<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED NOVEMBER 30, 1997
LONG-TERM INVESTING IN SHORT-TERM WORLD
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
"... In a year marked by rapid changes across
the globe in financial asset prices, municipal
bonds performed well, and they still represent
an extremely investment. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
4
ECONOMIC OVERVIEW
6
PERFORMANCE UPDATE
8
TERMS TO KNOW
9
FLORIDA'S
PERFORMANCE UPDATE
PORTFOLIO STATISTICS
AND PORTFOLIO
OF INVESTMENTS
14
NEW JERSEY'S
PERFORMANCE UPDATE,
PORTFOLIO STATISTICS
AND PORTFOLIO
OF INVESTMENTS
18
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, 1998 (UNADJUSTED FOR ANY SALES CHARGE)
- --------------------------------------------------------------------------------
[BAR GRAPH] [BAR GRAPH]
FLORIDA NEW YORK
<TABLE>
<S> <C> <C> <C>
CLASS A 8.27% CLASS A 8.44%
CLASS B 7.38% CLASS B 7.65%
CLASS C 7.26% CLASS C 7.56%
LIPPER FLORIDA TAX-FREE LIPPER NEW YORK TAX-FREE
INCOME FUNDS CATEGORY AVERAGE* 8.28% INCOME FUNDS CATEGORY AVERAGE* 8.27%
[BAR GRAPH] [BAR GRAPH]
NEW JERSEY PENNSYLVANIA
CLASS A 8.47% CLASS A 8.18%
CLASS B 7.49% CLASS B 7.37%
CLASS C 7.63% CLASS C 7.36%
LIPPER NEW JERSEY TAX-FREE LIPPER PENNSYLVANIA TAX-FREE
INCOME FUNDS CATEGORY AVERAGE* 8.02% INCOME FUNDS CATEGORY AVERAGE* 7.81%
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS
AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES WHEN REDEEMED MAY BE WORTH
MORE OR LESS THAN ORIGINAL COST.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
FLORIDA
<TABLE>
<CAPTION>
AS OF AS OF
8/31/98 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER FLORIDA TAX-FREE INCOME
FUND CLASS A $10.62 $10.42
- --------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME
FUND CLASS B $10.60 $10.40
- --------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME
FUND CLASS C $10.60 $10.41
- --------------------------------------------------------------------------------
</TABLE>
NEW JERSEY
<TABLE>
<CAPTION>
AS OF AS OF
8/31/98 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER NEW JERSEY TAX-FREE
INCOME FUND CLASS A $10.43 $10.12
- --------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE
INCOME FUND CLASS B $10.45 $10.15
- --------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE
INCOME FUND CLASS C $10.47 $10.16
- --------------------------------------------------------------------------------
</TABLE>
NEW YORK
<TABLE>
<CAPTION>
AS OF AS OF
8/31/98 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS A $11.11 $10.93
- --------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS B $11.13 $10.94
- --------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS C $11.10 $10.92
- --------------------------------------------------------------------------------
</TABLE>
PENNSYLVANIA
<TABLE>
<CAPTION>
AS OF AS OF
8/31/98 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS A $10.71 $10.41
- --------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS B $10.71 $10.41
- --------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS C $10.71 $10.41
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
CONTENTS
23
PENNSYLVANIA'S
PERFORMANCE UPDATE,
PORTFOLIO STATISTICS
AND PORTFOLIO
OF INVESTMENTS
28
REPORT OF
INDEPENDENT AUDITORS
29
FINANCIAL STATEMENTS
32
NOTES TO
FINANCIAL STATEMENTS
37
FINANCIAL HIGHLIGHTS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME FUNDS' LIPPER RANKINGS AS OF 8/31/98*
- --------------------------------------------------------------------------------
FLORIDA MUNICIPAL
DEBT CATEGORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1-YEAR #32 of #54 of #58 of
62 funds 62 funds 62 funds
- --------------------------------------------------------------------------------
5-YEAR #5 of N/A N/A
26 funds
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NEW JERSEY MUNICIPAL
DEBT CATEGORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1-YEAR #16 of #45 of #43 of
55 funds 55 funds 55 funds
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NEW YORK MUNICIPAL
DEBT CATEGORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1-YEAR #46 of #80 of #82 of
98 funds 98 funds 98 funds
- --------------------------------------------------------------------------------
5-YEAR #12 of N/A N/A
54 funds
- --------------------------------------------------------------------------------
10-YEAR #6 of 28 N/A N/A
funds
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
PENNSYLVANIA MUNICIPAL
DEBT CATEGORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1-YEAR #20 of #46 of #45 of
63 funds 63 funds 63 funds
- --------------------------------------------------------------------------------
</TABLE>
*Lipper Analytical Services, Inc. Rankings are based upon changes in net asset
value with all dividends reinvested and do not include the effect of sales
charges and, if they had, results may have been less favorable. Rankings are
historical and do not reflect future performance.
DIVIDEND REVIEW
THE FOLLOWING TABLES SHOW PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE
FUNDS AS OF AUGUST 31, 1998.
- --------------------------------------------------------------------------------
FLORIDA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE-YEAR INCOME: $.4870 $.3995 $.4001
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $.0381 $.0318 $.0400
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION
RATE+: 4.17% 3.48% 4.38%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.03% 3.39% 3.38%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.41% 5.39% 5.37%
- --------------------------------------------------------------------------------
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> <C>
ONE-YEAR INCOME: $.4342 $.3516 $.3575
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $.0364 $.0272 $.0297
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION
RATE+: 4.05% 3.02% 3.29%
- --------------------------------------------------------------------------------
SEC YIELD+: 3.64% 3.00% 3.02%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.18% 5.09% 5.13%
- --------------------------------------------------------------------------------
BASED ON A MARGINAL TAX RATE OF 41.1% (COMBINED NEW
JERSEY STATE AND FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NEW YORK
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE-YEAR INCOME: $.5286 $.4373 $.4385
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $.0427 $.0351 $.0373
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION
RATE+: 4.47% 3.66% 3.90%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.09% 3.44% 3.45%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 7.33% 6.16% 6.18%
- --------------------------------------------------------------------------------
BASED ON A MARGINAL TAX RATE OF 44.2% (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> <C>
ONE-YEAR INCOME: $.4384 $.3576 $.3593
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $.0367 $.0317 $.0276
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION
RATE+: 3.98% 3.44% 2.99%
- --------------------------------------------------------------------------------
SEC YIELD+: 3.56% 2.96% 2.98%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 5.83% 4.84% 4.88%
- --------------------------------------------------------------------------------
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, 1998. Distribution rate
simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended August 31, 1998 shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with 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. Yields
and distribution rates are historical and will fluctuate.
<PAGE> 4
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS.
SILVIA HOLDS BACHELOR OF ARTS AND PH.D. DEGREES IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND HAS A MASTER'S DEGREE IN ECONOMICS FROM BROWN
UNIVERSITY IN PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS
WITH THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $239 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
The third quarter of 1998 ended on a mildly positive note with the Federal
Reserve Board (the Fed) reducing interest rates by 1/4 of a point to 5.25
percent. While some investors were disappointed by the small size of the
adjustment, it nevertheless provided a moment of relief after several stormy
months. Economic and political instability in Russia, terrorist bombings and
U.S. retaliation overseas, lingering effects of the "contagion" in Asia, not to
mention weak corporate profits and political scandal in the United States were
responsible for considerable uncertainty and market volatility. A series of
market dips and drops continued to fuel the debate about whether we would
finally see the end of our long-running bull market -- or even plummet into a
recession.
The Fed's mid-September bank credit survey indicated that domestic banks
are tightening credit standards for both large and small borrowers. This
suggests a reduction in the supply of credit going forward with subsequent
negative impacts on employment growth and capital spending. In this sense, there
is the beginning of a credit crunch starting in U.S. bank credit markets.
But investors should find comfort in the fact that economic fundamentals
continue to favor financial assets in the U.S. -- particularly Treasury bonds.
In a nutshell, the nation's economy remains strong despite its slowdown in the
second half of the year. Short-term interest rates are expected to remain low
for the remainder of the year. There are no major tax or regulatory threats
waiting in the wings. And our economy continues to draw investors from around
the world, although perhaps not as fervently as last year.
The nation's gross domestic product (GDP), which represents the total value
of all goods and services produced within the U.S. economy, is expected to have
grown at an annualized rate of 2 percent in the third quarter of 1998. Faster
growth can be attributed to several one-time factors, including a domestic
correction in inventory levels and the end of the General Motors strike.
Real capital spending and employment growth have remained solid. Consumer
confidence remains fairly high. Home sales remain robust. Economic policy
continues to support the nation's fiscal budget surplus projection of $65
billion.
As far as inflation goes, there are two tales to be told. Prices for
consumer goods, as measured by the consumer price index (CPI), are steady.
Compare this to prices for services, which have risen between 2.5 and 3.5
percent. For investors, this difference in pricing flexibility translates into a
difference in profit expectations. Profits of domestic service firms should be
much stronger than commodity producers dependent on export markets.
Across the Atlantic, Europe's economy appears to be growing at an even pace
as the region progresses toward the Economic and Monetary Union (EMU) slated for
January 1, 1999. One effect of the union may be a slight rise in short-term
interest rates in Europe -- not because there will be an overt change in policy,
but simply because of the convergence of some very disparate interest rates. The
average rate will likely be higher than the relatively attractive rate the
German Central Bank currently offers, for example.
In Asia, which has been making headlines around the world for more than a
year now, the latest news is from Japan, which recently installed a new prime
minister as well as a new finance minister. Much discussion will be focused on
changes in Japan's economic policy, particularly in terms of taxation and
banking reform -- and patience is in order. Most of the changes in taxation will
impact Japan in the first half of 1999. But as far as banking reform goes, those
of us familiar with bank reform in the U.S. know that this will be a two- to
five-year process. Certainly, investors are looking to Japan to spark recovery
for Asia as a whole, which continues to suffer from the "contagion" of low
currency values, seriously reduced consumer spending and general economic
malaise.
Indeed, while its full effects remain to be seen -- and felt -- by the
majority of American businesses and individuals, the Asian economic crisis has
contributed to the general uncertainty of the emotion-driven U.S. markets.
Whether it's an economic crisis abroad or political scandal at home, current
events move the investors who move the markets.
4
<PAGE> 5
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND SHAREHOLDER
DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR DEFLATION, CREDIT
EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR INVESTMENT
RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE 10-YEAR TREASURY
RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES. THE OTHER DATA REPORT
YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (9/30/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.46 5.57 6.3 6.64
PRIME RATE (2) 8.5 8.5 8.5 8.25
INFLATION RATE(3)* 1.68 1.44 2.22 2.88
THE U.S. DOLLAR(4) 8.19 4.88 8.76 3.32
CAPITAL GOODS ORDERS(5)* 2.81 8.1 8.2 8.2
INDUSTRIAL PRODUCTION(5)* 1.82 4.31 5.03 3.3
EMPLOYMENT GROWTH(6) 2.68 2.57 2.6 2.13
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. in the last five years,
inflation has been as high as 6 percent. the low, moderate inflation of the
last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of August 31, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
One might conclude that, as a result of 1998's slow corporate profit growth
and turmoil in Russia and Asia, the psychology of the markets is
shifting -- even some of Wall Street's most resolute bulls appear to be
reconsidering their long-held convictions. But with the economy's strong
fundamentals in place, the outlook for a bear market is premature. In any case,
prudent investors are wise to watch for the following economic warning signs:
inflation in the form of rising wages and/or prices; residual fallout from Asia,
which could appear in the form of reduced sales and earnings for American
businesses; and a continued widening of our trade deficit, an imbalance caused
by heightened American demand for foreign goods and services. In the months to
come, investors are likely to maintain their bias in favor of investments that
have historically been considered more conservative: larger capitalization
stocks, U.S. Treasuries and only the highest-grade corporate bonds.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ John E. Silvia
JOHN E. SILVIA
October 9, 1998
5
<PAGE> 6
PERFORMANCE UPDATE
[MIER PHOTO]
[MIER PHOTO]
Christopher Mier joined Scudder Kemper Investments, Inc. in 1986 and is a
managing director. Mier is the lead portfolio manager of Kemper Florida Tax-Free
Income Fund and New York Tax-Free Income Fund. Mier received a B.A. degree in
economics from the University of Michigan and went on to receive his M.M. in
finance from the Kellogg Graduate School of Management at Northwestern
University. He is a chartered financial analyst.
[BRENNAN PHOTO]
Eleanor R. Brennan is the lead portfolio manager of Kemper New Jersey Tax-Free
Income Fund. Brennan joined Scudder Kemper Investments in March 1995 and is a
vice president. Prior to joining Scudder Kemper, Brennan was an assistant
portfolio manager for an unaffiliated investment management firm from 1993 to
1995. She received her B.A. in economics from Ursinus College and an M.S. in
finance from Drexel University. Brennan is a chartered financial analyst.
[CONDON PHOTO]
Philip G. Condon is the lead portfolio manager of the Kemper Pennsylvania Tax-
Free Income Fund. Condon joined Scudder Kemper Investments in 1983 and is a
managing director. He received a B.A. and M.B.A., with a concentration in
finance, from the University of Massachusetts, Amherst.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
MUNICIPAL BONDS IN GENERAL AND KEMPER STATE TAX-FREE INCOME SERIES IN PARTICULAR
PERFORMED WELL DURING THE PAST TWELVE MONTHS. BELOW, CO-PORTFOLIO MANAGER CHRIS
MIER DISCUSSES THE FORCES THAT AFFECTED THE MUNICIPAL BOND MARKET, AND HOW THE
FUNDS WERE POSITIONED IN RESPONSE.
Q CHRIS, THE LAST YEAR APPEARS TO HAVE BEEN A PERIOD OF UNUSUALLY STRONG
PERFORMANCE FOR MUNICIPAL BONDS. IN FACT, THE AVERAGE MUNICIPAL BOND FUND
RETURNED 8.20 PERCENT AS MEASURED BY THE LIPPER GENERAL MUNICIPAL DEBT CATEGORY
AVERAGE, WHICH WAS EVEN BETTER THAN THE STOCK MARKET'S 8.12 PERCENT AS MEASURED
BY THE S&P 500*. WHAT FACTORS WERE RESPONSIBLE FOR THIS PERFORMANCE?
A The last year was somewhat unusual because factors outside the U.S. played
a significant role in the performance of municipal bonds. The market was
impacted first by developments in Asia, then in Latin America and Russia.
Before the fiscal year began, news about potential economic and currency
problems in Asian countries had been circulating for a while. Investors began to
realize that the outsized growth experienced by these countries -- particularly
Hong Kong, Thailand, Malaysia and Indonesia -- was fueled largely by intense
speculation by investors worldwide. This support reversed itself in the summer
of 1997 and came to a head in October as the Hong Kong stock market imploded. A
series of foreign currency devaluations followed.
However, the problems abroad led to strong performance by government bonds
here in the
U.S. Investors opted for the relatively safe haven of Treasuries, and demand
drove Treasury bond prices sharply higher. At the same time, investors expected
cheaper foreign goods to put a damper on U.S. inflation, and lower exports to
impede U.S. economic growth. This suggested lower interest rates in the future,
a positive for bonds.
In 1998, Latin American countries also started to experience problems, and
most recently, Russia effectively devalued the ruble. This continuing turmoil
further increased demand for U.S. government bonds, and the result was that
Treasuries staged a powerful rally in August as the fiscal year drew to a close.
* The Standard and Poor's 500 stock index is an unmanaged index generally
considered representative of the U.S. stock market.
Q DID MUNICIPAL BONDS ENJOY THE SAME KIND OF RALLY?
A To an extent, yes. But one factor that impeded the muni market's progress
was very heavy issuance. Lower interest rates increased the supply of municipal
bonds in two ways:
1) New issues -- new bond offerings flooded the market as local governments
tried to capitalize on low interest rates to beef up infrastructure such as
highways and water/sewer projects.
6
<PAGE> 7
PERFORMANCE UPDATE
2) Refinancing bonds -- when rates decline, municipal issuers look to
refinance their debt, just like private homeowners refinance their mortgages
when rates fall. So municipal governments issued new lower-yielding bonds to
replace the higher-yielding ones.
If the current rate of issuance keeps up, 1998 will be a record year in
terms of municipal bond issuance.
Much of this supply has been sopped up by hedge funds and "crossover"
buyers, primarily investors who usually buy taxable bonds, but who have
recognized the outstanding value in municipals. Such "non-traditional" buyers
have helped offset the glut of issuance.
Q HOW DID YOU RESPOND TO THE MARKET'S CONDITIONS?
A Primarily, we adjusted the duration of the funds to help position them to
perform. Duration, as you may know, is an indication of a portfolio's
sensitivity to changes in interest rates. If you expect the market to rally
and interest rates to go down, you want to lengthen duration to help the funds
participate as much as possible. If you expect interest rates to trend up, you
want to shorten duration to help lessen the negative effects.
As the fiscal year began, we had been keeping the duration of the funds
neutral. That continued through October, when global stock markets went into a
tailspin. After that, we began to lengthen duration because we expected a
flight to quality to increase demand for government bonds and to force
interest rates lower.
In January, market yields appeared to be near a low, so we moved back to a
neutral stance until late into the summer of 1998. During the first half of
the year, the domestic economy still appeared strong, and the Federal
Reserve's policy reflected a bias to keep interest rates stable to help guard
against inflation. But in June, investors began to see signs that U.S.
economic growth was slowing and that troubles abroad would likely impede
strong domestic growth. So we lengthened durations of the funds through July
and August, which put us in a position to benefit when the market rallied
strongly in August.
Overall, we did well adjusting duration in advance of the market's moves,
which helped us post good returns despite an overabundance of supply. In fact,
three of the four funds (Class A shares, unadjusted for any sales charge),
covered in this report significantly outpaced their Lipper category average
for the year, and the fourth, the Florida fund (Class A shares, unadjusted for
any sales charge), was right at the average. (See page 2 for One-Year Total
Returns)
Q YOU MENTIONED THAT CROSSOVER BUYERS HAVE BEGUN TO "RECOGNIZE THE OUTSTANDING
VALUE IN MUNICIPALS." WHAT OUTSTANDING VALUE DO YOU MEAN?
A Municipal bonds offer attractive value right now for several reasons. First,
the heavy supply of municipal bonds has kept yields from declining as fast as
Treasuries. Thus, at the end of August, municipal bonds offered nearly the
same yield as Treasuries. Second, that relatively high yield doesn't even take
into account the tax advantage. And third, because municipal bonds give you a
better real return, that is, what you have left after taking into account the
effects of inflation.
Finally, municipal bonds are not currently experiencing some of the credit
problems other markets -- such as those for corporate bonds or emerging
markets bonds -- are facing.
Q SO YOUR OUTLOOK FOR THE MUNI MARKET IS PRETTY BRIGHT AT THIS POINT.
A We're very optimistic about the prospects for municipal bonds. Municipal bonds
not only performed well during the year, they still represent an extremely
attractive investment. Their value versus other fixed income securities is
only one reason. There are others. For example, the strong economy and low
interest rates have increased tax revenues and allowed municipal governments
to strengthen their balance sheets. In our experience, credit quality has
never been better for many states.
In addition, the Federal Reserve may lower interest rates in the near future
if the U.S. economy appears to be stalling. That would mean lower rates for
money market fund investors, and investors who currently have billions of
dollars in assets on the sidelines may recognize that munis appear to be the
best value in the fixed-income market right now. Demand from such investors
could spark a significant rally.
7
<PAGE> 8
And finally, the volatility in other markets over the last 12 months has shown
the importance of diversification. Because the stock market has advanced
strongly over the last three years, many investors' portfolios may have become a
little stock-heavy. They may want to take some money out of stocks and put it in
bonds to rebalance their portfolios, and muni bonds right now may be a smart
choice for many such investors.
TERMS TO KNOW
FLIGHT-TO-QUALITY BUYING A term describing when investors move assets from
foreign equity and foreign bond securities to U.S. Treasuries and other high
quality securities in times of global economic uncertainty.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period. Total return assumes the
reinvestment of all dividends and represents the aggregate percentage or dollar
value change over the period.
CROSSOVER BUYERS Newcomers to a particular market who do not usually buy
securities in that market, but who are drawn by attractive, often temporary
values.
8
<PAGE> 9
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR LIFE OF CLASS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS A 3.41% 5.16% 7.65% (since 4/25/91)
- --------------------------------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS B 4.38% N/A 6.22% (since 5/31/94)
- --------------------------------------------------------------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME FUND CLASS C 7.26% N/A 6.64% (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 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Florida Tax- Lehman
Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) A(1) Index+ Index++
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
4/25/91 10000 10000 10000
9664 10079 10059
10118 10471 10148
10506 10822 10200
10526 10854 10303
10991 11265 10370
11232 11565 10451
11463 11776 10496
11897 12213 10621
12457 12613 10680
12907 13039 10732
12/31/93 13011 13222 10784
12379 12496 10888
12527 12637 10947
12540 12721 11050
12502 12539 11072
13387 13425 11198
13663 13748 11280
13974 14143 11331
14802 14727 11354
14336 14550 11516
14460 14661 11590
14836 14997 11672
12/31/96 15201 15380 11731
15143 15343 11834
15639 15871 11857
16088 16350 11923
16520 16793 11930
16622 16987 11997
16861 17245 12056
8/31/98 17199 17556 12071
</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 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Florida Tax- Lehman
Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) B(1) Index+ Index++
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
10031 9942 10034
9921 10007 10129
9837 9864 10149
10521 10561 10264
10916 10816 10339
10874 11126 10386
11550 11586 10407
11175 11446 10556
11147 11534 10624
11424 11798 10698
12/31/96 11772 12099 10753
11762 12070 10847
12108 12486 10868
12359 12862 10929
12/31/97 12688 13211 10936
12764 13363 10997
12896 13567 11051
8/31/98 12925 13811 11064
</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 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Florida Tax- Lehman
Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) C(1) Index+ Index++
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9910 9942 10034
9903 10007 10129
9845 9864 10149
10531 10561 10264
10731 10816 10339
10955 11126 10386
11573 11586 10407
11197 11446 10556
11255 11534 10624
11524 11798 10698
12/31/96 11795 12099 10753
11727 12070 10847
12072 12486 10868
12407 12862 10929
12/31/97 12713 13211 10936
12761 13363 10997
12908 13567 11051
8/31/98 13149 13811 11064
</TABLE>
Past performance is not a guarantee of future results. Investment returns and
principal values will fluctuate so that shares when redeemed may be worth more
or less than original cost.
* Average annual total return and total return measure net investment income
and capital gain or loss from portfolio investments over the periods specified,
assuming reinvestment of dividends and, where indicated, adjustment for the
maximum sales charge. The maximum sales charge for Class A shares is 4.5%. For
Class B shares, the maximum contingent deferred sales charge is 4%. Class C
shares have no sales adjustment, but redemptions within one year of purchase may
be subject to a contingent deferred sales charge of 1%. Share classes invest in
the same underlying portfolio. Average annual total return reflects annualized
change while total return reflects aggregate change. During the periods noted,
securities prices fluctuated.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred sales charge
in effect at the end of the period for Class B shares. In comparing the Kemper
State Tax-Free Income Funds to the Lehman Brothers Municipal Bond Index, you
should note that the funds' performance reflects the maximum sales charges,
while no such charges are reflected in the performance of the index.
+ The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the following
criteria: a minimum credit rating of BBB, have been issued as a part of an issue
of at least $50 million, have been issued within the last 5 years and have a
maturity of at least 2 years. Bonds subject to Alternative Minimum Tax (AMT),
variable rate bonds and zero coupon bonds are excluded from the index. Source is
Towers Data Systems.
++ The Consumer Price Index is a statistical measure of change, over time,
in the prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source is
Towers Data Systems.
9
<PAGE> 10
PORTFOLIO STATISTICS
KEMPER FLORIDA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION*
- ---------------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- ---------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 77% 73%
- ---------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 13 11
- ---------------------------------------------------------------------------------
CASH AND EQUIVALENTS 1 10
- ---------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 9 6
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
QUALITY
ON 8/31/98 ON 8/31/97
<S> <C> <C>
AAA 59% 53%
- ---------------------------------------------------------------------------------
AA 13 19
- ---------------------------------------------------------------------------------
A 7 4
- ---------------------------------------------------------------------------------
BBB 10 15
- ---------------------------------------------------------------------------------
NOT RATED 11 9
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
<TABLE>
<CAPTION>
[PIE CHART] [PIE CHART]
YEARS TO MATURITY
ON 8/31/98 ON 8/31/97
<S> <C> <C>
1-10 YEARS 11% 15%
- ---------------------------------------------------------------------------------
11-20 YEARS 57 39
- ---------------------------------------------------------------------------------
+21 YEARS 32 46
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
AVERAGE MATURITY
ON 8/31/98 ON 8/31/97
<S> <C> <C>
17.0 years 15.9 years
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER FLORIDA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- --------------------------------------------------------------------------------------------------------------
Hillsboro County, Aviation Auth., Tampa International
Airport, Rev.,
6.90%, to be called 10-1-99 @ 102 $ 585 $ 617
-----------------------------------------------------------------------------------------
Volusia County Health Facilities Auth., Memorial Health
Systems, Hospital Facilities Rev., 8.25%, to be called
6-1-00 @ 102 1,940 2,123
-----------------------------------------------------------------------------------------
Jacksonville Health Facilities Auth., Rev., Memorial Medical
Center Proj., Rev., 6.75%, to be called 5-1-01 @ 102 2,000 2,188
-----------------------------------------------------------------------------------------
Department of Natural Resources, Preservation 2000, Rev.,
6.75% to be called 7-1-01 @ 102 1,000 1,099
-----------------------------------------------------------------------------------------
Dunedin, Mease Health Care, Hospital Rev., 6.75%, to be
called 11-15-01 @ 102 750 831
-----------------------------------------------------------------------------------------
St. Petersburg Health Facilities Auth., Allegheny Health
System, Rev.,
7.00%, to be called 12-1-01 @ 102 500 558
-----------------------------------------------------------------------------------------
Charlotte County, Utility System Rev., 6.75%, to be called
10-1-03 @ 102 250 287
-----------------------------------------------------------------------------------------
St. Petersburg Health Facilities Auth., Allegheny Health
System, Rev.,
6.75%, to be called 12-1-03 @ 100 1,000 1,134
-----------------------------------------------------------------------------------------
Jacksonville District, Water and Sewer Rev., 5.00%, to be
called 10-1-08 @ 100 1,000 1,068
-----------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--9.2% 9,905
-----------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------
Board of Education, Public Education Capital Outlay, Gen.
Oblg.,
4.50% through 7.25%, 2014 through 2027 3,840 3,890
-----------------------------------------------------------------------------------------
Department of Natural Resources, Preservation 2000, Rev.,
5.25%, 2011 1,000 1,067
-----------------------------------------------------------------------------------------
Housing Finance Agcy., GNMA Collateralized Home Ownership
Rev., 7.90%, 2022 910 961
-----------------------------------------------------------------------------------------
Ports Authority Financing Community, Gen. Oblg.,
5.375%, 2016 2,000 2,083
-----------------------------------------------------------------------------------------
Broward County:
Airport System Rev., 5.25%, 2012 1,000 1,051
Port Facilities Rev., 5.375%, 2012 1,500 1,596
North Site Proj., Resource Recovery Rev., 7.95%, 2008 815 874
South Site Proj., Resource Recovery Rev., 7.95%, 2008 865 928
-----------------------------------------------------------------------------------------
Dade City Governmental Leasing Corp., Department of Health
and Rehabilitation Services, Rev., 9.00%, 2020 1,025 1,078
-----------------------------------------------------------------------------------------
Dade County:
Aviation Rev., 6.55% and 5.125%, 2013 and 2014 3,000 3,220
Housing Finance Auth., Single Family Mortgage Rev., 7.25%,
2023 355 374
Miami International Airport, Aviation Facilities, Rev.,
5.00%, 2024 1,000 986
School District, Gen. Oblg., 5.375%, 2014 1,000 1,083
Water and Sewer System Rev., 6.25% and 5.50%, 2011 and
2025 2,500 2,687
-----------------------------------------------------------------------------------------
Duval County Housing Finance Auth., Single Family Mortgage
Rev.,
7.25%, 2019 520 550
-----------------------------------------------------------------------------------------
Escambia County:
Housing Finance Auth., Single Family Mortgage Rev., 6.90%,
2020 805 853
Pollution Control Rev., 6.40%, 2030 1,500 1,654
-----------------------------------------------------------------------------------------
Fort Pierce, Utilities System Rev., zero coupon, 2009 4,695 2,883
-----------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gainesville, Utilities System Rev., 6.50%, 2010 $1,370 $ 1,636
-----------------------------------------------------------------------------------------
Hillsborough County:
Aviation Auth., Tampa International Airport, Rev., 6.90%,
2011 665 700
Housing Finance Auth., Single Family Mortgage Rev., 6.50%
and 7.30%, 2019 and 2022 1,345 1,576
Utility Rev., 7.00%, 2014 1,325 1,433
-----------------------------------------------------------------------------------------
Jacksonville, Electric Auth., Rev., 5.00%, 2023 1,000 992
-----------------------------------------------------------------------------------------
Manatee County, Meditrust Proj., First Mortgage Rev., 7.35%,
2015 1,615 1,836
-----------------------------------------------------------------------------------------
Martin County, Industrial Dev. Auth., Indiantown
Cogeneration, L.P. Proj., Rev., 7.875%, 2025 2,325 2,737
-----------------------------------------------------------------------------------------
Nassau County, GF/ Amelia Island Properties, Inc. Proj.,
Rev., 9.75%, 2023 985 1,145
-----------------------------------------------------------------------------------------
North Miami, Johnson and Wales University Proj., Educational
Facilities Rev., 6.10% and 6.125%, 2013 and 2020 2,785 2,942
-----------------------------------------------------------------------------------------
Orange County, Health Facilities Auth., Rev., 6.25%, 2016
and 2018 3,500 4,119
-----------------------------------------------------------------------------------------
Orlando - Orange County Expressway Auth., Junior Lien, Rev.,
6.50%, 2012 1,000 1,198
-----------------------------------------------------------------------------------------
Orlando:
Greater Orlando, Aviation Auth., Rev., 5.125%, 2017 1,000 1,008
Utilities Commission, Water and Electric Rev., 6.75%, 2017 3,000 3,706
-----------------------------------------------------------------------------------------
Palm Beach County:
Criminal Justice Facilities, Rev., 7.20%, 2015 110 142
Gen. Oblg., 5.00%., 2014 1,000 1,097
Port Palm Beach, District of Florida, Rev., 5.375%, 2012 1,100 1,172
Solid Waste Auth., Rev., 6.00%, 2019 2,865 1,389
-----------------------------------------------------------------------------------------
Pensacola, Health Facilities Auth., Rev., 5.25%, 2011 2,200 2,267
-----------------------------------------------------------------------------------------
Pinellas County:
Pollution Control Rev., 7.20%, 2014 2,000 2,198
Sewer Rev., 5.00%, 2013 1,000 1,028
-----------------------------------------------------------------------------------------
Port St. Lucie, Special Assessment, Rev., 5.00% and 5.40%,
2013 and 2016 3,000 3,113
-----------------------------------------------------------------------------------------
St. John's County, Water and Sewer Rev., zero coupon, 2016 440 187
-----------------------------------------------------------------------------------------
Sunrise:
Public Facilities Rev., zero coupon, 2018 425 161
Utilities System Rev., 5.20%, 2022 2,000 2,083
-----------------------------------------------------------------------------------------
Tampa:
Expressway Auth., Rev., 5.125%, 2017 475 483
Health System, Catholic Health, Rev., 4.75%, 2028 1,000 954
Sports Auth., Special Purpose, Rev., 5.75%, 2020 2,075 2,334
Utility Tax, Rev., zero coupon, 2015 through 2020 7,000 2,869
-----------------------------------------------------------------------------------------
Village Center Community Dev. District, Utility Rev., 6.00%,
2018 1,250 1,440
-----------------------------------------------------------------------------------------
Westchase Community Dev. District, Rev., 5.80%, 2012 3,000 3,308
-----------------------------------------------------------------------------------------
Winter Haven Utility System, Rev., 4.75%, 2028 1,000 965
-----------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev.:
zero coupon and 6.50%, 2017 and 2018 5,500 3,577
Gen. Oblg., 5.375% through 6.25%, 2013 through 2025 4,350 4,850
Highway and Transportation Auth., Rev., 6.00% , 2018 1,250 1,443
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 1,030 1,122
-----------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Matching Fund Loan,
Rev.,
6.00% and 7.25% 2018 and 2022 3,630 4,008
-----------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--88.4% 95,036
-----------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--97.6%
(Cost: $97,771) 104,941
-----------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET Yield--3.50%
INSTRUMENTS
- --.9%
Due--September 1998
(Cost: $1,000) $1,000 $ 1,000
-----------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.5%
(Cost: $98,771) 105,941
-----------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.5% 1,590
-----------------------------------------------------------------------------------------
NET ASSETS--100% $107,531
-----------------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- ------------------------------------------------------------------------------
Based on the cost of investments of $98,771,000 for federal income tax purposes
at August 31, 1998, the gross unrealized appreciation was $7,179,000, the gross
unrealized depreciation was $9,000 and the net unrealized appreciation on
investments was $7,170,000.
See accompanying Notes to Financial Statements.
13
<PAGE> 14
PERFORMANCE UPDATE
KEMPER NEW JERSEY TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER NEW JERSEY TAX-FREE INCOME FUND CLASS A 3.56% 6.30% (since 3/15/95)
- --------------------------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE INCOME FUND CLASS B 4.49 6.45 (since 3/15/95)
- --------------------------------------------------------------------------------------------------
KEMPER NEW JERSEY TAX-FREE INCOME FUND CLASS C 7.63 7.08 (since 3/15/95)
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Kemper New Jersey Tax-Free Income Fund Class A
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investments in
Class A shares from 3/15/95 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
New Jersey Lehman
Tax-Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) A(1) Index+ Index++
- --------------------------------------------------------------
<S> <C> <C> <C>
3/15/95 10000 10000 10000
9666 10115 10033
9832 10359 10106
10076 10656 10152
10700 11096 10172
10405 10963 10318
10442 11047 10384
10653 11300 10457
12/31/96 10916 11588 10510
10879 11560 10603
11216 11958 10623
11548 12319 10683
12/31/97 11850 12653 10689
11947 12799 10749
12120 12994 10802
8/31/98 12361 13227 10815
</TABLE>
- --------------------------------------------------------------------------------
Kemper New Jersey Tax-Free Income Fund Class B
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investments in
Class B shares from 3/15/95 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
New Jersey Lehman
Tax-Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) B(1) Index+ Index++
- --------------------------------------------------------------
<S> <C> <C> <C>
3/15/95 10000 10000 10000
10097 10115 10033
10493 10359 10106
10460 10656 10152
11155 11096 10172
10827 10963 10318
10779 11047 10384
10965 11300 10457
12/31/96 11304 11588 10510
11303 11560 10603
11604 11958 10623
11867 12319 10683
12/31/97 12167 12653 10689
12252 12799 10749
12417 12994 10802
8/31/98 12420 13227 10815
</TABLE>
- --------------------------------------------------------------------------------
Kemper New Jersey Tax-Free Income Fund Class C
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investments in
Class C shares from 3/15/95 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
New Jersey Lehman
Tax-Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) C1 Index+ Index++
<S> <C> <C> <C>
3/15/95 10000 10000 10000
10122 10115 10033
10286 10359 10106
10531 10656 10152
11161 11096 10172
10824 10963 10318
10869 11047 10384
11076 11300 10457
12/31/96 11326 11588 10510
11279 11560 10603
11593 11958 10623
11915 12319 10683
12/31/97 12207 12653 10689
12289 12799 10749
12444 12994 10802
8/31/98 12675 13227 10815
</TABLE>
Past performance is not a guarantee of future results. Investment returns and
principal values will fluctuate so that shares when redeemed may be worth
more or less than original cost.
* Average annual total return and total return measure net
investment income and capital gain or loss from portfolio investments over the
periods specified, assuming reinvestment of dividends and, where indicated,
adjustment for the maximum sales charge. The maximum sales charge for Class A
shares is 4.5%. For Class B shares, the maximum contingent deferred sales charge
is 4%. Class C shares have no sales adjustment, but redemptions within one year
of purchase may be subject to a contingent deferred sales charge of 1%. Share
classes invest in the same underlying portfolio. Average annual total return
reflects annualized change while total return reflects aggregate change. During
the periods noted, securities prices fluctuated.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the contingent deferred sales charge
in effect at the end of the period for Class B shares. In comparing the Kemper
State Tax-Free Income Funds to the Lehman Brothers Municipal Bond Index, you
should note that the funds' performance reflects the maximum sales charges,
while no such charges are reflected in the performance of the index.
+ The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the following
criteria: a minimum credit rating of BBB, have been issued as a part of an issue
of at least $50 million, have been issued within the last 5 years and have a
maturity of at least 2 years. Bonds subject to Alternative Minimum Tax (AMT),
variable rate bonds and zero coupon bonds are excluded from the index. Source is
Towers Data Systems.
++ The Consumer Price Index is a statistical measure of change, over time,
in the prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source is
Towers Data Systems.
14
<PAGE> 15
KEMPER NEW JERSEY TAX-FREE INCOME FUND
PORTFOLIO COMPOSITION* ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 63% 60%
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 29 25
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 1 12
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 7 3
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
QUALITY ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 72% 73%
- --------------------------------------------------------------------------------
AA 10 9
- --------------------------------------------------------------------------------
A 2 4
- --------------------------------------------------------------------------------
BBB 10 10
- --------------------------------------------------------------------------------
B 1 1
- --------------------------------------------------------------------------------
NOT RATED 5 3
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
YEARS TO MATURITY ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 16% 5%
- --------------------------------------------------------------------------------
11-20 YEARS 65 72
- --------------------------------------------------------------------------------
+ 21 YEARS 19 23
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
AVERAGE MATURITY ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
16.4 years 15.8 years
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
15
PORTFOLIO Statistics
<PAGE> 16
PORTFOLIO OF INVESTMENTS
NEW JERSEY TAX-FREE INCOME FUND
Portfolio of Investments at August 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- --------------------------------------------------------------------------------------------------------------
Jersey City, Gen. Oblg., 6.60%, to be called 5-15-01 @ 102 $ 40 $ 44
-----------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, to be called 10-1-02 @ 102 75 86
-----------------------------------------------------------------------------------------
Atlantic City Board of Education, Gen. Oblg.,
6.15%, to be called 12-1-02 @ 102 150 166
-----------------------------------------------------------------------------------------
Essex County, Improvement Auth., College Proj., Rev.,
7.00%, to be called 12-1-04 @ 102 15 18
-----------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--5.2% 314
=========================================================================================
- --------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------
Economic Dev. Auth.:
Educational Testing Service, Rev., 5.875% and 6.125%, 2015
and 2026 200 215
Market Transition Facility, Rev., 5.875%, 2011 90 99
Pollution Control, Public Service Electric and Gas Company
Proj., Rev., 6.40%, 2032 90 99
-----------------------------------------------------------------------------------------
Educational Facilities Auth.:
Caldwell College, Rev., 7.25%, 2025 50 55
Institute of Advanced Study, Rev., 5.00%, 2014 150 153
Rider College, Rev., 6.20%, 2017 115 125
Rowan College, Rev., 5.875%, 2013 100 110
Rutgers State University, Rev., 5.00%, 2013 100 103
Trenton State College, Rev., 5.125%, 2024 100 100
-----------------------------------------------------------------------------------------
Health Care Facilities Financing Auth.:
Atlantic City Medical Center, Rev., 6.80%, 2011 75 83
Holy Name Hospital, Rev., 6.00%, 2025 100 106
Dover General Hospital and Medical Center, Rev., 5.875%,
2012 75 82
Hackensack Medical Center, Rev., 6.625%, 2017 15 16
Jersey Shore Medical Center, Rev., 6.25%, 2016 100 111
Southern Ocean County Hospital, Rev., 6.125%, 2013 120 127
-----------------------------------------------------------------------------------------
Highway Auth., Garden State Parkway, Rev., 6.25%, 2014 50 54
-----------------------------------------------------------------------------------------
Housing and Mortgage Finance Agcy., Home Buyer Rev., 6.05%,
2028 100 107
-----------------------------------------------------------------------------------------
Sports and Exposition Auth., Rev., 6.00%, 2013 100 108
-----------------------------------------------------------------------------------------
Transportation Trust Fund Auth., Rev., 6.50%, 2005 and 2011 175 205
-----------------------------------------------------------------------------------------
Turnpike Auth., Rev., 6.50%, 2016 125 151
-----------------------------------------------------------------------------------------
Wastewater Treatment Trust, Rev., 7.00%, 2007 100 121
-----------------------------------------------------------------------------------------
Atlantic City Board of Education, Gen. Oblg., 6.10%, 2014 100 116
-----------------------------------------------------------------------------------------
Bayshore Regional Sewerage Auth., Rev., 5.50%, 2012 100 108
-----------------------------------------------------------------------------------------
Bergen County, Utilities Auth., Rev., 5.125%, 2012 50 52
-----------------------------------------------------------------------------------------
Camden County Improvement Auth., Rev., 5.25%, 2013 100 105
-----------------------------------------------------------------------------------------
Cape May County, Municipal Utilities Auth., Rev., 6.00%,
2011 15 16
-----------------------------------------------------------------------------------------
Chatham Borough, Gen. Oblg., 5.80%, 2015 32 35
-----------------------------------------------------------------------------------------
Clearview Regional High School District, Board of Education,
Gen. Oblg., 5.00%, 2011 75 79
-----------------------------------------------------------------------------------------
East Orange Board of Education, Gen. Oblg., zero coupon,
2016 150 65
-----------------------------------------------------------------------------------------
Elizabeth, Gen. Oblg., zero coupon, 2007 225 152
-----------------------------------------------------------------------------------------
Freehold Township Board of Education, Gen. Oblg., 5.375%,
2011 50 53
-----------------------------------------------------------------------------------------
Hudson County, Gen. Oblg., 5.40%, 2025 50 53
-----------------------------------------------------------------------------------------
Jackson Township, Gen. Oblg., 6.60%, 2012 135 163
-----------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Jersey City:
Gen. Oblg., 5.50% and 6.25%, 2011 and 2012 $100 $ 112
Utilities Auth., Rev., 5.25%, 2008 50 54
-----------------------------------------------------------------------------------------
Manchester Township, Gen. Oblg., 5.00%, 2011 50 52
-----------------------------------------------------------------------------------------
Mercer County, Improvement Auth., Rev., 5.75%, 2017 100 109
-----------------------------------------------------------------------------------------
Merchantville Board of Education, Gen. Oblg., 5.80%, 2014 100 108
-----------------------------------------------------------------------------------------
Metuchen Local School District, Gen. Oblg., 5.125%, 2016 100 102
-----------------------------------------------------------------------------------------
Middlesex County:
Improvement Auth., Rev., 5.45%, 2011 75 81
Utilities Auth., Rev., 5.25%, 2010 55 59
-----------------------------------------------------------------------------------------
Monroe Township Board of Education, Gen. Oblg., 5.20%, 2015 75 79
-----------------------------------------------------------------------------------------
Newark:
Board of Education, Gen. Oblg., 6.00%, 2010 15 16
Gen. Oblg., 5.30%, 2008 75 81
-----------------------------------------------------------------------------------------
North Brunswick Township, Gen. Oblg., 6.10% and 6.30%, 2010
and 2015 135 150
-----------------------------------------------------------------------------------------
North Hudson Sewerage Auth., Rev., 5.25%, 2016 100 103
-----------------------------------------------------------------------------------------
Ocean County, Utilities Auth., Rev., 5.00%, 2013 50 51
-----------------------------------------------------------------------------------------
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., Rev., 9.125%, 2015 25 28
JFK International Air Terminal LLC Proj., Rev., 5.75%,
2025 100 106
Rev., 6.00%, 2014 75 82
-----------------------------------------------------------------------------------------
Salem County Pollution Control Auth., Rev., 5.70%, 2028 75 79
-----------------------------------------------------------------------------------------
Southern Regional High School District, Gen. Oblg., 5.50%,
2010 75 81
-----------------------------------------------------------------------------------------
Sparta Township Board of Education, Gen. Oblg., 5.75%, 2013 75 81
-----------------------------------------------------------------------------------------
Summit, Gen. Oblg., 5.00%, 2010 45 47
-----------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Electric Power Auth., Rev., 4.75% and 6.50%, 2006 and 2024 175 183
Highway and Transportation Auth., Rev., 6.25%, 2016 120 142
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev.,
6.50%, 2026 100 109
Industrial, Tourist, Educational, Medical, Environmental
Control Facilities, Financing Auth., Rev., 5.625%, 2017 25 26
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 40 44
-----------------------------------------------------------------------------------------
Virgin Islands:
Public Finance Auth., Matching Fund Loan, Rev., 6.00%,
2022 100 105
Water and Power Auth., Rev., 5.30%, 2018 75 76
-----------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--94.2% 5,689
=========================================================================================
TOTAL INVESTMENTS--99.4%
(Cost: $5,611) 6,003
=========================================================================================
CASH AND OTHER ASSETS, LESS LIABILITIES--.6% 34
-----------------------------------------------------------------------------------------
NET ASSETS--100% $6,037
-----------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $5,611,000 for federal income tax purposes
at August 31, 1998, the gross and net unrealized appreciation on investments was
$392,000.
See accompanying Notes to Financial Statements.
17
<PAGE> 18
PERFORMANCE UPDATE
KEMPER NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER NEW YORK TAX-FREE INCOME FUND
CLASS A 3.52% 4.95% 7.98% 7.46% (since 12/31/85)
- ---------------------------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME FUND
CLASS B 4.65 N/A N/A 6.03 (since 5/31/94)
- ---------------------------------------------------------------------------------------------------
KEMPER NEW YORK TAX-FREE INCOME FUND
CLASS C 7.56 N/A N/A 6.37 (since 5/31/94)
- ---------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Kemper New York Tax-Free Income Fund Class A
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class A shares from 12/31/85 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
New York Lehman
Tax-Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) A(1) Index+ Index++
- --------------------------------------------------------------
<S> <C> <C> <C>
12/31/85 10000 10000 10000
10060 11012 9954
9813 10945 10018
10299 11533 10082
10750 11932 10110
10919 12220 10256
10497 11889 10384
9921 11593 10522
10637 12111 10558
10810 12527 10659
10976 12770 10796
11256 13098 10961
11461 13342 11025
11592 13430 11189
12424 14225 11354
12413 14235 11436
12/31/89 12837 14781 11537
12762 14847 11775
13110 15194 11885
13025 15203 12141
13598 15858 12242
13958 16217 12351
14302 16563 12443
14994 17207 12553
15419 17784 12617
15453 17837 12745
16148 18513 12827
16558 19006 12928
16872 19351 12983
17575 20070 13138
18201 20727 13211
18834 21428 13275
12/31/93 19060 21729 13339
18207 20536 13468
18352 20768 13541
18324 20905 13669
18117 20606 13696
19283 22062 13852
19684 22593 13952
20183 23243 14016
21374 24202 14044
20778 23911 14245
20911 24094 14337
21431 24646 14437
21919 25274 14511
21826 25213 14639
22551 26082 14666
23197 26868 14748
23868 27597 14758
24068 27915 14840
24422 28340 14913
8/31/98 24887 28850 14931
</TABLE>
- --------------------------------------------------------------------------------
Kemper New York Tax-Free Income Fund Class B
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class B shares from 05/31/94 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
New York Lehman
Tax-Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) B(1) Index+ Index++
- --------------------------------------------------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
10018.9 9942 10034
10046.8 10007 10129
9771.1 9864 10149
10373.8 10561 10264
10766 10816 10339
10751.6 11126 10386
11425.5 11586 10407
11103.4 11446 10556
11046.5 11534 10624
11307.7 11798 10698
12/31/96 11625.6 12099 10753
11608 12070 10847
11966.8 12486 10868
12216.4 12862 10929
12/31/97 12542.4 13211 10936
12643.8 13363 10997
12805.5 13567 11051
8/31/98 12831.7 13811 11064
</TABLE>
- --------------------------------------------------------------------------------
Kemper New York Tax-Free Income Fund Class C
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class C shares from 05/31/94 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
New York Lehman
Tax-Free Brothers
Income Municipal Consumer
Measurement Period Fund Class Bond Price
(Fiscal Year Covered) C(1) Index+ Index++
- --------------------------------------------------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
10000 9942 10034
10000 10007 10129
10000 9864 10149
10067 10561 10264
10257 10816 10339
10495 11126 10386
11093 11586 10407
10760 11446 10556
10816 11534 10624
11052 11798 10698
12/31/96 11278 12099 10753
11207 12070 10847
11567 12486 10868
11874 12862 10929
12/31/97 12180 13211 10936
12256 13363 10997
12411 13567 11051
8/31/98 12632 13811 11064
</TABLE>
Past performance is not a guarantee of future results. Investment returns and
principal values will fluctuate so that shares when redeemed may be worth more
or less than original cost.
*Average annual total return and total return measure net investment income and
capital gain or loss from portfolio investments over the periods specified,
assuming reinvestment of dividends and, where indicated, adjustment for the
maximum sales charge. The maximum sales charge for Class A shares is 4.5%. For
Class B shares, the maximum contingent deferred sales charge is 4%. Class C
shares have no sales adjustment, but redemptions within one year of purchase may
be subject to a contingent deferred sales charge of 1%. Share classes invest in
the same underlying portfolio. Average annual total return reflects annualized
change while total return reflects aggregate change. During the periods noted,
securities prices fluctuated.
(1)Performance includes reinvestment of dividends and adjustment for the maximum
sales charge for Class A shares and the contingent deferred sales charge in
effect at the end of the period for Class B shares. In comparing the Kemper
State Tax-Free Income Funds to the Lehman Brothers Municipal Bond Index, you
should note that the funds' performance reflects the maximum sales charges,
while no such charges are reflected in the performance of the index.
+The Lehman Brothers Municipal Bond Index includes approximately 15,000 bonds.
To be included in the index a municipal bond must meet the following criteria: a
minimum credit rating of BBB, have been issued as a part of an issue of at least
$50 million, have been issued within the last 5 years, and have a maturity of at
least 2 years. Bonds subject to Alternative Minimum Tax (AMT), variable rate
bonds and zero coupon bonds are excluded from the index. Source is Towers Data
Systems.
++The Consumer Price Index is a statistical measure of change, over time, in the
prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source is
Towers Data Systems.
18
<PAGE> 19
PORTFOLIO STATISTICS
KEMPER NEW YORK TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 73% 75%
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 11 11
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 14 5
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 9
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 42% 46%
- --------------------------------------------------------------------------------
AA 12 25
- --------------------------------------------------------------------------------
A 23 8
- --------------------------------------------------------------------------------
BBB 16 16
- --------------------------------------------------------------------------------
BB -- 1
- --------------------------------------------------------------------------------
B 1 1
- --------------------------------------------------------------------------------
NOT RATED 6 3
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 14% 13%
- --------------------------------------------------------------------------------
11-20 YEARS 51 50
- --------------------------------------------------------------------------------
+21 YEARS 35 37
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE MATURITY ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
17.6 years 15.9 years
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
NEW YORK TAX-FREE INCOME FUND
Portfolio of Investments at August 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- --------------------------------------------------------------------------------------------------------------
Virgin Islands Housing Finance Auth., GNMA Collateralized
Home Mortgage Rev., 8.10%, to be called 12-1-98 @ 102 $ 70 $ 72
-----------------------------------------------------------------------------------------
Dormitory Auth., Ideal Senior Living Center, Rev., 7.625%,
to be called 2-1-99 @ 102 400 415
-----------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Montefiore Medical
Center, Rev., 7.25%, to be called 2-15-99 @ 102 2,000 2,074
-----------------------------------------------------------------------------------------
Dutchess County Resource Recovery Agcy., Solid Waste
Management System, Rev., 7.50%, to be called 1-1-00 @ 102 2,000 2,139
-----------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Mental Health Service
Facilities Improvement, Rev., 7.75%, to be called 2-15-00
@ 102 365 393
-----------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Mental Health Service
Facilities Improvement, Rev., 7.875%, to be called 8-15-00
@ 102 940 1,032
-----------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Presbyterian Hospital
Proj., Rev., 7.70%, to be called 8-15-00 @ 102 4,000 4,378
-----------------------------------------------------------------------------------------
Environmental Facilities Corp., State Water Pollution
Control, Revolving Fund Rev., 7.25%, to be called 6-15-01
@ 102 900 1,000
-----------------------------------------------------------------------------------------
Dormitory Auth., Menorah Campus, Inc., Rev., 7.30% and
7.40%, to be called 8-1-01 @ 102 3,850 4,295
-----------------------------------------------------------------------------------------
Housing Finance Agcy., Service Contract Obligation, Rev.,
7.30%, to be called 9-15-01 @ 102 1,925 2,156
-----------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Mental Health Service
Facilities, Improvement, Rev., 7.40%, to be called 2-15-02
@ 102 755 853
-----------------------------------------------------------------------------------------
Housing Finance Agcy., Service Contract Obligation, Rev.,
7.25%, to be called 3-15-02 @ 102 1,815 2,052
-----------------------------------------------------------------------------------------
Dormitory Auth., State University Educational Facilities,
Rev., 7.25%, to be called 5-15-02 @ 102 155 176
-----------------------------------------------------------------------------------------
Virgin Islands, Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, to be called 10-1-02 @ 102 7,100 8,135
-----------------------------------------------------------------------------------------
Battery Park City Auth., Rev., 8.625%, to be called 6-1-05 @
100 10 13
-----------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--10.3% 29,183
-----------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------
Dormitory Auth.:
City University System, Rev., 5.75% and 7.00%, 2009
through 2018 12,550 14,187
Colgate University, Rev., 6.00%, 2016 and 2021 1,750 2,022
Cornell University, Rev., 7.375%, 2020 2,000 2,159
Fordham University, Rev., 7.20%, 2015 790 850
Judicial Lease Facility, Rev., 7.375%, 2016 120 152
Mental Health Services Facilities Improvement, Rev., 5.00%
2012 2,320 2,497
Nursing Home Facilities, Rev., 5.00%, 2024 4,750 4,612
Pace University, Rev., 6.50%, 2011 and 2012 1,260 1,509
Special Art School Districts Program, Rev., 7.00%, 2013 1,300 1,395
State University Educational Facilities, Rev., 5.875%
through 7.50%, 2010 through 2017 4,325 5,089
St. Joseph's Hospital Health Center, Rev., 6.00%, 2009 1,000 1,127
St. Vincent's Hospital and Medical Center, Rev., 7.375%,
2011 2,500 2,782
Upstate Community Colleges, Rev., 5.875%, 2016 3,555 3,799
-----------------------------------------------------------------------------------------
Energy Research and Dev. Auth., Consolidated Edison Company
of New York, Inc. Proj., Rev., 7.50%, 2025 3,500 3,632
-----------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Environmental Facilities Corp.:
Huntington Resource Recovery Proj., Rev., 7.50%, 2012 $ 3,745 $ 4,054
Riverbank State Park, Rev., 6.25%, 2012 3,695 4,324
State Water Pollution Control, Revolving Fund Rev., 7.25%
and 6.50%, 2010 and 2014 190 208
-----------------------------------------------------------------------------------------
Housing Finance Agcy.:
Local Government Assistance Corp., zero coupon, 2009 5,980 3,722
Multi-Family Mortgage, Rev., 6.95% and 6.00%, 2012 and
2027 2,695 2,905
Service Contract Oblg., Rev., 7.25% and 7.30%, 2012 260 289
State University Construction, Rev., 8.00%, 2011 200 261
West-H.E.L.P. Housing, Rev., 7.55%, 2002 2,420 2,503
-----------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy.:
Albany Medical Center, Rev., 8.00%, 2028 55 56
Medical Care Facilities Finance Agcy., Rev., 7.60%, 2029 2,000 2,075
Mental Health Service Facilities Improvement, Rev., 7.40%
to 7.875%, 2015 through 2020 1,420 1,527
-----------------------------------------------------------------------------------------
Metropolitan Transportation Auth.:
Commuter Facilities Rev., 5.375% and 5.25%, 2027 and 2028 6,000 6,158
Transit, Rev., 6.00% and 4.75%, 2016 and 2024 8,750 9,486
-----------------------------------------------------------------------------------------
Mortgage Agcy., Homeowner Mortgage, Rev., 6.45% to 7.95%,
2009 through 2022 9,280 9,871
-----------------------------------------------------------------------------------------
Port Auth. of New York and New Jersey, Gen. Oblg., 6.25% and
9.125%, 2015 10,550 12,219
-----------------------------------------------------------------------------------------
Thruway Auth., Special Oblg., 6.00%, 2011 5,000 5,531
-----------------------------------------------------------------------------------------
Urban Dev. Corp.:
State Facilities, Rev., 5.60%, 2015 2,260 2,434
Syracuse University Center for Science and Technology,
Rev., 5.50% 2015 and 2017 9,390 9,989
-----------------------------------------------------------------------------------------
Allegany County, Industrial Development Agcy. Civic
Facilities, Rev., 5.25%, 2010 1,100 1,166
-----------------------------------------------------------------------------------------
Long Island, Power Auth., Electricity System, Rev., 5.25%
and 5.50%, 2023 through 2029 22,500 22,990
-----------------------------------------------------------------------------------------
Monroe County, Gen. Oblg., 6.00%, 2018 and 2019 2,330 2,684
-----------------------------------------------------------------------------------------
Nassau County:
Gen. Oblg., 6.00%, 2012 and 2013 1,415 1,622
Industrial Development Agcy. Civic Facilities, Rev., zero
coupon and 4.75%, 2019 and 2028 3,000 2,293
-----------------------------------------------------------------------------------------
New York City:
Gen. Oblg., zero coupon, 2008 12,955 8,389
Gen. Oblg., 5.00% through 7.75%, 2002 and 2025 18,605 20,122
Housing Dev. Corp., Multi-Unit Mortgage Rev., 7.30%, 2010 8,800 9,427
Industrial Dev. Agcy., Brooklyn Navy Yard Cogeneration
Partners, L.P. Proj., Rev., 5.75%, 2036 7,000 7,212
Municipal Water Finance Auth., Water and Sewer System,
Rev., 5.875% and 5.75%, 2026 and 2029 5,500 5,868
Water and Sewer Systems, Finance Auth., Rev., 5.25%, 2029 5,000 5,043
-----------------------------------------------------------------------------------------
Niagara County, Water Treatment Plant, Gen. Oblg., 7.25% and
7.00% 2011 and 2012 1,215 1,420
-----------------------------------------------------------------------------------------
Orange County Industrial Development Agcy., Life Care
Community, Rev., 5.625% and 5.70%, 2018 and 2028 3,500 3,526
-----------------------------------------------------------------------------------------
Triborough Bridge and Tunnel Auth., Gen. Purpose Rev.,
6.125%, 2021 7,205 8,462
-----------------------------------------------------------------------------------------
Ulster County, Resource Recovery Agcy., Solid Waste System,
Rev., 6.00%, 2014 3,000 3,165
-----------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Puerto Rico Commonwealth:
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev., 6.50%, 2018 $ 5,985 $ 6,542
Gen. Oblg., zero coupon, 2008 and 2016 6,000 2,741
Gen. Oblg., 6.00%, 2016 3,655 4,217
Highway and Transit Auth., Rev., 5.50%, 2026 2,000 2,081
Highway and Transportation Auth., Rev., 6.00%, 2018 2,750 3,175
-----------------------------------------------------------------------------------------
Virgin Island Public Finance Auth., Home Mortgage Loan,
Rev., 5.875%, 2018 5,000 5,184
-----------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--88.2% 250,753
-----------------------------------------------------------------------------------------
TOTAL OBLIGATIONS--98.5%
(Cost: $261,000) 279,936
-----------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--3.75%
INSTRUMENTS Due--September 1998
- --.4% (Cost: $1,200) 1,200 1,200
-----------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.9%
(Cost: $262,200) 281,136
-----------------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES--1.1% 3,184
-----------------------------------------------------------------------------------------
NET ASSETS--100% $284,320
-----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $262,200,000 for federal income tax purposes
at August 31, 1998, the gross unrealized appreciation was $18,944,000, the gross
unrealized depreciation was $8,000 and the net unrealized appreciation on
investments was $18,936,000.
See accompanying Notes to Financial Statements.
22
<PAGE> 23
PERFORMANCE UPDATE
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND CLASS A 3.31% 7.00% (since 3/15/95)
- -----------------------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND CLASS B 4.37 7.12 (since 3/15/95)
- -----------------------------------------------------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND CLASS C 7.36 7.62 (since 3/15/95)
- -----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Kemper Pennsylvania Tax-Free Income Fund Class A
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class A shares from 3/15/95 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Pennsylvania
Tax-Free Lehman
Income Brothers Consumer
Measurement Period Fund Class Municipal Price
(Fiscal Year Covered) A(1) Bond Index+ Index++
- ---------------------------------------------------------------
<S> <C> <C> <C>
3/15/95 10000 10000 10000
9635 10115 10033
9834 10359 10106
10149 10656 10152
10803 11096 10172
10535 10963 10318
10567 11047 10384
10816 11300 10457
12/31/96 11112 11588 10510
11081 11560 10603
11447 11958 10623
11832 12319 10683
12/31/97 12164 12653 10689
12287 12799 10749
12437 12994 10802
8/31/98 12643 13227 10815
</TABLE>
- --------------------------------------------------------------------------------
Kemper Pennsylvania Tax-Free Income Fund Class B
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class B shares from 3/15/95 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Pennsylvania
Tax-Free Lehman
Income Brothers Consumer
Measurement Period Fund Class Municipal Price
(Fiscal Year Covered) B(1) Bond Index+ Index++
- ---------------------------------------------------------------
<S> <C> <C> <C>
3/15/95 10000 10000 10000
10510 10359 10106
10497 10656 10152
11233 11096 10172
10921 10963 10318
10866 11047 10384
11091 11300 10457
12/31/96 11475 11588 10510
11479 11560 10603
11811 11958 10623
12138 12319 10683
12/31/97 12460 12653 10689
12569 12799 10749
12711 12994 10802
8/31/98 12695 13227 10815
</TABLE>
- --------------------------------------------------------------------------------
Kemper Pennsylvania Tax-Free Income Fund Class C
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class C shares from 3/15/95 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Pennsylvania
Tax-Free Lehman
Income Brothers Consumer
Measurement Period Fund Class Municipal Price
(Fiscal Year Covered) C(1) Bond Index+ Index++
- --------------------------------------------------------------
<S> <C> <C> <C>
3/15/95 10000 10000 10000
10090 10115 10033
10278 10359 10106
10586 10656 10152
11245 11096 10172
10946 10963 10318
10954 11047 10384
11184 11300 10457
12/31/96 11479 11588 10510
11427 11560 10603
11782 11958 10623
12156 12319 10683
12/31/97 12481 12653 10689
12565 12799 10749
12708 12994 10802
8/31/98 12900 13227 10815
</TABLE>
Past performance is not a guarantee of future results. Investment returns and
principal values will fluctuate so that shares when redeemed may be worth more
or less than original cost.
*Average annual total return and total return measure net investment income and
capital gain or loss from portfolio investments over the periods specified,
assuming reinvestment of dividends and, where indicated, adjustment for the
maximum sales charge. The maximum sales charge for Class A shares is 4.5%. For
Class B shares, the maximum contingent deferred sales charge is 4%. Class C
shares have no sales adjustment, but redemptions within one year of purchase may
be subject to a contingent deferred sales charge of 1%. Share classes invest in
the same underlying portfolio. Average annual total return reflects annualized
change while total return reflects aggregate change. During the periods noted,
securities prices fluctuated.
(1)Performance includes reinvestment of dividends and adjustment for the maximum
sales charge for Class A shares and the contingent deferred sales charge in
effect at the end of the period for Class B shares. In comparing the Kemper
State Tax-Free Income Funds to the Lehman Brothers Municipal Bond Index, you
should note that the funds' performance reflects the maximum sales charges,
while no such charges are reflected in the performance of the index.
+The Lehman Brothers Municipal Bond Index includes approximately 15,000
bonds. To be included in the index a municipal bond must meet the following
criteria: a minimum credit rating of BBB, have been issued as a part of an issue
of at least $50 million, have been issued within the last 5 years, and have a
maturity of at least 2 years. Bonds subject to Alternative Minimum Tax (AMT),
variable rate bonds and zero coupon bonds are excluded from the index. Source is
Towers Data Systems.
++The Consumer Price Index is a statistical measure of change, over time, in the
prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source is
Towers Data Systems.
23
<PAGE> 24
PORTFOLIO STATISTICS
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 68% 71%
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 8 6
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 20 10
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 4 13
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
ON 8/31/98 ON 8/31/97
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 71% 62%
- --------------------------------------------------------------------------------
AA 8 12
- --------------------------------------------------------------------------------
A -- 3
- --------------------------------------------------------------------------------
BBB 15 20
- --------------------------------------------------------------------------------
NOT RATED 6 3
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
ON 8/31/98 ON 8/31/97
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 21% 12%
- --------------------------------------------------------------------------------
11-20 YEARS 62 60
- --------------------------------------------------------------------------------
+21 YEARS 17 28
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
ON 8/31/98 ON 8/31/97
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE MATURITY ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
13.9 years 13.7 years
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
24
<PAGE> 25
PORTFOLIO OF INVESTMENTS
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND
Portfolio of Investments at August 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADVANCE REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY UNITED STATES GOVERNMENT SECURITIES
- ------------------------------------------------------------------------------------------------------
Armstrong County, Gen. Oblg., 6.00%, to be called 6-1-99 @
100 $ 20 $ 20
---------------------------------------------------------------------------------
Lower Salford Township, Sewer Auth., Rev., 7.375%, to be
called 7-15-00 @ 100 45 48
---------------------------------------------------------------------------------
University Area Joint Auth., Sewer Rev., 7.10%, to be called
9-1-00 @ 101 10 11
---------------------------------------------------------------------------------
Allegheny County, Gen. Oblg., 6.50%, to be called 9-1-01 @
100 10 11
---------------------------------------------------------------------------------
Gen. Oblg., 6.50%, to be called 11-1-01 @ 101.50 25 27
---------------------------------------------------------------------------------
Fort Le Boeuf School District, Gen. Oblg. 5.35%, to be
called 1-1-02 @ 100 50 52
---------------------------------------------------------------------------------
University of Pittsburgh, University Capital Proj., Gen.
Oblg., 6.125%, to be called 6-1-02 @ 102 65 71
---------------------------------------------------------------------------------
Exeter Township, Berks County Auth., Rev., 6.20%, to be
called 7-15-02 @ 100 75 81
---------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, to be called 10-1-02 @ 102 100 115
---------------------------------------------------------------------------------
Turnpike Commission, Rev., 6.00%, to be called 12-1-04 @ 102 65 73
---------------------------------------------------------------------------------
Bethlehem Area School District, Gen. Oblg., 6.00%, to be
called 3-1-06 @ 100 100 112
---------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--8.0% 621
---------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ------------------------------------------------------------------------------------------------------
Convention Center Auth., Rev., 6.70% and 6.75%, 2016 and
2019 160 187
---------------------------------------------------------------------------------
Gen. Oblg., 6.25% and 6.60% , 2011 and 2001 100 112
---------------------------------------------------------------------------------
Higher Educational Facilities Auth.:
Allegheny General Hospital, Rev., 7.00%, 2011 100 105
Bryn Mawr College, Rev., 5.625%, 2017 50 54
Philadelphia College of Textiles & Science, Rev., 6.70%
and 7.20%, 2014 and 2007 110 126
University of Pennsylvania, Rev., 5.55%, 2009 50 54
Ursinus College, Rev., 5.90%, 2027 100 105
---------------------------------------------------------------------------------
Housing Finance Agcy., Single Family Mortgage Rev., 5.50%
and 6.30%, 2006 and 2015 175 186
---------------------------------------------------------------------------------
Industrial Dev. Auth., Economic Dev., Rev., 6.00% and 7.00%,
2012 and 2007 80 90
---------------------------------------------------------------------------------
Turnpike Commission, Rev., 6.25%, 2011 10 11
---------------------------------------------------------------------------------
Allegheny County :
Higher Education Building Auth., Duquesne University
Proj., Rev., 6.50%, 2011 160 191
Hospital, Dev. Auth., Rev., 5.70%, 2015 75 81
Municipality of Penn Hills, Gen. Oblg., 5.80%, 2013 100 110
Pittsburgh International Airport, Rev., 5.75%, 2013 100 111
---------------------------------------------------------------------------------
Baldwin and Whitewater School District, zero coupon, 2007 50 33
---------------------------------------------------------------------------------
Blair County, Gen. Oblg., 5.75% and 5.50%, 2006 and 2011 255 277
---------------------------------------------------------------------------------
Bucks County, Community College Auth., Rev., 5.50%, 2017 100 104
---------------------------------------------------------------------------------
Cambria County :
Gen. Oblg., 5.875%, 2008 15 17
Industrial Dev. Auth., Pollution Control Rev., 5.35%, 2010 100 109
---------------------------------------------------------------------------------
Columbia County, Industrial Dev. Auth., First Street
Association Proj., Rev., 9.00%, 2014 65 73
---------------------------------------------------------------------------------
Cornwall and Lebanon School District, Rev., 5.85%, 2009 15 16
---------------------------------------------------------------------------------
Delaware Valley Regional Finance Auth., Rev., 7.75%, 2027 75 108
---------------------------------------------------------------------------------
Downingtown Area School District, Gen. Oblg., 5.375%, 2009 100 108
---------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
---------------------------------------------------------------------------------
<S> <C> <C> <C>
General McLane School District, Gen. Oblg., 5.65%, 2011 $ 70 $ 76
---------------------------------------------------------------------------------
Gettysburg, Gen. Oblg., 5.375%, 2013 250 271
---------------------------------------------------------------------------------
Harrisburg, Gen. Oblg., zero coupon, 2009 150 90
---------------------------------------------------------------------------------
Hazleton, Health Services Auth., Rev., 6.20% and 5.50%, 2026
and 2027 200 207
---------------------------------------------------------------------------------
Jeannette, Health Service Auth., Rev., 6.00%, 2018 95 100
---------------------------------------------------------------------------------
Jim Thorpe Area School District, Gen. Oblg., 5.35%, 2012 100 106
---------------------------------------------------------------------------------
Lackawanna County, Gen. Oblg., 6.00%, 2011 15 17
---------------------------------------------------------------------------------
Lancaster County, Solid Waste Management, Rev., 5.25%, 2008 125 134
---------------------------------------------------------------------------------
Lehigh County :
Gen. Oblg., 5.00%, 2006 70 73
Good Shepherd Rehabilitation Hospital, Rev., 5.20%, 2012 50 52
---------------------------------------------------------------------------------
Luzerne County, Gen. Oblg., 6.00%, 2011 15 16
---------------------------------------------------------------------------------
McKean County Hospital Auth., Bradford Hospital Proj., Rev.,
5.375% and 6.10%, 2003 and 2020 115 121
---------------------------------------------------------------------------------
Mckeesport Area School District, Gen. Oblg., zero coupon,
2009 250 150
---------------------------------------------------------------------------------
Media Boro, Gen. Oblg., 6.45%, 2012 40 43
---------------------------------------------------------------------------------
Moon Area School Dist., Gen Oblg., zero coupon, 2012 230 115
---------------------------------------------------------------------------------
New Castle Area Hospital Auth., Jameson Memorial, Rev.,
6.00%, 2010 100 113
---------------------------------------------------------------------------------
Northampton County, Industrial Dev. Auth., Metropolitan
Edison Proj., Rev., 6.10%, 2021 125 138
---------------------------------------------------------------------------------
North Penn School District, Gen. Oblg., 5.10%, 2010 65 68
---------------------------------------------------------------------------------
Philadelphia :
Airport System, Rev., 5.75% and 5.25%, 2008 and 2011 350 371
Gas Works Rev., 5.10% through 6.375%, 2004 through 2014 400 427
Gen. Oblg., 5.00%, 2025 125 124
IDA Baptist Church, Gen. Oblg., 5.50%, 2018 250 248
Municipal Auth., Rev., 6.80% and 6.125%, 2002 and 2008 110 118
School District, Gen. Oblg., 6.25%, 2005 and 2009 110 127
Water and Wastewater Rev., 6.25% and 5.50%, 2012 and 2014 150 164
---------------------------------------------------------------------------------
Pleasant Valley School District, Gen. Oblg., 4.60%, 2003 25 26
---------------------------------------------------------------------------------
Ridley School District, Gen. Oblg., 4.40%, 1999 10 10
---------------------------------------------------------------------------------
Southeastern Transportation Auth., Rev., 5.90% and 6.00%,
2010 and 2012 125 137
---------------------------------------------------------------------------------
South Fork Municipal Auth., Rev., 5.25%, 2011 150 159
---------------------------------------------------------------------------------
Suburban Lancaster Sewer Auth., Rev., 5.80%, 2010 100 109
---------------------------------------------------------------------------------
Twin Valley School District, Gen. Oblg., 5.875%, 2012 20 20
---------------------------------------------------------------------------------
University Area Joint Auth., Sewer Rev., 5.25%, 2014 50 53
---------------------------------------------------------------------------------
University of Pittsburg, University Capital Proj., Gen.
Oblg., 6.125%, 2021 35 38
---------------------------------------------------------------------------------
Westmoreland County Industrial Dev. Auth., Health System
Proj., Rev., 6.00%, 2011 15 16
---------------------------------------------------------------------------------
Wilkinsburg Joint Water Auth., Water Rev., zero coupon, 2010 130 76
---------------------------------------------------------------------------------
York County Industrial Dev. Auth., Public Service Electric
and Gas Company, Rev., 6.45%, 2019 20 23
---------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev., 5.625% and 6.50%, 2017 and 2018 150 161
Highway and Transportation Auth., Rev., 6.25%, 2016 115 136
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 40 44
---------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--87.9% 6,845
---------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--95.9%
(Cost: $7,032) 7,466
---------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET Yield--3.35%
INSTRUMENTS Due--September 1998
- --2.6% (Cost: $200) $ 200 $ 200
---------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.5%
(Cost: $7,232) 7,666
---------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.5% 119
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
NET ASSETS--100% $7,785
---------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $7,232,000 for federal income tax purposes
at August 31, 1998, the gross unrealized appreciation was $437,000, the gross
unrealized depreciation was $3,000 and the net unrealized appreciation on
investments was $434,000.
See accompanying Notes to Financial Statements.
27
<PAGE> 28
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, 1998, the related statements of operations for the year then ended
and changes in net assets for each of the two years in the period then ended and
the financial highlights for each of the fiscal periods since 1994. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
August 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the above mentioned Funds of the Kemper State Tax-Free Income Series at
August 31, 1998, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and the financial highlights for each of the fiscal periods since 1994, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1998
28
<PAGE> 29
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY NEW YORK PENNSYLVANIA
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------
Investments, at value (Cost: $98,771, $5,611,
$262,200 and $7,232, respectively) $105,941 6,003 281,136 7,666
- ------------------------------------------------------------------------------------------------------
Cash 41 62 -- 37
- ------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 64 9 1,367 --
- ------------------------------------------------------------------------------------------------------
Investments sold 2,392 -- 1,359 --
- ------------------------------------------------------------------------------------------------------
Interest 1,708 79 3,594 101
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS 110,146 6,153 287,456 7,804
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------------------------------------
Payable for:
Dividends 77 4 219 5
- ------------------------------------------------------------------------------------------------------
Fund shares redeemed -- -- 571 --
- ------------------------------------------------------------------------------------------------------
Investments purchased 2,424 101 2,083 --
- ------------------------------------------------------------------------------------------------------
Management fee 48 3 128 3
- ------------------------------------------------------------------------------------------------------
Administrative services fee 16 -- 43 1
- ------------------------------------------------------------------------------------------------------
Distribution services fee 5 2 10 4
- ------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related
expenses 23 2 16 2
- ------------------------------------------------------------------------------------------------------
Trustees' fees and other 22 4 66 4
- ------------------------------------------------------------------------------------------------------
Total liabilities 2,615 116 3,136 19
- ------------------------------------------------------------------------------------------------------
NET ASSETS $107,531 6,037 284,320 7,785
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------------------------------------
Paid-in capital $ 99,379 5,685 263,453 7,352
- ------------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments 982 (40) 1,931 (1)
- ------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 7,170 392 18,936 434
- ------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $107,531 6,037 284,320 7,785
- ------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $100,431 1,916 268,155 3,297
- ------------------------------------------------------------------------------------------------------
Shares outstanding 9,461 184 24,133 308
- ------------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $ 10.62 10.43 11.11 10.71
- ------------------------------------------------------------------------------------------------------
Maximum offering price per share (net asset value,
plus 4.71% of net asset value or 4.50% of offering
price) $ 11.12 10.92 11.63 11.21
- ------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $ 6,379 3,989 12,390 3,367
- ------------------------------------------------------------------------------------------------------
Shares outstanding 602 381 1,114 314
- ------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per
share (net assets / shares outstanding) $ 10.60 10.45 11.13 10.71
- ------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $ 721 132 3,775 1,121
- ------------------------------------------------------------------------------------------------------
Shares outstanding 68 13 340 105
- ------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per
share (net assets / shares outstanding) $ 10.60 10.47 11.10 10.71
- ------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended August 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY NEW YORK PENNSYLVANIA
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------------
Interest income $5,775 296 15,979 360
- -------------------------------------------------------------------------------------------------------------
Expenses:
Management fee 576 31 1,543 38
- -------------------------------------------------------------------------------------------------------------
Administrative services fee 193 12 526 16
- -------------------------------------------------------------------------------------------------------------
Distribution services fee 46 29 107 31
- -------------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related
expenses 81 5 188 8
- -------------------------------------------------------------------------------------------------------------
Professional fees 5 1 10 1
- -------------------------------------------------------------------------------------------------------------
Reports to shareholders 21 2 91 2
- -------------------------------------------------------------------------------------------------------------
Trustees' fees and other 15 8 12 12
- -------------------------------------------------------------------------------------------------------------
Total expenses before expense waiver 937 88 2,477 108
- -------------------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment
manager -- 2 -- 8
- -------------------------------------------------------------------------------------------------------------
Total expenses after expense waiver 937 86 2,477 100
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,838 210 13,502 260
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------------
Net realized gain on sale of investments
(including options purchased) 1,947 24 4,730 31
- -------------------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (60) (5) (91) (1)
- -------------------------------------------------------------------------------------------------------------
Net realized gain 1,887 19 4,639 30
- -------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on
investments 1,508 193 4,612 229
- -------------------------------------------------------------------------------------------------------------
Net gain on investments 3,395 212 9,251 259
- -------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $8,233 422 22,753 519
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
30
<PAGE> 31
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
Years ended August 31, 1998 and 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY
------------------------ -------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 4,838 5,213 210 173
- ---------------------------------------------------------------------------------------------------------------
Net realized gain 1,887 1,672 19 2
- ---------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 1,508 1,668 193 150
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 8,233 8,553 422 325
- ---------------------------------------------------------------------------------------------------------------
Distribution from net investment income (4,838) (5,213) (210) (173)
- ---------------------------------------------------------------------------------------------------------------
Distribution from net realized gain (1,420) (1,208) (47) (25)
- ---------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (6,258) (6,421) (257) (198)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions 1,711 (6,392) 568 1,195
- ---------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 3,686 (4,260) 733 1,322
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 103,845 108,105 5,304 3,982
- ---------------------------------------------------------------------------------------------------------------
END OF YEAR $107,531 103,845 6,037 5,304
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NEW YORK PENNSYLVANIA
------------------------ -------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 13,502 15,054 260 208
- ---------------------------------------------------------------------------------------------------------------
Net realized gain 4,639 5,594 30 58
- ---------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 4,612 4,097 229 170
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 22,753 24,745 519 436
- ---------------------------------------------------------------------------------------------------------------
Distribution from net investment income (13,502) (15,054) (260) (208)
- ---------------------------------------------------------------------------------------------------------------
Distribution from net realized gain (4,612) (2,349) (57) --
- ---------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (18,114) (17,403) (317) (208)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (6,253) (23,754) 1,279 1,627
- ---------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,614) (16,412) 1,481 1,855
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 285,934 302,346 6,304 4,449
- ---------------------------------------------------------------------------------------------------------------
END OF YEAR $284,320 285,934 7,785 6,304
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 32
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. Financial futures and options are
valued at the settlement price established each day
by the board of trade or exchange on which they are
traded. Over-the-counter traded options are valued
based upon prices provided by market makers. Other
securities and assets are valued at fair value as
determined in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis and includes premium and original
issue discount amortization on fixed income
securities. Realized gains and losses from
investment transactions are reported on an
identified cost basis.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated among the Funds in
proportion to their relative net assets.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the close of the Exchange. The net
asset value per share is determined separately for
each class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. Each Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies, and to distribute
all of its taxable income to its
32
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
shareholders. Accordingly, each Fund paid no
federal income taxes and no federal income tax
provision was required.
DIVIDENDS TO SHAREHOLDERS. Each Fund declares and
records a daily dividend equal to its net
investment income for that day, to holders of
shares for which payment has been received. Income
dividends are distributed monthly. Net realized
capital gains, if any, are distributed at least
annually. Dividends are determined in accordance
with income tax principles which may treat certain
transactions differently from generally accepted
accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS
WITH AFFILIATES MANAGEMENT AGREEMENT. Each Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the annual rate of .55%
of the first $250 million of average daily net
assets declining to .40% of average daily net
assets in excess of $12.5 billion. Management fees
incurred for the year ended August 31, 1998 are as
follows:
<TABLE>
<S> <C> <C>
Florida $ 576,000
New Jersey 31,000
New York 1,543,000
Pennsylvania 38,000
</TABLE>
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's businesses to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, each Fund's
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Trustees of each Fund has
approved new investment management agreements with
Scudder Kemper, which are substantially identical
to the former investment management agreements,
except for the dates of execution and termination.
The Board of Trustees of each Fund will seek
shareholder approval of the new investment
management agreements through a proxy solicitation
that is currently scheduled to conclude in mid-
December.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Trust has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
paid in connection with the distribution of each
Fund's Class A shares for the year ended August 31,
1998 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY KDI BY KDI TO FIRMS
--------------- -------------------
<S> <C> <C>
Florida $28,000 90,000
New Jersey 1,000 2,000
New York 47,000 178,000
Pennsylvania 1,000 10,000
</TABLE>
For services under the distribution services
agreement, each Fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares of each Fund.
In addition, KDI receives any contingent deferred
sales charges (CDSC) from redemptions of Class B
and Class C shares. Distribution fees, CDSC and
33
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
commissions related to Class B and Class C shares
for the year ended August 31, 1998 are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION
FEES (AFTER
EXPENSE WAIVER) COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY KDI PAID BY KDI TO FIRMS
--------------- --------------------
<S> <C> <C>
Florida $50,000 56,000
New Jersey 36,000 45,000
New York 123,000 128,000
Pennsylvania 31,000 49,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agree-ment with KDI. For
providing information and administrative services
to shareholders, each Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
arrangements with financial services firms that
provide these services and pays these firms based
on assets of Fund accounts the firms service.
Administrative services fees (ASF) paid for the
year ended August 31, 1998 are as follows:
<TABLE>
<CAPTION>
ASF PAID BY THE
FUND TO KDI ASF PAID BY KDI
(AFTER EXPENSE --------------------------------
WAIVER) TO ALL FIRMS TO AFFILIATES
--------------- --------------- -------------
<S> <C> <C> <C>
Florida $193,000 193,000 --
New Jersey 10,000 14,000 --
New York 526,000 532,000 16,000
Pennsylvania 13,000 17,000 --
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds' transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Trust. Under the agreement,
for the year ended August 31, 1998, KSvC received
shareholder services fees as follows:
<TABLE>
<S> <C>
Florida $ 42,000
New Jersey 3,000
New York 134,000
Pennsylvania 4,000
</TABLE>
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of
Scudder Kemper. For the year ended August 31, 1998,
the Funds made no payments to their officers and
incurred trustees' fees aggregating $16,000 to
independent trustees.
OPERATING EXPENSE WAIVER. Scudder Kemper agreed to
waive certain operating expenses of the New Jersey
and Pennsylvania Funds. Under this arrangement,
Scudder Kemper waived expenses of $2,000 and
$8,000, respectively, for the year ended August 31,
1998.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended August 31, 1998, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
<TABLE>
<CAPTION>
NEW NEW
FLORIDA JERSEY YORK PENNSYLVANIA
------- ---------- -------- ------------
<S> <C> <C> <C> <C>
Purchases $76,776 2,369 223,003 3,384
Proceeds from sales 68,234 1,262 212,666 1,680
</TABLE>
34
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the Funds (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
--------------------- ---------------------
FLORIDA SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,067 $11,250 926 $ 9,544
-----------------------------------------------------------------------------
Class B 308 3,227 254 2,612
-----------------------------------------------------------------------------
Class C 13 142 29 301
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 290 3,052 352 3,625
-----------------------------------------------------------------------------
Class B 11 117 8 89
-----------------------------------------------------------------------------
Class C 1 10 1 8
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SHARES REDEEMED
Class A (1,419) (14,927) (2,062) (21,201)
-----------------------------------------------------------------------------
Class B (104) (1,149) (126) (1,295)
-----------------------------------------------------------------------------
Class C (1) (11) (7) (75)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 19 201 -- 5
-----------------------------------------------------------------------------
Class B (19) (201) -- (5)
-----------------------------------------------------------------------------
NET INCREASE
(DECREASE) FROM
CAPITAL SHARE
TRANSACTIONS $ 1,711 $ (6,392)
-----------------------------------------------------------------------------
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
------------------- -------------------
NEW JERSEY SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 24 $ 232 54 $ 547
-------------------------------------------------------------------------
Class B 123 1,278 70 704
-------------------------------------------------------------------------
Class C 3 34 19 187
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 7 75 6 58
-------------------------------------------------------------------------
Class B 11 120 8 81
-------------------------------------------------------------------------
Class C 1 8 -- 4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SHARES REDEEMED
Class A (43) (443) (27) (272)
-------------------------------------------------------------------------
Class B (59) (609) (11) (110)
-------------------------------------------------------------------------
Class C (12) (127) -- (4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 4 44 -- --
-------------------------------------------------------------------------
Class B (4) (44) -- --
-------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE
TRANSACTIONS $ 568 $1,195
-------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
--------------------- ---------------------
NEW YORK SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,255 $13,685 1,425 $ 15,421
-----------------------------------------------------------------------------
Class B 295 3,244 356 3,837
-----------------------------------------------------------------------------
Class C 212 2,324 177 1,915
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 948 10,538 970 10,474
-----------------------------------------------------------------------------
Class B 36 402 28 300
-----------------------------------------------------------------------------
Class C 12 139 9 99
-----------------------------------------------------------------------------
SHARES REDEEMED
Class A (3,067) (33,718) (5,038) (54,373)
-----------------------------------------------------------------------------
Class B (105) (1,155) (104) (1,122)
-----------------------------------------------------------------------------
Class C (156) (1,712) (28) (305)
-----------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 43 467 6 62
-----------------------------------------------------------------------------
Class B (43) (467) (6) (62)
-----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE
TRANSACTIONS $(6,253) $(23,754)
-----------------------------------------------------------------------------
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
------------------- -------------------
PENNSYLVANIA SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 59 $ 632 52 $ 526
-------------------------------------------------------------------------
Class B 93 979 139 1,426
-------------------------------------------------------------------------
Class C 19 197 39 402
-------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 9 96 7 71
-------------------------------------------------------------------------
Class B 8 89 5 50
-------------------------------------------------------------------------
Class C 3 34 2 20
-------------------------------------------------------------------------
SHARES REDEEMED
Class A (22) (237) (36) (371)
-------------------------------------------------------------------------
Class B (40) (423) (46) (466)
-------------------------------------------------------------------------
Class C (8) (88) (3) (31)
-------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 18 191 1 8
-------------------------------------------------------------------------
Class B (18) (191) (1) (8)
-------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE
TRANSACTIONS $1,279 $1,627
-------------------------------------------------------------------------
</TABLE>
36
<PAGE> 37
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------
CLASS A
--------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------
FLORIDA 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $10.42 10.21 10.27 10.11 10.98
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .49 .51 .52 .53 .52
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .35 .33 .08 .30 (.52)
- --------------------------------------------------------------------------------------------------
Total from investment operations .84 .84 .60 .83 --
- --------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .49 .51 .52 .53 .52
- --------------------------------------------------------------------------------------------------
Distribution from net realized gain .15 .12 .14 .14 .35
- --------------------------------------------------------------------------------------------------
Total dividends .64 .63 .66 .67 .87
- --------------------------------------------------------------------------------------------------
Net asset value, end of year $10.62 10.42 10.21 10.27 10.11
- --------------------------------------------------------------------------------------------------
TOTAL RETURN 8.27% 8.37 5.83 8.62 (.11)
RATIOS TO AVERAGE NET ASSETS
Expenses .85% .83 .84 .80 .79
- --------------------------------------------------------------------------------------------------
Net investment income 4.65% 4.92 5.00 5.30 5.04
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------
CLASS B
-----------------------------------------------------
MAY 31
YEAR ENDED AUGUST 31, TO
------------------------------------ AUGUST 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.40 10.19 10.26 10.10 10.13
Income from investment operations:
Net investment income .40 .42 .43 .44 .11
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .35 .33 .07 .30 (.03)
- -------------------------------------------------------------------------------------------------------
Total from investment operations .75 .75 .50 .74 .08
- -------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .40 .42 .43 .44 .11
- -------------------------------------------------------------------------------------------------------
Distribution from net realized gain .15 .12 .14 .14 --
- -------------------------------------------------------------------------------------------------------
Total dividends .55 .54 .57 .58 .11
- -------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.60 10.40 10.19 10.26 10.10
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.38% 7.48 4.84 7.67 .74
- -------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------------
Expenses 1.68% 1.65 1.68 1.65 1.70
- -------------------------------------------------------------------------------------------------------
Net investment income 3.82% 4.10 4.16 4.45 4.28
- -------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------
CLASS C
------------------------------
MAY 31
YEAR ENDED AUGUST 31, TO AUGUST
------------------------------ 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.41 10.20 10.26 10.10 10.13
- ------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .40 .42 .43 .45 .11
- ------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .34 .33 .08 .30 (.03)
- ------------------------------------------------------------------------------------------
Total from investment operations .74 .75 .51 .75 .08
- ------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .40 .42 .43 .45 .11
- ------------------------------------------------------------------------------------------
Distribution from net realized gain .15 .12 .14 .14 --
- ------------------------------------------------------------------------------------------
Total dividends .55 .54 .57 .59 .11
- ------------------------------------------------------------------------------------------
Net asset value, end of period $10.60 10.41 10.20 10.26 10.10
- ------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.26% 7.49 4.97 7.84 .75
- ------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------
Expenses 1.69% 1.64 1.64 1.52 1.54
- ------------------------------------------------------------------------------------------
Net investment income 3.81% 4.11 4.20 4.58 4.52
- ------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $107,531 103,845 108,105 117,292 124,721
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate 70% 87 119 96 53
- -----------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR ALL FUNDS: Total return does not reflect the effect of sales charges.
38
<PAGE> 39
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------
CLASS A
---------------------------------------
MARCH 15
YEAR ENDED AUGUST 31, TO
--------------------- AUGUST 31,
NEW JERSEY 1998 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------
Net asset value, beginning of period $10.12 9.85 9.75 9.50
- ----------------------------------------------------------------------------------
Income from investment operations:
Net investment income .43 .43 .43 .22
- ----------------------------------------------------------------------------------
Net realized and unrealized gain .40 .33 .10 .25
- ----------------------------------------------------------------------------------
Total from investment operations .83 .76 .53 .47
- ----------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .43 .43 .43 .22
- ----------------------------------------------------------------------------------
Distribution from net realized gain .09 .06 -- --
- ----------------------------------------------------------------------------------
Total dividends .52 .49 .43 .22
- ----------------------------------------------------------------------------------
Net asset value, end of period $10.43 10.12 9.85 9.75
- ----------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.47% 7.85 5.50 4.89
- ----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------
Expenses absorbed by the Fund .96% 1.13 1.13 .39
- ----------------------------------------------------------------------------------
Net investment income 4.23% 4.28 4.41 4.99
- ----------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------
Expenses 1.07% 1.15 1.45 .94
- ----------------------------------------------------------------------------------
Net investment income 4.12% 4.26 4.09 4.44
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------
CLASS B
---------------------------------------
MARCH 15
YEAR ENDED AUGUST 31, TO
--------------------- AUGUST 31,
1998 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------
Net asset value, beginning of period $10.15 9.88 9.77 9.50
- ----------------------------------------------------------------------------------
Income from investment operations:
Net investment income .35 .35 .36 .18
- ----------------------------------------------------------------------------------
Net realized and unrealized gain .39 .33 .11 .27
- ----------------------------------------------------------------------------------
Total from investment operations .74 .68 .47 .45
- ----------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .35 .35 .36 .18
- ----------------------------------------------------------------------------------
Distribution from net realized gain .09 .06 -- --
- ----------------------------------------------------------------------------------
Total dividends .44 .41 .36 .18
- ----------------------------------------------------------------------------------
Net asset value, end of period $10.45 10.15 9.88 9.77
- ----------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.49% 7.02 4.80 4.69
- ----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.76% 1.90 2.00 1.18
- ----------------------------------------------------------------------------------
Net investment income 3.43% 3.51 3.54 4.20
- ----------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------
Expenses 1.76% 1.92 2.32 1.73
- ----------------------------------------------------------------------------------
Net investment income 3.43% 3.49 3.22 3.65
- ----------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------
CLASS C
------------------------------------
MARCH 15
YEAR ENDED AUGUST 31, TO
--------------------- AUGUST 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------
Net asset value, beginning of period $10.16 9.88 9.77 9.50
- ----------------------------------------------------------------------------------
Income from investment operations:
Net investment income .36 .35 .36 .18
- ----------------------------------------------------------------------------------
Net realized and unrealized gain .40 .34 .11 .27
- ----------------------------------------------------------------------------------
Total from investment operations .76 .69 .47 .45
- ----------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .36 .35 .36 .18
- ----------------------------------------------------------------------------------
Distribution from net realized gain .09 .06 -- --
- ----------------------------------------------------------------------------------
Total dividends .45 .41 .36 .18
- ----------------------------------------------------------------------------------
Net asset value, end of period $10.47 10.16 9.88 9.77
- ----------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.63% 7.19 4.89 4.75
- ----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.73% 1.79 1.70 1.18
- ----------------------------------------------------------------------------------
Net investment income 3.46% 3.62 3.84 4.20
- ----------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------
Expenses 1.77% 1.81 2.02 1.73
- ----------------------------------------------------------------------------------
Net investment income 3.42% 3.60 3.52 3.65
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------
MARCH 15
YEAR ENDED AUGUST 31, TO
---------------------- AUGUST 31,
1998 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at end of period (in thousands) $6,037 5,304 3,982 4,309
- ----------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 23% 65 128 68
- ----------------------------------------------------------------------------------
</TABLE>
NOTE FOR NEW JERSEY FUND:
Scudder Kemper 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, Scudder Kemper agreed to absorb
certain operating expenses of the Fund. "Other ratios to average net assets" are
computed without this expense waiver or absorption.
40
<PAGE> 41
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------
CLASS A
--------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------
NEW YORK 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------
Net asset value, beginning of year $10.93 10.66 10.80 10.73 11.59
- -------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .53 .56 .56 .58 .58
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .36 .36 -- .20 (.60)
- -------------------------------------------------------------------------------------------
Total from investment operations .89 .92 .56 .78 (.02)
- -------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .53 .56 .56 .58 .58
- -------------------------------------------------------------------------------------------
Distribution from net realized gain .18 .09 .14 .13 .26
- -------------------------------------------------------------------------------------------
Total dividends .71 .65 .70 .71 .84
- -------------------------------------------------------------------------------------------
Net asset value, end of year $11.11 10.93 10.66 10.80 10.73
- -------------------------------------------------------------------------------------------
TOTAL RETURN 8.44% 8.77 5.26 7.62 (.19)
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------
Expenses .84% .83 .83 .81 .76
- -------------------------------------------------------------------------------------------
Net investment income 4.81% 5.15 5.15 5.47 5.29
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------
CLASS B
--------------------------------------------
MAY 31
YEAR ENDED AUGUST 31, TO
------------------------------ AUGUST 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.94 10.66 10.80 10.73 10.77
- -------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .44 .47 .47 .48 .12
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .37 .37 -- .20 (.04)
- -------------------------------------------------------------------------------------------
Total from investment operations .81 .84 .47 .68 .08
- -------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .44 .47 .47 .48 .12
- -------------------------------------------------------------------------------------------
Distribution from net realized gain .18 .09 .14 .13 --
- -------------------------------------------------------------------------------------------
Total dividends .62 .56 .61 .61 .12
- -------------------------------------------------------------------------------------------
Net asset value, end of period $11.13 10.94 10.66 10.80 10.73
- -------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.65% 7.96 4.36 6.69 .75
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------
Expenses 1.67% 1.67 1.69 1.67 1.68
- -------------------------------------------------------------------------------------------
Net investment income 3.98% 4.31 4.29 4.61 4.36
- -------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 42
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------
CLASS C
-----------------------------------------------
MAY 31
YEAR ENDED AUGUST 31, TO
------------------------------ AUGUST 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.92 10.65 10.79 10.73 10.77
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .44 .47 .47 .48 .12
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .36 .36 -- .19 (.04)
- ----------------------------------------------------------------------------------------------
Total from investment operations .80 .83 .47 .67 .08
- ----------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .44 .47 .47 .48 .12
- ----------------------------------------------------------------------------------------------
Distribution from net realized gain .18 .09 .14 .13 --
- ----------------------------------------------------------------------------------------------
Total dividends .62 .56 .61 .61 .12
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $11.10 10.92 10.65 10.79 10.73
- ----------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.56% 7.87 4.38 6.64 .70
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------
Expenses 1.67% 1.65 1.67 1.62 1.63
- ----------------------------------------------------------------------------------------------
Net investment income 3.98% 4.33 4.31 4.66 4.68
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
---------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $284,320 285,934 302,346 319,477 342,839
- ----------------------------------------------------------------------------------------------
Portfolio turnover rate 77% 92 104 112 43
- ----------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 43
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------
CLASS A
------------------------------------
MARCH 15
YEAR ENDED AUGUST 31, TO
--------------------- AUGUST 31,
PENNSYLVANIA 1998 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------
Net asset value, beginning of period $10.41 9.95 9.81 9.50
- -----------------------------------------------------------------------------------
Income from investment operations:
Net investment income .44 .46 .44 .22
- -----------------------------------------------------------------------------------
Net realized and unrealized gain .39 .46 .14 .31
- -----------------------------------------------------------------------------------
Total from investment operations .83 .92 .58 .53
- -----------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .44 .46 .44 .22
- -----------------------------------------------------------------------------------
Distribution from net realized gain .09 -- -- --
- -----------------------------------------------------------------------------------
Total dividends .53 .46 .44 .22
- -----------------------------------------------------------------------------------
Net asset value, end of period $10.71 10.41 9.95 9.81
- -----------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.18% 9.41 6.01 5.54
- -----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------
Expenses absorbed by the Fund .98% .97 1.06 .46
- -----------------------------------------------------------------------------------
Net investment income 4.15% 4.48 4.33 4.93
- -----------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------
Expenses 1.10% 1.12 1.39 1.01
- -----------------------------------------------------------------------------------
Net investment income 4.03% 4.33 4.00 4.38
- -----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
CLASS B
------------------------------------
MARCH 15
YEAR ENDED AUGUST 31, TO
--------------------- AUGUST 31,
1998 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------
Net asset value, beginning of period $10.41 9.95 9.80 9.50
- -----------------------------------------------------------------------------------
Income from investment operations:
Net investment income .36 .38 .37 .18
- -----------------------------------------------------------------------------------
Net realized and unrealized gain .39 .46 .15 .30
- -----------------------------------------------------------------------------------
Total from investment operations .75 .84 .52 .48
- -----------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .36 .38 .37 .18
- -----------------------------------------------------------------------------------
Distribution from net realized gain .09 -- -- --
- -----------------------------------------------------------------------------------
Total dividends .45 .38 .37 .18
- -----------------------------------------------------------------------------------
Net asset value, end of period $10.71 10.41 9.95 9.80
- -----------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.37% 8.58 5.29 5.05
- -----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.74% 1.73 1.83 1.24
- -----------------------------------------------------------------------------------
Net investment income 3.39% 3.72 3.56 4.15
- -----------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------
Expenses 1.86% 1.93 2.16 1.79
- -----------------------------------------------------------------------------------
Net investment income 3.27% 3.52 3.23 3.60
- -----------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 44
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------
CLASS C
-----------------------------------
MARCH 15
YEAR ENDED AUGUST 31, TO
--------------------- AUGUST 31,
1998 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.41 9.95 9.81 9.50
- ----------------------------------------------------------------------------------
Income from investment operations:
Net investment income .36 .38 .37 .19
- ----------------------------------------------------------------------------------
Net realized and unrealized gain .39 .46 .14 .31
- ----------------------------------------------------------------------------------
Total from investment operations .75 .84 .51 .50
- ----------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .36 .38 .37 .19
- ----------------------------------------------------------------------------------
Distribution from net realized gain .09 -- -- --
- ----------------------------------------------------------------------------------
Total dividends .45 .38 .37 .19
- ----------------------------------------------------------------------------------
Net asset value, end of period $10.71 10.41 9.95 9.81
- ----------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.36% 8.60 5.19 5.18
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses absorbed by the Fund 1.72% 1.71 1.80 1.21
- ----------------------------------------------------------------------------------
Net investment income 3.41% 3.74 3.59 4.18
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.79% 1.96 2.13 1.76
- ----------------------------------------------------------------------------------
Net investment income 3.34% 3.49 3.26 3.63
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------
MARCH 15
YEAR ENDED AUGUST 31, TO
---------------------- AUGUST 31,
1998 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at end of period (in thousands) $7,785 6,304 4,449 2,118
- ----------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 26% 117 158 85
- ----------------------------------------------------------------------------------
</TABLE>
NOTE FOR PENNSYLVANIA FUND:
Scudder Kemper 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, Scudder Kemper agreed to absorb
certain operating expenses of the Fund. "Other ratios to average net assets" are
computed without this expense waiver or absorption.
TAX INFORMATION
Florida, New Jersey, New York and Pennsylvania Funds paid distributions of $.08,
$.03, $.07, and $.03 per share, respectively, from net long-term capital gains
during the year ended August 31, 1998, of which 0%, 0%, 57%, and 0% represent
20% rate gains, respectively.
Pursuant to Section 852 of the Internal Revenue Code, the Florida, New Jersey,
New York and Pennsylvania Funds designate $1,354,000, $5,000, $2,866,000, and
$17,000, respectively, as capital gain dividends for the year ended August 31,
1998, of which 100%, 100%, 100%, and 100% represent 20% rate gains,
respectively.
Of the dividends paid from net investment income by each Fund for the taxable
year ended August 31, 1998, 100% are designated as exempt interest dividends for
federal income tax purposes. However, a portion of the dividends may be
includable in the alternative minimum tax calculation.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
44
<PAGE> 45
NOTES
45
<PAGE> 46
NOTES
46
<PAGE> 47
NOTES
47
<PAGE> 48
TRUSTEES&OFFICERS
<TABLE>
<CAPTION>
TRUSTEES OFFICERS
<S> <C> <C>
DANIEL PIERCE MARK S. CASADY CHRISTOPHER J. MIER
Chairman and Trustee President Vice President
DAVID W. BELIN PHILIP J. COLLORA ROBERT C. PECK, JR.
Trustee Vice President and Vice President
Secretary
LEWIS A. BURNHAM KATHRYN L. QUIRK
Trustee JOHN R. HEBBLE Vice President
Treasurer
DONALD L. DUNAWAY LINDA J. WONDRACK
Trustee ELEANOR R. BRENNAN Vice President
Vice President
ROBERT B. HOFFMAN MAUREEN E. KANE
Trustee PHILIP G. CONDON Assistant Secretary
Vice President
DONALD R. JONES CAROLINE PEARSON
Trustee JERARD K. HARTMAN Assistant Secretary
Vice President
SHIRLEY D. PETERSON ELIZABETH C. WERTH
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
WILLIAM P. SOMMERS BRENDA LYONS
Trustee ANN M. MCCREARY Assistant Treasurer
Vice President
EDMOND D. VILLANI
Trustee
</TABLE>
................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
................................................................................
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
................................................................................
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania Avenue
Kansas City, MO 64105
................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Tax-Free Income Funds prospectus.
KSTIS - 2 (10/98) 1057600
