000 28,000
Pennsylvania 9,000 9,000 1,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds' transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Trust. Under the agreement,
for the year ended August 31, 1996, KSvC received
shareholder services fees as follows:
<TABLE>
<CAPTION>
SHAREHOLDER SERVICES FEES
REMITTED TO KSVC
-------------------------
<S> <C>
Florida $ 49,000
New Jersey 2,000
New York 160,000
Pennsylvania 2,000
</TABLE>
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of ZKI.
For the year ended August 31, 1996, the Funds made
no payments to its officers and incurred trustees'
fees aggregating $15,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended August 31, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY NEW YORK PENNSYLVANIA
-------- ---------- -------- ------------
<S> <C> <C> <C> <C>
Purchases $132,683 5,325 321,319 8,090
Proceeds from sales 142,846 5,844 339,993 5,873
</TABLE>
32
<PAGE> 33
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,
1996 1995
--------------------- --------------------------
FLORIDA SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 876 $ 9,149 1,835 $ 17,931
-----------------------------------------------------------------------------------
Class B 345 3,629 219 2,167
-----------------------------------------------------------------------------------
Class C 38 398 2 22
-----------------------------------------------------------------------------------
SHARES ISSUED IN
REINVESTMENT
OF DIVIDENDS
Class A 380 3,948 455 4,487
-----------------------------------------------------------------------------------
Class B 7 73 5 45
-----------------------------------------------------------------------------------
Class C 1 4 -- --
-----------------------------------------------------------------------------------
SHARES REDEEMED
Class A (2,195) (22,721) (3,318) (32,857)
-----------------------------------------------------------------------------------
Class B (270) (2,825) (115) (1,160)
-----------------------------------------------------------------------------------
Class C (11) (110) -- --
-----------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 1 12 6 64
-----------------------------------------------------------------------------------
Class B (1) (12) (6) (64)
-----------------------------------------------------------------------------------
NET DECREASE
FROM CAPITAL
SHARE TRANSACTIONS $ (8,455) $ (9,365)
-----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 15, 1995 TO
AUGUST 31, 1996 AUGUST 31, 1995
--------------------- --------------------------
NEW JERSEY SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 76 $ 766 254 $ 2,458
-----------------------------------------------------------------------------------
Class B 127 1,271 174 1,685
-----------------------------------------------------------------------------------
Class C 2 21 2 16
-----------------------------------------------------------------------------------
SHARES ISSUED IN
REINVESTMENT OF
DIVIDENDS
Class A 5 47 2 16
-----------------------------------------------------------------------------------
Class B 5 52 2 17
-----------------------------------------------------------------------------------
Class C -- 3 1 2
-----------------------------------------------------------------------------------
SHARES REDEEMED
Class A (164) (1,625) (25) (246)
-----------------------------------------------------------------------------------
Class B (75) (743) (1) (15)
-----------------------------------------------------------------------------------
Class C (14) (136) -- --
-----------------------------------------------------------------------------------
NET INCREASE
(DECREASE)
FROM CAPITAL
SHARE TRANSACTIONS $ (344) $ 3,933
-----------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995
--------------------- ----------------------
NEW YORK SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,200 $ 13,047 1,686 $ 17,802
-------------------------------------------------------------------------------
Class B 391 4,260 278 2,974
-------------------------------------------------------------------------------
Class C 90 978 38 410
-------------------------------------------------------------------------------
SHARES ISSUED IN
REINVESTMENT OF
DIVIDENDS
Class A 1,202 13,096 1,340 13,940
-------------------------------------------------------------------------------
Class B 19 210 9 92
-------------------------------------------------------------------------------
Class C 4 42 1 6
-------------------------------------------------------------------------------
SHARES REDEEMED
Class A (4,027) (43,719) (5,633) (58,773)
-------------------------------------------------------------------------------
Class B (83) (893) (80) (851)
-------------------------------------------------------------------------------
Class C (22) (241) (3) (34)
-------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 7 73 15 164
-------------------------------------------------------------------------------
Class B (7) (73) (15) (164)
-------------------------------------------------------------------------------
NET DECREASE
FROM CAPITAL
SHARE TRANSACTIONS $(13,220) $(24,434)
-------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 15, 1995 TO
AUGUST 31, 1996 AUGUST 31, 1995
--------------------- ----------------------
PENNSYLVANIA SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 154 $ 1,568 94 $ 918
-------------------------------------------------------------------------------
Class B 100 1,009 94 916
-------------------------------------------------------------------------------
Class C 52 520 1 15
-------------------------------------------------------------------------------
SHARES ISSUED IN
REINVESTMENT OF
DIVIDENDS
Class A 5 53 1 9
-------------------------------------------------------------------------------
Class B 3 34 1 9
-------------------------------------------------------------------------------
Class C 2 17 -- --
-------------------------------------------------------------------------------
SHARES REDEEMED
Class A (39) (386) (7) (75)
-------------------------------------------------------------------------------
Class B (32) (322) (4) (37)
-------------------------------------------------------------------------------
Class C (14) (135) -- --
-------------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL
SHARE TRANSACTIONS $ 2,358 $ 1,755
-------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Funds have entered into exchange traded futures
contracts on U.S. Treasury securities in order to
help protect themselves from anticipated market
conditions and, as such, bear the risk that arises
from entering into these contracts.
At the time a Fund enters into a futures contract,
it is required to make a margin deposit with its
custodian. Subsequently, gain or loss is recognized
and payments are made on a daily basis between the
Fund and its broker as the market value of the
futures contract fluctuates. At August 31, 1996,
the market values of assets pledged by the Funds to
cover margin requirements for open futures
positions were $391,000, $15,000, $617,000 and
$13,000 for the Florida, New Jersey, New York and
Pennsylvania Funds, respectively. The Funds also
had liquid securities in their portfolios in excess
of the face amount of the following short Treasury
Bond futures open at August 31, 1996. The contracts
expire in December, 1996.
<TABLE>
<CAPTION>
GAIN AT
FUND FACE AMOUNT 8/31/96
<S> <C> <C>
-----------------------------------------
Florida $16,224,000 $207,000
-----------------------------------------
New Jersey 432,000 5,000
-----------------------------------------
New York 8,763,000 114,000
-----------------------------------------
Pennsylvania 325,000 5,000
-----------------------------------------
</TABLE>
35
<PAGE> 36
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED AUGUST 31,
---------------------
FLORIDA 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $10.27 10.11 10.98 10.22 9.69
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .52 .53 .52 .58 .64
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 .30 (.52) .81 .53
- -------------------------------------------------------------------------------------------------------
Total from investment operations .60 .83 -- 1.39 1.17
- -------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .52 .53 .52 .58 .64
- -------------------------------------------------------------------------------------------------------
Distribution from net realized gain .14 .14 .35 .05 --
- -------------------------------------------------------------------------------------------------------
Total dividends .66 .67 .87 .63 .64
- -------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.21 10.27 10.11 10.98 10.22
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN 5.83% 8.62 (.11) 13.96 12.51
RATIOS TO AVERAGE NET ASSETS (A)
Expenses .84% .80 .79 .63 .25
- -------------------------------------------------------------------------------------------------------
Net investment income 5.00 5.30 5.04 5.48 6.25
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
MAY 31, MAY 31,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
----------------- ---------- ---------------- ----------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.26 10.10 10.13 10.26 10.10 10.13
- -------------------------------------------------------------------------------- ------------------------------------
Income from investment operations:
Net investment income .43 .44 .11 .43 .45 .11
- -------------------------------------------------------------------------------- ------------------------------------
Net realized and unrealized gain (loss) .07 .30 (.03) .08 .30 (.03)
- -------------------------------------------------------------------------------- ------------------------------------
Total from investment operations .50 .74 .08 .51 .75 .08
- -------------------------------------------------------------------------------- ------------------------------------
Less dividends:
Distribution from net investment income .43 .44 .11 .43 .45 .11
- -------------------------------------------------------------------------------- ------------------------------------
Distribution from net realized gain .14 .14 -- .14 .14 --
- -------------------------------------------------------------------------------- ------------------------------------
Total dividends .57 .58 .11 .57 .59 .11
- -------------------------------------------------------------------------------- ------------------------------------
Net asset value, end of period $10.19 10.26 10.10 10.20 10.26 10.10
- -------------------------------------------------------------------------------- ------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.84% 7.67 .74 4.97% 7.84 .75
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.68% 1.65 1.70 1.64 1.52 1.54
- -------------------------------------------------------------------------------- ------------------------------------
Net investment income 4.16 4.45 4.28 4.20 4.58 4.52
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $108,105 117,292 124,721 129,702 109,226
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 119% 96 53 35 20
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR FLORIDA FUND:
(a) Certain expenses of the Florida Fund were waived or absorbed by ZKI during
the two years ended August 31, 1992 and 1993. If no waiver had been in place
during these years, the expense ratios would have increased by .42% and .01% of
average net assets, respectively, with a corresponding decrease in the net
investment income ratios during these periods.
36
<PAGE> 37
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------ ------------------------ ------------------------
MARCH 15, MARCH 15, MARCH 15,
YEAR ENDED 1995 TO YEAR ENDED 1995 TO YEAR ENDED 1995 TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
NEW JERSEY 1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $9.75 9.50 9.77 9.50 9.77 9.50
- ---------------------------------------------------------------- ------------------------- ------------------------------
Income from investment operations:
Net investment income .43 .22 .36 .18 .36 .18
- ---------------------------------------------------------------- ------------------------- ------------------------------
Net realized and unrealized gain .10 .25 .11 .27 .11 .27
- ---------------------------------------------------------------- ------------------------- ------------------------------
Total from investment operations .53 .47 .47 .45 .47 .45
- ---------------------------------------------------------------- ------------------------- ------------------------------
Less distribution from net investment
income .43 .22 .36 .18 .36 .18
- ---------------------------------------------------------------- ------------------------- ------------------------------
Net asset value, end of period $9.85 9.75 9.88 9.77 9.88 9.77
- ---------------------------------------------------------------- ---------------------- ---------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.50% 4.89 4.80 4.69 4.89 4.75
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)(B)
Expenses absorbed by the Fund 1.13% .39 2.00 1.18 1.70 1.18
- ---------------------------------------------------------------- ------------------------- ------------------------------
Net investment income 4.41 4.99 3.54 4.20 3.84 4.20
OTHER RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)(B)
Expenses 1.45% .94 2.32 1.73 2.02 1.73
- ---------------------------------------------------------------- ------------------------- ------------------------------
Net investment income 4.09 4.44 3.22 3.65 3.52 3.65
- ---------------------------------------------------------------- ------------------------- ------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
<CAPTION>
YEAR MARCH 15,
ENDED 1995 TO
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $3,982 4,309
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 128% 68
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR NEW JERSEY FUND:
(b) ZKI agreed to waive the management fee of the New Jersey Fund from its
inception, March 15, 1995, through September 15, 1995. Thereafter, the
management fee was gradually reinstated. "Other ratios to average net assets"
are computed without the undertaking to waive the management fee.
37
<PAGE> 38
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED AUGUST 31,
--------------------------------------------------
NEW YORK 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $10.80 10.73 11.59 10.97 10.41
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .56 .58 .58 .63 .65
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) -- .20 (.60) .72 .56
- -------------------------------------------------------------------------------------------------------
Total from investment operations .56 .78 (.02) 1.35 1.21
- -------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .56 .58 .58 .63 .65
- -------------------------------------------------------------------------------------------------------
Distribution from net realized gain .14 .13 .26 .10 --
- -------------------------------------------------------------------------------------------------------
Total dividends .70 .71 .84 .73 .65
- -------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.66 10.80 10.73 11.59 10.97
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN 5.26% 7.62 (.19) 12.82 12.07
RATIOS TO AVERAGE NET ASSETS
Expenses .83% .81 .76 .67 .66
- -------------------------------------------------------------------------------------------------------
Net investment income 5.15 5.47 5.29 5.69 6.12
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
--------------------------------------- ------------------------------------------
MAY 31, MAY 31,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.80 10.73 10.77 10.79 10.73 10.77
- --------------------------------------------------------------------------------- ---------------------------------------------
Income from investment operations:
Net investment income .47 .48 .12 .47 .48 .12
- --------------------------------------------------------------------------------- ---------------------------------------------
Net realized and unrealized gain (loss) -- .20 (.04) -- .19 (.04)
- --------------------------------------------------------------------------------- ---------------------------------------------
Total from investment operations .47 .68 .08 .47 .67 .08
- --------------------------------------------------------------------------------- ---------------------------------------------
Less dividends:
Distribution from net investment income .47 .48 .12 .47 .48 .12
- --------------------------------------------------------------------------------- ---------------------------------------------
Distribution from net realized gain .14 .13 -- .14 .13 --
- --------------------------------------------------------------------------------- ---------------------------------------------
Total dividends .61 .61 .12 .61 .61 .12
- --------------------------------------------------------------------------------- ---------------------------------------------
Net asset value, end of period $10.66 10.80 10.73 10.65 10.79 10.73
- --------------------------------------------------------------------------------- ---------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.36% 6.69 .75 4.38 6.64 .70
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.69% 1.67 1.68 1.67 1.62 1.63
- --------------------------------------------------------------------------------- ---------------------------------------------
Net investment income 4.29 4.61 4.36 4.31 4.66 4.68
- ----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $302,346 319,477 342,839 354,461 290,464
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 104% 112 43 36 16
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------- ------------------------- -------------------------
YEAR MARCH 15, YEAR MARCH 15, YEAR MARCH 15,
ENDED 1995 TO ENDED 1995 TO ENDED 1995 TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
PENNSYLVANIA 1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $9.81 9.50 9.80 9.50 9.81 9.50
- ----------------------------------------------------------------------- ------------------------- -------------------------
Income from investment operations:
Net investment income .44 .22 .37 .18 .37 .19
- ----------------------------------------------------------------------- ------------------------- -------------------------
Net realized and unrealized gain .14 .31 .15 .30 .14 .31
- ----------------------------------------------------------------------- ------------------------- -------------------------
Total from investment operations .58 .53 .52 .48 .51 .50
- ----------------------------------------------------------------------- ------------------------- -------------------------
Less distribution from net investment income .44 .22 .37 .18 .37 .19
- ----------------------------------------------------------------------- ------------------------- -------------------------
Net asset value, end of period $9.95 9.81 9.95 9.80 9.95 9.81
- ----------------------------------------------------------------------- ------------------------- ------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.01% 5.54 5.29 5.05 5.19 5.18
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) (C)
Expenses absorbed by the Fund 1.06% .46 1.83 1.24 1.80 1.21
- ----------------------------------------------------------------------- ------------------------- -------------------------
Net investment income 4.33 4.93 3.56 4.15 3.59 4.18
- ----------------------------------------------------------------------- ------------------------- -------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) (C)
Expenses 1.39% 1.01 2.16 1.79 2.13 1.76
- ----------------------------------------------------------------------- ------------------------- -------------------------
Net investment income 4.00 4.38 3.23 3.60 3.26 3.63
- ----------------------------------------------------------------------- ------------------------- -------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
<CAPTION>
YEAR MARCH 15,
ENDED 1995 TO
AUGUST 31, AUGUST 31,
1996 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $4,449 2,118
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 158% 85
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR PENNSYLVANIA FUND:
(c) ZKI agreed to waive the management fee of the Pennsylvania Fund from its
inception, March 15, 1995, through September 15, 1995. Thereafter, the
management fee was gradually reinstated. "Other ratios to average net assets"
are computed without the undertaking to waive the management fees.
NOTE FOR ALL FUNDS:
Total return does not reflect the effect of sales charges.
FEDERAL TAX STATUS OF 1996 DIVIDENDS
All of the dividends paid from net investment income by the Funds constitute
tax-exempt interest that is not taxable for federal income tax purposes;
however, a portion of the dividends paid may be includable in the alternative
minimum tax calculation. A short-term capital gain dividend is taxable as
ordinary income, and a long-term capital gain dividend is taxable as a long-term
capital gain regardless of how long you have owned your shares.
39
<PAGE> 40
TRUSTEES & OFFICERS
TRUSTEES
STEPHEN B. TIMBERS
President and Trustee
DAVID W. BELIN
Trustee
LEWIS A. BURNHAM
Trustee
DONALD L. DUNAWAY
Trustee
ROBERT B. HOFFMAN
Trustee
DONALD R. JONES
Trustee
DOMINIQUE P. MORAX
Trustee
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
OFFICERS
J. PATRICK BEIMFORD, JR.
Vice President
CHARLES R. MANZONI, JR.
Vice President
CHRISTOPHER J. MIER
Vice President
JOHN E. NEAL
Vice President
PHILIP J. COLLORA
Vice President and
Secretary
JEROME L. DUFFY
Treasurer
ELIZABETH C. WERTH
Assistant Secretary
- --------------------------------------------------------------------------------
LEGAL COUNSEL
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT
KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
1-800-621-1048
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT
INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER
ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER
KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
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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 (10/96) 1023290
Printed in the U.S.A. [KEMPER LOGO]
