<PAGE> 1
Kemper Income and Capital
Preservation Fund
Semiannual Report to Shareholders
For the Period Ended
April 30, 1995
Offering investors the opportunity
for a high level of current income
and preservation of capital
(LOGO)
<PAGE> 2
KEMPER FIXED INCOME FUNDS
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 1, 1994
Kemper Adjustable Rate U.S. Government Fund
Kemper Diversified Income Fund
Kemper U.S. Government Securities Fund
Kemper High Yield Fund
Kemper Income and Capital Preservation Fund
Kemper Portfolios comprised of the following three series:
Kemper Cash Reserves Fund
Kemper U.S. Mortgage Fund
Kemper Short-Intermediate Government Fund
-------------------------
Kemper Corporation, the parent of Kemper Financial Services, Inc. ("KFS,"
the investment manager for the Funds), has entered into an agreement in
principle with an investor group led by Zurich Insurance Company ("Zurich")
pursuant to which Kemper Corporation would be acquired by the investor group in
a merger transaction. As part of the transaction, Zurich or an affiliate would
purchase KFS.
A definitive agreement is expected in early May 1995, subject to the
completion of the investor group's due diligence. Consummation of the
transaction is subject to a number of contingencies, including approval by the
board and stockholders of Kemper Corporation and the Zurich board and regulatory
approvals. Because the transaction would constitute an assignment of the Funds'
investment management agreements with KFS and, where applicable, Rule 12b-1
agreements under the Investment Company Act of 1940, and therefore a termination
of such agreements, the transaction is subject also to approval of new
agreements by Kemper Fund boards and shareholders. If the contingencies are
timely met, the transaction is expected to close early in the fourth quarter of
1995.
After consummation of the transaction, it is anticipated that the KFS
management team and the Kemper Fund portfolio managers would remain in place and
that the Kemper Funds would be operated in the same manner as they are
currently.
Also, Paul F. Sloan has been named the portfolio manager of Kemper U.S.
Government Securities Fund and Kemper U.S. Mortgage Fund and portfolio
co-manager of Kemper Short-Intermediate Government Fund and Kemper Adjustable
Rate U.S. Government Fund replacing J. Patrick Beimford, Jr. Mr. Beimford
continues as Director of Fixed Income Investments at KFS. Prior to joining KFS,
Mr. Sloan was the director of institutional portfolio management at an
investment management company and prior thereto he was a vice president and
investment officer for a regional bank. He received a B.A. in English Literature
from the University of Detroit, Detroit, Michigan, and an M.B.A. in Finance and
Business Economics from Wayne State University, Detroit, Michigan.
In addition, Kemper Diversified Income Fund is now managed by a team of
portfolio managers who are specialists in the basic sectors in which it invests.
Messrs. Robert S. Cessine, Gordon K. Johns, Michael A. McNamara, Harry E. Resis,
Jr., Paul F. Sloan and Jonathan W. Trutter are the members of the team. Mr.
Cessine is senior vice president and director of investment grade corporate and
sovereign bond research at KFS. Prior to joining KFS in January 1993, he was a
senior corporate bond analyst and chairman of the bond selection committee at an
investment management company. He received a masters degree in Finance from the
University of Wisconsin, Madison, Wisconsin, a masters degree in Agricultural
Economics from the University of Maryland, Baltimore/College Park, Maryland, and
a B.S. in Economics from the University of Wisconsin, Madison, Wisconsin. Mr.
Cessine is a Chartered Financial Analyst. Mr. Johns joined Kemper in 1988 and
currently is executive vice president of KFS and managing director of Kemper
Investment Management Company Limited in London. Previously, he was head of
international fixed income fund management at an investment bank in London. He
received a B.A. in law from Balliol College in Oxford, United Kingdom. Mr.
McNamara joined KFS in February 1972 and is currently a senior vice president of
KFS. He received a B.S. in Business Administration from the University of
Missouri, St. Louis, Missouri, and an M.B.A. in Finance from Loyola University,
Chicago, Illinois. Mr. Resis joined KFS in June 1988 and is currently a senior
vice president of KFS. He received a B.A. in Finance from Michigan State
University, East Lansing, Michigan. Mr. Sloan's background is discussed above.
Mr. Trutter is a first vice president of KFS. Before joining KFS in April 1989,
he was a vice president in commercial banking. Mr. Trutter has an A.B. with dual
majors in East Asian Languages and International Relations from University of
Southern California, Los Angeles and an M.B.A. from Kellogg Graduate School of
Management at Northwestern University, Evanston, Illinois. He is also a
Certified Public Accountant.
Separately, effective February 1, 1995, KFS transferred all its duties and
responsibilities as principal underwriter, distributor and administrator of the
Funds to Kemper Distributors, Inc., a wholly-owned subsidiary of KFS. KFS
continues to provide investment management services. See "Investment Manager and
Underwriter" in the prospectus.
May 8, 1995
KFIF-1A 5/95
<PAGE> 3
DEAR SHAREHOLDER:
We are pleased to provide you with an overview of the performance of your fund
for the six-month period ended April 30, 1995. In addition, following the
economic overview is a question and answer interview with your fund's Portfolio
Manager.
- - --------------------------------------------
PERFORMANCE & DIVIDEND REVIEW
- - ----------------------------------------------------------
Total Return Performance*
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1995
(UNADJUSTED FOR ANY SALES CHARGE)
<TABLE>
<S> <C>
Kemper Income and Capital Preservation Fund A 7.23%
Kemper Income and Capital Preservation Fund B 6.73%
Kemper Income and Capital Preservation Fund C 6.75%
Lipper Corporate Debt A Rated Funds
Category Average** 6.72%
- - ----------------------------------------------------------
</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.
When comparing Kemper Income and Capital Preservation Fund A to other Corporate
Debt A Rated funds in its Lipper** category for the following time periods ended
April 30, 1995, this fund ranked:
<TABLE>
<S> <C> <C> <C>
1-YEAR 5-YEAR 10-YEAR 15-YEAR
12 of 104 12 of 48 10 of 24 11 of 18
</TABLE>
The following table shows dividend and yield information for Kemper Income and
Capital Preservation Fund as of April 30, 1995.
<TABLE>
<S> <C> <C> <C>
- - -----------------------------------------------------------------------
A Shares B Shares C Shares
--------- --------- ---------
April Dividend: $0.0515 $0.0448 $0.0449
Net Asset Value: $8.16 $8.15 $8.15
Annualized Distribution Rate+: 7.57% 6.60% 6.61%
SEC Yield+: 6.84% 6.19% 6.22%
- - -----------------------------------------------------------------------
</TABLE>
- - ---------------------------------------
GENERAL ECONOMIC OVERVIEW
Comfortable with the pace of economic growth and the level of interest rates,
investors enjoyed generally positive performance in both the fixed-income and
stock markets in the first five months of 1995. But as we enter the summer
months, we are seeing a decided weakening in the economy and heightened
uncertainty.
What effect has the recent economic growth had on price inflation? Have higher
interest rates slowed the economy so much that a recession is now a true
threat--and will the Federal Reserve Board now reverse itself and start to ease
rates? Of course, these are the questions that only time will answer. At Kemper,
we believe that economic growth in the second quarter will be flat or possibly
even negative. Such a scenario is more severe than the press-heralded "soft
landing" and could conceivably set the scene for lower interest rates. At this
point--before the release of second quarter data--we believe we have seen only
signs of a slowdown, not a recession. We think that the Fed is not likely to
alter direction quickly.
Against this backdrop, we believe that the opportunities for investors will be
concentrated in high quality investments. Companies can no longer count on the
economy to provide an above average earnings boost. Rather, stocks that have
proven themselves with a pattern of consistent earnings are likely to attract
investor support. Specifically, industries that produce more consistent
earnings, such as consumer nondurables, technology and selected capital goods
can be expected to do well. Picking the right sectors to invest in will be the
key challenge for equity investors during the next few quarters.
We look for the fixed-income markets to continue their strong performance as
they tend to do well during periods of slow growth and low inflation.
Leading international economies are lagging the U.S. economy. Japan and Germany,
whose economies typically follow U.S. growth, are not as robust as in past
cycles. This phenomenon makes international investing very complex currently.
Moreover, conditions in emerging market countries underline the importance of
careful research and experience in understanding how these markets work.
We are calm about what has been described as a dollar crisis. While it's true
that the dollar has depreciated against the Japanese yen and many European
currencies, we note that the dollar has appreciated in value against the
currency of Canada and Mexico, two of our largest trading partners.
Political leadership also has some bearing on the progress of the economy and
the state of the financial markets. In the months preceding a presidential
election year, it has not been uncommon for incumbents to attempt to stimulate
growth. Given our Republican Congress and Democratic President, however, we do
not consider this a foregone conclusion as we move closer to 1996.
1
<PAGE> 4
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including an interview with your fund's portfolio
manager. Thank you for your continued support. We appreciate the opportunity to
serve your investment needs.
Sincerely,
[SIG]
Stephen B. Timbers
Chief Investment and Executive Officer
June 13, 1995
<TABLE>
<S> <C>
Stephen Timbers is Chief Executive Officer and
is also Chief Investment Officer of Kemper
Financial Services, Inc. (KFS). KFS and its
[PHOTO] affiliates manage approximately $60 billion in
assets, including $42 billion in retail mutual
funds. Timbers is a graduate of Yale
University and holds an M.B.A. from Harvard
University.
</TABLE>
* Total return measures net investment income and capital gain or loss from
portfolio investments, assuming reinvestment of all dividends. During the
period noted, securities prices fluctuated. For additional information, see
the Prospectus and Statement of Additional Information and the Financial
Highlights at the end of this report.
**Lipper Analytical Services, Inc. performance 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. Performance and rankings are historical and do not reflect future
performance.
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on April 30, 1995. 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 April 30, 1995 shown as an annualized percentage of the maximum
offering price on that date.
2
<PAGE> 5
Q&A
AN INTERVIEW
WITH PORTFOLIO
MANAGER
ROBERT CESSINE
Robert Cessine joined Kemper Financial Services, Inc. (KFS) in 1993
and is now a Senior Vice President of KFS and the Portfolio Manager of
[PHOTO] Kemper Income and Capital Preservation Fund. Mr. Cessine received both
his B.S. and M.B.A. degrees from the University of Wisconsin. He also
is a Chartered Financial Analyst.
Q: WHEN WE LAST SPOKE AT THE END OF OCTOBER, THE BOND MARKET WAS IN THE
MIDST OF A DIFFICULT YEAR. THAT SCENARIO SEEMS TO HAVE CHANGED IN
RECENT MONTHS.
A: Yes, the environment for bonds has actually been quite positive. Since
mid-November of last year, interest rates have trended lower, boosting all
sectors of the bond market. To give you an idea of the improvement, the Lehman
Brothers Aggregate Bond Index+, which is a broad measure of bond market
activity, fell 2.92% in 1994. For the first four months of 1995 the index
returned 6.51%, more than recovering last year's losses.
Q: WHAT'S BEHIND THIS DECLINE IN INTEREST RATES?
A: In late November, we began to see signs that the economy had slowed
from the very strong pace of earlier in 1994. As you may know, slower economic
growth is usually positive for bond prices because it implies that inflation,
which erodes the value of fixed payments, is less likely to rise. Throughout
the first quarter of 1995, economic data such as industrial production, retail
sales, employment and consumer confidence continued to be weak. Since these
suggested slower economic growth, yields declined and bond prices rallied.
Q: THE FUND PRIMARILY INVESTS IN INVESTMENT-GRADE CORPORATE BONDS AND
U.S. GOVERNMENT SECURITIES. HOW DID THESE SECTORS PERFORM FOR THE PAST
SIX MONTHS?
A: The corporate market performed exceptionally well versus Treasuries
and advanced 8.42% according to the Lehman Brothers Corporate Bond Index++.
Mortgages followed, advancing 7.25% according to the Lehman Brothers
Mortgage-Backed Index+++. Treasuries rose 6.48% according to the Lehman Brothers
Treasury Index++++. Both corporate bonds and mortgage-backed securities
outperformed Treasuries over the six-month period. These sectors benefited
from greater investor demand relative to the supply, because of their higher
yields.
Q: HOW DOES THIS COMPARE TO YOUR POSITIONING IN THESE SECTORS?
A: Because of our cautious outlook, we chose to lower the fund's
weightings in long-term corporates, which tend to be more vulnerable to price
declines if interest rates rise or if the demand for corporates diminishes. For
example, on December 31, 1994, the fund's weighting in long-term corporates was
54%, down from 62% at the end of October.
In January, our outlook improved. We saw better relative value in corporates,
particularly those of BBB quality, and in mortgages, which we thought offered
attractive yields relative to Treasuries. We gradually increased our position
in both of these sectors so that in April, we held a 63% position in corporates
and 12% in mortgages.
All things considered, then, our sector allocation was fairly well-timed.
Long-term securities advanced in December, so our cautious positioning hurt us
somewhat. But, our solid weighting in long-term, BBB quality corporates and
mortgages for the remainder of the period served us well, since these were
among the best performing sectors of the bond market.
3
<PAGE> 6
Q: WAS SHIFTING FROM SHORT-TERM TO LONGER-TERM SECURITIES ALSO PART OF
YOUR STRATEGY?
A: Yes, definitely. Our purchase of longer-term Treasuries in the early
months of 1995 boosted the fund's duration from 4.7 years at year-end, to 5.6
years at the end of April. Remember that duration is essentially a weighted
average term to maturity, where cash flows are expressed in terms of their
current values. The longer a portfolio's duration, the more its price can be
expected to fluctuate in response to changes in interest rates. So, by
increasing duration we were able to give the fund more exposure to the bond
market rally.
Q: WERE THERE ANY SECTORS OR NAMES WITHIN THE CORPORATE SECTOR THAT
PERFORMED PARTICULARLY WELL?
A: The airlines, media, cable, paper and forest and chemicals and
processing sectors all did well because of continued economic growth. Specific
names in the fund also benefited from what we call "spread contraction." This
occurs when a corporate bond appreciates in price, so that its yield exceeds
Treasuries by a smaller amount. For example, Westinghouse Electric rallied with
expectations of continued reductions in their debt. News American Holdings and
Black and Decker benefited from predictions that their credit ratings would be
upgraded. RJR Nabisco and Phillip Morris gained when it became apparent that the
risk related to a breakup of these companies would not impair their bond
prices.
Q: THE FUND'S CLASS A SHARES ROSE 7.23% IN THE SIX-MONTH PERIOD, WHEREAS
THE AVERAGE RETURN OF ITS LIPPER PEER GROUP WAS 6.72%.* TO WHAT DO YOU
ATTRIBUTE THIS GOOD PERFORMANCE?
A: As I mentioned earlier, we benefited from a heavy weighting in the
corporate sector, sufficient exposure to falling interest rates, and choosing
the right corporate issues with the experience of our credit research team. Our
good performance was really the result of all of these.
Q: WHAT IS YOUR OUTLOOK FOR THE HIGH-GRADE BOND MARKET?
A: We continue to be cautiously optimistic. Moderate economic growth
should continue to benefit corporate bond issuers, while favorable levels of
supply and demand are expected to continue. We think that issue selection will
continue to be important to attain strong performance.
PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
April 30, 1995 December 31, 1994 October 31, 1994
-------------- ----------------- ----------------
<S> <C> <C> <C>
MORTGAGE-BACKED 12% 6% 6%
TREASURY BONDS AND NOTES 13 13 12
(with maturities of
at least 1 year)
FOREIGN GOVERNMENTS 3 1 2
CORPORATE BONDS 63 54 62
CASH AND EQUIVALENTS 9 26 18
DURATION 5.6 years 4.7 years 5.0 years
</TABLE>
+ The Lehman Brothers Aggregate Bond Index is an unmanaged index
generally representative of intermediate-term government bonds,
investment grade corporate debt securities and mortgage-backed
securities. Source is Bloomberg.
++ The Lehman Corporate Bond Index is an unmanaged index including all
publicly issued, fixed-rate, nonconvertible investment grade domestic
corporate debt. Source is Bloomberg.
+++ Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index
that covers all fixed-rate securities backed by mortgage pools of the
Government National Mortgage Association (GNMA), Federal Home Loan
Mortgage Corporation (FHLMC) and Federal National Mortgage Association
(FNMA). Source is Bloomberg.
++++ Lehman Brothers Treasury Index is an unmanaged index that includes all
public obligations of the U.S. Treasury excluding flower bonds and
foreign-targeted issues. Source is Bloomberg.
* Lipper Analytical Services, Inc. performance is based upon changes in
net asset value with all dividends reinvested and does not include the
effect of sales charges and, if it had, results may have been less
favorable. Performance is historical and does not reflect future
performance.
4
<PAGE> 7
PORTFOLIO OF INVESTMENTS April 30, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- --------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION CERTIFICATES-11.9%
- - ------------------------------------------------------------
7.50%, 2023 and 2024 $33,037 $ 32,222
- - ------------------------------------------------------------
8.50%, 2024 29,332 29,910
- - ------------------------------------------------------------
62,132
U.S. TREASURY SECURITIES-18.7%
- - ------------------------------------------------------------
9.375%, 1996 30,000 30,867
- - ------------------------------------------------------------
8.50%, 2000 27,100 28,971
- - ------------------------------------------------------------
8.00%, 2001 20,000 21,047
- - ------------------------------------------------------------
10.375%, 2012 5,500 6,850
- - ------------------------------------------------------------
7.625%, 2025 10,000 10,342
- - ------------------------------------------------------------
98,077
TOTAL U.S. GOVERNMENT OBLIGATIONS-30.6%
(Cost: $162,196) 160,209
- - ------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS
- - ------------------------------------------------------------
Province of Manitoba, 7.75%, 2016 5,000 5,025
- - ------------------------------------------------------------
Province of Nova Scotia, 8.25%, 2019 4,000 4,177
- - ------------------------------------------------------------
Republic of Finland, 7.875%, 2004 5,000 5,122
- - ------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT
OBLIGATIONS-2.7%
(Cost: $14,765) 14,324
- - ------------------------------------------------------------
CORPORATE OBLIGATIONS
COMMUNICATIONS, MEDIA AND ELECTRONICS-6.0%
- - ------------------------------------------------------------
Continental Cablevision, Inc.,
9.50%, 2013 3,685 3,657
- - ------------------------------------------------------------
News American Holdings, Inc., 8.5%,
2005 7,500 7,688
- - ------------------------------------------------------------
Rogers Cablesystems Limited, 10.00%,
2005 3,500 3,553
- - ------------------------------------------------------------
Tele-Communications, Inc.
9.80%, 2012 4,350 4,509
8.75%, 2023 3,100 2,844
- - ------------------------------------------------------------
Time Warner Entertainment Company,
L.P., 8.375%, 2033 5,000 4,523
- - ------------------------------------------------------------
Viacom International Inc., 8.00%, 2006 5,000 4,613
- - ------------------------------------------------------------
31,387
CONSUMER PRODUCTS, RETAILING AND SERVICES-9.4%
- - ------------------------------------------------------------
Black & Decker, Corp., 7.50%, 2003 5,000 4,844
- - ------------------------------------------------------------
Federated Department Stores, 10.00%,
2001 5,000 5,300
- - ------------------------------------------------------------
Grand Metropolitan Investment Corp.,
7.45%, 2035 5,000 5,005
- - ------------------------------------------------------------
The Hertz Corporation, 7.00%, 2003 5,000 4,752
- - ------------------------------------------------------------
Philip Morris Companies Inc., 7.25%,
2003 $ 4,000 $ 3,869
- - ------------------------------------------------------------
Philips Electronics N.V., 8.375%, 2006 7,000 7,304
- - ------------------------------------------------------------
RJR Nabisco, Inc., 8.75%, 2005 7,500 7,347
- - ------------------------------------------------------------
Singer N.V., 7.00%, 2003 5,000 4,427
- - ------------------------------------------------------------
Vons Co., 9.625%, 2002 6,000 6,270
- - ------------------------------------------------------------
49,118
DRUGS AND HEALTH CARE-1.0%
- - ------------------------------------------------------------
Columbia Healthcare, 8.36%, 2024 5,000 4,994
- - ------------------------------------------------------------
FINANCIAL SERVICES-24.0%
- - ------------------------------------------------------------
Abbey National First Capital, 8.20%,
2004 5,000 5,165
- - ------------------------------------------------------------
ABN-Amro Holding N.V., 8.25%, 2009 7,000 7,104
- - ------------------------------------------------------------
Aegon N.V., 8.00%, 2006 5,000 5,069
- - ------------------------------------------------------------
African Development Bank, 9.30%, 2000 4,000 4,327
- - ------------------------------------------------------------
Ameritech Capital Funding Corporation,
7.50%, 2005 5,000 5,009
- - ------------------------------------------------------------
Aon Corporation, 6.70%, 2003 2,800 2,627
- - ------------------------------------------------------------
Associates Corporation, N.A., 8.25%,
1999 5,000 5,175
- - ------------------------------------------------------------
Capital One Bank
8.125%, 1998 3,500 3,559
8.125%, 2000 4,000 4,068
- - ------------------------------------------------------------
Crestar Financial Corporation, 8.75%,
2004 5,000 5,270
- - ------------------------------------------------------------
Dean Witter, Discover and Co.
6.875%, 2003 2,500 2,381
6.75%, 2013 2,500 2,127
- - ------------------------------------------------------------
First Fidelity Bancorporation, 9.625%,
1999 5,000 5,401
- - ------------------------------------------------------------
First USA Bank, 8.10%, 1997 7,500 7,610
- - ------------------------------------------------------------
Fleet Financial Group, Inc., 8.625%,
2007 5,000 5,234
- - ------------------------------------------------------------
General Electric Capital Corporation,
8.85%, 2005 4,150 4,511
- - ------------------------------------------------------------
Inter-American Development Bank,
7.125%, 2023 5,000 4,550
- - ------------------------------------------------------------
IBRD Japan, 14.90%, 1997 3,500 4,026
- - ------------------------------------------------------------
Kansallis Osake Pankki, 8.65%, 2050 5,000 5,036
- - ------------------------------------------------------------
Lehman Brothers Holdings, 8.375%, 1999 4,000 4,049
- - ------------------------------------------------------------
MBNA Corporation, 6.875%, 1999 5,000 4,873
- - ------------------------------------------------------------
NationsBank Corporation, 9.50%, 2004 3,150 3,489
- - ------------------------------------------------------------
Riggs National Corp., 8.50%, 2006 7,000 6,766
- - ------------------------------------------------------------
Standard Credit Card, 7.25%, 2008 5,000 4,835
- - ------------------------------------------------------------
Svenska Handelbanken, 8.35%, 2004 5,000 5,151
- - ------------------------------------------------------------
United States Leasing International,
Inc., 8.75%, 2001 3,000 3,177
- - ------------------------------------------------------------
Wells Fargo and Company, 8.75%, 2002 5,000 5,266
- - ------------------------------------------------------------
125,855
</TABLE>
5
<PAGE> 8
PORTFOLIO OF INVESTMENTS April 30, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- --------
<S> <C> <C>
MANUFACTURING AND CONSTRUCTION MATERIALS-5.8%
- - -------------------------------------------------------------
American Home Products, 7.90%, 2005 $ 7,500 $ 7,667
- - -------------------------------------------------------------
American Standard Inc.,
10.875%, 1999 3,000 3,173
- - -------------------------------------------------------------
CSR America, 6.875%, 2004 5,000 4,711
- - -------------------------------------------------------------
Grumman Corporation, 10.375%, 1999 5,000 5,108
- - -------------------------------------------------------------
Owens-Illinois, Inc., 11.00%, 2003 2,000 2,165
- - -------------------------------------------------------------
Westinghouse Electric Corporation
8.875%, 2001 5,500 5,695
8.625%, 2012 2,000 1,955
- - -------------------------------------------------------------
30,474
OIL, GAS AND PETROLEUM SERVICES-3.0%
- - -------------------------------------------------------------
Lyondell Petrochemical, 9.125%, 2002 5,000 5,281
- - -------------------------------------------------------------
Parker & Parsley Petroleum, 8.875%,
2005 5,000 5,065
- - -------------------------------------------------------------
USX Corporation, 9.625%, 2003 5,000 5,405
- - -------------------------------------------------------------
15,751
PAPER AND FOREST PRODUCTS-1.7%
- - -------------------------------------------------------------
Boise Cascade Company, 9.45%, 2009 5,000 5,370
- - -------------------------------------------------------------
James River Corporation, 9.25%, 2021 3,500 3,736
- - -------------------------------------------------------------
9,106
TRANSPORTATION-7.1%
- - -------------------------------------------------------------
Delta Airlines
9.32%, 2009 4,624 4,797
9.75%, 2021 3,000 3,101
- - -------------------------------------------------------------
Ford Motor Credit, 7.75%, 2005 5,000 5,004
- - -------------------------------------------------------------
General American Transportation Corp.,
10.29%, 1999 5,000 5,482
- - -------------------------------------------------------------
General Motors Acceptance Corporation,
8.875%, 2010 5,000 5,450
- - -------------------------------------------------------------
Penske Truck Leasing, 8.25%, 1999 $ 5,000 $ 5,118
- - -------------------------------------------------------------
United Airlines
10.67%, 2004 3,500 3,819
11.21%, 2014 4,000 4,504
- - -------------------------------------------------------------
37,275
UTILITIES-5.6%
- - -------------------------------------------------------------
Chesapeake and Potomic Telephone
Company of Virginia, 8.375%, 2029 5,000 5,427
- - -------------------------------------------------------------
Cincinnati Gas & Electric Company,
7.20%, 2003 5,000 4,442
- - -------------------------------------------------------------
Commonwealth Edison Company, 8.125%,
2007 5,000 4,863
- - -------------------------------------------------------------
Long Island Lighting Company, 7.125%,
2005 7,500 6,229
- - -------------------------------------------------------------
Niagra Mohawk Power Corporation,
8.00%, 2004 3,000 2,940
- - -------------------------------------------------------------
Texas Utilities Electric Company,
7.375%, 2025 6,000 5,369
- - -------------------------------------------------------------
29,270
TOTAL CORPORATE OBLIGATIONS-63.6%
(Cost: $335,687) 333,230
- - -------------------------------------------------------------
TOTAL INVESTMENTS-96.9%
(Cost: $512,648) 507,763
- - -------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES-3.1% 16,319
- - -------------------------------------------------------------
NET ASSETS-100% $524,082
=============================================================
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $512,648,000 for federal income tax purposes
at April 30, 1995, the aggregate gross unrealized appreciation was $6,921,000,
the aggregate gross unrealized depreciation was $11,806,000 and the net
unrealized depreciation of investments was $4,885,000.
See accompanying Notes to Financial Statements.
6
<PAGE> 9
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1995
(in thousands)
<TABLE>
<S> <C>
ASSETS
- - ------------------------------------------------------
Investments, at value
(Cost: $512,648) $507,763
- - ------------------------------------------------------
Receivable for:
Fund shares sold 592
- - ------------------------------------------------------
Investments sold 25,362
- - ------------------------------------------------------
Interest 9,811
- - ------------------------------------------------------
Total assets 543,528
- - ------------------------------------------------------
LIABILITIES AND NET ASSETS
- - ------------------------------------------------------
Cash overdraft 3,693
- - ------------------------------------------------------
Payable for:
Fund shares redeemed 686
- - ------------------------------------------------------
Investments purchased 14,502
- - ------------------------------------------------------
Management fee 238
- - ------------------------------------------------------
Administrative services fee 79
- - ------------------------------------------------------
Custodian and transfer agent
fees and related expenses 184
- - ------------------------------------------------------
Other 64
- - ------------------------------------------------------
Total liabilities 19,446
- - ------------------------------------------------------
Net assets $524,082
======================================================
ANALYSIS OF NET ASSETS
- - ------------------------------------------------------
Excess of amounts received from
issuance of shares over amounts paid
on redemptions of shares on
account of capital $543,991
- - ------------------------------------------------------
Accumulated net realized loss on
sales of investments (27,725)
- - ------------------------------------------------------
Unrealized depreciation of investments (4,885)
- - ------------------------------------------------------
Undistributed net investment income 12,701
- - ------------------------------------------------------
Net assets applicable to shares
outstanding $524,082
- - ------------------------------------------------------
THE PRICING OF SHARES
- - ------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price
per share ($494,478,862 / 60,561,056
shares outstanding) $8.16
- - ------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net
asset value or 4.50% of offering price) $8.54
======================================================
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales
charge)
per share ($28,867,640 / 3,542,688
shares outstanding) $8.15
======================================================
CLASS C SHARES
Net asset value and redemption price
per share ($736,034 / 90,279
shares outstanding) $8.15
======================================================
</TABLE>
See accompanying Notes to Financial Statements.
STATEMENT OF OPERATIONS
Six months ended April 30, 1995
(in thousands)
<TABLE>
<S> <C>
INTEREST INCOME $ 22,072
- - ------------------------------------------------------
EXPENSES
- - ------------------------------------------------------
Management fee 1,367
- - ------------------------------------------------------
Distribution services fee 78
- - ------------------------------------------------------
Administrative services fee 430
- - ------------------------------------------------------
Custodian and transfer agent
fees and related expenses 399
- - ------------------------------------------------------
Professional fees 16
- - ------------------------------------------------------
Reports to shareholders 41
- - ------------------------------------------------------
Trustees' fees and other 8
- - ------------------------------------------------------
Total expenses 2,339
- - ------------------------------------------------------
Net investment income 19,733
- - ------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
- - ------------------------------------------------------
Net realized loss on sales of investments (7,521)
- - ------------------------------------------------------
Net realized loss from
futures transactions (1,858)
- - ------------------------------------------------------
Net realized loss (9,379)
- - ------------------------------------------------------
Net change in balance of unrealized
depreciation of investments 25,450
- - ------------------------------------------------------
Net gain on investments 16,071
- - ------------------------------------------------------
Net increase in net assets resulting
from operations $ 35,804
======================================================
</TABLE>
7
<PAGE> 10
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
Six months
ended Year ended
April 30, October 31,
1995 1994
---------- -----------
<S> <C> <C>
OPERATIONS
- - --------------------------------------------------------
Net investment income $ 19,733 $ 39,819
- - --------------------------------------------------------
Net realized loss on
investments (9,379) (18,072)
- - --------------------------------------------------------
Net change in unrealized
depreciation 25,450 (49,533)
- - --------------------------------------------------------
Net increase (decrease) in
net assets resulting
from operations 35,804 (27,786)
- - --------------------------------------------------------
Net equalization charges (581) (125)
- - --------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS
- - --------------------------------------------------------
Distribution from net
investment income (19,673) (37,976)
- - --------------------------------------------------------
Distribution from net
realized gain on
investments -- (2,890)
- - --------------------------------------------------------
Distribution in excess
of net realized gain on
investments -- (271)
- - --------------------------------------------------------
Total dividends to
shareholders (19,673) (41,137)
- - --------------------------------------------------------
Net (decrease) increase
from capital share
transactions (1,900) 10,335
- - --------------------------------------------------------
Total increase (decrease)
in net assets 13,650 (58,713)
- - --------------------------------------------------------
NET ASSETS
- - --------------------------------------------------------
Beginning of period 510,432 569,145
- - --------------------------------------------------------
End of period (including
undistributed net
investment income of
$12,701 in 1995
and $13,222 in 1994) $524,082 510,432
========================================================
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE FUND
Kemper Income and Capital Preservation Fund currently 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 or a contingent deferred sales charge but are subject to higher ongoing
expenses than Class A shares and do not convert into another class. The Fund may
offer, to a limited group of investors, Class I shares (none sold through April
30, 1995) which are not subject to initial or contingent deferred sales charges
and have lower ongoing expenses than other classes. Each share represents an
identical interest in the investments of the Fund and has the same rights.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION
Investments are stated at value. Fixed income securities are valued by using
market quotations, or independent pricing services that use prices provided by
market makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Portfolio securities
that are traded on a national securities exchange are valued at the last sale
price on the exchange where primarily traded or, if there is no recent sale, at
the last current bid quotation. Portfolio securities that are primarily traded
on foreign securities exchanges are generally valued at the preceding closing
values of such securities on their respective exchanges where primarily traded.
Securities not so traded are valued at the last current bid quotation if market
quotations are available. Exchange traded options are valued at the last sale
price unless there is no sale price, in which event prices provided by market
makers are used. Over-the-counter traded options are valued based upon prices
provided by market makers. Financial futures and options thereon are valued at
the settlement price established each day by the board of trade or exchange on
which they are traded. Other securities and assets are valued at fair value as
determined in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed). Interest income is recorded on the accrual basis and
includes premium and discount amortization on money market instruments and
mortgage-backed securities; it also includes original issue and market discount
amortization on long-term fixed income securities. Realized gains and losses
from investment transactions are reported on an identified cost basis. Realized
and unrealized gains and
8
<PAGE> 11
losses on financial futures and options are included in net realized and
unrealized gain (loss) on investments, as appropriate.
The Fund may purchase securities with delivery or payment to occur at a later
date. At the time the Fund enters into a commitment to purchase a security, the
transaction is recorded and the value of the security is reflected in the net
asset value. The value of the security may vary with market fluctuations. No
interest accrues to the Fund until payment takes place. At the time the Fund
enters into this type of transaction it is required to designate cash or liquid
high-grade securities equal to the value of the securities purchased. At April
30, 1995, the Fund had no outstanding purchase commitments.
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 shares will be reduced by the amount of any applicable
contingent deferred sales charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is determined as of the earlier
of 3:00 p.m. Chicago time or the close of the Exchange. The net asset value per
share is determined separately for each class by dividing the Fund's net assets
attributable to that class by the number of shares of the class outstanding.
FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS
The Fund has complied with the special provisions of
the Internal Revenue Code available to investment companies for the six months
ended April 30, 1995. The accumulated net realized loss on sales of investments
for Federal income tax purposes at April 30, 1995, amounting to approximately
$27,451,000 is available to offset future taxable gains. If not applied, the
loss carryover expires during the period 2002 through 2003.
On May 17, 1995, the following per share dividends were declared, payable May
31, 1995 to shareholders of record on May 18, 1995.
<TABLE>
<CAPTION>
Class A Class B Class C
- - -----------------------------------------------------------------
<S> <C> <C> <C>
Income $.0515 .0448 .0450
- - -----------------------------------------------------------------
</TABLE>
The Fund declares and pays dividends on a monthly basis. Net realized capital
gains, if any, will be distributed at least annually. Differences in dividends
per share are due to different class expenses. Dividends payable to its
shareholders are recorded by the Fund on the ex-dividend date.
Distributions are determined in accordance with income tax principles which may
treat certain transactions differently from generally accepted accounting
principles.
EQUALIZATION ACCOUNTING
A portion of proceeds from sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment income so that income per
share available for distribution is not affected by sales or redemptions of
shares.
3. TRANSACTIONS WITH AFFILIATES
MANAGEMENT AGREEMENT
The Fund has a management agreement with Kemper Financial Services, Inc. (KFS)
and pays a management fee at an annual rate of .55% of the first $250 million of
average daily net assets declining gradually to .40% of average daily net assets
in excess of $12.5 billion. The Fund incurred a management fee of $1,367,000 for
the six months ended April 30, 1995.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT
The Fund has an underwriting and distribution services agreement with Kemper
Distributors, Inc. (KDI). Before February 1, 1995, KFS was the Fund's principal
underwriter and distributor. As principal underwriter for the Fund, KDI (as
successor to KFS) retained commissions of $69,000 for the six months ended April
30, 1995 for sales of Class A shares after allowing $261,000 as commissions to
firms, of which $45,000 was paid to firms affiliated with KDI. For distribution
services, the Fund pays KDI a fee of .75% of average daily net assets of the
Class B and Class C shares. Pursuant to the agreement, KDI enters into related
selling group agreements with various firms that provide distribution services
to investors. KDI compensates these firms at various rates for sales of Class B
and Class C shares. During the six months ended April 30, 1995, the Fund
incurred a distribution services fee for Class B and Class C shares of $78,000,
and KDI paid $257,000 for commissions and distribution fees to firms, including
$45,000 to firms affiliated with KDI. In addition, KDI received $25,000 of
contingent deferred sales charges.
ADMINISTRATIVE SERVICES AGREEMENT
The Fund has an administrative services agreement with KDI. Before February 1,
1995, KFS was the Fund's administrator. For providing information and
administrative services to shareholders, the Fund pays KDI a fee at an annual
rate of up to .25% of average daily net assets. KDI in turn has various
agreements with financial services firms that provide these services and pays
these firms based on assets of Fund accounts the firms service. For the six
months ended April 30, 1995, the Fund incurred an administrative services fee of
$430,000 and KDI (as successor to KFS) paid $440,000 to firms, including $54,000
that was paid to firms affiliated with KDI.
9
<PAGE> 12
CUSTODIAN AND TRANSFER AGENT AGREEMENT
The Fund has a custodian agreement and a transfer agent agreement with Investors
Fiduciary Trust Company (IFTC), which was 50% owned by KFS until January 31,
1995, when KFS completed the sale of IFTC to a third party. For the six months
ended April 30, 1995, the Fund incurred custodian and transfer agent fees of
$349,000 (excluding related expenses). Pursuant to a services agreement with
IFTC, Kemper Service Company (KSvC), an affiliate of KFS, is the shareholder
service agent of the Fund. For the six months ended April 30, 1995, IFTC
remitted shareholder service fees of $341,000 to KSvC.
OFFICERS AND TRUSTEES
Certain officers or trustees of the Fund are also officers or directors of KFS.
During the six months ended April 30, 1995, the Fund made no direct payments to
its officers and incurred trustees' fees of $2,000 to independent trustees.
4. INVESTMENT TRANSACTIONS
For the six months ended April 30, 1995, investment transactions (excluding
short term instruments) are as follows (in thousands):
<TABLE>
<S> <C>
Purchases $388,107
- - ------------------------------------------------------------
Proceeds from sales 392,134
- - ------------------------------------------------------------
</TABLE>
5. CAPITAL SHARE TRANSACTIONS
The following table summarizes the activity in capital shares of the Fund (in
thousands):
<TABLE>
<CAPTION>
Six months
ended Year ended
April 30, 1995 October 31, 1994
------------------- ------------------
Shares Amount Shares Amount
------- --------- ------- --------
<S> <C> <C> <C> <C>
Shares sold:
Class A 3,181 $ 24,425 11,289 $ 93,290
- - -------------------------------------------------------------------
Class B 2,795 22,160 4,160 33,723
- - -------------------------------------------------------------------
Class C 62 507 50 408
- - -------------------------------------------------------------------
Shares issued in
reinvestment of
dividends:
Class A 1,525 12,134 3,192 26,688
- - -------------------------------------------------------------------
Class B 64 510 19 149
- - -------------------------------------------------------------------
Class C 2 14 1 5
- - -------------------------------------------------------------------
Shares redeemed:
Class A (7,285) (56,218) (14,812) (121,231)
- - -------------------------------------------------------------------
Class B (634) (5,230) (2,831) (22,697)
- - -------------------------------------------------------------------
Class C (25) (202) -- --
- - -------------------------------------------------------------------
Conversion of
shares:
Class A 25 200 5 42
- - -------------------------------------------------------------------
Class B (25) (200) (5) (42)
- - -------------------------------------------------------------------
Net (decrease)
increase from
capital share
transactions $ (1,900) $ 10,335
===================================================================
</TABLE>
10
<PAGE> 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class A
--------------------------------------------------
Six months
ended
April 30, Year ended October 31,
1995 1994 1993 1992 1991
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.91 8.97 8.34 8.22 7.70
- - ----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .31 .61 .63 .67 .74
- - ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .25 (1.03) .62 .11 .53
- - ----------------------------------------------------------------------------------------------------------------------
Total from investment operations .56 (.42) 1.25 .78 1.27
- - ----------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .31 .59 .62 .66 .75
- - ----------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain on investments -- .04 -- -- --
- - ----------------------------------------------------------------------------------------------------------------------
Distribution in excess of net realized gain on investments -- .01 -- -- --
- - ----------------------------------------------------------------------------------------------------------------------
Total dividends .31 .64 .62 .66 .75
- - ----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.16 7.91 8.97 8.34 8.22
======================================================================================================================
TOTAL RETURN (%): 7.23 (4.86) 15.48 9.83 17.26
======================================================================================================================
RATIOS TO AVERAGE NET ASSETS (%):
Expenses .88 .94 .82 .82 .82
- - ----------------------------------------------------------------------------------------------------------------------
Net investment income 7.76 7.34 7.26 8.01 9.21
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Class B Class C
------------------------ ------------------------
Six months May 31, Six months May 31,
ended 1994, to ended 1994, to
April 30, October 31, April 30, October 31,
1995 1994 1995 1994
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.90 8.16 7.90 8.16
- - -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .27 .23 .27 .23
- - -------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .25 (.26) .25 (.26)
- - -------------------------------------------------------------------------------------------------------------------------
Total from investment operations .52 (.03) .52 (.03)
- - -------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .27 .23 .27 .23
- - -------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.15 7.90 8.15 7.90
=========================================================================================================================
TOTAL RETURN (%): 6.73 (.45) 6.75 (.44)
=========================================================================================================================
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 1.78 1.92 1.74 1.89
- - -------------------------------------------------------------------------------------------------------------------------
Net investment income 6.86 6.72 6.90 6.75
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Six months
ended
April 30, Year ended October 31,
1995 1994 1993 1992 1991
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA FOR ALL CLASSES:
Net assets at end of period (in thousands) $524,082 510,432 569,145 482,009 432,490
- - ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 147 163 190 178 115
======================================================================================================================
</TABLE>
NOTE: Ratios have been determined on an annualized basis. Total return is not
annualized and does not reflect the effect of any sales charges.
11
<PAGE> 14
(LOGO)
KEMPER FINANCIAL SERVICES, INC.
120 South LaSalle Street
Chicago, IL 60603
KEMPER INCOME AND CAPITAL PRESERVATION FUND
Trustees Officers
STEPHEN B. TIMBERS JOHN E. PETERS
President and Trustee Vice President
DAVID W. BELIN J. PATRICK BEIMFORD, JR.
Trustee Vice President
LEWIS A. BURNHAM ROBERT S. CESSINE
Trustee Vice President
DONALD L. DUNAWAY PHILIP J. COLLORA
Trustee Vice President and
ROBERT B. HOFFMAN Secretary
Trustee CHARLES F. CUSTER
Vice President and
DONALD R. JONES Assistant Secretary
Trustee JEROME L. DUFFY
DAVID B. MATHIS Treasurer
Trustee ELIZABETH C. WERTH
SHIRLEY D. PETERSON Assistant Secretary
Trustee
WILLIAM P. SOMMERS
Trustee
- - --------------------------------------------------------
Legal Counsel Custodian and Transfer Agent
VEDDER, PRICE, KAUFMAN INVESTORS FIDUCIARY
& KAMMHOLZ TRUST COMPANY
222 North LaSalle Street 127 West 10th Street
Chicago, IL 60601 Kansas City, MO 64105
Shareholder Service Agent
KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
800-621-1048
Investment Manager
KEMPER FINANCIAL SERVICES INC.
Principal Underwriter
KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street
Chicago, IL 60603
(LOGO)
PRINTED ON RECYCLED PAPER.
This report is not to be distributed unless preceded
or accompanied by a Kemper Fixed Income Funds prospectus.
239740
KICPF-3 (6/95) Printed in the U.S.A.
