<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED FEBRUARY 28, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
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
"... The funds benefited from the strong
rally in the municipal bond market from
October 24 through early January. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
4
ECONOMIC OVERVIEW
6
PERFORMANCE UPDATE
7
TERMS TO KNOW
8
FLORIDA'S PORTFOLIO STATISTICS
AND PORTFOLIO OF INVESTMENTS
12
NEW JERSEY'S PORTFOLIO STATISTICS
AND PORTFOLIO OF INVESTMENTS
16
NEW YORK'S PORTFOLIO STATISTICS
AND PORTFOLIO OF INVESTMENTS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME FUNDS' TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 28, 1998 (UNADJUSTED FOR ANY SALES
CHARGE)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[BAR GRAPH]
FLORIDA
- --------------------------------------------------------------------------------
<S> <C>
CLASS A 4.69%
CLASS B 4.36%
CLASS C 4.26%
LIPPER FLORIDA TAX-FREE INCOME FUNDS CATEGORY AVERAGE* 4.89%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NEW JERSEY
[BAR GRAPH]
- --------------------------------------------------------------------------------
<S> <C>
CLASS A 4.90%
CLASS B 4.42%
CLASS C 4.55%
LIPPER NEW JERSEY TAX-FREE INCOME FUNDS CATEGORY AVERAGE* 4.70%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NEW YORK
[BAR GRAPH]
- --------------------------------------------------------------------------------
<S> <C>
CLASS A 4.89%
CLASS B 4.35%
CLASS C 4.46%
LIPPER NEW YORK TAX-FREE INCOME FUNDS CATEGORY AVERAGE* 4.87%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PENNSYLVANIA
[BAR GRAPH]
- --------------------------------------------------------------------------------
<S> <C>
CLASS A 5.04%
CLASS B 4.62%
CLASS C 4.77%
LIPPER FLORIDA TAX-FREE INCOME FUNDS CATEGORY AVERAGE* 4.85%
- --------------------------------------------------------------------------------
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT REPRESENT FUTURE PERFORMANCE. RETURNS AND NET
ASSET VALUE FLUCTUATE. SHARES ARE REDEEMABLE AT CURRENT NET ASSET VALUE, WHICH
MAY BE MORE OR LESS THAN ORIGINAL COST.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FLORIDA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
2/28/98 8/31/97
- -----------------------------------------------------
<S> <C> <C>
KEMPER FLORIDA TAX-FREE INCOME
FUND CLASS A $10.51 $10.42
- -----------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME
FUND CLASS B $10.50 $10.40
- -----------------------------------------------------
KEMPER FLORIDA TAX-FREE INCOME
FUND CLASS C $10.50 $10.41
- -----------------------------------------------------
</TABLE>
- -----------------------------------------------------
NEW JERSEY
- -----------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
2/28/98 8/31/97
- -----------------------------------------------------
<S> <C> <C>
KEMPER NEW JERSEY TAX-FREE
INCOME FUND CLASS A $10.31 $10.12
- -----------------------------------------------------
KEMPER NEW JERSEY TAX-FREE
INCOME FUND CLASS B $10.33 $10.15
- -----------------------------------------------------
KEMPER NEW JERSEY TAX-FREE
INCOME FUND CLASS C $10.35 $10.16
- -----------------------------------------------------
</TABLE>
- -----------------------------------------------------
NEW YORK
- -----------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
2/28/98 8/31/97
- -----------------------------------------------------
<S> <C> <C> <C>
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS A $11.01 $10.93
- -----------------------------------------------------
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS B $11.01 $10.94
- -----------------------------------------------------
KEMPER NEW YORK TAX-FREE
INCOME FUND CLASS C $11.00 $10.92
- -----------------------------------------------------
</TABLE>
- -----------------------------------------------------
PENNSYLVANIA
- -----------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
2/28/98 8/31/97
- -----------------------------------------------------
<S> <C> <C>
KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS A $10.63 $10.41
- -----------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS B $10.62 $10.41
- -----------------------------------------------------
KEMPER PENNSYLVANIA TAX-FREE
INCOME FUND CLASS C $10.63 $10.41
- -----------------------------------------------------
</TABLE>
<PAGE> 3
CONTENTS
20
PENNSYLVANIA'S
PORTFOLIO STATISTICS
AND PORTFOLIO OF
INVESTMENTS
24
SHAREHOLDERS' MEETING
25
FINANCIAL STATEMENTS
28
NOTES TO
FINANCIAL STATEMENTS
33
FINANCIAL HIGHLIGHTS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER STATE TAX-FREE INCOME FUNDS' LIPPER RANKINGS*
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THEIR RESPECTIVE LIPPER CATEGORIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FLORIDA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #34 of 63 funds #55 of 63 funds #57 of 63 funds
- --------------------------------------------------------------------------------
5-YEAR #3 of 23 funds N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NEW JERSEY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #20 of 57 funds #48 of 57 funds #43 of 57 funds
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NEW YORK
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #51 of 95 funds #81 of 95 funds #79 of 95 funds
- --------------------------------------------------------------------------------
5-YEAR #10 of 48 funds N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #6 of 27 funds N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
PENNSYLVANIA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #11 of 66 funds #27 of 66 funds #33 of 66 funds
- --------------------------------------------------------------------------------
</TABLE>
*LIPPER ANALYTICAL SERVICES, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES IN
NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF
SALES CHARGES AND, IF THEY HAD, RESULTS MAY HAVE BEEN LESS FAVORABLE. RETURNS
AND RANKINGS ARE HISTORICAL AND DO NOT REFLECT FUTURE PERFORMANCE. THE FUNDS ARE
COMPARED TO THEIR RESPECTIVE LIPPER CATEGORIES AS FOLLOWS: FLORIDA MUNICIPAL
DEBT, NEW JERSEY MUNICIPAL DEBT, NEW YORK MUNICIPAL DEBT AND PENNSYLVANIA
MUNICIPAL DEBT.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE FOLLOWING TABLES SHOW PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE
FUNDS AS OF FEBRUARY 28, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FLORIDA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTH INCOME: $0.2455 $0.2007 $0.2009
- --------------------------------------------------------------------------------
FEBRUARY DIVIDEND: $0.0368 $0.0301 $0.0302
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.50% 3.69% 3.70%
- --------------------------------------------------------------------------------
SEC YIELD+: 3.75% 3.08% 3.08%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 5.96% 4.90% 4.90%
- --------------------------------------------------------------------------------
</TABLE>
BASED ON A MARGINAL TAX RATE OF 37.1% (FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NEW JERSEY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTH INCOME: $0.2131 $0.1734 $0.1748
- --------------------------------------------------------------------------------
FEBRUARY DIVIDEND: $0.0340 $0.0273 $0.0272
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.24% 3.40% 3.38%
- --------------------------------------------------------------------------------
SEC YIELD+: 3.52% 2.90% 2.88%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 5.98% 4.92% 4.89%
- --------------------------------------------------------------------------------
</TABLE>
BASED ON A MARGINAL TAX RATE OF 41.1% (COMBINED NEW JERSEY STATE AND
FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NEW YORK
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTH INCOME: $0.2641 $0.2166 $0.2173
- --------------------------------------------------------------------------------
FEBRUARY DIVIDEND: $0.0383 $0.0310 $0.0311
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.47% 3.62% 3.64%
- --------------------------------------------------------------------------------
SEC YIELD+: 3.74% 3.04% 3.07%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 6.62% 5.38% 5.43%
- --------------------------------------------------------------------------------
</TABLE>
BASED ON A MARGINAL INCOME TAX RATE OF 43.5% (COMBINED NEW YORK STATE, NEW
YORK CITY AND FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PENNSYLVANIA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTH INCOME: $0.2157 $0.1755 $0.1770
- --------------------------------------------------------------------------------
FEBRUARY DIVIDEND: $0.0323 $0.0257 $0.0276
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 3.91% 3.11% 3.34%
- --------------------------------------------------------------------------------
SEC YIELD+: 3.44% 2.85% 2.87%
- --------------------------------------------------------------------------------
TAX EQUIVALENT YIELD: 5.63% 4.66% 4.70%
- --------------------------------------------------------------------------------
</TABLE>
BASED ON A MARGINAL TAX RATE OF 38.9% (COMBINED PENNSYLVANIA STATE AND
FEDERAL INCOME TAX RATE)
- --------------------------------------------------------------------------------
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON FEBRUARY 28, 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 FEBRUARY 28, 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 1997 FEDERAL
AND STATE MARGINAL TAX RATE. INCOME MAY BE SUBJECT TO STATE AND LOCAL TAXES AND,
FOR SOME INVESTORS, A PORTION MAY BE SUBJECT TO THE ALTERNATIVE MINIMUM TAX.
<PAGE> 4
ECONOMIC OVERVIEW
[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. HE IS ALSO A MEMBER OF THE INVESTMENT POLICY AND STRATEGY COMMITTEE
FOR KEMPER FUNDS.
SILVIA HOLDS A BACHELOR OF ARTS AND PH.D. 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 ADVISOR FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $200 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS. IT IS ONE OF
THE 10 LARGEST MUTUAL FUND COMPLEXES IN THE UNITED STATES.
DEAR SHAREHOLDERS,
Despite ongoing stock market volatility, the economic climate for mutual fund
investors was fairly positive in the first quarter of 1998. The Dow Jones
Industrial Average rose 11.3 percent, making it the best first quarter since
1987. Seemingly in defiance of our diplomatic struggles with Iraq, political
scandal at home and a few major earnings disappointments particularly in the
technology sector, the market managed to hit several new highs in the first
quarter. U.S. corporate profit growth and earnings continued to boost stock
prices, making the market all the more attractive to investors. Steady U.S.
economic growth bolstered by stable interest rates created a positive
environment for both equity and fixed-income investing -- and we expect this
trend to continue.
The U.S. economy, as measured by the gross domestic product (GDP) growth rate,
grew at a 3.8 percent rate in 1997, representing solid growth for the year
ahead. Momentum for the year is expected to slow to a rate of 2.5 to 3.0
percent, still a very respectable rate.
Although the economy will continue to slow in the months ahead, the outlook is
still positive. Employment growth is expected to remain steady. Both bonds and
equities continue to perform well, thereby boosting consumer confidence and
spending. The housing market has been noteworthy, with new home sales reaching
an all-time high for this point in the economic cycle and housing starts remain
high relative to demographic trends.
Output prices, as measured by the Consumer Price Index (CPI), remained stable
at 1.5 to 2 percent year over year. When the rate of inflation remains stable
and as low as it has, the risk of higher interest rates is reduced and the real
return on financial assets grows. It is unlikely that the Fed will raise
interest rates in the second quarter.
Much of the market activity in the first quarter can be attributed to today's
service-based economy. With the arrival of annual and holiday bonuses at the end
of the fourth quarter -- compensation for a good year's work -- the first
quarter has established itself as a time for American employees to either spend
or stash away these lump sum earnings in Individual Retirement Accounts (IRAs)
and other investments.
One factor that affected the U.S. market in 1997 appears to be having a
diminished influence in 1998. The East Asian market crisis now appears for most
Asian countries to be subsiding. East Asia's economic difficulties did not
affect global production or employment nearly as much as the markets had
anticipated. Consequently, most investors have not felt the serious
repercussions that had been feared. Obviously, investors with heavy
concentrations in the region suffered the largest losses. But the markets were
anticipating a greater global impact -- and this has not yet come to pass.
Further impacts may occur or orders on shipments already made may find no
ultimate buyer. Then again, many East Asian countries appear to have already
recovered from the crisis. Some Asian currencies have stabilized and several
Asian stock markets have rebounded. Korea and Malaysia are two countries where
this has happened. The perception of an Asian "contagion" or flu throughout the
region is fading fast -- and investors in general seem to be staying in the
game.
At the end of February, the U.S. federal budget deficit essentially vanished.
Recent efforts to reduce the deficit, combined with higher federal revenues due
to the robust economy, left us with an expected budget surplus for fiscal 1998.
This stable fiscal environment is characterized by a reduction in Treasury
financing, which tends to have a downward effect on interest rates. Lower
interest rates fuel consumer spending, which clearly benefits the marketplace in
the form of higher corporate revenues and earnings. One result of higher
earnings is higher stock prices, which can ultimately benefit investors.
The last time the U.S. enjoyed a budget surplus was 1969. After nearly 30
years of being in the red, we very well may notice a new shift in psychology
about the Treasury market and the issuance of Treasury securities. In the past,
investors worried about deficits that were out of control and expected higher
interest rates on Treasuries. High interest rates are the bane of fixed-income
investing, so a balanced budget can be expected to have a positive effect.
On the global front, current economic fundamentals continue to favor the U.S.,
with the dollar persisting as a safe haven for investors. International
investors want to
4
<PAGE> 5
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The
10-year Treasury rate and the prime rate are prevailing interest rates. The
other data report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (3/31/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.65 6.03 6.89 6.51
PRIME RATE(2) 8.5 8.5 8.5 8.25
INFLATION RATE(3) 1.38 2.08 2.43 2.9
THE U.S. DOLLAR(4) 4.88 7.62 9.32 8.94
CAPITAL GOODS ORDERS(5)* 8.14 15.24 8.1 3.54
INDUSTRIAL PRODUCTION(5)* 4.95 4.99 5.31 2.41
EMPLOYMENT GROWTH(6) 2.59 2.36 2.27 1.78
</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 February 28, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
participate in U.S. economic growth, which, at 3.8 percent for 1997, was better
than the economic growth in both Europe and Japan. Europe's 1997 growth rate
remained fairly steady at 2 to 3 percent. Japan experienced a growth rate last
year of 1 percent. U.S. real interest rates have also been more attractive than
those of most other countries, enticing foreign investors to buy U.S.
Treasuries.
We anticipate the positive economic environment to continue. The budget
surplus should hold for at least the near term. President Clinton's initiatives
for increased spending and more tax credits haven't come to fruition. In fact,
proponents of spending control have continued to squelch spending programs on
Capitol Hill. All the while, fiscal policy has remained steady.
With solid economic growth, lower interest rates, low inflation and a
record-setting stock market, it is no wonder that investor expectations are
high. But, are investors expecting too much?
It is important to recognize that although from a macroeconomic perspective
the economy is strong, there are some microeconomic challenges that could
threaten in the months to come. These include health care reform and shifts in
the political landscape at home and continuing conflicts or new developments
abroad. For example, the European monetary union (EMU) appears to be proceeding
as we would expect. But within six months to a year after the EMU is established
in 1999, tensions may indeed mount as countries try to adapt to the new
structure. Each of these issues could affect our strong, yet reactive
marketplace. Be sure to stay tuned.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
JOHN E. SILVIA
JOHN E. SILVIA
April 10, 1998
5
<PAGE> 6
PERFORMANCE UPDATE
[MIER PHOTO]
CHRISTOPHER MIER JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1986 AND IS A
MANAGING DIRECTOR. MIER WAS A VICE PRESIDENT AND PORTFOLIO MANAGER OF THE KEMPER
STATE TAX-FREE INCOME SERIES FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 28,1998.
MIER RECEIVED A BACHELOR'S 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.
AS OF MARCH 1, 1998, ELEANOR R. BRENNAN HAS BEEN THE LEAD PORTFOLIO MANAGER OF
THE KEMPER MICHIGAN TAX-FREE INCOME FUND AND KEMPER NEW JERSEY TAX-FREE INCOME
FUND. BRENNAN JOINED SCUDDER KEMPER INVESTMENTS, INC. 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.
AS OF MARCH 1, 1998, PHILIP G. CONDON HAS BEEN 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.
THE ASIAN CRISIS AND RECORD LOW INFLATION SUPPORTED STRONG SIX-MONTH
PERFORMANCE BY THE FUNDS IN THE KEMPER STATE TAX-FREE INCOME FUND SERIES.
PORTFOLIO MANAGER CHRIS MIER EXPLAINS HOW THESE AND OTHER FACTORS AFFECTED THE
MUNICIPAL MARKET AND WHAT HE EXPECTS DOWN THE ROAD.
Q THE ASIAN MARKET AND CURRENCY CRISIS DOMINATED FINANCIAL NEWS DURING THE
PAST SIX MONTHS. HOW HAS IT AFFECTED THE MUNICIPAL BOND MARKET?
A When the Asian crisis came to the forefront in October, we recognized
that it would have a deflationary effect and would eventually trigger a flight
to quality in the bond market. With that in mind, we lengthened our duration in
the portfolios by late October. The funds benefited from a strong rally in the
municipal bond market from October 24 through early January.
We began reducing the duration of our portfolios in early January,
feeling that most of the effects of the Asian crisis were already embedded in
the bond market by mid-January when prices peaked. February was rather flat for
the municipal bond market, but Kemper State Tax-Free Income Series performed
well because of their structure and neutral positioning.
Q HOW DID THE UNPRECEDENTED NUMBER OF BONDS ISSUED DURING THIS PERIOD
AFFECT THE MARKET AND THE FUNDS?
A The tremendous number of bonds marketed during this period had a
significant effect on the market and a positive effect on our funds' portfolios.
Because of the large volume, we were able to shop around for attractive issues
to include in our portfolios. As for the market, the volume of new issues forced
municipal rates to stay attractive. Municipal rates were about 90 percent of a
30-year Treasury bond for the six-month period ended February 28, 1998.
In January, the market saw about $17.6 billion in volume compared to an
average of about $10 billion in the past three Januarys. February 1998 saw the
greatest volume of any February for the last decade at $20.2 billion. The
elevated supply was due to two factors -- declining interest rates, which led to
an increase in advanced refunding issues, and continued growth in new project
financings.
The solid economy also contributed to a significant improvement in credit
quality. When the economy is strong, cities and states get more tax revenue, and
more tax revenue means budgets are in balance and sometimes in surplus. That
results in higher credit ratings and thus, higher-quality bonds.
Q HOW HAS THE DIRECTION OF INTEREST RATES AFFECTED THE MARKET?
A Throughout most of this period, the Federal Reserve Board (the Fed) had
indicated a bias toward tightening rates because of strong domestic growth. When
the economy expands too quickly, inflation becomes a threat. The Fed was poised
to slow that growth by raising interest rates. However, on February 4, 1998, the
Fed went to a neutral bias because it was becoming apparent the Asian crisis
would have a deflationary effect and offset our very strong economy to some
degree.
6
<PAGE> 7
PERFORMANCE UPDATE
Q EL NINO HAS HIT FLORIDA ESPECIALLY HARD. WILL THE COSTS ASSOCIATED WITH
REBUILDING AFFECT THE STATE'S ABILITY TO REPAY THEIR OBLIGATIONS?
A When a natural disaster occurs, cities, counties and states receive a
great deal of federal money and insurance money to repair whatever has been
destroyed, so the disaster isn't as much of a financial drain as would be
expected. Florida is such a huge economy it should absorb the small remaining
costs without much difficulty.
Q WERE THERE ANY SIGNIFICANT EVENTS THAT AFFECTED THE INDIVIDUAL STATES
WITHIN KEMPER STATE TAX-FREE INCOME SERIES?
A New York City's credit quality was upgraded in February, although that
had been widely anticipated. Moody's upgraded the city from 'BAA1' to 'A.'
The reason is that the city draws a huge amount of economic support from
financial markets. When financial services are doing well, as they clearly have
the last several years, New York City's budget benefits. This upgrade is
especially meaningful because certain institutional investors -- bank trusts
and some insurance portfolios for example -- cannot invest in any bonds rated
lower than 'A.'
The Asian problem may affect California to a slightly greater extent than the
rest of the country because of the state's proximity to Asia and its import and
export activity. New York may likewise be a bit more affected because it is a
major banking center and therefore carries a disproportionate exposure to Asia's
banking crisis. However, I don't feel these Asian ties place either of the
states at risk.
Q HOW HAVE YOU RESPONDED TO THE CHANGING MUNICIPAL YIELD CURVE?
A We continue to take advantage of the relative flatness of the municipal
yield curve. I think the most attractive portion of the curve is in the 15-year
area. There is very little incentive to go beyond the 20-year range. The only
30-year paper we have is the premium bonds with prices that reflect their
shorter call features or else higher yielding securities like a 'BBB'- or 'A'-
rated bond (see Terms to Know for callable bond and bond ratings.)
Q WHAT IS YOUR OUTLOOK FOR THE MUNICIPAL BOND MARKET?
A Some unusual deals are in the pipeline. In March or April, the Long
Island Power Authority in New York will offer the largest bond issue ever to
come to the municipal market. During this time we also expect a number of other
large issues, and we will see some refunding. After April, we expect supply to
start to taper off. The market is likely to be relatively range bound, and
prices should remain somewhat stable. The volatility in the funds should be
even lower this year than it was last. I do think rates will trend lower again
once the domestic economy begins to show the effect from the Asian problems.
Q IS THIS STILL A GOOD TIME TO BE IN MUNICIPALS?
A I think municipals are quite attractive right now. They're at high yield
percentages to Treasuries and offer attractive real rates of interest because of
our current low rate of inflation. If supply begins to taper off and the economy
begins to slow a bit as we expect, that will be good news for the funds.
TERMS TO KNOW
BOND RATINGS Grades assigned by credit-rating agencies to corporate and
municipal debt securities, based on the borrower's expected ability to repay.
The higher the grade, the lower the interest rate a borrower must pay. The two
major Wall Street credit rating firms are Moody's Investors Service Inc. and
Standard & Poor's bond ratings.
CALLABLE BOND A bond issue, all or part of which may be redeemed before maturity
by the issuer under specified conditions. The term also applies to preferred
shares that may be redeemed by the issuing corporation.
DURATION A measure of the interest rate sensitivity of a portfolio,
incorporating time to maturity and coupon size. The longer the duration, the
greater the interest rate risk.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
7
<PAGE> 8
PORTFOLIO STATISTICS
KEMPER FLORIDA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
PORTFOLIO COMPOSITION* ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
REVENUE BONDS 75% 73%
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 10 5
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 9 11
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 6 11
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
QUALITY ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
AAA 56% 51%
- --------------------------------------------------------------------------------
AA 15 19
- --------------------------------------------------------------------------------
A 5 4
- --------------------------------------------------------------------------------
BBB 12 13
- --------------------------------------------------------------------------------
NOT RATED 12 13
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
YEARS TO MATURITY ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
1-10 YEARS 13% 15%
- --------------------------------------------------------------------------------
11-20 YEARS 59 39
- --------------------------------------------------------------------------------
21+ YEARS 28 46
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
15.2 years 15.9 years
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
FLORIDA TAX-FREE INCOME FUND
Portfolio of Investments at February 28, 1998 (unaudited)
(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
- --------------------------------------------------------------------------------------------------------------
Pasco County Solid Waste Disposal and Resource Recovery
System Rev., 7.80%, to be called 4-1-98 @ 102.50 $ 345 $ 355
-----------------------------------------------------------------------------------------
Hillsborough County, Aviation Auth., Tampa International
Airport, Rev., 6.90%, to be called 10-1-99 @ 102 585 625
-----------------------------------------------------------------------------------------
Volusia County Health Facilities Auth., Memorial Health
Systems, Hospital Facilities Rev., 8.25%, to be called
6-1-00 @ 102 1,940 2,153
-----------------------------------------------------------------------------------------
Jacksonville Health Facilities Auth., Memorial Medical
Center Proj., Rev., 6.75%, to be called 5-1-01 @ 102 2,000 2,197
-----------------------------------------------------------------------------------------
Department of Natural Resources, Preservation 2000, Rev.,
6.75%, to be called 7-1-01 @ 102 1,000 1,103
-----------------------------------------------------------------------------------------
Dunedin, Mease Health Care, Hospital Rev., 6.75%, to be
called 11-15-01 @ 102 750 833
-----------------------------------------------------------------------------------------
St. Petersburg Health Facilities Auth., Allegheny Health
System, Rev., 7.00%, to be called 12-1-01 @ 102 500 560
-----------------------------------------------------------------------------------------
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 1,133
-----------------------------------------------------------------------------------------
Jacksonville District, Water & Sewer Rev., 5.00%, to be
called 10-1-08 @ 100 1,000 1,055
-----------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--9.9% 10,301
-----------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------
Board of Education, Public Education Capital Outlay, Gen.
Oblg., 7.25%, 2023 390 422
-----------------------------------------------------------------------------------------
Department of Natural Resources, Preservation 2000, Rev.,
5.50%, 2010 2,000 2,187
-----------------------------------------------------------------------------------------
Housing Finance Agcy., GNMA Collateralized Home Ownership
Rev., 7.90%, 2022 1,110 1,178
-----------------------------------------------------------------------------------------
Broward County:
North Site Proj., Resource Recovery Rev., 7.95%, 2008 815 889
School District, Gen. Oblg., 6.00%, 2007 4,000 4,328
South Site Proj., Resource Recovery Rev., 7.95%, 2008 865 943
-----------------------------------------------------------------------------------------
Dade City Governmental Leasing Corp., Department of Health
and Rehabilitation Services, Rev., 9.00%, 2020 1,025 1,078
-----------------------------------------------------------------------------------------
Dade County:
Educational Facilities Auth., Rev., 6.00%, 2008 2,250 2,530
Housing Finance Auth., Single Family Mortgage Rev., 7.25%,
2023 370 391
Miami International Airport, Aviation Facilities, Rev.,
6.55% and 5.125%, 2013 and 2014 3,000 3,206
School District, Gen. Oblg., 5.00%, 2011 2,000 2,039
Water and Sewer System Rev., 6.25%, 2010 and 2011 1,800 1,743
-----------------------------------------------------------------------------------------
Duval County Housing Finance Auth., Single Family Mortgage
Rev., 7.25%, 2019 550 584
-----------------------------------------------------------------------------------------
Escambia County:
Housing Finance Auth., Single Family Mortgage Rev., 6.90%,
2020 805 852
Pollution Control Rev., 6.40%, 2030 2,500 2,758
-----------------------------------------------------------------------------------------
Fort Pierce, Utilities Auth., Rev., zero coupon, 2009 4,695 2,780
-----------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
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 $ 1,623
------------------------------------------------------------------------------------------
Hillsborough County:
Aviation Auth., Tampa International Airport, Rev., 6.90%,
2011 665 707
Housing Finance Auth., Single Family Mortgage Rev., 6.50%
and 7.30%, 2019 and 2022 1,345 1,553
Utility Rev., 7.00%, 2014 1,325 1,440
------------------------------------------------------------------------------------------
Jacksonville, Health Facilities Auth., Hospital Rev., 5.00%,
2015 1,700 1,701
------------------------------------------------------------------------------------------
Manatee County, Meditrust Proj., First Mortgage Rev., 7.35%,
2015 1,615 1,837
------------------------------------------------------------------------------------------
Martin County, Industrial Dev. Auth., Indiantown
Cogeneration, L.P. Proj., Rev., 7.875%, 2025 2,325 2,733
------------------------------------------------------------------------------------------
Nassau County, GF/Amelia Island Properties, Inc. Proj.,
Rev., 9.75%, 2023 985 1,152
------------------------------------------------------------------------------------------
North Miami, Johnson and Wales University Proj., Educational
Facilities Rev., 6.10% and 6.125%, 2013 and 2020 4,785 5,021
------------------------------------------------------------------------------------------
Orange County:
Health Facilities Auth., Rev., 6.25%, 2016 and 2018 3,500 4,040
Tourist Dev. Tax Rev., 5.90%, 2009 and 2010 3,325 3,757
Water Utilities System, Rev., Aviation Authority, Rev.,
5.25%, 2011 1,930 2,017
------------------------------------------------------------------------------------------
Orlando -- Orange County Expressway Auth., Junior Lien,
Rev., 6.50%, 2012 1,000 1,187
------------------------------------------------------------------------------------------
Orlando:
Greater Orlando, Aviation Authority, Rev., 5.75%, 2011 1,500 1,654
Utilities Commission, Water and Electric Rev., 6.75%, 2017 3,000 3,677
------------------------------------------------------------------------------------------
Palm Beach County:
Criminal Justice Facilities, Rev., 7.20%, 2015 110 140
Solid Waste Auth., Rev., 6.00%, 2009 2,000 2,273
------------------------------------------------------------------------------------------
Pensacola, Health Facilities Auth., Rev., 5.25%, 2011 2,200 2,249
------------------------------------------------------------------------------------------
Pinellas County, Pollution Control Rev., 7.20%, 2014 2,000 2,203
------------------------------------------------------------------------------------------
St. John's County, Water and Sewer Rev., zero coupon, 2016 440 177
------------------------------------------------------------------------------------------
Sunrise Public Facilities Rev., zero coupon, 2018 425 151
------------------------------------------------------------------------------------------
Tampa:
Sports Auth., Special Purpose, Rev., 5.75%, 2020 2,075 2,281
Utility Tax, Rev., zero coupon, 2015 through 2020 7,000 2,712
------------------------------------------------------------------------------------------
Village Center Community Dev. District, Utility Rev., 6.00%,
2018 1,250 1,413
------------------------------------------------------------------------------------------
Westchase Community Dev. District, Rev., 5.80%, 2012 3,000 3,268
------------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev.: zero coupon, 2017 3,500 1,319
6.50%, 2018 2,000 2,182
Gen. Oblg., 6.25%, 2013 850 994
Highway and Transportation Auth., Rev., 6.00%, 2018 1,250 1,412
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 1,030 1,119
------------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, 2018 2,125 2,386
------------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--84.5% 88,286
------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--94.4%
(Cost: $91,673) 98,587
------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET Yield--3.60% and 3.65%
INSTRUMENTS Due--March 1998
- --4.2% (Cost: $4,400) $4,400 $ 4,400
---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.6%
(Cost: $96,073) 102,987
---------------------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES--1.4% 1,460
---------------------------------------------------------------------------------------------
NET ASSETS--100% $104,447
---------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $96,073,000 for federal income tax purposes
at February 28, 1998, the gross unrealized appreciation was $7,067,000, the
gross unrealized depreciation was $153,000 and the net unrealized appreciation
on investments was $6,914,000.
See accompanying Notes to Financial Statements.
11
<PAGE> 12
PORTFOLIO STATISTICS
KEMPER NEW JERSEY TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 2/28/98 ON 8/31/97
- ------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 61% 62%
- ------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 27 25
- ------------------------------------------------------------------------------
CASH AND EQUIVALENTS 6 12
- ------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 6 1
- ------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
QUALITY ON 2/28/98 ON 8/31/97
- ------------------------------------------------------------------------------
<S> <C> <C>
AAA 70% 73%
- ------------------------------------------------------------------------------
AA 15 9
- ------------------------------------------------------------------------------
A 2 4
- ------------------------------------------------------------------------------
BBB 9 10
- ------------------------------------------------------------------------------
B 1 1
- ------------------------------------------------------------------------------
NOT RATED 3 3
- ------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
YEARS TO MATURITY ON 2/28/98 ON 8/31/97
- ------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 11% 5%
- ------------------------------------------------------------------------------
11-20 YEARS 74 72
- ------------------------------------------------------------------------------
21+ YEARS 15 23
- ------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AVERAGE MATURITY ON 2/28/98 ON 8/31/97
- ------------------------------------------------------------------------------
<S> <C> <C>
15.4 years 15.8 years
- ------------------------------------------------------------------------------
</TABLE>
* PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
NEW JERSEY TAX-FREE INCOME FUND
Portfolio of Investments at February 28, 1998 (unaudited)
(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
- ----------------------------------------------------------------------------------------------------------------
Jersey City, Gen. Oblg., 6.60%, to be called 5-15-01 @ 102 $ 40 $ 44
-------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------
North Brunswick Township, Gen. Oblg., 6.30%, to be called
2-1-05 @ 100 100 112
-------------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--5.8% 340
-------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ----------------------------------------------------------------------------------------------------------------
Economic Dev. Auth.:
Educational Testing Service, Rev., 6.125% and 5.875%, 2015
and 2026 200 213
Market Transition Facility, Rev., 5.875%, 2011 90 98
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 and 2016 250 251
Rider College, Rev., 6.20%, 2017 115 126
Rowan College, Rev., 5.875%, 2013 100 109
Rutgers State University, Rev., 5.00%, 2013 215 217
-------------------------------------------------------------------------------------------
Health Care Facilities Financing Auth.:
Atlantic City Medical Center, Rev., 6.80%, 2011 75 83
Camden County, Health Systems-Catholic Health East Auth.,
Rev., 5.25%, 2013 100 102
Dover General Hospital and Medical Center, Rev., 5.875%,
2012 75 81
Hackensack Medical Center, Rev., 6.625%, 2017 15 16
Holy Name Hospital, Rev., 6.00%, 2025 100 105
Jersey Shore Medical Center, Rev., 6.25%, 2016 100 110
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 100 105
-------------------------------------------------------------------------------------------
Sports and Exposition Auth., Rev., 6.00%, 2013 100 109
-------------------------------------------------------------------------------------------
Transportation Trust Fund Auth., Rev., 6.50%, 2005 and 2011 175 204
-------------------------------------------------------------------------------------------
Turnpike Auth., Rev., 6.50%, 2016 125 148
-------------------------------------------------------------------------------------------
Wastewater Treatment Trust, Rev., 7.00%, 2007 100 121
-------------------------------------------------------------------------------------------
Atlantic City Board of Education, Gen. Oblg., 6.10%, 2014 100 115
-------------------------------------------------------------------------------------------
Bayshore Regional Sewerage Auth., Rev., 5.50%, 2012 100 106
-------------------------------------------------------------------------------------------
Bergen County, Utilities Auth., Rev., 5.125%, 2012 50 51
-------------------------------------------------------------------------------------------
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 78
-------------------------------------------------------------------------------------------
Freehold Township Board of Education, Gen. Oblg., 5.375%,
2011 50 52
-------------------------------------------------------------------------------------------
Jackson Township, Gen. Oblg., 6.60%, 2012 135 161
-------------------------------------------------------------------------------------------
Jersey City, Gen. Oblg., 5.50% and 6.25%, 2011 and 2012 100 111
-------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Manchester Township, Gen. Oblg., 5.00%, 2011 $ 50 $ 51
---------------------------------------------------------------------------------------------
Mercer County, Improvement Auth., Rev., 5.00% and 5.75%,
2009 and 2017 210 221
---------------------------------------------------------------------------------------------
Merchantville Board of Education, Gen. Oblg., 5.80%, 2014 100 107
---------------------------------------------------------------------------------------------
Middlesex County:
Improvement Auth., Rev., 5.45%, 2011 75 80
Utilities Auth., Rev., 5.25%, 2010 55 58
---------------------------------------------------------------------------------------------
Monroe Township Board of Education, Gen. Oblg., 5.20%, 2015 75 78
---------------------------------------------------------------------------------------------
Newark:
Board of Education, Gen. Oblg., 6.00%, 2010 15 16
Gen. Oblg., 5.30%, 2008 75 80
---------------------------------------------------------------------------------------------
North Brunswick Township, Gen. Oblg., 6.10%, 2010 35 38
---------------------------------------------------------------------------------------------
North Hudson Sewerage Auth., Rev., 5.25%, 2016 100 102
---------------------------------------------------------------------------------------------
Ocean County:
Board of Education, Southern Regional High School, Gen.
Oblg., 5.50%, 2010 75 80
Utilities Auth., Wastewater Rev., 5.00%, 2013 50 50
---------------------------------------------------------------------------------------------
Parsippany Township, Troy Hills, Gen. Oblg., 5.00%, 2012 125 127
---------------------------------------------------------------------------------------------
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 100 105
Rev., 6.00%, 2014 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., 6.50%, 2006 75 87
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev., 6.50%, 2026 100 109
Highway and Transportation Auth., Rev., 6.25%, 2016 120 140
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 43
---------------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, 2018 75 84
---------------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--88.4% 5,193
---------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--94.2%
(Cost: $5,214) 5,533
---------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET Yield--3.30% to 3.50%
INSTRUMENTS Due--March 1998
- --5.1% -----------------------------------------------------------------------------------------------
Economic Dev. Auth.:
Gas Facilities, NUI Corporation Proj., Rev. $100 $ 100
Natural Gas Facilities, Natural Gas Company Proj., Rev. 100 100
Toys "R" Us, Inc., Rev. 100 100
-----------------------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--5.1%
(Cost: $300) 300
-----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.3%
(Cost: $5,514) 5,833
-----------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.7% 42
-----------------------------------------------------------------------------------------------
NET ASSETS--100% $ 5,875
-----------------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $5,514,000 for federal income tax purposes
at February 28, 1998, the gross unrealized appreciation was $322,000, the gross
unrealized depreciation was $3,000 and the net unrealized appreciation on
investments was $319,000.
See accompanying Notes to Financial Statements.
15
<PAGE> 16
PORTFOLIO STATISTICS
KEMPER NEW YORK TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 74% 75%
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 13 5
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 8 11
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 5 9
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 45% 46%
- --------------------------------------------------------------------------------
AA 17 25
- --------------------------------------------------------------------------------
A 16 8
- --------------------------------------------------------------------------------
BBB 17 16
- --------------------------------------------------------------------------------
BB 1 1
- --------------------------------------------------------------------------------
B 1 1
- --------------------------------------------------------------------------------
NOT RATED 3 3
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 9% 13%
- --------------------------------------------------------------------------------
11-20 YEARS 60 50
- --------------------------------------------------------------------------------
21+ YEARS 31 37
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE MATURITY ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
15.9 years 15.9 years
- --------------------------------------------------------------------------------
</TABLE>
* PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
NEW YORK TAX-FREE INCOME FUND
Portfolio of Investments at February 28, 1998 (unaudited)
(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
- ----------------------------------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Medical Hospital and
Nursing Home, Rev., 7.80%, to be called 8-15-98 @ 102 $ 1,000 $ 1,039
-------------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Mental Health Service
Facilities Improvement, Rev., 7.875%, to be called 8-15-98
@ 102 855 889
-------------------------------------------------------------------------------------------
Virgin Islands Housing Finance Auth., GNMA Collateralized
Home Mortgage Rev., 8.10%, to be called 12-1-98 @ 102 70 74
-------------------------------------------------------------------------------------------
Dormitory Auth., Ideal Senior Living Center, Rev., 7.625%,
to be called 2-1-99 @ 102 400 422
-------------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Montefiore Medical
Center, Rev., 7.25%, to be called 2-15-99 @ 102 2,000 2,107
-------------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Good Samaritan
Hospital, Rev., 7.625%, to be called 2-15-00 @ 102 1,000 1,025
-------------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Mental Health Service
Facilities Improvement, Rev., 7.75%, to be called 2-15-00
@ 102 365 398
-------------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Mental Health
Services Facilities Improvement, Rev., 7.875%, to be
called 8-15-00 @ 102 940 1,045
-------------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Presbyterian Hospital
Proj., Rev., 7.70%, to be called 8-15-00 @ 102 4,000 4,430
-------------------------------------------------------------------------------------------
Environmental Facilities Corp., State Water Pollution
Control, Revolving Fund Rev., 7.25%, to be called 6-15-01
@ 102 900 1,005
-------------------------------------------------------------------------------------------
Dormitory Auth., Menorah Campus Inc., Rev., 7.30% and 7.40%,
to be called 8-1-01 @ 102 3,855 4,333
-------------------------------------------------------------------------------------------
Housing Finance Agcy., Service Contract Obligation, Rev.,
7.30%, to be called 9-15-01 @ 102 1,925 2,168
-------------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy., Mental Health
Services Facilities Improvement, Rev., 7.40%, to be called
2-15-02 @ 102 755 858
-------------------------------------------------------------------------------------------
Housing Finance Agcy., Service Contract Obligation, Rev.,
7.25%, to be called 3-15-02 @ 102 1,815 2,061
-------------------------------------------------------------------------------------------
Dormitory Auth., State University Educational Facilities,
Rev., 7.25%, to be called 5-15-02 @ 102 155 177
-------------------------------------------------------------------------------------------
Battery Park City Auth., Rev., 8.625%, to be called 6-1-05 @
100 10 13
-------------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--7.7% 22,044
-------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUER PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dormitory Auth.:
Albany, Rev., 5.00%, 2009 $ 1,160 $ 1,178
Champlain Valley Physicians College, Rev., 5.00%, 2017 750 739
City University System, Rev., 5.75% and 7.00%, 2009
through 2018 11,550 12,895
Colgate University, Rev., 6.00%, 2016 and 2021 1,750 1,981
Cornell University, Rev., 7.375%, 2020 2,000 2,181
Culinary Institute, Rev., 5.00%, 2017 1,000 988
Fordham University, Rev., 7.20%, 2015 790 857
Hospital, Rev., 5.10%, 2011 5,475 5,609
Judicial Lease Facility, Rev., 7.375%, 2016 120 152
Mental Health Services Facilities Improvement, Rev.,
5.50%, 2012 2,320 2,462
Pace University, Rev., 6.50%, 2011 and 2012 1,260 1,494
Special Art School Districts Program, Rev., 7.00%, 2013 1,300 1,406
State University Educational Facilities, Rev., 5.50% to
7.50%, 2009 through 2017 7,325 8,270
St. Joseph's Hospital Health Center, Rev., 6.00%, 2008 and
2009 2,200 2,463
St. Vincent's Hospital and Medical Center, Rev., 7.375%,
2011 2,500 2,799
Upstate Community Colleges, Rev., 5.875%, 2016 3,555 3,771
----------------------------------------------------------------------------------------------
Energy Research and Dev. Auth., Consolidated Edison Company
of New York, Inc. Proj., Rev., 7.50%, 2025 3,500 3,679
----------------------------------------------------------------------------------------------
Environmental Facilities Corp.:
Huntington Resource Recovery Proj., Rev., 7.50%, 2012 3,745 4,100
Riverbank State Park, Rev., 6.25%, 2012 3,695 4,280
State Water Pollution Control, Revolving Fund Rev., 5.75%
to 7.25%, 2010 through 2014 5,190 5,745
----------------------------------------------------------------------------------------------
Housing Finance Agcy.:
Local Government Assistance Corp., Gen. Oblg., zero
coupon, 2009 5,980 3,611
Multi-Family Mortgage Rev., 6.95% and 6.00%, 2012 and 2027 2,695 2,881
Service Contract Oblg., Rev., 7.30% and 7.25%, 2012 260 290
State University Construction, Rev., 8.00%, 2011 200 258
West-H.E.L.P. Housing, Rev., 7.55%, Gen. Oblg., 2002 2,705 2,804
----------------------------------------------------------------------------------------------
Medical Care Facilities Finance Agcy.:
Albany Medical Center, Rev., 8.00%, 2028 1,085 1,125
Hospital and Nursing Home Rev., 7.60%, 2029 2,000 2,104
Mental Health Service Facilities Improvement, Rev., 7.40%
to 7.875%, 2015 through 2020 1,420 1,542
----------------------------------------------------------------------------------------------
Metropolitan Transportation Auth.:
Commuter Facilities Rev., 6.00%, 2016 and 2021 11,750 12,719
Transit, Rev., 5.25% to 6.10%, 2017 through 2021 6,750 7,025
----------------------------------------------------------------------------------------------
Mortgage Agcy., Homeowner Mortgage, Rev., 6.45% to 7.95%,
2009 through 2022 9,420 10,021
----------------------------------------------------------------------------------------------
Municipal Assistance Corp., Rev., 5.50%, 2008 5,000 5,442
----------------------------------------------------------------------------------------------
Port Auth. of New York and New Jersey, Gen. Oblg.,
6.25% and 9.125%, 2015 10,550 12,159
----------------------------------------------------------------------------------------------
Thruway Auth., Special Oblg., 5.25% and 6.00%, 2010 and 2011 7,900 8,445
----------------------------------------------------------------------------------------------
Urban Dev. Corp.:
State Facilities, Rev., 5.60%, 2015 2,260 2,367
Syracuse University Center for Science and Technology,
Rev., 5.50%, 2015 and 2017 9,390 9,803
----------------------------------------------------------------------------------------------
Dutchess County Resource Recovery Agcy., Solid Waste
Management System, Rev., 7.50%, 2009 2,000 2,155
----------------------------------------------------------------------------------------------
Monroe County, Gen Oblg., 6.00%, 2018 and 2019 2,330 2,636
----------------------------------------------------------------------------------------------
Nassau County, Gen. Oblg., 6.00%, 2011 through 2013 2,415 2,743
----------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York City:
Gen. Oblg., zero coupon, 2008 $12,955 $ 8,070
Gen. Oblg., 5.25% to 8.00%, 1998 through 2025 18,645 19,847
Housing Dev. Corp., Multi-Unit Mortgage Rev., 7.30%, 2010 8,800 9,397
Industrial Dev. Agcy, Brooklyn Navy Yard Cogeneration
Partners, L.P. Proj., Rev., 5.75%, 2036 7,000 7,238
Industrial Dev. Agcy., Northwest Airlines Proj., Rev.,
6.00%, 2027 2,000 2,098
Municipal Water Finance Auth., Water and Sewer System,
Rev., 5.875% and 5.75%, 2026 and 2029 8,000 8,481
--------------------------------------------------------------------------------------------
Niagara County, Water Treatment Plant, Gen. Oblg., 7.25% and
7.00%, 2011 and 2012 1,215 1,409
--------------------------------------------------------------------------------------------
Suffolk County Water Auth., Rev., 6.00% and 7.375%, 2009 and
2012 2,170 2,442
--------------------------------------------------------------------------------------------
Triborough Bridge and Tunnel Auth., Gen. Purpose Rev.,
6.125%, 2021 7,205 8,268
--------------------------------------------------------------------------------------------
Ulster County, Resource Recovery Agcy., Solid Waste System,
Rev., 6.00%, 2014 3,000 3,138
--------------------------------------------------------------------------------------------
Puerto Rico Commonwealth:
Facilities Financing Auth., Mennonite Gen. Hospital Proj.,
Rev., 6.50%, 2018 5,985 6,531
Gen. Oblg., zero coupon, 2008 and 2016 6,000 2,635
Highway and Transportation Auth., Rev., 6.00%, 2018 2,750 3,106
--------------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, 2018 7,100 7,970
--------------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--87.2% 247,809
--------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--94.9%
(Cost: $252,216) 269,853
--------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--3.60% to 3.95%
INSTRUMENTS Due--March 1998
- --6.1% --------------------------------------------------------------------------------------------
New York City, Municipal Water Finance Auth., Rev. 5,700 5,700
--------------------------------------------------------------------------------------------
Niagara County Energy Facility, Rev. 9,000 9,000
--------------------------------------------------------------------------------------------
Other 2,600 2,600
--------------------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--6.1%
(Cost: $17,300) 17,300
--------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--101.0%
(Cost: $269,516) 287,153
--------------------------------------------------------------------------------------------
LIABILITIES LESS, CASH AND OTHER ASSETS--(1.0)% (2,877)
--------------------------------------------------------------------------------------------
NET ASSETS--100% $284,276
--------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $269,516,000 for federal income tax purposes
at February 28, 1998, the gross unrealized appreciation was $17,818,000, the
gross unrealized depreciation was $181,000 and the net unrealized appreciation
on investments was $17,637,000.
See accompanying Notes to Financial Statements.
19
<PAGE> 20
PORTFOLIO STATISTICS
KEMPER PENNSYLVANIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS 56% 62%
- --------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS 28 15
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURED 10 10
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 6 13
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 68% 62%
- --------------------------------------------------------------------------------
AA 9 12
- --------------------------------------------------------------------------------
A 2 3
- --------------------------------------------------------------------------------
BBB 18 20
- --------------------------------------------------------------------------------
NOT RATED 3 3
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 15% 12%
- --------------------------------------------------------------------------------
11-20 YEARS 66 60
- --------------------------------------------------------------------------------
21+ YEARS 19 28
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE MATURITY ON 2/28/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
13.6 years 13.7 years
- --------------------------------------------------------------------------------
</TABLE>
* PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
20
<PAGE> 21
PORTFOLIO OF INVESTMENTS
PENNSYLVANIA TAX-FREE INCOME FUND
Portfolio of Investments at February 28, 1998 (unaudited)
(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
- -------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------
Cambria County, Gen. Oblg., 5.875%, to be called 8-15-04 @
102 15 17
----------------------------------------------------------------------------------------
Bethlehem Area School District, Gen. Oblg., 6.00%, to be
called 3-1-06 @ 100 100 111
----------------------------------------------------------------------------------------
TOTAL ADVANCE REFUNDED OBLIGATIONS--6.3% 429
----------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- -------------------------------------------------------------------------------------------------------------
Convention Center Auth., Rev., 6.70% and 6.75%, 2016 and
2019 160 184
----------------------------------------------------------------------------------------
Gen. Oblg., 6.60% and 6.25%, 2001 and 2011 100 112
----------------------------------------------------------------------------------------
Higher Educational Facilities Auth.:
Allegheny Gen. Hospital, Rev., 7.00%, 2011 100 110
Bryn Mawr College, Rev., 5.625%, 2017 50 53
Philadelphia College of Textiles & Science, Rev.,
7.20% and 6.70%, 2007 and 2014 110 125
University of Pennsylvania, Rev., 5.55%, 2009 50 53
Ursinus College, Rev., 5.90%, 2027 100 104
----------------------------------------------------------------------------------------
Housing Finance Agcy., Single Family Mortgage Rev., 6.30%
and 6.15%, 2015 and 2022 150 159
----------------------------------------------------------------------------------------
Industrial Dev. Auth., Economic Dev. Rev., 7.00% and 6.00%,
2007 and 2012 80 89
----------------------------------------------------------------------------------------
Turnpike Commission, Rev., 6.00% and 6.25%, 2009 and 2011 75 83
----------------------------------------------------------------------------------------
Allegheny County:
Higher Education Building Auth., Duquesne University
Proj., Rev., 6.50%, 2011 160 189
Hospital, Dev. Auth., Rev., 5.70%, 2015 75 80
McKeesport Area School District, Gen. Oblg., zero coupon,
2009 250 147
Municipality of Penn Hills, Gen. Oblg., 5.80%, 2013 100 108
Pittsburgh International Airport, Rev., 5.75%, 2013 100 109
----------------------------------------------------------------------------------------
Armstrong County, Gen. Oblg., 6.00%, 2006 20 20
----------------------------------------------------------------------------------------
Baldwin & Whitewater School District, zero coupon, 2007 50 32
----------------------------------------------------------------------------------------
Blair County, Gen. Oblg., 5.75%, 2006 100 110
----------------------------------------------------------------------------------------
Bucks County, Community College Auth., Rev., 5.50%, 2017 100 104
----------------------------------------------------------------------------------------
Cambria County, Gen. Oblg., 5.35%, 2010 100 107
----------------------------------------------------------------------------------------
Columbia County, Industrial Dev. Auth., First Street
Association Proj., Rev., 9.00%, 2014 65 73
----------------------------------------------------------------------------------------
Cornwall & Lebanon School District, Rev., 5.85%, 2009 15 16
----------------------------------------------------------------------------------------
Delaware Valley Regional Finance Auth., Rev., 7.75%, 2027 75 106
----------------------------------------------------------------------------------------
Downingtown Area School District, Gen. Oblg., 5.375%, 2009 100 107
----------------------------------------------------------------------------------------
General McLane School District, Gen. Oblg., 5.65%, 2011 70 75
----------------------------------------------------------------------------------------
Harrisburg, Gen. Oblg., zero coupon, 2009 150 88
----------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hazleton, Health Services Auth., Gen. Hospital 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 100 104
--------------------------------------------------------------------------------------
Lackawanna County, Gen. Oblg., 6.00%, 2011 15 16
--------------------------------------------------------------------------------------
Lancaster County, Solid Waste Management, Rev., 5.25%, 2008 125 132
--------------------------------------------------------------------------------------
Lehigh County:
Gen. Oblg., 5.00%, 2006 70 73
Good Shepherd Rehabilitation Hospital, Rev., 5.20%, 2012 50 51
--------------------------------------------------------------------------------------
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 115 120
--------------------------------------------------------------------------------------
Media Boro, Gen. Oblg., 6.45%, 2012 40 47
--------------------------------------------------------------------------------------
Monroeville Hospital Auth., Forbes Health System, Rev.,
5.75% and 6.25%, 2005 and 2015 150 161
--------------------------------------------------------------------------------------
Moon Area School District, Gen. Oblg., zero coupon, 2012 230 112
--------------------------------------------------------------------------------------
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 125 137
--------------------------------------------------------------------------------------
North Penn School District, Gen. Oblg., 5.10%, 2010 65 67
--------------------------------------------------------------------------------------
Philadelphia:
Airport System, Rev., 5.75%, 2008 100 108
Gas Works Rev., 5.10% and 6.375%, 2004 and 2014 115 123
Municipal Auth., Rev., 6.80% and 6.125%, 2002 and 2008 110 118
School District, Gen. Oblg., 6.25%, 2005 and 2009 110 126
Water and Wastewater Rev., 6.25% and 5.50%, 2012 and 2014 150 162
--------------------------------------------------------------------------------------
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 125 136
--------------------------------------------------------------------------------------
South Fork Municipal Auth., Rev., 5.25%, 2011 150 156
--------------------------------------------------------------------------------------
Suburban Lancaster Sewer Auth., Rev., 5.80%, 2010 100 108
--------------------------------------------------------------------------------------
Trafford School District, Gen. Oblg., 5.00%, 2008 150 156
--------------------------------------------------------------------------------------
Twin Valley School District, Gen. Oblg., 5.875%, 2012 20 20
--------------------------------------------------------------------------------------
University Area Joint Auth., Sewer Rev., 5.25%, 2014 50 53
--------------------------------------------------------------------------------------
University of Pittsburgh, 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 72
--------------------------------------------------------------------------------------
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 115 135
Ports Auth., American Airlines, Inc. Proj., Rev., 6.25%,
2026 40 44
--------------------------------------------------------------------------------------
Virgin Islands Public Finance Auth., Matching Fund Loan,
Rev., 7.25%, 2018 100 112
--------------------------------------------------------------------------------------
TOTAL OTHER MUNICIPAL OBLIGATIONS--86.1% 5,902
--------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--92.4%
(Cost: $5,962) 6,331
--------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------
ISSUER PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET Yield--3.60% to 3.65%
INSTRUMENTS Due--March 1998
- --7.3% ---------------------------------------------------------------------------------------
Delaware County, Industrial Dev. Auth., Pollution Control
Rev. $ 300 $ 300
---------------------------------------------------------------------------------------
Lehigh County, Gen Oblg. 200 200
---------------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--7.3%
(Cost: $500) 500
---------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.7%
(Cost: $6,462) 6,831
---------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.3% 22
---------------------------------------------------------------------------------------
NET ASSETS--100% $6,853
---------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $6,462,000 for federal income tax purposes
at February 28, 1998, the gross and net unrealized appreciation on investments
was $369,000.
See accompanying Notes to Financial Statements.
23
<PAGE> 24
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 3, 1997, a special shareholders' meeting was held and adjourned as
necessary. Kemper State Tax-Free Income Series Fund shareholders were asked to
vote on five separate issues: election of the nine members to the Board of
Trustees, ratification of Ernst & Young LLP as independent auditors, approval of
new investment management agreement with Scudder Kemper Investments, Inc.,
approval of changes in the funds' fundamental investment policies to permit a
master/feeder fund structure and approval of a new rule 12b-1 distribution plan
with Zurich Kemper Distributors, Inc. for Class B shares and Class C shares. The
following are the results for each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 119,248,795 2,108,979
Lewis A. Burnham 119,311,562 2,046,211
Donald L. Dunaway 119,304,528 2,053,245
Robert B. Hoffman 119,334,394 2,023,379
Donald R. Jones 119,298,645 2,059,128
Shirley D. Peterson 119,239,486 2,118,287
Daniel Pierce 119,315,862 2,041,911
William P. Sommers 119,329,837 2,027,937
Edmond D. Villani 119,280,576 2,077,197
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
117,579,199 738,097 3,040,476
</TABLE>
3) Approval of new investment management agreement with Scudder Kemper
Investments, Inc.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
Florida 6,611,545 120,351 139,090 806,089
New Jersey 324,164 0 1,885 36,942
New York 17,137,463 254,004 1,106,984 2,563,311
Pennsylvania 442,147 19,766 4,464 51,771
</TABLE>
4) Approval of changes in the funds' fundamental investment policies to permit a
master/feeder fund structure.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
Florida 5,393,015 452,928 218,954 806,089
New Jersey 278,972 9,965 169 36,942
New York 14,404,558 408,230 1,122,352 2,563,311
Pennsylvania 382,751 27,391 4,464 51,771
</TABLE>
5) To approve a new rule 12b-1 distribution plan with Zurich Kemper
Distributors, Inc.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
Florida
Class B 225,907 0 10,479 52,654
Class C 46,249 0 0 1,295
New Jersey
Class B 180,565 9,314 91 0
Class C 16,085 0 0 2,531
New York
Class B 442,667 20,751 26,818 63,454
Class C 152,199 0 5,067 56,694
Pennsylvania
Class B 189,295 27,260 0 2,163
Class C 67,329 0 0 0
</TABLE>
24
<PAGE> 25
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1998 (unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY NEW YORK PENNSYLVANIA
- ------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments, at value (Cost: $96,073, $5,514,
$269,516 and $6,462, respectively) $102,987 5,833 287,153 6,831
- ------------------------------------------------------------------------------------------------------
Cash -- 86 88 83
- ------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 49 -- 79 --
- ------------------------------------------------------------------------------------------------------
Investments sold 9 -- 10 --
- ------------------------------------------------------------------------------------------------------
Interest 1,573 76 3,268 91
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS 104,618 5,995 290,598 7,005
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------------------------------------
Cash overdraft 5 -- -- --
- ------------------------------------------------------------------------------------------------------
Payable for:
Dividends 86 4 236 6
- ------------------------------------------------------------------------------------------------------
Fund shares redeemed 5 -- 171 --
- ------------------------------------------------------------------------------------------------------
Investments purchased -- 104 5,640 132
- ------------------------------------------------------------------------------------------------------
Management fee 48 3 130 3
- ------------------------------------------------------------------------------------------------------
Administrative services fee 16 1 44 --
- ------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related
expenses 6 1 23 2
- ------------------------------------------------------------------------------------------------------
Distribution services fee 4 3 9 6
- ------------------------------------------------------------------------------------------------------
Trustees' fees and other 1 4 69 3
- ------------------------------------------------------------------------------------------------------
Total liabilities 171 120 6,322 152
- ------------------------------------------------------------------------------------------------------
NET ASSETS $104,447 5,875 284,276 6,853
- ------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------------------------------------
Paid-in capital $ 97,321 5,593 266,109 6,486
- ------------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments 212 (37) 530 (2)
- ------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 6,914 319 17,637 369
- ------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $104,447 5,875 284,276 6,853
- ------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $ 98,278 1,834 269,955 2,707
- ------------------------------------------------------------------------------------------------------
Shares outstanding 9,347 178 24,530 255
- ------------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets divided by shares outstanding) $10.51 10.31 11.01 10.63
- ------------------------------------------------------------------------------------------------------
Maximum offering price per share (net asset value,
plus 4.71% of net asset value or 4.50% of offering
price) $11.01 10.80 11.53 11.13
- ------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $ 5,557 3,824 11,218 3,142
- ------------------------------------------------------------------------------------------------------
Shares outstanding 529 370 1,019 296
- ------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per
share (net assets divided by shares outstanding) $10.50 10.33 11.01 10.62
- ------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $ 612 217 3,103 1,004
- ------------------------------------------------------------------------------------------------------
Shares outstanding 59 21 282 94
- ------------------------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per
share (net assets divided by shares outstanding) $10.50 10.35 11.00 10.63
- ------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended February 28, 1998 (unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY NEW YORK PENNSYLVANIA
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $2,844 141 8,026 168
- -------------------------------------------------------------------------------------------------------------
Expenses:
Management fee 287 15 781 18
- -------------------------------------------------------------------------------------------------------------
Administrative services fee 96 5 262 6
- -------------------------------------------------------------------------------------------------------------
Distribution services fee 21 13 52 15
- -------------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related
expenses 26 2 75 3
- -------------------------------------------------------------------------------------------------------------
Professional fees -- 1 2 1
- -------------------------------------------------------------------------------------------------------------
Reports to shareholders 1 1 34 1
- -------------------------------------------------------------------------------------------------------------
Trustees' fees and other 1 3 29 5
- -------------------------------------------------------------------------------------------------------------
Total expenses before expense waiver 432 40 1,235 49
- -------------------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment
manager -- -- -- 2
- -------------------------------------------------------------------------------------------------------------
Total expenses after expense waiver 432 40 1,235 47
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,412 101 6,791 121
- -------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------------
Net realized gain on sale of investments
(including options purchased) 1,115 24 3,167 29
- -------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from futures
transactions 2 (2) 71 --
- -------------------------------------------------------------------------------------------------------------
Net realized gain 1,117 22 3,238 29
- -------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on
investments 1,252 120 3,313 164
- -------------------------------------------------------------------------------------------------------------
Net gain on investments 2,369 142 6,551 193
- -------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $4,781 243 13,342 314
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
26
<PAGE> 27
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
Six months ended February 28, 1998 (unaudited) and year ended August 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY
------------------------ -------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $ 2,412 5,213 101 173
- ---------------------------------------------------------------------------------------------------------------
Net realized gain 1,117 1,672 22 2
- ---------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 1,252 1,668 120 150
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,781 8,553 243 325
- ---------------------------------------------------------------------------------------------------------------
Distribution from net investment income (2,412) (5,213) (101) (173)
- ---------------------------------------------------------------------------------------------------------------
Distribution from net realized gain (1,420) (1,208) (47) (25)
- ---------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (3,832) (6,421) (148) (198)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (347) (6,392) 476 1,195
- ---------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 602 (4,260) 571 1,322
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 103,845 108,105 5,304 3,982
- ---------------------------------------------------------------------------------------------------------------
END OF PERIOD $104,447 103,845 5,875 5,304
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NEW YORK PENNSYLVANIA
------------------------ -------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $ 6,791 15,054 121 208
- ---------------------------------------------------------------------------------------------------------------
Net realized gain 3,238 5,594 29 58
- ---------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 3,313 4,097 164 170
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 13,342 24,745 314 436
- ---------------------------------------------------------------------------------------------------------------
Distribution from net investment income (6,791) (15,054) (121) (208)
- ---------------------------------------------------------------------------------------------------------------
Distribution from net realized gain (4,612) (2,349) (57) --
- ---------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (11,403) (17,403) (178) (208)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share
transactions (3,597) (23,754) 413 1,627
- ---------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,658) (16,412) 549 1,855
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 285,934 302,346 6,304 4,449
- ---------------------------------------------------------------------------------------------------------------
END OF PERIOD $284,276 285,934 6,853 6,304
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 28
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 (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes premium and original
discount amortization on fixed income securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated among the Funds in
proportion to their relative net assets.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
FEDERAL INCOME TAXES. Each Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended February 28, 1998.
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 INVESTMENT MANAGER COMBINATION. Effective December
31, 1997, Zurich Insurance Company, the parent of
Zurich Kemper Investments, Inc. (ZKI), acquired a
majority interest in Scudder, Stevens & Clark, Inc.
(Scudder), another major investment manager. As a
result of this transaction, the operations of ZKI
were combined with Scudder to form a new global
investment organization named Scudder Kemper
Investments, Inc. (Scudder Kemper). The transaction
resulted in the termination of the Funds'
investment management agreement with ZKI, however,
a new investment management agreement between the
Funds and Scudder Kemper was approved by the Funds'
Board of Trustees and by the Funds' shareholders.
The new management agreement, which was effective
December 31, 1997, is the same in all material
respects as the previous management agreement,
except that Scudder Kemper is the new investment
adviser to the Funds. In addition, the names of the
Funds' principal underwriter and shareholder
service agent were changed to Kemper Distributors,
Inc. (KDI) and Kemper Service Company (KSvC),
respectively.
MANAGEMENT AGREEMENT. Under the Funds' management
agreement each Fund pays a management fee at an
annual rate of .55% of the first $250 million of
average daily net assets declining to .40% of
average daily net assets in excess of $12.5
billion. Management fees incurred for the six
months ended February 28, 1998 are as follows:
<TABLE>
<S> <C> <C>
Florida $287,000
New Jersey 15,000
New York 781,000
Pennsylvania 18,000
</TABLE>
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Trust has an underwriting and
distribution services agreement with KDI.
Underwriting commissions paid in connection with
the distribution of each Fund's Class A shares for
the six months ended February 28, 1998 are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY KDI BY KDI TO FIRMS
--------------- -------------------
<S> <C> <C>
Florida $22,000 46,000
New Jersey -- 1,000
New York 17,000 92,000
Pennsylvania -- 3,000
</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 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
29
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
redemptions of Class B and Class C shares.
Distribution fees, CDSC and commissions related to
Class B and Class C shares for the six months ended
February 28, 1998 are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION
FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY KDI PAID BY KDI TO FIRMS
--------------- --------------------
<S> <C> <C>
Florida $22,000 25,000
New Jersey 17,000 28,000
New York 59,000 57,000
Pennsylvania 17,000 29,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, each Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
arrangements with financial services firms that
provide these services and pays these firms based
on assets of Fund accounts the firms service.
Administrative services fees (ASF) paid for the six
months ended February 28, 1998 are as follows:
<TABLE>
<CAPTION>
ASF PAID BY THE ASF PAID BY KDI
FUND TO KDI TO ALL FIRMS
--------------- ---------------
<S> <C> <C>
Florida $ 96,000 94,000
New Jersey 5,000 8,000
New York 262,000 264,000
Pennsylvania 6,000 8,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds' transfer agent,
KSvC is the shareholder service agent of the Trust.
Under the agreement, for the six months ended
February 28, 1998, KSvC received shareholder
services fees as follows:
<TABLE>
<S> <C>
Florida $ 22,000
New Jersey 2,000
New York 71,000
Pennsylvania 2,000
</TABLE>
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of
Scudder Kemper. For the six months ended February
28, 1998, the Funds made no payments to their
officers and incurred trustees' fees aggregating
$4,000 to independent trustees.
OPERATING EXPENSE WAIVER. Scudder Kemper agreed to
waive certain operating expenses of the
Pennsylvania Fund beginning in December 1996. Under
this arrangement, Scudder Kemper waived expenses of
$2,000 for the six months ended February 28, 1998.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended February 28, 1998,
investment transactions (excluding short-term
instruments) are as follows (in thousands):
<TABLE>
<CAPTION>
FLORIDA NEW JERSEY NEW YORK PENNSYLVANIA
------- ---------- -------- ------------
<S> <C> <C> <C> <C>
Purchases $31,746 1,407 121,721 1,961
Proceeds from sales 28,470 697 118,605 1,325
</TABLE>
30
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the Funds (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997
--------------------- ---------------------
FLORIDA SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
SHARES SOLD
-----------------------------------------------------------------------------
Class A 504 $ 5,358 926 $ 9,544
-----------------------------------------------------------------------------
Class B 192 2,023 254 2,612
-----------------------------------------------------------------------------
Class C 4 45 29 301
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-----------------------------------------------------------------------------
Class A 183 1,931 352 3,625
-----------------------------------------------------------------------------
Class B 8 79 8 89
-----------------------------------------------------------------------------
Class C 1 5 1 8
-----------------------------------------------------------------------------
SHARES REDEEMED
-----------------------------------------------------------------------------
Class A (850) (8,967) (2,062) (21,201)
-----------------------------------------------------------------------------
Class B (71) (810) (126) (1,295)
-----------------------------------------------------------------------------
Class C (1) (11) (7) (75)
-----------------------------------------------------------------------------
CONVERSION OF SHARES
-----------------------------------------------------------------------------
Class A 6 59 -- 5
-----------------------------------------------------------------------------
Class B (6) (59) -- (5)
-----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE
TRANSACTIONS $ (347) $ (6,392)
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997
------------------- -------------------
NEW JERSEY SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------
SHARES SOLD
-------------------------------------------------------------------------
Class A 8 $ 82 54 $ 547
-------------------------------------------------------------------------
Class B 71 738 70 704
-------------------------------------------------------------------------
Class C 1 11 19 187
-------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-------------------------------------------------------------------------
Class A 4 42 6 58
-------------------------------------------------------------------------
Class B 6 64 8 81
-------------------------------------------------------------------------
Class C 1 6 -- 4
-------------------------------------------------------------------------
SHARES REDEEMED
-------------------------------------------------------------------------
Class A (26) (274) (27) (272)
-------------------------------------------------------------------------
Class B (17) (177) (11) (110)
-------------------------------------------------------------------------
Class C (2) (16) -- (4)
-------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE
TRANSACTIONS $ 476 $1,195
-------------------------------------------------------------------------
</TABLE>
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997
--------------------- ---------------------
NEW YORK SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
-----------------------------------------------------------------------------
Class A 555 $ 6,002 1,425 $ 15,421
-----------------------------------------------------------------------------
Class B 116 1,271 356 3,837
-----------------------------------------------------------------------------
Class C 89 980 177 1,915
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-----------------------------------------------------------------------------
Class A 607 6,800 970 10,474
-----------------------------------------------------------------------------
Class B 23 254 28 300
-----------------------------------------------------------------------------
Class C 8 91 9 99
-----------------------------------------------------------------------------
SHARES REDEEMED
-----------------------------------------------------------------------------
Class A (1,595) (17,580) (5,038) (54,373)
-----------------------------------------------------------------------------
Class B (42) (459) (104) (1,122)
-----------------------------------------------------------------------------
Class C (87) (956) (28) (305)
-----------------------------------------------------------------------------
CONVERSION OF SHARES
-----------------------------------------------------------------------------
Class A 9 98 6 62
-----------------------------------------------------------------------------
Class B (9) (98) (6) (62)
-----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE
TRANSACTIONS $(3,597) $(23,754)
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997
------------------- -------------------
PENNSYLVANIA SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
-------------------------------------------------------------------------
Class A 16 $ 172 52 $ 526
-------------------------------------------------------------------------
Class B 43 457 139 1,426
-------------------------------------------------------------------------
Class C 1 15 39 402
-------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 5 51 7 71
-------------------------------------------------------------------------
Class B 5 50 5 50
-------------------------------------------------------------------------
Class C 2 20 2 20
-------------------------------------------------------------------------
SHARES REDEEMED
Class A (10) (100) (36) (371)
-------------------------------------------------------------------------
Class B (23) (252) (46) (466)
-------------------------------------------------------------------------
Class C -- -- (3) (31)
-------------------------------------------------------------------------
CONVERSION OF SHARES
Class A -- -- 1 8
-------------------------------------------------------------------------
Class B -- -- (1) (8)
-------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE
TRANSACTIONS $ 413 $1,627
-------------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------
CLASS A
-----------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, ---------------------------------
FLORIDA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.42 10.21 10.27 10.11 10.98
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .25 .51 .52 .53 .52
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .24 .33 .08 .30 (.52)
- --------------------------------------------------------------------------------------------------
Total from investment operations .49 .84 .60 .83 --
- --------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .25 .51 .52 .53 .52
- --------------------------------------------------------------------------------------------------
Distribution from net realized gain .15 .12 .14 .14 .35
- --------------------------------------------------------------------------------------------------
Total dividends .40 .63 .66 .67 .87
- --------------------------------------------------------------------------------------------------
Net asset value, end of period $10.51 10.42 10.21 10.27 10.11
- --------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.69% 8.37 5.83 8.62 (.11)
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------
Expenses .78% .83 .84 .80 .79
- --------------------------------------------------------------------------------------------------
Net investment income 4.66% 4.92 5.00 5.30 5.04
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------
CLASS B
------------------------------------------------
SIX MONTHS MAY 31
ENDED YEAR ENDED AUGUST 31, TO
FEBRUARY 28, --------------------- 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 .20 .42 .43 .44 .11
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .25 .33 .07 .30 (.03)
- --------------------------------------------------------------------------------------------------
Total from investment operations .45 .75 .50 .74 .08
- --------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .20 .42 .43 .44 .11
- --------------------------------------------------------------------------------------------------
Distribution from net realized gain .15 .12 .14 .14 --
- --------------------------------------------------------------------------------------------------
Total dividends .35 .54 .57 .58 .11
- --------------------------------------------------------------------------------------------------
Net asset value, end of period $10.50 10.40 10.19 10.26 10.10
- --------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.36% 7.48 4.84 7.67 .74
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------
Expenses 1.62% 1.65 1.68 1.65 1.70
- --------------------------------------------------------------------------------------------------
Net investment income 3.82% 4.10 4.16 4.45 4.28
- --------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 34
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------------
CLASS C
-----------------------------------------------------
SIX MONTHS MAY 31
ENDED YEAR ENDED AUGUST 31, TO AUGUST
FEBRUARY 28, --------------------- 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 .20 .42 .43 .45 .11
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .24 .33 .08 .30 (.03)
- ------------------------------------------------------------------------------------------------
Total from investment operations .44 .75 .51 .75 .08
- ------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .20 .42 .43 .45 .11
- ------------------------------------------------------------------------------------------------
Distribution from net realized gain .15 .12 .14 .14 --
- ------------------------------------------------------------------------------------------------
Total dividends .35 .54 .57 .59 .11
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $10.50 10.41 10.20 10.26 10.10
- ------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.26% 7.49 4.97 7.84 .75
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------
Expenses 1.62% 1.64 1.64 1.52 1.54
- ------------------------------------------------------------------------------------------------
Net investment income 3.82% 4.11 4.20 4.58 4.52
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
<CAPTION>
- ---------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, -----------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $104,447 103,845 108,105 117,292 124,721
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 59% 87 119 96 53
- ---------------------------------------------------------------------------------------------------
</TABLE>
NOTES FOR ALL FUNDS:
Total return does not reflect the effect of sales charges. Data for the period
ended February 28, 1998 is unaudited.
34
<PAGE> 35
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------
CLASS A
----------------------------------------------
SIX MONTHS YEAR ENDED MARCH 15
ENDED AUGUST 31, TO
FEBRUARY 28, ------------- AUGUST 31,
NEW JERSEY 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.12 9.85 9.75 9.50
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .21 .43 .43 .22
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain .28 .33 .10 .25
- -----------------------------------------------------------------------------------------
Total from investment operations .49 .76 .53 .47
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .21 .43 .43 .22
- -----------------------------------------------------------------------------------------
Distribution from net realized gain .09 .06 -- --
- -----------------------------------------------------------------------------------------
Total dividends .30 .49 .43 .22
- -----------------------------------------------------------------------------------------
Net asset value, end of period $10.31 10.12 9.85 9.75
- -----------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.90% 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 4.13% 4.28 4.41 4.99
- -----------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------
Expenses .96% 1.15 1.45 .94
- -----------------------------------------------------------------------------------------
Net investment income 4.13% 4.26 4.09 4.44
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------
CLASS B
---------------------------------------------
SIX MONTHS YEAR ENDED MARCH 15
ENDED AUGUST 31, TO
FEBRUARY 28, ------------ AUGUST 31,
1998 1997 1996 1995
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.15 9.88 9.77 9.50
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .17 .35 .36 .18
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain .27 .33 .11 .27
- ----------------------------------------------------------------------------------------
Total from investment operations .44 .68 .47 .45
- ----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .17 .35 .36 .18
- ----------------------------------------------------------------------------------------
Distribution from net realized gain .09 .06 -- --
- ----------------------------------------------------------------------------------------
Total dividends .26 .41 .36 .18
- ----------------------------------------------------------------------------------------
Net asset value, end of period $10.33 10.15 9.88 9.77
- ----------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.42% 7.02 4.80 4.69
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.72% 1.90 2.00 1.18
- ----------------------------------------------------------------------------------------
Net investment income 3.37% 3.51 3.54 4.20
- ----------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------
Expenses 1.72% 1.92 2.32 1.73
- ----------------------------------------------------------------------------------------
Net investment income 3.37% 3.49 3.22 3.65
- ----------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------
CLASS C
--------------------------------------------
SIX MONTHS YEAR ENDED MARCH 15
ENDED AUGUST 31, TO
FEBRUARY 28, ------------ AUGUST 31,
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.16 9.88 9.77 9.50
- ------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .17 .35 .36 .18
- ------------------------------------------------------------------------------------------
Net realized and unrealized gain .28 .34 .11 .27
- ------------------------------------------------------------------------------------------
Total from investment operations .45 .69 .47 .45
- ------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .17 .35 .36 .18
- ------------------------------------------------------------------------------------------
Distribution from net realized gain .09 .06 -- --
- ------------------------------------------------------------------------------------------
Total dividends .26 .41 .36 .18
- ------------------------------------------------------------------------------------------
Net asset value, end of period $10.35 10.16 9.88 9.77
- ------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.55% 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 3.36% 3.62 3.84 4.20
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.73% 1.81 2.02 1.73
- ------------------------------------------------------------------------------------------
Net investment income 3.36% 3.60 3.52 3.65
- ------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS MARCH 15
ENDED YEAR ENDED AUGUST 31, TO
FEBRUARY 28, --------------------- AUGUST 31,
1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at end of period (in thousands) $5,875 5,304 3,982 4,309
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 27% 65 128 68
- ---------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR NEW JERSEY FUND:
The investment manager 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, the investment manager agreed to
absorb certain operating expenses of the Fund. "Other ratios to average net
assets" are computed without this expense waiver or absorption.
36
<PAGE> 37
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------------
CLASS A
------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, ---------------------------------
NEW YORK 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.93 10.66 10.80 10.73 11.59
- -----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .26 .56 .56 .58 .58
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .26 .36 -- .20 (.60)
- -----------------------------------------------------------------------------------------------
Total from investment operations .52 .92 .56 .78 (.02)
- -----------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .26 .56 .56 .58 .58
- -----------------------------------------------------------------------------------------------
Distribution from net realized gain .18 .09 .14 .13 .26
- -----------------------------------------------------------------------------------------------
Total dividends .44 .65 .70 .71 .84
- -----------------------------------------------------------------------------------------------
Net asset value, end of period $11.01 10.93 10.66 10.80 10.73
- -----------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.89% 8.77 5.26 7.62 (.19)
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------------
Expenses .82% .83 .83 .81 .76
- -----------------------------------------------------------------------------------------------
Net investment income 4.79% 5.15 5.15 5.47 5.29
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------
CLASS B
-----------------------------------------------------
SIX MONTHS MAY 31
ENDED YEAR ENDED AUGUST 31, TO
FEBRUARY 28, --------------------- AUGUST 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.94 10.66 10.80 10.73 10.77
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .22 .47 .47 .48 .12
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .25 .37 -- .20 (.04)
- ----------------------------------------------------------------------------------------------------
Total from investment operations .47 .84 .47 .68 .08
- ----------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .22 .47 .47 .48 .12
- ----------------------------------------------------------------------------------------------------
Distribution from net realized gain .18 .09 .14 .13 --
- ----------------------------------------------------------------------------------------------------
Total dividends .40 .56 .61 .61 .12
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $11.01 10.94 10.66 10.80 10.73
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.35% 7.96 4.36 6.69 .75
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses 1.68% 1.67 1.69 1.67 1.68
- ----------------------------------------------------------------------------------------------------
Net investment income 3.93% 4.31 4.29 4.61 4.36
- ----------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------------
CLASS C
-----------------------------------------------------
SIX MONTHS MAY 31
ENDED YEAR ENDED AUGUST 31, TO
FEBRUARY 28, --------------------- AUGUST 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.92 10.65 10.79 10.73 10.77
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .22 .47 .47 .48 .12
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .26 .36 -- .19 (.04)
- ----------------------------------------------------------------------------------------------------
Total from investment operations .48 .83 .47 .67 .08
- ----------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .22 .47 .47 .48 .12
- ----------------------------------------------------------------------------------------------------
Distribution from net realized gain .18 .09 .14 .13 --
- ----------------------------------------------------------------------------------------------------
Total dividends .40 .56 .61 .61 .12
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $11.00 10.92 10.65 10.79 10.73
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.46% 7.87 4.38 6.64 .70
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses 1.66% 1.65 1.67 1.62 1.63
- ----------------------------------------------------------------------------------------------------
Net investment income 3.95% 4.33 4.31 4.66 4.68
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, ------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $284,276 285,934 302,346 319,477 342,839
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 81% 92 104 112 43
- ----------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------------
CLASS A
---------------------------------------------------
SIX MONTHS MARCH 15
ENDED YEAR ENDED AUGUST 31, TO
FEBRUARY 28, --------------------- 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 .22 .46 .44 .22
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain .31 .46 .14 .31
- -------------------------------------------------------------------------------------------------
Total from investment operations .53 .92 .58 .53
- -------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .22 .46 .44 .22
- -------------------------------------------------------------------------------------------------
Distribution from net realized gain .09 -- -- --
- -------------------------------------------------------------------------------------------------
Total dividends .31 .46 .44 .22
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $10.63 10.41 9.95 9.81
- -------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.04% 9.41 6.01 5.54
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund .97% .97 1.06 .46
- -------------------------------------------------------------------------------------------------
Net investment income 4.07% 4.48 4.33 4.93
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses .97% 1.12 1.39 1.01
- -------------------------------------------------------------------------------------------------
Net investment income 4.07% 4.33 4.00 4.38
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------
CLASS B
--------------------------------------------------
SIX MONTHS MARCH 15
ENDED YEAR ENDED AUGUST 31, TO
FEBRUARY 28, --------------------- AUGUST 31,
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.41 9.95 9.80 9.50
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .18 .38 .37 .18
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain .30 .46 .15 .30
- ------------------------------------------------------------------------------------------------
Total from investment operations .48 .84 .52 .48
- ------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .18 .38 .37 .18
- ------------------------------------------------------------------------------------------------
Distribution from net realized gain .09 -- -- --
- ------------------------------------------------------------------------------------------------
Total dividends .27 .38 .37 .18
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $10.62 10.41 9.95 9.80
- ------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.62% 8.58 5.29 5.05
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.72% 1.73 1.83 1.24
- ------------------------------------------------------------------------------------------------
Net investment income 3.32% 3.72 3.56 4.15
- ------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------
Expenses 1.81% 1.93 2.16 1.79
- ------------------------------------------------------------------------------------------------
Net investment income 3.23% 3.52 3.23 3.60
- ------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------
CLASS C
-------------------------------------------------
SIX MONTHS MARCH 15
ENDED YEAR ENDED AUGUST 31, TO
FEBRUARY 28, --------------------- AUGUST 31,
1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.41 9.95 9.81 9.50
- -----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .18 .38 .37 .19
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain .31 .46 .14 .31
- -----------------------------------------------------------------------------------------------
Total from investment operations .49 .84 .51 .50
- -----------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .18 .38 .37 .19
- -----------------------------------------------------------------------------------------------
Distribution from net realized gain .09 -- -- --
- -----------------------------------------------------------------------------------------------
Total dividends .27 .38 .37 .19
- -----------------------------------------------------------------------------------------------
Net asset value, end of period $10.63 10.41 9.95 9.81
- -----------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.77% 8.60 5.19 5.18
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.70% 1.71 1.80 1.21
- -----------------------------------------------------------------------------------------------
Net investment income 3.34% 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 3.25% 3.49 3.26 3.63
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS MARCH 15
ENDED YEAR ENDED AUGUST 31, TO
FEBRUARY 28, --------------------- AUGUST 31,
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at end of period (in thousands) $6,853 6,304 4,449 2,118
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 44% 117 158 85
- ------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR PENNSYLVANIA FUND:
The investment manager 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, the investment manager 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
NOTES
41
<PAGE> 42
NOTES
42
<PAGE> 43
NOTES
43
<PAGE> 44
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY KATHRYN L. QUIRK
Chairman and Trustee President Vice President
DAVID W. BELIN PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President, Vice President
Secretary and Treasurer
LEWIS A. BURNHAM JOHN R. HEBBLE
Trustee ELEANOR R. BRENNAN Assistant Treasurer
Vice President
DONALD L. DUNAWAY MAUREEN E. KANE
Trustee PHILIP G. CONDON Assistant Secretary
Vice President
ROBERT B. HOFFMAN CAROLINE PEARSON
Trustee JERALD K. HARTMAN Assistant Secretary
Vice President
DONALD R. JONES ELIZABETH C. WERTH
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
SHIRLEY D. PETERSON
Trustee ANN M. MCCREARY
Vice President
WILLIAM P. SOMMERS
Trustee CHRISTOPHER J. MIER
Vice President
EDMOND D. VILLANI
Trustee ROBERT C. PECK, JR.
Vice President
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER
- --------------------------------------------------------------------------------
SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania
Kansas City, MO 64105
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Tax-Free Income Funds prospectus.
KSTIS - 3 (4/98) 1045800
