<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD (SM)
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED AUGUST 31, 1997
Florida Tax-Free Income Fund
New Jersey Tax-Free Income Fund
New York Tax-Free Income Fund
Pennsylvania Tax-Free Income Fund
KEMPER STATE TAX-FREE INCOME SERIES
<PAGE> 2
CONTENTS
4
ECONOMIC OVERVIEW
6
PERFORMANCE UPDATE
7
TERMS TO KNOW
8
FLORIDA'S PERFORMANCE UPDATE
PORTFOLIO STATISTICS AND PORTFOLIO
OF INVESTMENTS
13
NEW JERSEY'S PERFORMANCE UPDATE,
PORTFOLIO STATISTICS AND PORTFOLIO
OF INVESTMENTS
17
NEW YORK'S PERFORMANCE UPDATE,
PORTFOLIO STATISTICS AND PORTFOLIO OF
INVESTMENTS
At A GLANCE
-------------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME FUNDS' TOTAL RETURNS
-------------------------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 31, 1997 (UNADJUSTED FOR SALES CHARGE)
-------------------------------------------------------------------------------
FLORIDA
[BAR GRAPH]
-------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.37%
CLASS B 7.48%
CLASS C 7.49%
LIPPER FLORIDA TAX FREE INCOME FUNDS CATEGORY
AVERAGE* 8.49%
-------------------------------------------------------------------------------
</TABLE>
NEW JERSEY
[BAR GRAPH]
-------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 7.85%
CLASS B 7.02%
CLASS C 7.19%
LIPPER NEW JERSEY TAX FREE INCOME FUNDS CATEGORY
AVERAGE* 8.18%
-------------------------------------------------------------------------------
</TABLE>
NEW YORK
[BAR GRAPH]
-------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.77%
CLASS B 7.96%
CLASS C 7.87%
LIPPER NEW YORK TAX FREE INCOME FUNDS CATEGORY
AVERAGE* 8.93%
-------------------------------------------------------------------------------
</TABLE>
PENNSYLVANIA
[BAR GRAPH]
-------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 9.41%
CLASS B 8.58%
CLASS C 8.60%
LIPPER PENNSYLVANIA TAX FREE INCOME FUNDS CATEGORY
AVERAGE* 8.62%
-------------------------------------------------------------------------------
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT REPRESENT FUTURE PERFORMANCE. RETURNS AND NET
ASSET VALUE FLUCTUATE. SHARES ARE REDEEMABLE AT CURRENT NET ASSET VALUE, WHICH
MAY BE MORE OR LESS THAN ORIGINAL COST.
FLORIDA
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
NET ASSET VALUE
-------------------------------------------------------------------------------
AS OF AS OF
8/31/97 8/31/96
-------------------------------------------------------------------------------
<S> <C> <C>
KEMPER FLORIDA TAX-FREE INCOME
FUND CLASS A $ 10.42 $ 10.21
-------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME
FUND CLASS B $ 10.40 $ 10.19
-------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME
FUND CLASS C $ 10.41 $ 10.20
-------------------------------------------------------------------------------
</TABLE>
NEW JERSEY
<TABLE>
<CAPTION>
AS OF AS OF
8/31/97 8/31/96
-------------------------------------------------------------------------------
<S> <C> <C>
KEMPER NEW JERSEY TAX-FREE
INCOME FUND CLASS A $ 10.12 $ 9.85
-------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE
INCOME FUND CLASS B $ 10.15 $ 9.88
-------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE
INCOME FUND CLASS C $ 10.16 $ 9.88
-------------------------------------------------------------------------------
</TABLE>
NEW YORK
<TABLE>
<CAPTION>
AS OF AS OF
8/31/97 8/31/96
-------------------------------------------------------------------------------
<S> <C> <C>
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS A $ 10.93 $ 10.66
-------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS B $ 10.94 $ 10.66
-------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS C $ 10.92 $ 10.65
-------------------------------------------------------------------------------
</TABLE>
PENNSYLVANIA
<TABLE>
<CAPTION>
AS OF AS OF
8/31/97 8/31/96
-------------------------------------------------------------------------------
<S> <C> <C>
KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS A $ 10.41 $ 9.95
-------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS B $ 10.41 $ 9.95
-------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS C $ 10.41 $ 9.95
-------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
CONTENTS
22
PENNSYLVANIA'S
PERFORMANCE UPDATE,
PORTFOLIO STATISTICS
AND PORTFOLIO OF
INVESTMENTS
27
REPORT OF
INDEPENDENT AUDITORS
28
FINANCIAL STATEMENTS
31
NOTES TO
FINANCIAL STATEMENTS
36
FINANCIAL HIGHLIGHTS
AT A GLANCE
-------------------------------------------------------------------------------
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 #41 OF 77 FUNDS #63 OF 77 FUNDS #63 OF 77 FUNDS
-------------------------------------------------------------------------------
5-YEAR #5 OF 21 FUNDS N/A N/A
-------------------------------------------------------------------------------
</TABLE>
NEW JERSEY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #37 OF 57 FUNDS #52 OF 57 FUNDS #50 OF 57 FUNDS
-------------------------------------------------------------------------------
</TABLE>
NEW YORK
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #59 OF 91 FUNDS #84 OF 91 FUNDS #85 OF 91 FUNDS
-------------------------------------------------------------------------------
5-YEAR #11 OF 45 FUNDS N/A N/A
-------------------------------------------------------------------------------
10-YEAR # 7 OF 26 FUNDS N/A N/A
-------------------------------------------------------------------------------
</TABLE>
PENNSYLVANIA
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #11 OF 62 FUNDS #29 OF 62 FUNDS #27 OF 62 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, 1997.
FLORIDA
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.5073 $0.4208 $0.4220
-------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0395 $0.0326 $0.0328
-------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.87% 4.03% 4.05%
-------------------------------------------------------------------------------
SEC YIELD+: 4.07% 3.44% 3.45%
-------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.47% 5.47% 5.48%
-------------------------------------------------------------------------------
BASED ON A MARGINAL TAX RATE OF 37.1% (FEDERAL
INCOME TAX RATE)
-------------------------------------------------------------------------------
</TABLE>
NEW JERSEY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4272 $0.3508 $0.3504
-------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0336 $0.0279 $0.0281
-------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.27% 3.54% 3.56%
-------------------------------------------------------------------------------
SEC YIELD+: 3.82% 3.18% 3.21%
-------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.46% 5.38% 5.43%
-------------------------------------------------------------------------------
BASED ON A MARGINAL TAX RATE OF 40.9% (COMBINED NEW
JERSEY STATE AND FEDERAL INCOME TAX RATE)
-------------------------------------------------------------------------------
</TABLE>
NEW YORK
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.5563 $0.4650 $0.4651
-------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0435 $0.0365 $0.0367
-------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 5.12 4.29 4.32
-------------------------------------------------------------------------------
SEC YIELD+: 4.03% 3.37% 3.39%
-------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 7.24% 6.05% 6.09%
-------------------------------------------------------------------------------
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>
CLASS A CLASS B CLASS C
-------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4579 $0.3796 $0.3823
-------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0355 $0.0293 $0.0296
-------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.38% 3.62% 3.66%
-------------------------------------------------------------------------------
SEC YIELD+: 3.79% 3.20% 3.22%
-------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.20% 5.24% 5.27%
-------------------------------------------------------------------------------
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, 1997. Distribution rate
simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended August 31, 1997 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.
<PAGE> 4
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
Stephen B. Timbers is president, chief investment and executive officer of
Zurich Kemper Investments Inc. (ZKI). ZKI and its affiliates manage
approximately $86 billion in assets, including $49 billion in retail mutual
funds. Timbers is a graduate of Yale University and holds an M.B.A. from
Harvard University.
DEAR SHAREHOLDER,
A self-regulating economy, a balanced budget agreement and a positive stock
market all have contributed to another excellent year for investors. Given the
extended length of today's bull market (which celebrated its 15th anniversary on
August 12), it is prudent to wonder whether the end is near. Our position is
that while there is a certain precariousness to today's environment, which we
will elaborate on below, we see little to suggest that there will be more than
occasional market corrections.
Bipartisan agreement to balance the federal budget by the year 2002 represents
significant progress that should benefit investors over the long term. By
reducing the burden of capital gains and eliminating certain tax loopholes, the
Taxpayer Relief Act of 1997 and the Balanced Budget Act of 1997 have the
potential to meaningfully affect behavior. Now that the ceiling has been raised
on capital gains from the sale of a home, empty nesters will be more inclined to
move out of homes and into smaller condominiums. Added investment and savings
options should help boost the country's sagging savings rate. From a social
perspective, government's action to widen the difference between the taxation
rate on capital gains and on income reflects a conscious effort to encourage
capital investment. The more people and businesses can do for themselves, the
less likely they are to rely on the government, which should help restrain
federal spending.
The maximum tax on long-term capital gains is now 20 percent versus a maximum
of approximately 40 percent on ordinary income earned by Americans in the
highest income tax brackets. This dramatic difference could have some influence
on the management of mutual funds in the future. Although few investment
decisions are based on their tax consequences, the legislation supports a "buy
and hold" approach to investing, by which a mutual fund generates investment
returns through gains on investments held 18 months or longer. Such gains are
taxed at the reduced capital gains rate. On the margin, portfolio managers
should focus on long-term investing -- the strategy that we have always
supported.
In addition, mutual funds will gain investment flexibility with the new law's
repeal of what has been called the "short/short rule." Previously, investment
companies had been subject to a 30 percent limitation on total income arising
from the sale of securities held less than three months -- or face severe tax
consequences. The lifting of this limitation provides newer funds, in
particular, with much needed maneuvering ability.
You can expect to hear more from Kemper about the implications of the new
legislation, and specifically about the tax reporting changes, over the next
several weeks and months. Overall, we believe that this legislation is something
the country can be proud of. It represents years of a commitment on the part of
the federal government to hold spending in check and refrain from creating new
programs. Expanding corporate revenues and profits in an extended period of low
inflation also contributed to making this investor-friendly environment
possible.
As we look toward the end of the year, we see little to trouble us. The
economy appears to be in excellent condition. Continuing the alternatingly
fast/slow pace that we have experienced for several months, the fast-growing
first quarter was followed by a slower second quarter. Such self-regulation has
minimized any need for the Federal Reserve Board to raise interest rates again.
We don't rule out the possibility of another hike in the fourth quarter,
however.
Inflation is very low. In spite of unemployment being the lowest we have seen
in decades, wage pressures are still manageable. Strong productivity,
attributable to technological advances and better management practices, has
produced largely non-inflationary economic growth. This environment is one of
the best in decades.
Our primary concern is the very high valuations of the stock market. All
things considered, it is difficult to see where we can go from here. With prices
at such heady levels, the market can be expected to react negatively to even
minor earnings disappointments, as we saw in August. Kemper's response to this
market is to
4
<PAGE> 5
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic Activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund
performance.
The following are some significant economic guideposts and their investment
rationale that may help your investment decision-making. The 10-year Treasury
rate and the prime rate are prevailing interest rates. The other data report
year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
NOW (09/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-year Treasury Rate (1) 6.21 6.89 6.53 6.04
Prime Rate (2) 8.5 8.5 8.25 8.75
Inflation rate (3)* 2.22 2.76 3.07 2.54
The U.S. Dollar (4) 8.76 9.32 4.74 -1.05
Capital Goods Orders (5)* 11.11 8.1 3.77 9.42
Industrial Production (5)* 4.75 4.91 2.65 3.43
Employment Growth (6) 2.23 2.27 2.1 2.19
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6 percent. The low, moderate inflation of the
last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of August 31, 1997.
Source: Economics Department, Zurich Kemper Investment, Inc.
remain fully invested and to reduce risk by diversifying across a wider group of
investment opportunities. Research, the first step in stock selection, is key in
this kind of a market.
Bond markets are obviously cheered by recent events, and prospects for income
investors continue to be positive. Interest rates are stable and credit quality
has not been an issue. A dwindling supply of municipal bonds has enabled
municipal investments to outperform U.S. Treasuries.
In such a fully valued domestic market, it can make sense to look to
international markets for their growth potential. The strength of the dollar
thus far this year has diminished returns but international opportunities look
bright.
With this commentary as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
October 8, 1997
5
<PAGE> 6
PERFORMANCE UPDATE
[MIER PHOTO]
CHRIS MIER JOINED ZURICH KEMPER INVESTMENTS, INC. IN 1986 AND IS NOW SENIOR VICE
PRESIDENT AND PORTFOLIO MANAGER OF THE KEMPER STATE TAX-FREE INCOME SERIES. MIER
RECEIVED A BACHELOR'S DEGREE IN ECONOMICS FROM THE UNIVERSITY OF MICHIGAN AND A
MASTER'S OF MANAGEMENT DEGREE 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 FISCAL YEAR ENDED AUGUST 31, 1997, A YEAR WITH CONTINUED LOW INFLATION
DESPITE MODERATE ECONOMIC GROWTH, KEMPER STATE TAX-FREE INCOME FUND SERIES
BENEFITED FROM A RANGE-BOUND INTEREST RATE ENVIRONMENT. PORTFOLIO MANAGER CHRIS
MIER EXPLAINS HOW THE PORTFOLIOS WERE ADJUSTED TO TAKE ADVANTAGE OF THIS
CLIMATE.
Q THE FEDERAL RESERVE BOARD (THE FED) RAISED INTEREST RATES IN MARCH. HOW
DID THIS AFFECT THE MUNICIPAL BOND MARKET?
A First let's look at what led up to the interest rate increase. In January,
stronger economic growth surfaced, including higher-than-expected fourth quarter
GDP growth and better-than-expected holiday retail sales. Investors remained
cautious as it appeared likely that the Fed would move to raise interest rates
to slow the economy and keep inflation under control. Remember, strong economic
growth indicates the potential for higher inflation. Inflation is negative for
bond investors as it erodes the "real" value of fixed-income investments.
The markets' fears were realized when the Fed increased short-term
interest rates by 0.25 percent on March 25. This adjustment was considered a
preemptive move aimed at slowing growth in the economy to maintain the existing
low rate of inflation. Although the market had already substantially discounted
the expected move, all investment markets suffered with the move and yields on
bonds rose (prices fell).
In April, economic growth once again appeared to slow. As no signs of
inflation surfaced, the markets began to recover and yields tended to fall or
remain stable throughout July. In August, the last month of the funds' fiscal
year, rates rose.
Q DID THIS FLUCTUATION IN MARKET YIELDS AFFECT THE PERFORMANCE OF THE FUNDS?
A Yields fluctuated with the markets' view on the direction of economic
growth and inflation. However, the fluctuations were not dramatic by historical
standards. In fact, the Bond Buyer 24-Bond Index (RBI) -- a gauge of municipal
bond interest rates -- fluctuated by less than one percent (70 basis points)
during the period. The RBI was at its period high on September 5, 1996 at 6.19
percent and dropped to its lowest July 31, 1997 at 5.49 percent. The tightness
of the yield range provided for relatively stable bond prices throughout the
fiscal year compared with previous fiscal years.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE SERIES IN THIS STABLE RATE
ENVIRONMENT?
A We looked for ways to increase income without significantly increasing the
series' risk exposure. One way we did this was by selectively choosing A and BBB
rated bonds, which offer higher coupon rates than some of the funds' higher
quality and insured issues.
Q WERE THERE ANY OTHER SIGNIFICANT ADJUSTMENTS MADE TO THE FUNDS?
A We maintained duration in a much tighter band, which was more compatible
with the
6
<PAGE> 7
PERFORMANCE UPDATE
tighter prevailing rate range. Remember, 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.
Q DID THE LEVEL OF MUNICIPAL SUPPLY HAVE A SIGNIFICANT EFFECT ON THE MARKET?
A New issuance was slightly higher in 1997 compared with 1996. New issuance
volume in 1997 through August was $126.8 billion compared with $118.3 billion
for the same period in 1996, according to The Bond Buyer. Demand for municipal
issues came mainly from property and casualty companies and individuals buying
direct.
Q WERE THERE ANY SECTORS THAT PERFORMED ABOVE YOUR EXPECTATIONS?
A The transportation sector performed well during the period. The stronger
economy encouraged increased travel by the public, helping toll road issues.
Toll road bonds are held by several of our tax-free funds.
Q ARE MUNICIPAL BOND FUNDS A GOOD INVESTMENT IN THE CURRENT ECONOMIC
ENVIRONMENT?
A Municipal bonds can play an important role in rounding out a
well-diversified portfolio of investments. The tax-exempt income that municipal
bond funds provide may be especially helpful now as many investors may be under-
invested in tax-exempt assets. Municipal bonds and equities are both important
components of a balanced portfolio. If your exposure to municipals has declined
on a relative basis, now may be the right time to review your long-term goals
and rebalance your portfolio of investments.
Q WHAT IS YOUR OUTLOOK FOR THE MUNICIPAL MARKET?
A Municipals are attractively valued in this market environment. Demand will
continue to come mainly from the property and casualty industry as well as
individuals. Mutual fund demand for municipal bonds should pick up especially as
individuals who have accumulated wealth in the equity market attempt to maintain
or protect that wealth in a less risky vehicle.
Q WERE THERE ANY SIGNIFICANT TRENDS THAT AFFECTED INDIVIDUAL STATES WITHIN
KEMPER'S STATE TAX-FREE INCOME FUND SERIES?
A The credit quality of several municipalities improved during the year,
including New York City and New York state. New Jersey benefited from New York's
improved economic environment as many people who live in New Jersey work in New
York and spend their income in their home state. Also, Florida's economy
benefited from gains in tourism. Pennsylvania also had a positive economic year.
TERMS TO KNOW
DURATION Duration is a measure of the interest rate sensitivity of a fixed-
income investment or portfolio. The longer the duration, the greater the
interest rate risk.
REVENUE BOND INDEX (RBI) RBI is the average yield on 25 revenue bonds with
30-year maturities compiled by THE BOND BUYER, a newspaper that reports on the
municipal bond market.
TOTAL RETURN A fund's total return figure measures both the net investment
income 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.
7
<PAGE> 8
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR LIFE OF CLASS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS A 3.49% 6.25% 7.55% (since 4/25/91)
- -------------------------------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS B 4.47% N/A 5.82 (since 5/31/94)
- -------------------------------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS C 7.49% N/A 6.45 (since 5/31/94)
- -------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A Shares from 4/25/91 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4/25/91 12/31/93 12/31/95 8/31/97
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS A(1) 10000 13011 14802 15884
- -----------------------------------------------------------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10000 13222 14727 16158
- -----------------------------------------------------------------------------------------------
CONSUMER PRICE INDEX++ 10000 10784 11354 11871
- -----------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B Shares from 5/31/94 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 8/31/97
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS B(1) 10000 11551 11773 12023
- -----------------------------------------------------------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10000 11586 12099 12711
- -----------------------------------------------------------------------------------------------
CONSUMER PRICE INDEX++ 10000 10407 10753 10881
- -----------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C Shares from 5/31/94 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
5/31/94 12/31/95 12/31/96 8/31/97
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS C(1) 10000 11573 11795 12258
- -----------------------------------------------------------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX+ 10000 11586 12099 12711
- -----------------------------------------------------------------------------------------------
CONSUMER PRICE INDEX++ 10000 10407 10753 10881
- -----------------------------------------------------------------------------------------------
</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 Class A shares adjustment for the
maximum sales charge of 4.5 percent and for Class B shares adjustment for
the applicable contingent deferred sales charge (CDSC) as follows: 1-year,
3 percent; 5-year, 1 percent; since inception, 0 percent. The maximum CDSC
for Class B shares is 4 percent. For Class C shares, there is a 1 percent
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.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred sales
charge in effect at the end of the period for Class B shares. In comparing
the Kemper State Tax-Free Income Funds to the Lehman Brothers Municipal
Bond Index, you should note that the funds' performance reflects the
maximum sales charges, while no such charges are reflected in the
performance of the index.
+ The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the
following criteria: a minimum credit rating of BBB, have been issued as a
part of an issue of at least $50 million, have been issued within the last
5 years, and have a maturity of at least 2 years. Bonds subject to
Alternative Minimum Tax (AMT), variable rate bonds and zero coupon bonds
are excluded from the index. Source is Towers Data Systems.
++ The Consumer Price Index is a statistical measure of change, over time,
in the prices of goods and services in major expenditure groups for all
urban consumers. It is generally considered to be a measure of inflation.
Source is Towers Data Systems.
8
<PAGE> 9
PORTFOLIO STATISTICS
KEMPER FLORIDA TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 73% 79%
- ------------------------------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 11 11
- ------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS 10 3
- ------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 6 7
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
QUALITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
AAA 53% 56%
- ------------------------------------------------------------------------------------------------------
AA 19 17
- ------------------------------------------------------------------------------------------------------
A 4 8
- ------------------------------------------------------------------------------------------------------
BBB 15 11
- ------------------------------------------------------------------------------------------------------
NOT RATED 9 8
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 15% 7%
- ------------------------------------------------------------------------------------------------------
11-20 YEARS 39 44
- ------------------------------------------------------------------------------------------------------
+21 YEARS 46 49
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
15.9 years 16.0 years
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
FLORIDA TAX-FREE INCOME FUND
Portfolio of Investments at August 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charlotte County, Utility System Rev., 6.75%, to be called
10-1-03 @ 102 $ 250 $ 284
--------------------------------------------------------------------------------------------
Dunedin, Mease Health Care, Hospital Rev., 6.75%, to be
called 11-15-01 @ 102 750 833
--------------------------------------------------------------------------------------------
Jacksonville District, Water & Sewer Rev., 5.00%, to be
called 10-1-06 @ 102 1,000 950
--------------------------------------------------------------------------------------------
Jacksonville Health Facilities Auth., Memorial Medical
Center Proj., Rev., 6.75%, to be called 5-1-01 @ 102 2,000 2,199
--------------------------------------------------------------------------------------------
Volusia County Health Facilities Auth., Memorial Health
Systems, Hospital Facilities Rev., 8.25%, to be called
6-1-00 @ 102 1,940 2,170
--------------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--6.2% 6,436
--------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------
Board of Education, Public Education Capital Outlay, Gen.
Oblg., 4.75% and 7.25%, 2018 and 2023 2,140 2,021
--------------------------------------------------------------------------------------------
Department of Natural Resources, Preservation 2000, Rev.,
4.90% and 6.75%, 2013 2,000 2,048
--------------------------------------------------------------------------------------------
Department of Transportation, Gen. Oblg., 5.00%, 2027 1,000 934
--------------------------------------------------------------------------------------------
Department of Transportation, Right-of-Way Acquisition and
Bridge Construction Rev., 5.00%, 2021 3,000 2,840
--------------------------------------------------------------------------------------------
Housing Finance Agcy., GNMA Collateralized Home Ownership
Rev., 7.90%, 2022 1,175 1,249
--------------------------------------------------------------------------------------------
Jacksonville Transportation Auth., Senior Lien Rev., 5.00%,
2022 2,000 1,878
--------------------------------------------------------------------------------------------
Broward County:
North Site Proj., Resource Recovery Rev., 7.95%, 2008 850 927
School District, Gen. Oblg., 6.00%, 2007 4,000 4,285
South Site Proj., Resource Recovery Rev., 7.95%, 2008 905 986
--------------------------------------------------------------------------------------------
Citrus County, Pollution Control Rev., 6.35%, 2022 1,000 1,062
--------------------------------------------------------------------------------------------
Dade City Governmental Leasing Corp., Department of Health
and Rehabilitation Services, Rev., 9.00%, 2020 1,025 1,070
--------------------------------------------------------------------------------------------
Dade County:
Housing Finance Auth., Single Family Mortgage Rev., 7.25%,
2023 370 390
Miami International Airport, Aviation Facilities, Rev.,
6.55%, 2013 2,000 2,166
School District, Gen. Oblg., 6.00%, 2004 2,000 2,172
Water and Sewer System Rev., 6.25%, 2010 1,000 1,124
--------------------------------------------------------------------------------------------
Duval County Housing Finance Auth., Single Family Mortgage
Rev., 7.25%, 2019 550 584
--------------------------------------------------------------------------------------------
Escambia County:
Housing Finance Auth., Single Family Mortgage Rev., 6.90%,
2020 805 848
Pollution Control Rev., 6.40%, 2030 2,500 2,677
--------------------------------------------------------------------------------------------
Gainesville, Utilities System Rev., 6.50%, 2010 1,370 1,568
--------------------------------------------------------------------------------------------
Hillsborough County:
Aviation Auth., Tampa International Airport, Rev., 6.90%,
2011 1,250 1,337
Capital Improvement Proj., Rev., 5.125%, 2022 2,180 2,090
Housing Finance Auth., Single Family Mortgage Rev., 6.50%
and 7.30%, 2019 and 2022 1,345 1,516
Utility Rev., 7.00%, 2014 1,325 1,436
--------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jacksonville:
Health Facilities Auth., Hospital Rev., 5.00%, 2015 $ 1,700 $ 1,627
St. John's River, Rev., 6.00%, 2005 2,000 2,184
----------------------------------------------------------------------------------------------
Manatee County:
Gen. Oblg., 4.75%, 2013 1,000 933
Meditrust Proj., First Mortgage Rev., 7.35%, 2015 1,660 1,860
----------------------------------------------------------------------------------------------
Martin County, Industrial Dev. Auth., Indiantown
Cogeneration, L.P. Proj., Rev., 7.875%, 2025 2,325 2,685
----------------------------------------------------------------------------------------------
Nassau County, GF/Amelia Island Properties, Inc. Proj.,
Rev., 9.75%, 2023 990 1,132
----------------------------------------------------------------------------------------------
North Miami, Johnson and Wales University Proj., Educational
Facilities Rev., 6.10% and 6.125%, 2013 and 2020 4,785 4,880
----------------------------------------------------------------------------------------------
Orange County:
Health Facilities Auth., Rev., 6.25%, 2016 and 2018 3,500 3,906
Tourist Dev. Tax Rev., 5.90%, 2010 1,000 1,093
----------------------------------------------------------------------------------------------
Orlando--Orange County Expressway Auth.,
Junior Lien, Rev., 6.50%, 2012 1,000 1,152
----------------------------------------------------------------------------------------------
Orlando Utilities Commission, Water and Electric Rev.,
6.75%, 2017 3,000 3,554
----------------------------------------------------------------------------------------------
Palm Beach County:
Criminal Justice Facilities, Rev., 7.20%, 2015 110 135
Solid Waste Auth., Rev., 6.00%, 2009 2,000 2,205
----------------------------------------------------------------------------------------------
Pasco County Solid Waste Disposal and Resource Recovery
System Rev., 7.80%, 2011 345 360
----------------------------------------------------------------------------------------------
Pensacola, Health Facilities Auth., Rev., 5.25%, 2011 2,200 2,180
----------------------------------------------------------------------------------------------
Pinellas County, Pollution Control Rev., 7.20%, 2014 2,000 2,182
----------------------------------------------------------------------------------------------
St. Petersburg Health Facilities Auth., Allegheny Health
System, Rev., 7.00% and 6.75%, 2015 and 2021 1,500 1,653
----------------------------------------------------------------------------------------------
Tampa Sports Auth., Special Purpose, Rev., 5.75%, 2020 2,075 2,196
----------------------------------------------------------------------------------------------
Village Center Community Dev. District, Utility Rev., 6.00%,
2018 1,250 1,367
----------------------------------------------------------------------------------------------
Westchase Community Dev. District, Rev., 5.80%, 2012 3,000 3,168
----------------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Aqueduct and Sewer Auth., Rev., 5.00%, 2019 1,000 955
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev., 6.50%, 2018 2,000 2,102
Gen. Oblg., 6.25%, 2013 850 960
Highway and Transportation Auth., Rev., 6.00%, 2018 1,250 1,371
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 1,030 1,095
----------------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, 2018 2,125 2,365
----------------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--83.3% 86,508
----------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--89.5%
(Cost: $87,282) 92,944
----------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET INSTRUMENTS
Yield--3.70% to 3.85%
Due--September 1997
Hillsborough County, Industrial Development Auth., Rev. $5,100 $ 5,100
----------------------------------------------------------------------------------------------
St. Lucie County, Pollution Control Rev. 4,200 4,200
----------------------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--9.0%
(Cost: $9,300) 9,300
----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.5%
(Cost: $96,582) 102,244
----------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.5% 1,601
----------------------------------------------------------------------------------------------
NET ASSETS--100% $103,845
----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $96,582,000 for federal income tax purposes
at August 31, 1997, the gross unrealized appreciation was $5,727,000, the gross
unrealized depreciation was $65,000 and the net unrealized appreciation on
investments was $5,662,000.
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, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER NEW JERSEY TAX-FREE INCOME FUND CLASS A 3.03% 5.43% (since 3/15/95)
- ------------------------------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE INCOME FUND CLASS B 4.01 5.61 (since 3/15/95)
- ------------------------------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE INCOME FUND CLASS C 7.19 6.85 (since 3/15/95)
- ------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from 3/15/95 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3/15/95 12/31/95 12/31/96 8/31/97
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper New Jersey Tax-Free Income Fund Class A(1) 10000 10700 10916 11396
- ---------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ 10000 11096 11588 12174
- ---------------------------------------------------------------------------------------------------------------------
Consumer Price Index++ 10000 10172 10510 10636
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 3/15/95 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3/15/95 12/31/95 12/31/96 8/31/97
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper New Jersey Tax-Free Income Fund Class B(1) 10000 11156 11305 11441
- ---------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ 10000 11096 11588 12174
- ---------------------------------------------------------------------------------------------------------------------
Consumer Price Index++ 10000 10172 10510 10636
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE INCOME FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 3/15/95 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3/15/95 12/31/95 12/31/96 8/31/97
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper New Jersey Tax-Free Income Fund Class C(1) 10000 11161 11326 11776
- ---------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ 10000 11096 11588 12174
- ---------------------------------------------------------------------------------------------------------------------
Consumer Price Index++ 10000 10172 10510 10636
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
LINE GRAPHS CLASS A, B & C
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 Class A shares adjustment for the
maximum sales charge of 4.5 percent and for Class B shares adjustment for
the applicable contingent deferred sales charge (CDSC) as follows: 1-year,
3 percent; 5-year, 1 percent; since inception, 0 percent. The maximum CDSC
for Class B shares is 4 percent. For Class C shares, there is a 1 percent
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.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred sales
charge in effect at the end of the period for Class B shares. In comparing
the Kemper State Tax-Free Income Funds to the Lehman Brothers Municipal
Bond Index, you should note that the funds' performance reflects the
maximum sales charges, while no such charges are reflected in the
performance of the index.
+ The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the
following criteria: a minimum credit rating of BBB, have been issued as a
part of an issue of at least $50 million, have been issued within the last
5 years, and have a maturity of at least 2 years. Bonds subject to
Alternative Minimum Tax (AMT), variable rate bonds and zero coupon bonds
are excluded from the index. Source is Towers Data Systems.
++ The Consumer Price Index is a statistical measure of change, over time,
in the prices of goods and services in major expenditure groups for all
urban consumers. It is generally considered to be a measure of inflation.
Source is Towers Data Systems.
13
<PAGE> 14
PORTFOLIO STATISTICS
KEMPER NEW JERSEY TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION*
- -----------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
<S> <C> <C>
REVENUE BONDS 60% 62%
- -----------------------------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 25 31
- -----------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS 12 7
- -----------------------------------------------------------------------------------------------------
U.S. GOVERNMENTS SECURED 3 --
- -----------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
<TABLE>
<CAPTION>
QUALITY
- -----------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
AAA 73% 76%
- -----------------------------------------------------------------------------------------------------
AA 9 6
- -----------------------------------------------------------------------------------------------------
A 4 7
- -----------------------------------------------------------------------------------------------------
BBB 10 7
- -----------------------------------------------------------------------------------------------------
B 1 --
- -----------------------------------------------------------------------------------------------------
NOT RATED 3 4
- -----------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
<TABLE>
<CAPTION>
YEARS TO MATURITY
- -----------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1-10 YEARS 5% 1%
- -----------------------------------------------------------------------------------------------------
11-20 YEARS 72 74
- -----------------------------------------------------------------------------------------------------
+ 21 YEARS 23 25
- -----------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
<TABLE>
<CAPTION>
AVERAGE MATURITY
- -----------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
<S> <C> <C>
15.8 years 15.4 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, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Essex County, Improvement Auth., College Proj.,
Rev., 7.00%, to be called 12-1-04 @ 102 $ 15 $ 17
--------------------------------------------------------------------------------------------
Jersey City, Gen. Oblg., 6.60%, to be called 5-15-01 @ 102 40 44
--------------------------------------------------------------------------------------------
North Brunswick Township, 6.30%,
to be called 2-1-05 @ 100 100 110
--------------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--3.2% 171
--------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------
Economic Dev. Auth.:
Educational Testing Service, Rev., 6.125%, 2015 100 106
Harrogate, Inc., Rev., 5.875%, 2026 100 101
Market Transition Facility, Rev., 5.875%, 2011 90 95
Pollution Control, Public Service Electric and Gas Company
Proj., Rev., 6.40%, 2032 90 97
--------------------------------------------------------------------------------------------
Educational Facilities Auth.:
Caldwell College, Rev., 7.25%, 2025 50 53
Rider College, Rev., 6.20%, 2017 115 123
Rowan College, Rev., 5.875%, 2013 100 106
--------------------------------------------------------------------------------------------
Health Care Facilities Financing Auth.:
Atlantic City Medical Center, Rev., 6.80%, 2011 75 82
Dover General Hospital and Medical Center, Rev., 5.875%,
2012 75 79
Hackensack Medical Center, Rev., 6.625%, 2017 15 16
Holy Name Hospital, Rev., 6.00%, 2025 100 102
Jersey Shore Medical Center, Rev., 6.25%, 2016 100 107
Southern Ocean County Hospital, Rev., 6.125%, 2013 120 124
--------------------------------------------------------------------------------------------
Highway Auth., Garden State Parkway, Rev., 6.25%, 2014 50 54
--------------------------------------------------------------------------------------------
Housing and Mortgage Finance Agcy., Home Buyer Rev., 6.05%,
2028 100 103
--------------------------------------------------------------------------------------------
Sports and Exposition Auth., Rev., 6.00%, 2013 100 105
--------------------------------------------------------------------------------------------
Transportation Trust Fund Auth., Rev., 6.50%, 2005 and 2011 175 199
--------------------------------------------------------------------------------------------
Turnpike Auth., Rev., 6.50%, 2016 125 144
--------------------------------------------------------------------------------------------
Wastewater Treatment Trust, Rev., 7.00%, 2007 100 118
--------------------------------------------------------------------------------------------
Atlantic City Board of Education, Gen. Oblg., 6.15%, 2015 150 160
--------------------------------------------------------------------------------------------
Bayshore Regional Sewerage Auth., Rev., 5.50%, 2012 100 103
--------------------------------------------------------------------------------------------
Bergen County, Utilities Auth., Rev., 5.125%, 2012 50 50
--------------------------------------------------------------------------------------------
Brick Township, Municipal Utilities Auth., Rev., 5.00%, 2016 75 72
--------------------------------------------------------------------------------------------
Cape May County, Municipal Utilities Auth., Rev., 6.00%,
2011 15 16
--------------------------------------------------------------------------------------------
Chatham Borough, Gen. Oblg., 5.80%, 2015 32 33
--------------------------------------------------------------------------------------------
Cumberland County, Utilities Auth., Rev., 5.00%, 2017 75 72
--------------------------------------------------------------------------------------------
Freehold Township Board of Education, Gen. Oblg., 5.375%,
2011 50 51
--------------------------------------------------------------------------------------------
Jackson Township, Gen. Oblg., 6.60%, 2012 135 157
--------------------------------------------------------------------------------------------
Jersey City, Gen. Oblg., 5.50% and 6.25%, 2011 and 2012 100 108
--------------------------------------------------------------------------------------------
Manchester Township, Gen. Oblg., 5.00%, 2011 50 50
--------------------------------------------------------------------------------------------
Merchantville Board of Education, Gen. Oblg., 5.80%, 2014 100 104
--------------------------------------------------------------------------------------------
Monroe Township Board of Education, Gen. Oblg., 5.10%, 2017 75 73
--------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Monroe Township, Gen. Oblg., 5.20%, 2015 $ 75 $ 75
-----------------------------------------------------------------------------------------------
Newark:
Board of Education, Gen. Oblg., 6.00%, 2010 15 16
Gen. Oblg., 5.30%, 2008 75 77
-----------------------------------------------------------------------------------------------
North Brunswick Township, Gen. Oblg., 6.10%, 2010 35 37
-----------------------------------------------------------------------------------------------
North Hudson Sewerage Auth., Rev., 5.25%, 2016 100 98
-----------------------------------------------------------------------------------------------
North Jersey District, Water Supply Commission, Wanaque
North Proj., Rev., 5.125%, 2021 100 96
-----------------------------------------------------------------------------------------------
Ocean County:
Board of Education, Southern Regional High School, Gen.
Oblg., 5.50%, 2010 75 77
Utilities Auth., Wastewater Rev., 5.00%, 2013 100 98
-----------------------------------------------------------------------------------------------
Paulsboro Borough, Gen. Oblg., 5.80%, 2014 15 16
-----------------------------------------------------------------------------------------------
Port Auth. of New York and New Jersey:
Continental Airlines, Inc. and Eastern Airlines, Inc. Proj.,
9.125%, 2015 25 28
JFK International Air Terminal LLC Proj., Rev., 5.75%, 2025 200 203
Rev., 6.00%, 2014 75 79
-----------------------------------------------------------------------------------------------
Sparta Township Board of Education, Gen. Oblg., 5.75%, 2013 75 78
-----------------------------------------------------------------------------------------------
Summit, Gen. Oblg., 5.00%, 2010 45 45
-----------------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Electric Power Authority, Rev., 6.50%, 2006 75 85
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev., 6.50%, 2026 100 105
Highway and Transportation Auth., Rev., 6.25%, 2016 120 135
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 40 42
Public Buildings Auth., Rev., 5.25%, 2021 75 72
-----------------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, 2018 75 83
-----------------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--85.0% 4,508
-----------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--88.2%
(Cost: $4,480) 4,679
-----------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS
Yield--3.00% to 3.20%
Due--September 1997
Economic Dev. Auth.:
Gas Facilities, NUI Corporation Proj., Rev. 200 200
Natural Gas Facilities, Natural Gas Company Proj., Rev. 100 100
Toys "R" Us, Inc., Rev. 200 200
-----------------------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--9.4%
(Cost: $500) 500
-----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--97.6%
(Cost: $4,980) 5,179
-----------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--2.4% 125
-----------------------------------------------------------------------------------------------
NET ASSETS--100% $5,304
-----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $4,980,000 for federal income tax purposes
at August 31, 1997, the gross unrealized appreciation was $200,000, the gross
unrealized depreciation was $1,000 and the net unrealized appreciation on
investments was $199,000.
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, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER NEW YORK TAX-FREE INCOME FUND CLASS A 3.88% 5.78% 7.64% 7.38% (since 12/31/85)
- -------------------------------------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME FUND CLASS B 4.95 N/A N/A 5.50 (since 5/31/94)
- -------------------------------------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME FUND CLASS C 7.87 N/A N/A 6.00 (since 5/31/94)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
[LINEGRAPH]
- --------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from 12/31/85 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12/31/85 12/31/89 12/31/93 8/31/97
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper New York Tax-Free Income Fund Class A(1) 10,000 12,837 19,060 22,950
- --------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index(+) 10,000 14,781 21,729 26,553
- --------------------------------------------------------------------------------------------------------------------------
Consumer Price Index(++) 10,000 11,537 13,339 14,684
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
[LINEGRAPH]
- --------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 5/31/94 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 8/31/97
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper New York Tax-Free Income Fund Class B(1) 10,000 11,426 11,626 11,906
- --------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index(+) 10,000 11,586 12,099 12,711
- --------------------------------------------------------------------------------------------------------------------------
Consumer Price Index(++) 10,000 10,407 10,753 10,881
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
[LINEGRAPH]
- --------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 5/31/94 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 8/31/97
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper New York Tax-Free Income Fund Class C(1) 10,000 11,420 11,611 12,091
- --------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index(+) 10,000 11,586 12,099 12,711
- --------------------------------------------------------------------------------------------------------------------------
Consumer Price Index(++) 10,000 10,407 10,753 10,881
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
LINE GRAPHS CLASS A, B & C
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 Class A shares adjustment for the
maximum sales charge of 4.5 percent and for Class B shares adjustment for
the applicable contingent deferred sales charge (CDSC) as follows: 1-year,
3 percent; 5-year, 1 percent; since inception, 0 percent. The maximum CDSC
for Class B shares is 4 percent. For Class C shares, there is a 1 percent
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.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred sales
charge in effect at the end of the period for Class B shares. In comparing
the Kemper State Tax-Free Income Funds to the Lehman Brothers Municipal
Bond Index, you should note that the funds' performance reflects the
maximum sales charges, while no such charges are reflected in the
performance of the index.
+ The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the
following criteria: a minimum credit rating of BBB, have been issued as a
part of an issue of at least $50 million, have been issued within the last
5 years, and have a maturity of at least 2 years. Bonds subject to
Alternative Minimum Tax (AMT), variable rate bonds and zero coupon bonds
are excluded from the index. Source is Towers Data Systems.
++ The Consumer Price Index is a statistical measure of change, over time,
in the prices of goods and services in major expenditure groups for all
urban consumers. It is generally considered to be a measure of inflation.
Source is Towers Data Systems.
17
<PAGE> 18
PORTFOLIO STATISTICS
KEMPER NEW YORK TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 75% 88%
- ------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 11 6
- ------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS 9 2
- ------------------------------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 5 4
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
QUALITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
<S> <C> <C> <C>
AAA 46% 43%
- ------------------------------------------------------------------------------------------------------
AA 25 25
- ------------------------------------------------------------------------------------------------------
A 8 8
- ------------------------------------------------------------------------------------------------------
BBB 16 21
- ------------------------------------------------------------------------------------------------------
BB 1 --
- ------------------------------------------------------------------------------------------------------
B 1 --
- ------------------------------------------------------------------------------------------------------
NOT RATED 3 3
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 13% 7%
- ------------------------------------------------------------------------------------------------------
11-20 YEARS 50 51
- ------------------------------------------------------------------------------------------------------
+21 YEARS 37 42
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
<TABLE>
<CAPTION>
AVERAGE MATURITY
- ------------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
15.9 years 17.6 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, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Battery Park City Auth., Rev., 8.625%, to be called 6-1-05 @
100 $ 10 $ 12
---------------------------------------------------------------------------------------------
Dormitory Auth.:
Ideal Senior Living Center, Rev., 7.625%, to be called
2-1-99 @ 102 400 428
Menorah Campus Inc., Rev., 7.30% and 7.40%, to be called
8-1-01 @ 102 3,855 4,344
State University Educational Facilities, Rev., 7.25%, to
be called 5-15-02 @ 102 155 176
---------------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy.:
Hospital and Nursing Home, Rev., 7.80% to be called
8-15-98 @ 102 1,000 1,057
Mental Health Service Facilities Improvement, Rev.:
7.40% to 7.75% to be called 2-15-02 @ 102 1,185 1,325
7.875% to be called 2-15-00 @ 102 1,795 1,956
Montefiore Medical Center, Rev., 7.25%, to be called
2-15-99 @ 102 2,000 2,129
Presbyterian Hospital Proj., Rev., 7.70%, to be called
8-15-00 @ 102 4,000 4,457
---------------------------------------------------------------------------------------------
New York City:
Gen. Oblg.:
8.00% to be called 6-1-98 @ 100 1,180 1,217
7.75% to be called 3-15-00 @ 101.50 1,665 1,831
Municipal Assistance Corp., Rev., 7.625%, to be called
7-1-99 @ 102 4,160 4,502
---------------------------------------------------------------------------------------------
Power Auth. Electrical, Gen. Purpose Rev., 8.00%, to be
called 1-1-98 @ 102 5,320 5,501
---------------------------------------------------------------------------------------------
Thruway Auth., Local Highway and Bridge Service Contract,
Rev., 7.25%, to be called 1-1-01 @ 102 1,890 2,093
---------------------------------------------------------------------------------------------
Urban Dev. Corp., Syracuse University Center for Science and
Technology, Rev., 7.75%, to be called 1-1-98 @ 102 200 207
---------------------------------------------------------------------------------------------
Virgin Islands Housing Finance Auth., GNMA Collateralized
Home Mortgage Rev., 8.10%, to be called 12-1-98 @ 102 70 75
---------------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--10.9% 31,310
---------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------
Dormitory Auth.:
Champlain Valley Physicians College, Rev., 5.00%, 2017 750 705
City University System, Rev., 5.75% and 7.00%, 2009
through 2018 11,550 12,470
Colgate University, Rev., 6.00%, 2016 and 2021 1,750 1,908
Cornell University, Rev., 7.375%, 2020 2,000 2,193
Fordham University, Rev., 7.20%, 2015 790 862
Judicial Lease Facility, Rev., 7.375%, 2016 120 148
Mental Health Services Facilities Improvement, Rev.,
5.125%, 2021 6,280 6,009
Pace University, Rev., 6.50%, 2011 and 2012 1,260 1,450
Special Art School Districts Program, Rev., 7.00%, 2013 1,300 1,411
State University Educational Facilities, Rev., 5.875% to
7.50%, 2010 through 2017 4,325 4,891
St. Joseph's Hospital Health Center, Rev., 6.00%, 2008 and
2009 2,200 2,392
St. Vincent's Hospital and Medical Center, Rev., 7.375%,
2011 2,500 2,794
Upstate Community Colleges, Rev., 5.875%, 2016 3,555 3,660
---------------------------------------------------------------------------------------------
Energy Research and Dev. Auth., Consolidated Edison Company
of New York, Inc. Proj., Rev., 6.10% to 7.75%, 2020
through 2025 7,400 7,748
---------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Environmental Facilities Corp.:
Huntington Resource Recovery Proj., Rev., 7.50%, 2012 $ 3,745 $ 4,137
Riverbank State Park, Rev., 6.25% and 5.125%, 2012 and
2022 7,695 7,972
State Water Pollution Control, Revolving Fund Rev., 5.75%
to 7.25%, 2010 through 2014 8,500 9,125
----------------------------------------------------------------------------------------------------
Housing Finance Agcy.:
Multi-Family Mortgage Rev., 6.95% and 6.00%, 2012 and 2027 2,695 2,834
Service Contract Oblg., Rev., 7.30% and 7.25%, 2012 4,000 4,439
State University Construction, Rev., 8.00%, 2011 200 251
West-H.E.L.P. Housing, Rev., 7.55%, 2002 2,980 3,100
----------------------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy.:
Albany Medical Center, Rev., 8.00%, 2028 1,085 1,149
Columbian Presbyterian Hospital, Rev., 7.875%, 2007 500 512
Good Samaritan Hospital, Rev., 7.625%, 2023 1,000 1,035
Hospital and Nursing Home Rev., 7.60%, 2029 2,000 2,129
Mental Health Service Facilities Improvement, Rev., 7.40%
to 7.875%, 2015 through 2020 1,420 1,553
----------------------------------------------------------------------------------------------------
Metropolitan Transportation Auth.:
Commuter Facilities Rev., 6.00%, 2021 4,000 4,198
Transit, Rev., 5.00% to 6.10%, 2016 through 2021 21,500 21,754
----------------------------------------------------------------------------------------------------
Mortgage Agcy.:
Homeowner Mortgage, Rev., 6.45% to 7.95%, 2009 to 2022 9,455 9,955
Single Family Housing, Rev., 8.30%, 2017 680 694
----------------------------------------------------------------------------------------------------
Port Auth. of New York and New Jersey, Gen. Oblg., 5.375% to
9.125%, 2015 and 2017 11,730 12,919
----------------------------------------------------------------------------------------------------
United Nations Dev. Corp., Rev., 5.40% and 5.60%, 2014 and
2026 5,075 5,021
----------------------------------------------------------------------------------------------------
Urban Dev. Corp.:
State Facilities, Rev., 5.60%, 2015 2,260 2,303
Syracuse University Center for Science and Technology,
Rev., 5.50%, 2015 and 2017 9,390 9,459
----------------------------------------------------------------------------------------------------
Dutchess County Resource Recovery Agcy., Solid Waste
Management System, Rev., 7.50%, 2009 2,000 2,169
----------------------------------------------------------------------------------------------------
Monroe County, Gen. Oblg., 6.00%, 2018 and 2019 2,330 2,544
----------------------------------------------------------------------------------------------------
Nassau County, Gen. Oblg., 5.25% and 6.00%, 2012 through
2016 5,190 5,363
----------------------------------------------------------------------------------------------------
New York City:
Gen. Oblg., 6.00% to 8.00%, 1998 through 2025 5,680 5,894
Housing Dev. Corp., Multi-Unit Mortgage Rev., 7.30%, 2010 8,800 9,411
Industrial Dev. Agcy, Japan Airlines Company, Ltd. Proj.,
Rev., 6.00%, 2015 5,250 5,484
Industrial Dev. Agcy., Northwest Airlines Proj., Rev.,
6.00%, 2027 2,000 2,023
Municipal Water Finance Auth., Water and Sewer System,
Rev., 5.125% to 5.875%, 2021 through 2026 8,975 8,817
----------------------------------------------------------------------------------------------------
Niagara County, Water Treatment Plant, Gen. Oblg., 7.25% and
7.00%, 2011 and 2012 1,215 1,386
----------------------------------------------------------------------------------------------------
Niagara Frontier Transportation Auth., Airport Rev., 6.125%,
2014 3,000 3,149
----------------------------------------------------------------------------------------------------
Suffolk County Water Auth., Rev., 7.375%, 2012 170 179
----------------------------------------------------------------------------------------------------
Triborough Bridge and Tunnel Auth., Gen. Purpose Rev.,
6.125%, 2021 7,205 7,944
----------------------------------------------------------------------------------------------------
Troy, Municipal Assistance Corp., Rev., 5.00%, 2022 1,200 1,131
----------------------------------------------------------------------------------------------------
Ulster County, Resource Recovery Agcy., Solid Waste System,
Rev., 6.00%, 2014 3,000 3,064
----------------------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev., 6.50%, 2018 5,985 6,289
Highway and Transportation Auth., Rev., 6.00%, 2018 2,750 3,017
</TABLE>
20
PORTFOLIO OF INVESTMENTS
<PAGE> 21
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Virgin Islands, Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, 2018 $ 7,100 $ 7,903
----------------------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--80.1% 228,947
----------------------------------------------------------------------------------------------------
TOTAL OBLIGATIONS--91.0%
(Cost: $245,933) 260,257
----------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS
Yield--3.65% to 3.75%
Due--September 1997
Energy Facility, Rev. 5,250 5,250
----------------------------------------------------------------------------------------------------
New York City:
Gen. Oblg. 6,900 6,900
Municipal Water Finance Auth., Rev. 2,000 2,000
----------------------------------------------------------------------------------------------------
Niagra County Energy Facility, Rev. 10,700 10,700
----------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--8.7%
(Cost: $24,850) 24,850
----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.7%
(Cost: $270,783) 285,107
----------------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.3% 827
----------------------------------------------------------------------------------------------------
NET ASSETS--100% $285,934
----------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $270,783,000 for federal income tax purposes
at August 31, 1997, the gross unrealized appreciation was $14,456,000, the gross
unrealized depreciation was $132,000 and the net unrealized appreciation on
investments was $14,324,000.
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, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND CLASS A 4.46% 6.52% (since 3/15/95)
- -----------------------------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND CLASS B 5.57 6.60 (since 3/15/95)
- -----------------------------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND CLASS C 8.60 7.72 (since 3/15/95)
- -----------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 3/15/95 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3/15/95 12/31/95 12/31/96 8/31/97
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Pennsylvania Tax-Free Income Fund Class A(1) 10000 10803 11112 11688
- --------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ 10000 11096 11588 12174
- --------------------------------------------------------------------------------------------------------------
Consumer Price Index++ 10000 10172 10510 10636
- --------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 3/15/95 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3/15/95 12/31/95 12/31/96 8/31/97
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Pennsylvania Tax-Free Income Fund Class B(1) 10000 11234 11475 11709
- --------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ 10000 11096 11588 12174
- --------------------------------------------------------------------------------------------------------------
Consumer Price Index++ 10000 10172 10510 10636
- --------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 3/15/95 to
8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3/15/95 12/31/95 12/31/96 8/31/97
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Pennsylvania Tax-Free Income Fund Class C(1) 10000 11245 11479 12016
- --------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ 10000 11096 11588 12174
- --------------------------------------------------------------------------------------------------------------
Consumer Price Index++ 10000 10172 10510 10636
- --------------------------------------------------------------------------------------------------------------
</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 Class A shares adjustment for the
maximum sales charge of 4.5 percent and for Class B shares adjustment for
the applicable contingent deferred sales charge (CDSC) as follows: 1-year,
3 percent; 5-year, 1 percent; since inception, 0 percent. The maximum CDSC
for Class B shares is 4 percent. For Class C shares, there is a 1 percent
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.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred sales
charge in effect at the end of the period for Class B shares. In comparing
the Kemper State Tax-Free Income Funds to the Lehman Brothers Municipal
Bond Index, you should note that the funds' performance reflects the
maximum sales charges, while no such charges are reflected in the
performance of the index.
+ The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the
following criteria: a minimum credit rating of BBB, have been issued as a
part of an issue of at least $50 million, have been issued within the last
5 years, and have a maturity of at least 2 years. Bonds subject to
Alternative Minimum Tax (AMT), variable rate bonds and zero coupon bonds
are excluded from the index. Source is Towers Data Systems.
++ The Consumer Price Index is a statistical measure of change, over time,
in the prices of goods and services in major expenditure groups for all
urban consumers. It is generally considered to be a measure of inflation.
Source is Towers Data Systems.
22
<PAGE> 23
PORTFOLIO STATISTICS
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND*
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 71% 68%
- ------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 6 --
- ------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS 13 4
- ------------------------------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 10 28
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
QUALITY
<TABLE>
<CAPTION>
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
AAA 62% 75%
- ------------------------------------------------------------------------------------------------------
AA 12 9
- ------------------------------------------------------------------------------------------------------
A 3 --
- ------------------------------------------------------------------------------------------------------
BBB 20 13
- ------------------------------------------------------------------------------------------------------
BB -- --
- ------------------------------------------------------------------------------------------------------
B -- --
- ------------------------------------------------------------------------------------------------------
NOT RATED 3 3
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 12% 1%
- ------------------------------------------------------------------------------------------------------
11-20 YEARS 60 82
- ------------------------------------------------------------------------------------------------------
+21 YEARS 28 17
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/97 ON 8/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
13.7 years 14.9 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, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allegheny County, Gen. Oblg., 6.50%, to be called 9-1-01 @
100 $ 10 $ 11
------------------------------------------------------------------------------------------
Bethlehem Area School District, Gen. Oblg., 6.00%, to be
called 3-1-06 @ 100 100 109
------------------------------------------------------------------------------------------
Exeter Township, Berks County Auth., Rev., 6.20%, to be
called 7-15-02 @ 100 75 81
------------------------------------------------------------------------------------------
Gen. Oblg., 6.50%, to be called 11-1-01 @ 101.50 25 27
------------------------------------------------------------------------------------------
Higher Educational Facilities Auth., University of
Pittsburgh, Rev., 6.125%, to be called 6-1-02 @ 102 65 71
------------------------------------------------------------------------------------------
Lower Salford Township, Sewer Auth., Rev., 7.375%, to be
called 7-15-00 @ 100 45 49
------------------------------------------------------------------------------------------
University Area Joint Auth., Sewer Rev., 7.10%, to be called
9-1-00 @ 101 10 11
------------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--5.7% 359
------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------
Convention Center Auth., Rev., 6.70% and 6.75%, 2016 and
2019 160 179
------------------------------------------------------------------------------------------
Gen. Oblg., 6.25%, 2011 50 56
------------------------------------------------------------------------------------------
Higher Educational Facilities Auth.:
Allegheny Gen. Hospital, Rev., 7.00%, 2011 100 110
Bryn Mawr College, Rev., 5.625%, 2017 50 51
Muhlenberg College, Temple University and Thomas Jefferson
University, Rev., 7.20%, 2007 40 47
Philadelphia College of Textiles & Science, Rev., 6.70%,
2014 70 75
University of Pennsylvania, Rev., 5.35% and 5.55%, 2008
and 2009 150 155
Ursinus College, Rev., 5.90%, 2027 100 101
------------------------------------------------------------------------------------------
Housing Finance Agcy., Single Family Mortgage Rev., 5.90% to
6.30%, 2008 through 2022 200 207
------------------------------------------------------------------------------------------
Industrial Dev. Auth., Economic Dev. Rev., 7.00% and 6.00%,
2007 and 2012 80 87
------------------------------------------------------------------------------------------
Turnpike Commission, Rev., 6.00% and 6.25%, 2009 and 2011 75 81
------------------------------------------------------------------------------------------
Allegheny County:
Higher Education Building Auth., Duquesne University
Proj., Rev., 6.50%, 2011 160 185
Hospital Dev. Auth., Rev., 5.70%, 2015 75 77
Industrial Dev. Auth., USX Proj., Rev., 6.10%, 2018 75 76
Pittsburgh International Airport, 5.75%, 2013 100 104
------------------------------------------------------------------------------------------
Baldwin & Whitewater School District, zero coupon, 2007 50 30
------------------------------------------------------------------------------------------
Blair County, Gen. Oblg., 5.75%, 2006 100 108
------------------------------------------------------------------------------------------
Bucks County, Community College Auth., Rev., 5.50%, 2017 100 101
------------------------------------------------------------------------------------------
Cambria County, Gen. Oblg., 5.875%, 2008 15 16
------------------------------------------------------------------------------------------
Columbia County, Industrial Dev. Auth., First Street
Association Proj., Rev., 9.00%, 2014 65 71
------------------------------------------------------------------------------------------
Delaware Valley Regional Finance Auth., Rev., 7.75%, 2027 75 100
------------------------------------------------------------------------------------------
Downingtown Area School District, Gen. Oblg., 5.55%, 2018 100 101
------------------------------------------------------------------------------------------
General McLane School District, Gen. Oblg., 5.65%, 2011 70 73
------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hazleton Health Services Auth.:
Hazelton General Hospital, Rev., 5.50%, 2027 $ 125 $ 120
St. Joseph Medical Center Proj., Rev., 6.20%, 2026 75 77
---------------------------------------------------------------------------------------------
Jeannette, Health Service Auth., Rev., 6.00%, 2018 95 97
---------------------------------------------------------------------------------------------
Jim Thorpe Area School District, Gen. Oblg., 5.35%, 2012 100 101
---------------------------------------------------------------------------------------------
Lackawanna County, Gen. Oblg., 6.00%, 2011 15 16
---------------------------------------------------------------------------------------------
Lehigh County:
Gen. Oblg., 5.00%, 2006 70 71
Good Shepherd Rehabilitation Hospital, Rev., 5.20%, 2012 100 99
---------------------------------------------------------------------------------------------
McKean County Hospital Auth., Bradford Hospital Proj., Rev.,
5.375% and 6.10%, 2003 and 2020 115 117
---------------------------------------------------------------------------------------------
Media Boro, Gen. Oblg., 6.45%, 2012 40 45
---------------------------------------------------------------------------------------------
Monroeville Hospital Auth., Forbes Health System, Rev.,
5.75% and 6.25%, 2005 and 2015 150 156
---------------------------------------------------------------------------------------------
Municipality of Penn Hills, 5.80%, 2013 100 104
---------------------------------------------------------------------------------------------
New Castle Area Hospital Auth., Jameson Memorial, Rev.,
6.00%, 2010 100 109
---------------------------------------------------------------------------------------------
Northampton County, Industrial Dev. Auth., Metropolitan
Edison Proj., Rev., 6.10%, 2021 125 132
---------------------------------------------------------------------------------------------
North Penn School District, Gen. Oblg., 5.10%, 2010 65 65
---------------------------------------------------------------------------------------------
Philadelphia:
Airport System, Rev., 5.75%, 2008 100 106
Gas Works Rev., 6.375%, 2014 90 96
Municipal Auth., Rev., 6.80% and 6.125%, 2002 and 2008 110 116
School District, Gen. Oblg., 6.25%, 2005 and 2009 110 124
Water and Wastewater Rev., 6.25% and 5.50%, 2012 and 2014 150 157
---------------------------------------------------------------------------------------------
Pleasant Valley School District, Gen. Oblg., 4.60%, 2003 25 25
---------------------------------------------------------------------------------------------
Southeastern Transportation Auth., Rev., 5.90% and 6.00%,
2010 and 2012 125 133
---------------------------------------------------------------------------------------------
South Fork Municipal Auth., Rev., 5.25%, 2011 75 75
---------------------------------------------------------------------------------------------
Suburban Lancaster Sewer Auth., Rev., 5.80%, 2010 100 105
---------------------------------------------------------------------------------------------
University Area Joint Auth., Sewer Rev., 5.25%, 2014 50 50
---------------------------------------------------------------------------------------------
University of Pittsburgh, 5.00% and 6.125%, 2021 135 131
---------------------------------------------------------------------------------------------
Westmoreland County Industrial Dev. Auth., Health System
Proj., Rev., 6.00%, 2011 15 16
---------------------------------------------------------------------------------------------
Wilkes Barre Area School District, Gen. Oblg., 5.25%, 2014 100 99
---------------------------------------------------------------------------------------------
York County Industrial Dev. Auth., Public Service Electric
and Gas Company, Rev., 6.45%, 2019 20 22
---------------------------------------------------------------------------------------------
Puerto Rico:
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev., 6.50%, 2018 100 105
Highway and Transportation Auth., Rev., 6.25%, 2016 115 129
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 40 43
---------------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, 2018 100 111
---------------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--81.6% 5,143
---------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--87.3%
(Cost: $5,297) 5,502
---------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET INSTRUMENTS
Yield--3.65% to 3.70%
Due--September 1997
Delaware County, Industrial Dev. Auth., Pollution Control
Rev. $ 400 $ 400
---------------------------------------------------------------------------------------------
Franciscan Health System, Saint Mary Hospital Auth., Rev. 100 100
---------------------------------------------------------------------------------------------
Lehigh County, Gen. Oblg. 300 300
---------------------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--12.7%
(Cost: $800) 800
---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--100%
(Cost: $6,097) 6,302
---------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES 2
---------------------------------------------------------------------------------------------
NET ASSETS--100% $6,304
---------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $6,097,000 for federal income tax purposes
at August 31, 1997, the gross unrealized appreciation was $208,000, the gross
unrealized depreciation was $3,000 and the net unrealized appreciation on
investments was $205,000.
See accompanying Notes to Financial Statements.
26
<PAGE> 27
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, 1997, the related statements of operations for the year then ended
and changes in net assets for each of the two years in the period then ended and
the financial highlights for each of the fiscal periods since 1993. 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, 1997, 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, 1997, the results of their operations for the year then ended, the changes
in their net assets for each of the two years in the period then ended, and the
financial highlights for each of the fiscal periods since 1993, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1997
27
<PAGE> 28
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY NEW YORK PENNSYLVANIA
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------
Investments, at value (Cost: $96,582, $4,980,
$270,783 and $6,097, respectively) $102,244 5,179 285,107 6,302
- ------------------------------------------------------------------------------------------------------
Cash 143 148 32 23
- ------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 1 -- 350 276
- ------------------------------------------------------------------------------------------------------
Investments sold 8 72 -- 1
- ------------------------------------------------------------------------------------------------------
Interest 1,669 69 3,737 91
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS 104,065 5,468 289,226 6,693
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------------------------------------
Payable for:
Dividends 118 4 335 5
- ------------------------------------------------------------------------------------------------------
Fund shares redeemed -- -- 55 --
- ------------------------------------------------------------------------------------------------------
Investments purchased -- 149 2,602 375
- ------------------------------------------------------------------------------------------------------
Management fee 48 2 130 3
- ------------------------------------------------------------------------------------------------------
Administrative services fee 16 1 43 1
- ------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related
expenses 8 1 36 1
- ------------------------------------------------------------------------------------------------------
Distribution services fee 3 2 8 2
- ------------------------------------------------------------------------------------------------------
Trustees' fees and other 27 5 83 2
- ------------------------------------------------------------------------------------------------------
Total liabilities 220 164 3,292 389
- ------------------------------------------------------------------------------------------------------
NET ASSETS $103,845 5,304 285,934 6,304
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------------------------------------
Paid-in capital $ 97,668 5,117 269,706 6,073
- ------------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments 515 (12) 1,904 26
- ------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 5,662 199 14,324 205
- ------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $103,845 5,304 285,934 6,304
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $ 99,051 1,947 272,777 2,529
- ------------------------------------------------------------------------------------------------------
Shares outstanding 9,504 192 24,954 244
- ------------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $10.42 10.12 10.93 10.41
- ------------------------------------------------------------------------------------------------------
Maximum offering price per share (net asset value,
plus 4.71% of net asset value or 4.50% of offering
price) $10.91 10.60 11.45 10.90
- ------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $ 4,226 3,144 10,184 2,826
- ------------------------------------------------------------------------------------------------------
Shares outstanding 406 310 931 271
- ------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per
share
(net assets / shares outstanding) $10.40 10.15 10.94 10.41
- ------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $ 568 213 2,973 949
- ------------------------------------------------------------------------------------------------------
Shares outstanding 55 21 272 91
- ------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per
share
(net assets / shares outstanding) $10.41 10.16 10.92 10.41
- ------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 29
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY NEW YORK PENNSYLVANIA
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------------
Interest income $6,130 246 17,589 278
- -------------------------------------------------------------------------------------------------------------
Expenses:
Management fee 587 25 1,604 28
- -------------------------------------------------------------------------------------------------------------
Administrative services fee 189 11 519 12
- -------------------------------------------------------------------------------------------------------------
Distribution services fee 30 22 83 22
- -------------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related
expenses 77 7 242 7
- -------------------------------------------------------------------------------------------------------------
Professional fees 14 -- 9 --
- -------------------------------------------------------------------------------------------------------------
Reports to shareholders 15 1 52 1
- -------------------------------------------------------------------------------------------------------------
Trustees' fees and other 5 8 26 9
- -------------------------------------------------------------------------------------------------------------
Total expenses before expense waiver 917 74 2,535 79
- -------------------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment
manager -- 1 -- 9
- -------------------------------------------------------------------------------------------------------------
Total expenses after expense waiver 917 73 2,535 70
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 5,213 173 15,054 208
- ------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------------
Net realized gain on sale of investments
(including options purchased) 1,968 32 5,995 73
- -------------------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (296) (30) (401) (15)
- -------------------------------------------------------------------------------------------------------------
Net realized gain 1,672 2 5,594 58
- -------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on
investments 1,668 150 4,097 170
- -------------------------------------------------------------------------------------------------------------
Net gain on investments 3,340 152 9,691 228
- -------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $8,553 325 24,745 436
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
29
<PAGE> 30
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED AUGUST 31, 1997 and 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY
------------------------ -------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 5,213 5,821 173 174
- ---------------------------------------------------------------------------------------------------------------
Net realized gain 1,672 1,023 2 22
- ---------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 1,668 (198) 150 (5)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 8,553 6,646 325 191
- ---------------------------------------------------------------------------------------------------------------
Distribution from net investment income (5,213) (5,821) (173) (174)
- ---------------------------------------------------------------------------------------------------------------
Distribution from net realized gain on investments (1,208) (1,557) (25) --
- ---------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (6,421) (7,378) (198) (174)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (6,392) (8,455) 1,195 (344)
- ---------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (4,260) (9,187) 1,322 (327)
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 108,105 117,292 3,982 4,309
- ---------------------------------------------------------------------------------------------------------------
END OF YEAR $103,845 108,105 5,304 3,982
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NEW YORK PENNSYLVANIA
------------------------ -------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 15,054 16,197 208 156
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) 5,594 2,811 58 (29)
- ---------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 4,097 (2,528) 170 2
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 24,745 16,480 436 129
- ---------------------------------------------------------------------------------------------------------------
Distribution from net investment income (15,054) (16,197) (208) (156)
- ---------------------------------------------------------------------------------------------------------------
Distribution from net realized gain on investments (2,349) (4,194) -- --
- ---------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (17,403) (20,391) (208) (156)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (23,754) (13,220) 1,627 2,358
- ---------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (16,412) (17,131) 1,855 2,331
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 302,346 319,477 4,449 2,118
- ---------------------------------------------------------------------------------------------------------------
END OF YEAR $285,934 302,346 6,304 4,449
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 31
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 a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Differences in class expenses
will result in the payment of different per share
income dividends by class. Each share of a Fund has
equal rights with respect to voting, dividends and
assets, subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Exchange traded financial futures
and options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Over-the-counter
traded options are valued based upon prices
provided by market makers. Other securities and
assets are valued at fair value as determined in
good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes premium and original
discount amortization on fixed income securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated among the Funds in
proportion to their relative net assets.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. 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, are distributed at least
annually. Dividends are determined in accordance
with income tax principles which may treat certain
transactions differently from generally accepted
accounting principles.
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3 TRANSACTIONS
WITH AFFILIATES MANAGEMENT AGREEMENT. The Trust has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI), and each Fund pays a management fee at an
annual rate of .55% of the first $250 million of
average daily net assets declining to .40% of
average daily net assets in excess of $12.5
billion. Management fees incurred for the year
ended August 31, 1997 are as follows:
<TABLE>
<S> <C>
Florida $ 587,000
New Jersey 25,000
New York 1,604,000
Pennsylvania 28,000
</TABLE>
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Trust has an underwriting and
distribution services agreement with Zurich Kemper
Distributors, Inc. (ZKDI) (formerly known as Kemper
Distributors, Inc.). Underwriting commissions paid
in connection with the distribution of each Fund's
Class A shares for the year ended August 31, 1997
are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY ZKDI BY ZKDI TO FIRMS
---------------- -------------------
<S> <C> <C>
Florida $22,000 104,000
New Jersey 1,000 --
New York 42,000 219,000
Pennsylvania 1,000 10,000
</TABLE>
For services under the distribution services
agreement, each Fund pays ZKDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, ZKDI 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, ZKDI receives any
contingent deferred sales charges (CDSC) from
redemptions of Class B and Class C shares.
Distribution fees and commissions paid in
connection with the sale of each Fund's Class B and
Class C shares and the CDSC received in connection
with the redemption of such shares for the year
ended August 31, 1997 are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY ZKDI PAID BY ZKDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Florida $35,000 67,000
New Jersey 23,000 28,000
New York 92,000 138,000
Pennsylvania 29,000 43,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agreement with ZKDI. For
providing information and administrative services
to shareholders, each Fund pays ZKDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. ZKDI in turn has various
arrangements with financial services firms that
provide these services and pays these firms based
on assets of Fund accounts the firms service.
Administrative services fees (ASF) paid for the
year ended August 31, 1997 are as follows:
<TABLE>
<CAPTION>
ASF PAID BY ZKDI
ASF PAID BY THE -----------------------------
FUND TO ZKDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Florida $189,000 191,000 2,000
New Jersey 11,000 11,000 --
New York 519,000 522,000 19,000
Pennsylvania 12,000 14,000 --
</TABLE>
32
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds' transfer agent,
Zurich Kemper Service Company (ZKSvC) (formerly
known as Kemper Service Company) is the shareholder
service agent of the Trust. Under the agreement,
for the year ended August 31, 1997, ZKSvC received
shareholder services fees as follows:
<TABLE>
<S> <C>
Florida $ 44,000
New Jersey 3,000
New York 144,000
Pennsylvania 3,000
</TABLE>
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of ZKI.
For the year ended August 31, 1997, the Funds made
no payments to their officers and incurred
trustees' fees aggregating $15,000 to independent
trustees.
OPERATING EXPENSE WAIVER. ZKI agreed to waive
certain operating expenses of the New Jersey and
Pennsylvania Funds beginning in December 1996.
Under this arrangement, ZKI waived expenses of
$1,000 and $9,000, respectively, for the year ended
August 31, 1997.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended August 31, 1997, 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 $ 86,048 3,526 255,501 6,526
Proceeds from sales 101,822 2,745 301,092 5,517
</TABLE>
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the Funds (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
--------------------- ---------------------
FLORIDA SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 926 $ 9,544 876 $ 9,149
-----------------------------------------------------------------------------
Class B 254 2,612 345 3,629
-----------------------------------------------------------------------------
Class C 29 301 38 398
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 352 3,625 380 3,948
-----------------------------------------------------------------------------
Class B 8 89 7 73
-----------------------------------------------------------------------------
Class C 1 8 1 4
-----------------------------------------------------------------------------
SHARES REDEEMED
Class A (2,062) (21,201) (2,195) (22,721)
-----------------------------------------------------------------------------
Class B (126) (1,295) (270) (2,825)
-----------------------------------------------------------------------------
Class C (7) (75) (11) (110)
-----------------------------------------------------------------------------
CONVERSION OF SHARES
Class A -- 5 1 12
-----------------------------------------------------------------------------
Class B -- (5) (1) (12)
-----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE
TRANSACTIONS $(6,392) $ (8,455)
-----------------------------------------------------------------------------
</TABLE>
33
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
------------------- --------------------
NEW JERSEY SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 54 $ 547 76 $ 766
-------------------------------------------------------------------------
Class B 70 704 127 1,271
-------------------------------------------------------------------------
Class C 19 187 2 21
-------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 6 58 5 47
-------------------------------------------------------------------------
Class B 8 81 5 52
-------------------------------------------------------------------------
Class C -- 4 -- 3
-------------------------------------------------------------------------
SHARES REDEEMED
Class A (27) (272) (164) (1,625)
-------------------------------------------------------------------------
Class B (11) (110) (75) (743)
-------------------------------------------------------------------------
Class C -- (4) (14) (136)
-------------------------------------------------------------------------
NET INCREASE
(DECREASE) FROM
CAPITAL SHARE
TRANSACTIONS $1,195 $ (344)
-------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
--------------------- ---------------------
NEW YORK SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,425 $15,421 1,200 $ 13,047
-----------------------------------------------------------------------------
Class B 356 3,837 391 4,260
-----------------------------------------------------------------------------
Class C 177 1,915 90 978
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 970 10,474 1,202 13,096
-----------------------------------------------------------------------------
Class B 28 300 19 210
-----------------------------------------------------------------------------
Class C 9 99 4 42
-----------------------------------------------------------------------------
SHARES REDEEMED
Class A (5,038) (54,373) (4,027) (43,719)
-----------------------------------------------------------------------------
Class B (104) (1,122) (83) (893)
-----------------------------------------------------------------------------
Class C (28) (305) (22) (241)
-----------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 6 62 7 73
-----------------------------------------------------------------------------
Class B (6) (62) (7) (73)
-----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE
TRANSACTIONS $(23,754) $(13,220)
----------------------------------------------------------------------------
</TABLE>
34
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
------------------- -------------------
PENNSYLVANIA SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 52 $ 526 154 $1,568
-------------------------------------------------------------------------
Class B 139 1,426 100 1,009
-------------------------------------------------------------------------
Class C 39 402 52 520
-------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 7 71 5 53
-------------------------------------------------------------------------
Class B 5 50 3 34
-------------------------------------------------------------------------
Class C 2 20 2 17
-------------------------------------------------------------------------
SHARES REDEEMED
Class A (36) (371) (39) (386)
-------------------------------------------------------------------------
Class B (46) (466) (32) (322)
-------------------------------------------------------------------------
Class C (3) (31) (14) (135)
-------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 1 8 -- --
-------------------------------------------------------------------------
Class B (1) (8) -- --
-------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE
TRANSACTIONS $1,627 $2,358
-------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6
FINANCIAL FUTURES
CONTRACTS The Funds listed below have entered into exchange
traded financial futures contracts on U.S. Treasury
securities in order to help protect themselves from
anticipated market conditions and, as such, bear
the risk that arises from entering into these
contracts.
At the time a Fund enters into a futures contract,
it is required to make a margin deposit with its
custodian. Subsequently, gain or loss is recognized
and payments are made on a daily basis between the
Fund and its broker as the market value of the
futures contract fluctuates. At August 31, 1997,
the market values of assets pledged by the Funds to
cover margin requirements for open futures
positions were $34,000, $9,000 and $8,000 for the
Florida, New Jersey and Pennsylvania Funds,
respectively. The Funds also had liquid securities
in their portfolios in excess of the face amount of
the following short Treasury Note futures open at
August 31, 1997. The contracts expire in December,
1997.
<TABLE>
<CAPTION>
GAIN AT
FUND FACE AMOUNT 8/31/97
-----------------------------------
<S> <C> <C>
Florida $2,725,000 $8,000
-----------------------------------
New Jersey 217,000 --
-----------------------------------
Pennsylvania 435,000 --
-----------------------------------
</TABLE>
35
<PAGE> 36
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED AUGUST 31,
--------------------------------------
FLORIDA 1997 1996 1995 1994 1993
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.21 10.27 10.11 10.98 10.22
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .51 .52 .53 .52 .58
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .33 .08 .30 (.52) .81
- --------------------------------------------------------------------------------
Total from investment operations .84 .60 .83 -- 1.39
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .51 .52 .53 .52 .58
- --------------------------------------------------------------------------------
Distribution from net realized gain .12 .14 .14 .35 .05
- --------------------------------------------------------------------------------
Total dividends .63 .66 .67 .87 .63
- --------------------------------------------------------------------------------
Net asset value, end of year $10.42 10.21 10.27 10.11 10.98
- --------------------------------------------------------------------------------
TOTAL RETURN 8.37% 5.83 8.62 (.11) 13.96
RATIOS TO AVERAGE NET ASSETS
Expenses .83% .84 .80 .79 .63
- --------------------------------------------------------------------------------
Net investment income 4.92% 5.00 5.30 5.04 5.48
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
MAY 31 MAY 31
YEAR ENDED AUGUST 31, TO YEAR ENDED AUGUST 31, TO
---------------------- AUGUST 31, --------------------- AUGUST 31,
1997 1996 1995 1994 1997 1996 1995 1994
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.19 10.26 10.10 10.13 10.20 10.26 10.10 10.13
- ------------------------------------------------------------------------------ -----------------------------------
Income from investment operations:
Net investment income .42 .43 .44 .11 .42 .43 .45 .11
- ------------------------------------------------------------------------------ -----------------------------------
Net realized and unrealized gain (loss) .33 .07 .30 (.03) .33 .08 .30 (.03)
- ------------------------------------------------------------------------------ -----------------------------------
Total from investment operations .75 .50 .74 .08 .75 .51 .75 .08
- ------------------------------------------------------------------------------ -----------------------------------
Less dividends:
Distribution from net investment income .42 .43 .44 .11 .42 .43 .45 .11
- ------------------------------------------------------------------------------ -----------------------------------
Distribution from net realized gain .12 .14 .14 -- .12 .14 .14 --
- ------------------------------------------------------------------------------ -----------------------------------
Total dividends .54 .57 .58 .11 .54 .57 .59 .11
- ------------------------------------------------------------------------------ -----------------------------------
Net asset value, end of period $10.40 10.19 10.26 10.10 10.41 10.20 10.26 10.10
- ----------------------------------------------------------------------------- -----------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.48% 4.84 7.67 .74 7.49 4.97 7.84 .75
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.65% 1.68 1.65 1.70 1.64 1.64 1.52 1.54
- ------------------------------------------------------------------------------ -----------------------------------
Net investment income 4.10% 4.16 4.45 4.28 4.11 4.20 4.58 4.52
- ------------------------------------------------------------------------------ -----------------------------------
</TABLE>
SUPPLEMENTAL DATA FOR ALL CLASSES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $103,845 108,105 117,292 124,721 129,702
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 87% 119 96 53 35
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR ALL FUNDS: Total return does not reflect the effect of sales charges.
36
<PAGE> 37
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED MARCH 15
AUGUST 31, TO
------------- AUGUST 31,
NEW JERSEY 1997 1996 1995
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.85 9.75 9.50
- -------------------------------------------------------------------------
Income from investment operations:
Net investment income .43 .43 .22
- -------------------------------------------------------------------------
Net realized and unrealized gain .33 .10 .25
- -------------------------------------------------------------------------
Total from investment operations .76 .53 .47
- -------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .43 .43 .22
- -------------------------------------------------------------------------
Distribution from net realized gain .06 -- --
- -------------------------------------------------------------------------
Total dividends .49 .43 .22
- -------------------------------------------------------------------------
Net asset value, end of period $10.12 9.85 9.75
- -------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.85% 5.50 4.89
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses absorbed by the Fund 1.13% 1.13 .39
- -------------------------------------------------------------------------
Net investment income 4.28% 4.41 4.99
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.15% 1.45 .94
- -------------------------------------------------------------------------
Net investment income 4.26% 4.09 4.44
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED MARCH 15 YEAR ENDED MARCH 15
AUGUST 31, TO AUGUST 31, TO
------------- AUGUST 31, ------------ AUGUST 31,
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 9.88 9.77 9.50 9.88 9.77 9.50
- ------------------------------------------------------------------------- --------------------------
Income from investment operations:
Net investment income .35 .36 .18 .35 .36 .18
- ------------------------------------------------------------------------- --------------------------
Net realized and unrealized gain .33 .11 .27 .34 .11 .27
- ------------------------------------------------------------------------- --------------------------
Total from investment operations .68 .47 .45 .69 .47 .45
- ------------------------------------------------------------------------- --------------------------
Less dividends:
Distribution from net investment income .35 .36 .18 .35 .36 .18
- ------------------------------------------------------------------------- --------------------------
Distribution from net realized gain .06 -- -- .06 -- --
- ------------------------------------------------------------------------- --------------------------
Total dividends .41 .36 .18 .41 .36 .18
- ------------------------------------------------------------------------- --------------------------
Net asset value, end of period $10.15 9.88 9.77 10.16 9.88 9.77
- ------------------------------------------------------------------------- --------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.02% 4.80 4.69 7.19 4.89 4.75
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses absorbed by the Fund 1.90% 2.00 1.18 1.79 1.70 1.18
- ------------------------------------------------------------------------- --------------------------
Net investment income 3.51% 3.54 4.20 3.62 3.84 4.20
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.92% 2.32 1.73 1.81 2.02 1.73
- ------------------------------------------------------------------------- --------------------------
Net investment income 3.49% 3.22 3.65 3.60 3.52 3.65
SUPPLEMENTAL DATA FOR ALL CLASSES
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 15
AUGUST 31, TO
-------------------- AUGUST 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets at end of period (in thousands) $5,304 3,982 4,309
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 65% 128 68
- -----------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR NEW JERSEY FUND:
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 through September 15, 1996.
Additionally, beginning in December 1996, ZKI agreed to absorb certain operating
expenses of the Fund. "Other ratios to average net assets" are computed without
expense waiver or absorption.
37
<PAGE> 38
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED AUGUST 31,
--------------------------------------------
NEW YORK 1997 1996 1995 1994 1993
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.66 10.80 10.73 11.59 10.97
- ---------------------------------------------------------------------------------
Income from investment operations:
Net investment income .56 .56 .58 .58 .63
- ---------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .36 -- .20 (.60) .72
- ---------------------------------------------------------------------------------
Total from investment operations .92 .56 .78 (.02) 1.35
- ---------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .56 .56 .58 .58 .63
- ---------------------------------------------------------------------------------
Distribution from net realized gain .09 .14 .13 .26 .10
- ---------------------------------------------------------------------------------
Total dividends .65 .70 .71 .84 .73
- ---------------------------------------------------------------------------------
Net asset value, end of year $10.93 10.66 10.80 10.73 11.59
- ---------------------------------------------------------------------------------
TOTAL RETURN 8.77% 5.26 7.62 (.19) 12.82
RATIOS TO AVERAGE NET ASSETS
Expenses .83% .83 .81 .76 .67
- ---------------------------------------------------------------------------------
Net investment income 5.15% 5.15 5.47 5.29 5.69
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED AUGUST 31, MAY 31 TO YEAR ENDED AUGUST 31, MAY 31 TO
------------------------ AUGUST 31, ----------------------- AUGUST 31,
1997 1996 1995 1994 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.66 10.80 10.73 10.77 10.65 10.79 10.73 10.77
- -------------------------------------------------------------------------- ------------------------------------
Income from investment operations:
Net investment income .47 .47 .48 .12 .47 .47 .48 .12
- -------------------------------------------------------------------------- ------------------------------------
Net realized and unrealized gain
(loss) .37 -- .20 (.04) .36 -- .19 (.04)
- -------------------------------------------------------------------------- ------------------------------------
Total from investment operations .84 .47 .68 .08 .83 .47 .67 .08
- -------------------------------------------------------------------------- ------------------------------------
Less dividends:
Distribution from net investment
income .47 .47 .48 .12 .47 .47 .48 .12
- -------------------------------------------------------------------------- ------------------------------------
Distribution from net realized gain .09 .14 .13 -- .09 .14 .13 --
- -------------------------------------------------------------------------- ------------------------------------
Total dividends .56 .61 .61 .12 .56 .61 .61 .12
- -------------------------------------------------------------------------- ------------------------------------
Net asset value, end of period $10.94 10.66 10.80 10.73 10.92 10.65 10.79 10.73
- -------------------------------------------------------------------------- ------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.96% 4.36 6.69 .75 7.87 4.38 6.64 .70
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.67% 1.69 1.67 1.68 1.65 1.67 1.62 1.63
- -------------------------------------------------------------------------- ------------------------------------
Net investment income 4.31% 4.29 4.61 4.36 4.33 4.31 4.66 4.68
- -------------------------------------------------------------------------- ------------------------------------
</TABLE>
SUPPLEMENTAL DATA FOR ALL CLASSES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $285,934 302,346 319,477 342,839 354,461
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 92% 104 112 43 36
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED
AUGUST 31, MARCH 15 TO
------------- AUGUST 31,
PENNSYLVANIA 1997 1996 1995
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.95 9.81 9.50
- ----------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .44 .22
- ----------------------------------------------------------------------
Net realized and unrealized gain .46 .14 .31
- ----------------------------------------------------------------------
Total from investment operations .92 .58 .53
- ----------------------------------------------------------------------
Less distribution from net investment
income .46 .44 .22
- ----------------------------------------------------------------------
Net asset value, end of period $10.41 9.95 9.81
- ----------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 9.41% 6.01 5.54
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses absorbed by the Fund .97% 1.06 .46
- ----------------------------------------------------------------------
Net investment income 4.48% 4.33 4.93
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.12% 1.39 1.01
- ----------------------------------------------------------------------
Net investment income 4.33% 4.00 4.38
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED YEAR ENDED
AUGUST 31, MARCH 15 TO AUGUST 31, MARCH 15 TO
-------------- AUGUST 31, ------------ AUGUST 31,
1997 1996 1995 1997 1996 1995
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.95 9.80 9.50 9.95 9.81 9.50
- ----------------------------------------------------------------------- --------------------------
Income from investment operations:
Net investment income .38 .37 .18 .38 .37 .19
- ----------------------------------------------------------------------- --------------------------
Net realized and unrealized gain .46 .15 .30 .46 .14 .31
- ----------------------------------------------------------------------- --------------------------
Total from investment operations .84 .52 .48 .84 .51 .50
- ----------------------------------------------------------------------- --------------------------
Less distribution from net investment
income .38 .37 .18 .38 .37 .19
- ----------------------------------------------------------------------- --------------------------
Net asset value, end of period $10.41 9.95 9.80 10.41 9.95 9.81
- ----------------------------------------------------------------------- --------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.58% 5.29 5.05 8.60 5.19 5.18
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses absorbed by the Fund 1.73% 1.83 1.24 1.71 1.80 1.21
- ----------------------------------------------------------------------- --------------------------
Net investment income 3.72% 3.56 4.15 3.74 3.59 4.18
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.93% 2.16 1.79 1.96 2.13 1.76
- ----------------------------------------------------------------------- --------------------------
Net investment income 3.52% 3.23 3.60 3.49 3.26 3.63
- ----------------------------------------------------------------------- --------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, MARCH 15 TO
-------------------- AUGUST 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets at end of period (in thousands) $6,304 4,449 2,118
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 117% 158 85
- -----------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR PENNSYLVANIA FUND:
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 through September 15, 1996.
Additionally, beginning in December 1996, ZKI agreed to absorb certain operating
expenses of the Fund. "Other ratios to average net assets" are computed without
expense waiver or absorption.
FEDERAL TAX STATUS OF 1997 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.
39
<PAGE> 40
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS CHARLES R. MANZONI, JR.
President and Trustee Vice President
DAVID W. BELIN
Trustee CHRISTOPHER J. MIER
LEWIS A. BURNHAM Vice President
Trustee
JOHN E. NEAL
DONALD L. DUNAWAY Vice President
Trustee
ROBERT C. PECK, JR.
ROBERT B. HOFFMAN Vice President
Trustee
PHILIP J. COLLORA
DONALD R. JONES Vice President and
Trustee Secretary
SHIRLEY D. PETERSON JEROME L. DUFFY
Trustee Treasurer
WILLIAM P. SOMMERS ELIZABETH C. WERTH
Trustee Assistant Secretary
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT ZURICH KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
(800) 621-1048
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INVESTMENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a Kemper
Tax-Free Income Funds prospectus.
KSTIS - 2 (10/97) 1038270
