<PAGE> 1
Kemper Income and Capital
Preservation Fund
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED OCTOBER 31, 1995
Offering investors the opportunity for a high level of current income and
preservation of capital
"...The move out of mortgages and increased investment in Treasuries was
extremely beneficial for the fund in terms of total return...as were the fund's
corporate bonds..."
[KEMPER MUTUAL FUND LOGO]
<PAGE> 2
Table of
Contents
3
General
Economic Overview
5
Performance Update
8
Terms to Know
10
Industry Sectors
11
Portfolio of
Investments
15
Report of
Independent Auditors
16
Financial Statements
18
Notes to
Financial Statements
22
Financial Highlights
At A Glance
Kemper Income and Capital Preservation Fund Total Returns for the year ended
October 31, 1995 (unadjusted for any sales charge):
<TABLE>
<CAPTION>
LIPPER CORPORATE DEBT
A RATED FUNDS CATEGORY
Class A Class B Class C AVERAGE*
<S> <C> <C> <C>
17.47% 16.12% 16.45% 15.80%
</TABLE>
[BAR GRAPH]
*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.
NET ASSET VALUE
<TABLE>
<CAPTION>
As of As of
10/31/95 10/31/94
- -------------------------------------------------------------------------------------
<S> <C> <C>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS A $8.62 $7.91
- -------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS B $8.59 $7.90
- -------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS C $8.61 $7.90
- -------------------------------------------------------------------------------------
</TABLE>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND RANKINGS
COMPARED TO ALL OTHER FUNDS IN THE LIPPER
CORPORATE DEBT A RATED FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- ----------------------------------------------------
<S> <C> <C> <C>
1-YEAR # 19 OF # 38 OF # 33 OF
111 FUNDS 111 FUNDS 111 FUNDS
- ----------------------------------------------------
5-YEAR # 10 OF
47 FUNDS N/A N/A
- ----------------------------------------------------
10-YEAR # 8 OF
25 FUNDS N/A N/A
- ----------------------------------------------------
</TABLE>
DIVIDEND AND YIELD REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF OCTOBER 31, 1995.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
- -------------------------------------------------------------
1 YEAR INCOME: $0.6180 $0.5402 $0.5442
- -------------------------------------------------------------
OCTOBER DIVIDEND: $0.0515 $0.0448 $0.0453
- -------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 7.17% 6.26% 6.31%
- -------------------------------------------------------------
SEC YIELD+: 5.75% 5.10% 5.12%
- -------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on October 31, 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 October 31, 1995 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.
About Your Report
SHAREHOLDER REPORTS REVISED
Your fund's annual report is the best source for tracking the progress of your
investment. This report includes several changes that have been made in an
effort to provide additional information to you as well as to explain
significant changes to the fund over the last fiscal year. In addition, the
performance update includes commentary from your fund's portfolio manager on
what might be expected in the coming months.
Specifically, your report now includes:
- - Terms you need to know related to your fund
- - A look at your fund's portfolio composition and how it has changed
- - The years to maturity and the duration of the fund's underlying investments
If you have any comments about the revised format, please write to:
Kemper Mutual Funds
Shareholder Communications
120 South LaSalle Street
Chicago, IL 60603
<PAGE> 3
General Economic Overview
[PHOTO of Stephen B. Timbers]
STEPHEN B. TIMBERS IS CHIEF EXECUTIVE AND CHIEF INVESTMENT OFFICER OF KEMPER
FINANCIAL SERVICES, INC. (KFS). KFS AND ITS AFFILIATES MANAGE APPROXIMATELY $63
BILLION IN ASSETS, INCLUDING $44 BILLION IN RETAIL MUTUAL FUNDS. TIMBERS IS A
GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD UNIVERSITY.
DEAR SHAREHOLDER,
Investors enjoyed generally positive performance in both the fixed income and
stock markets in 1995. The returns of most leading securities markets worldwide
are significantly higher than they were in 1994.
We have an excellent environment for financial assets. After several quarters
of robust growth, the United States economy seems to be growing at a pace that
investors find comfortable. Contrary to isolated reports that caused some
observers to become concerned, we believe the economy is in no jeopardy of
recession. Its health was confirmed with the news that the economy grew (as
measured by real gross domestic product [GDP]) at an annual rate of 4.2% in the
third quarter. This follows much lower growth in the first two quarters, as the
economy was adjusting to the Federal Reserve Board's series of interest rate
increases. The slowdown, in fact, was acknowledged by the Fed when it eased
short-term rates by a small but symbolic 25 basis points in July. Now we know
that the economy was rebounding from July through September.
Growth without a corresponding increase in inflation is very encouraging.
Although we are well along in the economic cycle and at a point when prices
often start hiking up, inflationary pressures have actually been reduced
somewhat.
It is likely that the Fed will reduce rates again, possibly as early
as December 19. An additional rate cut would provide stimulation for the
economy and acknowledge the serious discussion -- if not resolution -- on
reducing the federal budget deficit. Even with a rate cut, our forecast calls
for lower growth ranging between 2% to 3% for the next few quarters, with the
momentum likely to come from exports and nonresidential construction.
MARKET OUTLOOK
Slow growth and low inflation is the optimal combination for investors in the
fixed income markets, and we expect them to continue to perform well.
We believe that the opportunities for common stock investors will be
increasingly concentrated in higher quality investments. After hitting new
highs and showing considerable strength for most of the year, the stock market
has shown some vulnerability and then gone on to set records. However, it's
inevitable -- the current bull market will come to an end some day. In fact,
some sectors may be overextended today.
As we view the new year, companies cannot necessarily count on the economy to
provide above-average earnings support. Rather, stocks that have proven
themselves with a pattern of consistent earnings are likely to attract investor
support. Specifically, sectors that produce more consistent earnings, such as
health care, consumer nondurables, selected 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.
International investing continues to be quite complex. After sinking to its
post-World War II low in April, the value of the U.S. dollar has gained
strength against most foreign currencies. While a stronger dollar favors the
U.S. economy because it reduces the cost of American imports and attracts
foreign capital, a strong dollar in relation to a local currency has the effect
of devaluing a foreign investment. The value of the dollar and the
attractiveness of U.S. investments to foreign investors will be key factors in
the next few months.
3
<PAGE> 4
General 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.
<TABLE>
<CAPTION>
Now (11/30/95) 6 months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE (1) 5.93 6.17 7.81 5.77
PRIME RATE (2) 8.75 9.00 8.50 6.00
INFLATION RATE (3) 2.74 3.18 2.60 2.74
THE U.S. DOLLAR (4) -1.57 - 9.31 -4.52 1.71
CAPITAL GOODS ORDERS (5) (*) 7.60 17.84 13.53 23.75
INDUSTRIAL PRODUCTION (6) 2.20 3.31 6.58 2.98
EMPLOYMENT GROWTH (7) 1.50 2.29 3.15 2.58
</TABLE>
[BAR GRAPH]
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best
borrowers.
(3) Inflation reduces an investor's real return. In the last five
years, inflation has been as high as 6%. The low, moderate inflation of the
last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on corporate profits and equity performance.
(7) An influence on family income and retail sales.
*Data as of October 31, 1995
SOURCE: ECONOMICS DEPARTMENT, KEMPER FINANCIAL SERVICES, INC.
- -------------------------------------------------------------------------------
We are in the midst of a global recovery, and the same fundamentals that have
driven markets higher in the U.S. can be found in many foreign countries
currently. However, leading international economies continue to lag the U.S.
Japan and Germany, whose economies typically follow U.S. growth, are not as
robust as in past cycles. Moreover, conditions in emerging market countries
underline the importance of careful research and experience in understanding
how these markets work.
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 been common for incumbents to attempt to stimulate growth.
Given our Republican Congress and Democratic President, however, we do not
consider this as likely this time.
With the rest of the country, we are closely following political initiatives
to produce a balanced federal budget. This is a political wild card, but we
would expect both the stock and fixed-income markets to react with enthusiasm if
progress can be made.
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including a question-and-answer interview with
your fund's portfolio manager. Thank you for your continued support. We
appreciate the opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
CHIEF INVESTMENT AND EXECUTIVE OFFICER
December 12, 1995
4
<PAGE> 5
Performance Update
[PHOTO of Robert Cessine]
ROBERT CESSINE JOINED KEMPER FINANCIAL SERVICES, INC. (KFS) IN JANUARY 1993. HE
IS NOW A SENIOR VICE PRESIDENT OF KFS AND THE PORTFOLIO MANAGER OF KEMPER
INCOME AND CAPITAL PRESERVATION FUND. MR. CESSINE RECEIVED BOTH HIS B.S. AND
M.S. DEGREES FROM THE UNIVERSITY OF WISCONSIN, MADISON, WISCONSIN AND IS A
CHARTERED FINANCIAL ANALYST.
DURING THE LAST YEAR, LOW INFLATION AND FALLING INTEREST RATES CREATED AN
ENVIRONMENT THAT LED TO ONE OF THE BEST BOND MARKETS IN HISTORY. KEMPER INCOME
AND CAPITAL PRESERVATION FUND PORTFOLIO MANAGER ROBERT CESSINE EXPLAINS HOW HE
EXTENDED THE FUND'S DURATION TO CAPITALIZE ON THE DECLINING INTEREST RATE
ENVIRONMENT AND TO ENHANCE PERFORMANCE.
Q. THE FUND'S FISCAL YEAR -- NOVEMBER 1, 1994, THROUGH OCTOBER 31, 1995 --
STARTED AS INTEREST RATES PEAKED AND CONTINUED DURING A PERIOD OF FALLING
RATES. WHAT WAS BEHIND THIS SHIFT IN INTEREST RATE DIRECTION AND HOW DID IT
IMPACT THE BOND MARKET?
A. Throughout 1994, economic growth was robust. The Federal Reserve Board --
in an effort to circumvent inflation -- raised the federal funds rate six times
during 1994 and once in February 1995, resulting in a total increase of 3
percent. Such interest rate hikes hurt the market and bond prices fell
dramatically. It was the worst year in modern times for U.S. bonds.
Yet 1995 was a very good year for bonds. The Fed's tightening led to a soft
landing for the economy -- slow economic growth and low inflation. And, as
growth slowed, interest rates began to fall and the performance of fixed-income
investments improved. Bond prices increased throughout 1995 as market interest
rates fell, making bonds more appealing investments.
Q. THE FUND'S CLASS A SHARES RETURNED 17.47 PERCENT FOR THE FISCAL YEAR. HOW
DOES THAT COMPARE TO SIMILAR BOND FUNDS AND WHAT DID YOU DO TO ENHANCE THE
FUND'S PERFORMANCE?
A. We are pleased with the fund's annual total return. All share classes of the
fund ranked in the top 8 percent among all fixed-income funds during the fiscal
year ended October 31, 1995, as measured by Lipper Analytical Services, Inc.
Its Class A Shares ranked #149, Class B Shares ranked #330 and Class C Shares
ranked #273 out of all 4,253 fixed-income funds for the year. When compared to
Lipper's Corporate Debt A Rated Category, the fund's Class A Shares placed #19,
Class B Shares placed #38 and Class C Shares placed #33 out of 111 funds for
the fiscal year.
The portfolio's average duration was critical to the fund's strong
performance. Duration is a measurement of a portfolio's sensitivity to interest
rates. The shorter the duration, the less sensitive it is to interest rate
5
<PAGE> 6
Performance Update
changes. When interest rates began to rise in 1994, we adopted a defensive
strategy and shortened the fund's average duration. And as interest rates
peaked in November 1994, the fund's duration was 4.3 years.
We maintained a short duration until February, when economic indicators
revealed that growth had begun to slow. At that point, we began extending the
fund's duration because we expected interest rates to fall. As a result of our
optimism, the fund was well prepared to exploit the Spring bond rally that
heightened in May. The fund's duration at that time had been extended to 6.4
years. As we continued to extend duration, the fund outperformed the average of
its peers from April through October, when the fund's duration reached 6.6
years.
Q. HOW DID YOU ADJUST THE DURATION?
A. The most significant adjustment was our sale of the fund's mortgage holdings.
In April, mortgages represented 12 percent of the fund. But by May, we had sold
all of the fund's mortgage holdings to invest in Treasuries, which were
beginning to outperform as interest rates fell. We sold 30-year Government
National Mortgage Association (GNMA) mortgage-backed securities with coupon
rates of 7.5 and 8.5 percent. In their place we purchased intermediate- and
long-term U.S. Treasuries with longer average durations. This made sense
because as interest rates fall, there is a higher risk of mortgage prepayments.
If that happens, the fund must reinvest at less attractive market rates.
Moreover, in a declining interest rate environment, the prices of mortgages do
not keep pace with Treasury prices.
The move out of mortgages and increased investment in Treasuries was extremely
beneficial for the fund in terms of total return. Had we kept our investment in
mortgages, each GNMA bond would have appreciated in price by less than $2
between the first part of May and the end of the fiscal year. In contrast, the
Treasuries we purchased and held increased in price by approximately
$4.50-$5.50. Although yields on the Treasuries weren't as high as on the
mortgages, you can see how beneficial price appreciation was to shareholders.
Q. THE FUND INVESTS IN SEVERAL DIFFERENT TYPES OF ASSETS. WHICH SECTOR
CONTRIBUTED MOST TO PERFORMANCE THIS YEAR?
A. The corporate bond sector was the strongest performer for many reasons.
First, as the Fed achieved a soft landing for the economy, inflationary
pressures eased and corporate earnings continued to grow. This provided an
excellent environment for corporate bonds overall. Because of their strong
performance, we maintained a high level of investment in corporate bonds
throughout the year -- between 52-74 percent of the portfolio. And the fund's
corporate bond holdings outperformed the other sectors by generating a higher
rate of income as well as significant price appreciation.
The second factor contributing to this sector's performance was our high level
of investment in BBB-rated bonds, which represented between 23- 30 percent of
the fund's portfolio during the year. The lowest rated of all investment grade
bonds, BBB-rated issues outperformed all other high grade bonds for the fiscal
year. BBB-rated bonds returned 19.34 percent, while investment grade bonds as a
whole returned 18.79 percent, according to the Lehman Brothers Investment Grade
Corporate Index.
Outstanding returns from several specific industries also
enhanced returns in the fund's corporate bond sector. The media and cable
industry returned over 22 percent during the fiscal year, according to the
Lehman Brothers Investment Grade Index. Strong cash flows and debt reduction
programs within the industry contributed to its performance. We doubled our
investment in this sector to 8.5 percent of the fund because we expect
continued cash flow growth and credit quality improvement from these companies.
The paper and forest products industry also enjoyed strong performance as
demand for paper increased and there was a limited supply of new manufacturing
capacity. Although we did not increase the level of our investment in this
sector, we bought and sold several issues at prices that enhanced the fund's
total return.
Some of the fund's stronger performing bonds, in terms of
income and price appreciation, were those within the airline sector. After
several unprofitable
6
<PAGE> 7
Performance Update
years, the airline industry has reduced costs and increased operating profits
to levels not seen since 1989. In response to the severe credit quality decline
experienced in previous years, Delta and United Airlines embarked upon
ambitious programs to reduce operating expenses. Simultaneously, airline
traffic grew and industry capacity declined, resulting in higher revenues and
significantly higher profits. This helped the fund's investment in those
airlines. For instance, a Delta issue we purchased in March appreciated in
price by 14 percent through the end of the year. This price appreciation,
combined with the issue's attractive coupon rate of 9.75 percent, provided a
total return of nearly 20 percent in just seven months.
Finally, the fund's outstanding corporate bond performance was enhanced by the
ongoing research efforts of a dedicated team of credit analysts. Together they
consider economic factors such as interest rates, the strength of the economy
and the relative valuations -- and attractiveness -- of the fund's potential
investments. The research they provide enhances the investment selection
process, which is critical to good total return performance.
Q. WERE THERE ANY DISAPPOINTMENTS DURING THE YEAR?
A. We wish we would have identified earlier that the economy was slowing. If we
had extended duration in November, 1994, rather than February, 1995, the fund
could have provided an even higher return. Although the fund realized gains in
December, 1994 and January, 1995, performance for the two months slipped
slightly under that of our peers. Fortunately by extending duration ahead of
the spring bond rally, the fund recovered the ground it lost to its competitors
early in the year.
Q. THE FUND'S DIVIDEND REMAINED CONSTANT DURING THE YEAR WHILE INTEREST RATES
DECLINED AND THE FUND'S INCOME-GENERATING MORTGAGES WERE SOLD. WHAT TYPES OF
ADJUSTMENTS DID YOU MAKE TO MAINTAIN THE FUND'S DISTRIBUTION?
A. Maintaining a high rate of income for the fund is a priority to us, but we
also manage for total return. In the past, mortgage investments have been an
important supplement to the fund's dividend income. However, selling
mortgages and investing in Treasuries significantly enhanced the fund's total
return. Yet, we were still able to preserve the fund's distribution rate by
maintaining our portfolio of higher coupon Treasuries and corporate bonds.
Together, these two sources more than made up for any income lost by selling
rather than holding the mortgages.
Q. DO YOU ANTICIPATE THAT NEXT YEAR WILL BE AS POSITIVE FOR THE FUND?
A. The economic outlook is very good. We anticipate continued slow to moderate
economic growth, a benign level of inflation and interest rates that should
continue to fall. Further contributing to this scenario is the likelihood that
a meaningful balanced federal budget agreement will be reached. If that
happens, it is possible that interest rates may move even lower during 1996.
This would be a very positive environment for fixed-income investments.
Q. WHAT ARE THE RISKS TO THAT ASSUMPTION?
A. The risk would be that economic growth significantly accelerates but, at this
point, that's not what the economic data suggest. Exports and housing
construction markets are somewhat strong but it is unlikely that these two
forces alone could move the economy in a different direction. If the economy
would take off, we'd shorten the average maturity of the fund and probably
increase our level of mortgage investments, which generally perform better than
other fixed-income asset classes when interest rates rise.
7
<PAGE> 8
Terms to Know
BOND RALLY A sharp, short-lived rise in bond values after a period of either
little movement or falling values.
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income portfolio incorporating time to maturity and coupon size. The
larger the duration number, the greater the interest rate risk.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period, assuming the
reinvestment of all dividends. It represents the aggregate percentage or dollar
value change over the period.
YIELD A fund's yield is a measure of the net investment income per share
earned over a specific one month or 30-day period expressed as a percentage of
the maximum offering price of the fund's shares at the end of the period.
Performance Update
- ------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- ------------------------------------------------------------------------------
FOR PERIODS ENDED OCTOBER 31, 1995 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEAR CLASS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS A 12.22% 9.69% 9.23% 9.51% (SINCE 4/15/74)
- -------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS B 13.13 N/A N/A 8.72 (SINCE 5/31/94)
- -------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS C 16.45 N/A N/A 10.98 (SINCE 5/31/94)
- -------------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER INCOME AND
CAPITAL PRESERVATION FUND CLASS A FROM 1/1/76 THROUGH 10/31/95
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1/1/76 12/31/81 12/31/86 12/31/91 10/31/95
<S> <C> <C> <C> <C>
KEMPER INCOME AND CAPITAL PRESERVATION
FUND CLASS A(1) 10,000 11,952 27,893 43,281 $ 58,789
LEHMAN BROTHERS AGGREGATE BOND INDEX+ 10,000 13,418 31,253 50,188 $ 66,120
CONSUMER PRICE INDEX++ 10,000 16,937 19,910 24,847 $ 27,694
</TABLE>
[LINE GRAPH]
Past performance is not predictive of future performance. Returns and net asset
value fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
* Average annual total return measures net investment income and capital gain
or loss from portfolio investments, assuming reinvestment of all dividends and
for A Shares adjustment for the maximum sales charge of 4.5% and for B Shares
adjustment for the applicable contingent deferred sales charge as follows:
1-year, 3%; 5-year, 1%; since inception, 0%. During the periods noted,
securities prices fluctuated. For additional information, see the Prospectus
and Statement of Additional Information and the Financial Highlights at the end
of this report.
(1)Performance includes reinvestment of dividends and adjustment for the maximum
sales charge for A Shares and the contingent deferred sales charge in effect at
the end of the period for B Shares. In comparing the Kemper Income and Capital
Preservation Fund performance to the Lehman Brothers Aggregate Bond Index, you
should also note that the fund's performance reflects the maximum sales charge,
while no such charges are reflected in the performance of the index.
+ 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 Lipper
Analytical Services, Inc.
++ The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. Source is Towers Data Systems.
8
<PAGE> 9
Performance Update
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER INCOME AND
CAPITAL PRESERVATION FUND CLASS B FROM 5/31/94 THROUGH 10/31/95
<TABLE>
<CAPTION>
5/31/94 12/31/94 10/31/95
------- -------- --------
<S> <C> <C> <C>
KEMPER INCOME AND CAPITAL PRESERVATION
FUND CLASS B(1) 10,000 10,008 $ 11,261
LEHMAN BROTHERS AGGREGATE BOND INDEX+ 10,000 10,077 $ 11,600
CONSUMER PRICE INDEX++ 10,000 10,149 $ 10,420
</TABLE>
[LINE GRAPH]
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER INCOME AND
CAPITAL PRESERVATION FUND CLASS C FROM 5/31/94 THROUGH 10/31/95
<TABLE>
<CAPTION>
5/31/94 12/31/94 10/31/95
------- -------- --------
<S> <C> <C> <C>
KEMPER INCOME AND CAPITAL PRESERVATION
FUND CLASS C(1) 10,000 10,009 $ 11,594
LEHMAN BROTHERS AGGREGATE BOND INDEX+ 10,000 10,077 $ 11,600
CONSUMER PRICE INDEX++ 10,000 10,149 $ 10,420
</TABLE>
[LINE GRAPH]
9
<PAGE> 10
Industry Sectors
PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
ON 10/31/95 ON 10/31/94
- ------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED --% 6%
TREASURY BONDS AND NOTES 18 12
FOREIGN BONDS 5 2
CORPORATE BONDS 65 62
CASH AND EQUIVALENTS 12 18
- ------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/95 ON 10/31/94
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
ON 10/31/95 ON 10/31/94
- ------------------------------------------------------------------------------
<S> <C> <C>
CASH AND EQUIVALENTS 12% 18%
1-10 YEARS 49 41
10-20 YEARS 20 26
20+ YEARS 19 15
- ------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/95 ON 10/31/94
DURATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
ON 10/31/95 ON 10/31/94
- ------------------------------------------------------------------------------
<S> <C>
DURATION 6.6 YEARS 4.2 YEARS
- ------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
Portfolio of Investments
KEMPER INCOME AND CAPITAL PRESERVATION FUND
PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
PRINCIPAL
GOVERNMENT OBLIGATIONS AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT
OBLIGATIONS U.S. Treasury Notes and Bonds
8.875%, 1997 $10,000 $10,611
9.25%, 1998 30,000 32,691
10.75%, 2003 45,000 57,832
6.875%, 2025 5,000 5,357
7.625%, 2025 50,100 58,092
----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--25.3%
(Cost: $159,964) 164,583
============================================================================
FOREIGN GOVERNMENT Republic of Finland, 7.875%, 2004 5,000 5,473
OBLIGATIONS Republic of Italy, 6.875%, 2023 5,000 4,625
Province of Manitoba, 7.75%, 2016 5,000 5,412
Province of Nova Scotia, 8.25%, 2019 4,000 4,481
----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS--3.1%
(Cost: $19,449) 19,991
============================================================================
- -------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS
- -------------------------------------------------------------------------------------------------------------
BANKS - 15.5% Abbey National First Capital, 8.20%, 2004 5,000 5,513
ABN-Amro Holding N.V., 8.25%, 2009 7,000 7,603
Banco Central Hispano, 7.50%, 2005 7,500 7,656
Barnett Bank, 6.90%, 2005 7,500 7,539
Capital One Bank, 8.125%, 2000 7,500 7,929
Citicorp, 7.625%, 2005 5,000 5,303
Crestar Financial Corporation, 8.75%, 2004 5,000 5,636
Dresdner Bank, N.Y., 7.25%, 2015 5,000 5,074
First Fidelity Bancorporation, 9.625%, 1999 5,000 5,535
First USA Bank, 8.10%, 1997 7,500 7,684
Fleet Financial Group, Inc., 8.625%, 2007 5,000 5,656
Kansallis Osake Pankki, 8.65%, 2050 5,000 5,271
NationsBank Corporation, 9.50%, 2004 5,000 5,877
Riggs National Corp., 8.50%, 2006 7,000 7,276
Svenska Handelbamken, 8.35%, 2004 5,000 5,485
Wells Fargo and Company, 8.75%, 2002 5,000 5,551
----------------------------------------------------------------------------
100,588
============================================================================
COMMUNICATIONS, MEDIA Continental Cablevision, Inc., 9.50%, 2013 3,685 3,860
AND ELECTRONICS - 8.5% Cox Communications, 6.875%, 2005 7,500 7,497
Digital Equipment Corporation, 7.125%, 2002 7,000 6,919
News American Holdings, Inc., 9.25%, 2013 7,500 8,534
Rogers Cablesystems Limited, 10.00%, 2005 3,500 3,657
Tele-Communications, Inc., 9.80%, 2012 4,350 4,976
Telewest PLC, zero coupon, 2007 8,000 4,700
</TABLE>
11
<PAGE> 12
Portfolio of Investments
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Time Warner Entertainment Company, L.P.,
8.375%, 2033 $7,500 $7,598
Viacom International Inc., 8.00%, 2006 7,500 7,444
---------------------------------------------------------------------------
55,185
===========================================================================
CONSUMER PRODUCTS, American Home Products, 7.90%, 2005 7,500 8,167
RETAILING AND Black & Decker Corp., 7.50%, 2003 7,000 7,240
SERVICES - 10.5% Federated Department Stores, 10.00%, 2001 7,500 8,025
Grand Metropolitan Investment Corp., 7.45%, 2035 5,000 5,412
May Department Stores, 7.50%, 2015 7,500 7,733
Philip Morris Inc.
8.25%, 2003 3,500 3,809
7.25%, 2003 4,000 4,100
Philips Electronics N.V., 8.375%, 2006 7,000 7,796
RJR Nabisco, Inc.
8.00%, 2000 3,500 3,671
8.75%, 2005 7,500 7,446
Sears Roebuck Acceptance Corporation, 6.75%, 2005 5,000 5,003
---------------------------------------------------------------------------
68,402
===========================================================================
DRUGS AND HEALTH Columbia Healthcare, 6.910%, 2005 7,500 7,580
CARE - 1.9% Tenet Healthcare, 8.625%, 2003 4,750 4,869
---------------------------------------------------------------------------
12,449
===========================================================================
FINANCIAL SERVICES - Aegon N.V., 8.00%, 2006 5,000 5,456
9.8% African Development Bank, 9.30%, 2000 4,000 4,471
Associates Corporation, N.A., 8.25%, 1999 5,000 5,350
Commercial Credit, 7.375%, 2005 5,000 5,227
Donaldson, Lufkin & Jenrette, 6.875%, 2005 5,000 4,975
Finova Capital Corporation, 6.625%, 2001 5,000 5,022
General Electric Capital Corporation, 8.625%, 2008 5,000 5,835
Household Finance, 8.00%, 2004 5,000 5,428
Inter-American Development Bank, 7.00%, 2025 7,500 7,555
International Bank for Reconstruction & Development,
14.90%, 1997 3,500 3,957
Lehman Brothers Holdings, 7.125%, 2003 5,000 5,022
United States Leasing International,
Inc., 8.75%, 2001 5,000 5,554
---------------------------------------------------------------------------
63,852
===========================================================================
MANUFACTURING AND American Standard Inc., 10.875%, 1999 3,000 3,270
CONSTRUCTION Case Corporation, 7.25%, 2005 5,000 5,125
MATERIALS - 4.4% CSR America, 6.875%, 2005 7,500 7,570
EG & G Inc., 6.80%, 2005 5,000 4,950
Grumman Corporation, 10.375%, 1999 5,000 5,035
Owens-Illinois, Inc., 11.00%, 2003 2,000 2,220
---------------------------------------------------------------------------
28,170
===========================================================================
</TABLE>
12
<PAGE> 13
Portfolio of Investments
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OIL, GAS AND Parker & Parsley Petroleum, 8.875%, 2005 $5,000 $5,421
PETROLEUM Petronas Dagangan Bhd, 7.75%, 2015 5,000 5,227
SERVICES - 3.7% Repsol International Finance, 7.00%, 2005 5,000 5,141
USX Corporation, 9.375%, 2012 7,500 8,472
-----------------------------------------------------------------------------
24,261
=============================================================================
PAPER AND FOREST Boise Cascade Company
PRODUCTS - 2.8% 9.850%, 2002 2,000 2,305
9.45%, 2009 5,500 6,503
James River Corporation, 9.25%, 2021 3,500 4,164
West Fraser Timber Co. Ltd., 7.25%, 2002 5,000 5,021
-----------------------------------------------------------------------------
17,993
=============================================================================
TRANSPORTATION - 6.8% Delta Airlines
9.32%, 2009 4,553 4,956
9.75%, 2021 3,000 3,430
Ford Motor Credit, 7.75%, 2005 5,000 5,344
General American Transportation Corp., 10.29%, 1999 5,000 5,613
General Motors Acceptance Corporation, 8.875%, 2010 5,000 5,894
The Hertz Corporation, 7.00%, 2003 5,000 5,032
Penske Truck Leasing, 8.25%, 1999 5,000 5,294
United Airlines
11.21%, 2014 4,000 4,818
9.56%, 2018 3,500 3,727
-----------------------------------------------------------------------------
44,108
=============================================================================
UTILITIES - 2.5% Chesapeake and Potomic Telephone Company
of Virginia, 8.375%, 2029 5,000 5,916
Commonwealth Edison Company, 8.125%, 2007 5,000 5,140
Tenaga, Nasional Berhad, 7.50%, 2025 5,000 4,970
-----------------------------------------------------------------------------
16,026
=============================================================================
TOTAL CORPORATE OBLIGATIONS--66.4%
(Cost: $416,689) 431,034
=============================================================================
MONEY MARKET Yield-5.72% to 5.85%, Due November 1995
INSTRUMENTS Conagra Inc. 2,800 2,800
Cooper Industries 5,000 4,994
Goldman Sachs Group L.P. 2,300 2,299
Quaker Oats 3,000 2,997
</TABLE>
13
<PAGE> 14
Portfolio of Investments
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sheffield Receivables $5,000 $4,994
Working Capital Management Company L.P. 2,000 2,000
-----------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--3.1%
(Cost: $20,085) 20,084
=============================================================================
TOTAL INVESTMENTS--97.9%
(Cost: $616,187) 635,692
=============================================================================
CASH AND OTHER ASSETS, LESS LIABILITIES--2.1% 13,735
=============================================================================
NET ASSETS--100% $649,427
=============================================================================
</TABLE>
- ------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- ------------------------------------------------------------------------------
Based on the cost of investments of $616,187,000 for federal income tax
purposes at October 31, 1995, the aggregate gross unrealized appreciation was
$22,135,000, aggregate gross unrealized depreciation was $2,630,000 and the net
unrealized appreciation of investments was $19,505,000.
See accompanying Notes to Financial Statements.
14
<PAGE> 15
Report of Independent Auditors
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER INCOME AND CAPITAL PRESERVATION FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Income and Capital
Preservation Fund as of October 31, 1995, the related statements of
operations for the year then ended and changes in net assets for each of the
two years in the period then ended and the financial highlights for each of the
fiscal periods since 1991. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Kemper Income and Capital Preservation Fund at October 31, 1995, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the fiscal periods since 1991, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 28, 1995
15
<PAGE> 16
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
<S> <C>
Investments, at value
(Cost: $616,187) $ 635,692
Cash 1,270
Receivable for:
Fund shares sold 1,106
Investments sold 5,910
Interest 13,176
TOTAL ASSETS 657,154
=======================================================================
- -----------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------
Payable for:
Dividends 1,208
Fund shares redeemed 395
Investments purchased 5,446
Management fee 288
Administrative services fee 104
Custodian and transfer agent fees and related expenses 166
Other 120
Total Liabilities 7,727
- -----------------------------------------------------------------------
NET ASSETS $ 649,427
=======================================================================
- -----------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------
Paid-in capital $ 639,348
Accumulated net realized loss on investments (21,045)
Net unrealized appreciation on investments 19,505
Undistributed net investment income 11,619
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 649,427
=======================================================================
- -----------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($535,786 / 62,158 shares outstanding)
Maximum offering price per share $8.62
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $9.03
=======================================================================
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($97,425 / 11,336 shares outstanding) $8.59
=======================================================================
CLASS C SHARES
Net asset value and redemption price per share
($4,860 / 564 shares outstanding) $8.61
=======================================================================
CLASS I SHARES
Net asset value and redemption price per share
($11,356 / 1,318 shares outstanding) $8.61
=======================================================================
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE> 17
Financial Statements
STATEMENT OF OPERATIONS
Year ended October 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
<S> <C>
Interest income $ 44,957
Expenses:
Management fee 2,923
Administrative services fee 954
Distribution services fee 301
Custodian and transfer agent fees and related expenses 964
Professional fees 45
Reports to shareholders 96
Trustees' fees and other 38
Total expenses 5,321
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 39,636
=======================================================================
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized loss on sales of investments
(1,822)
Net realized loss from futures transactions (1,132)
Net realized loss (2,954)
Change in net unrealized depreciation on investments 49,840
Net gain on investments 46,886
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 86,522
=======================================================================
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1995 1994
- --------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 39,636 $ 39,819
Net realized loss (2,954) (18,072)
Change in net unrealized depreciation 49,840 (49,533)
Net increase (decrease) in net assets
resulting from operations 86,522 (27,786)
Net equalization charges (381) (125)
Distribution from net investment income (40,603) (37,976)
Distribution from net realized gain -- (3,161)
Total dividends to shareholders (40,603) (41,137)
Net increase from capital share transactions 93,457 10,335
TOTAL INCREASE (DECREASE) IN NET ASSETS 138,995 (58,713)
============================================================================================
- --------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------
Beginning of year 510,432 569,145
END OF YEAR (INCLUDING UNDISTRIBUTED
NET INVESTMENT INCOME OF $11,619
AND $13,222, RESPECTIVELY) $ 649,427 510,432
============================================================================================
</TABLE>
17
<PAGE> 18
Notes to Financial Statements
- ------------------------------------------------------------------------------
1 DESCRIPTION OF THE FUND Kemper Income and Capital Preservation
Fund is an open-end management
investment company organized as a
business trust under the laws of
Massachusetts. The Fund offers four
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. Class I shares, which are
sold to a limited group of investors,
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.
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
18
<PAGE> 19
Notes to Financial Statements
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 and therefore no
federal income tax provision is
required. The accumulated net
realized loss on sales of investments
for federal income tax purposes at
October 31, 1995, amounting to
approximately $21,025,000 is
available to offset future taxable
gains. If not applied, the loss
carryover expires during the period
2002 through 2003.
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.
Dividends are determined in
accordance with income tax principles
which may treat certain transactions
differently than 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 $2,923,000 for the
year ended October 31, 1995.
UNDERWRITING AND DISTRIBUTION
SERVICES AGREEMENT. The Fund has an
underwriting and distribution
services agreement with Kemper
Distributors, Inc. (KDI).
Underwriting commissions paid in
connection with the distribution of
Class A shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS
COMMISSIONS ALLOWED BY KDI PAID TO
RETAINED TO RETAIL FIRMS AFFILIATES
BY KDI (INCLUDING AFFILIATES) OF KDI
----------- ---------------------- -----------
<S> <C> <C> <C>
Year ended October 31, 1995 $96,000 767,000 110,000
</TABLE>
For services under the distribution
services agreement, 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 at
various rates for sales of Class B
and Class C shares. In addition, KDI
receives any contingent deferred
sales charges (CDSC)
19
<PAGE> 20
Notes to Financial Statements
from redemptions of Class B shares.
Distribution fees and commissions paid
in connection with the sale of Class B
and Class C shares and the CDSC
received in connection with the
redemption of Class B shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
DISTRIBUTION AND DISTRIBUTION AMOUNTS
FEES AND FEES PAID BY PAID TO
CDSC RECEIVED KDI TO FIRMS AFFILIATES
BY KDI (INCLUDING AFFILIATES) OF KDI
------------- ---------------------- ----------
<S> <C> <C> <C>
Year ended October 31, 1995 $387,000 888,000 114,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The
Fund has an administrative services
agreement with KDI. For providing
information and administrative services
to Class A, Class B and Class C
shareholders, the 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 agreements
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 are as follows:
<TABLE>
<CAPTION>
ASF
ASF PAID BY ASF
PAID BY THE KDI TO FIRMS PAID TO
FUND TO KDI (INCLUDING AFFILIATES) AFFILIATES OF KDI
----------- ---------------------- -----------------
<S> <C> <C> <C>
Year ended October 31, 1995 $954,000 980,000 108,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENTS.
Pursuant to a services agreement with
the Fund's transfer agent, Kemper
Service Company (KSvC) is the
shareholder service agent of the Fund.
For the year ended October 31, 1995, the
transfer agent remitted shareholder
services fees to KSvC of $840,000.
OFFICERS AND TRUSTEES. Certain
officers or trustees of the Fund are
also officers or directors of KFS.
During the year ended October 31,
1995, the Fund made no direct
payments to its officers and incurred
trustees' fees of $21,000 to
independent trustees.
- -------------------------------------------------------------------------------
4 INVESTMENT TRANSACTIONS For the year ended October 31, 1995,
investment transactions (excluding
short-term instruments) are as
follows (in thousands):
Purchases $1,026,727
Proceeds from sales 953,000
20
<PAGE> 21
Notes to Financial Statements
- --------------------------------------------------------------------------------
5 CAPITAL SHARE TRANSACTIONS The following table summarizes the
activity in capital shares of the
Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1995 1994
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------
SHARES SOLD
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 11,111 $ 90,463 11,289 $ 93,290
Class B 13,152 110,374 4,160 33,723
Class C 1,023 8,763 50 408
Class I 1,374 11,709 -- --
-------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-------------------------------------------------------------------------------
Class A 2,950 24,216 3,192 26,688
Class B 254 2,120 19 149
Class C 10 92 1 5
Class I 26 224 -- --
-------------------------------------------------------------------------------
SHARES REDEEMED
-------------------------------------------------------------------------------
Class A (15,124) (121,197) (14,812) (121,231)
Class B (3,307) (28,190) (2,831) (22,697)
Class C (520) (4,413) -- --
Class I (82) (704) -- --
-------------------------------------------------------------------------------
CONVERSION OF SHARES
-------------------------------------------------------------------------------
Class A 106 883 5 42
Class B (106) (883) (5) (42)
-------------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL
SHARE TRANSACTIONS $ 93,457 $ 10,335
===============================================================================
</TABLE>
21
<PAGE> 22
Financial Highlights
<TABLE>
<CAPTION>
--------------------------------------------------------
CLASS A
--------------------------------------------------------
YEAR ENDED OCTOBER 31,
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 7.91 8.97 8.34 8.22 7.70
Income from investment operations:
Net investment income .61 .61 .63 .67 .74
Net realized and unrealized gain (loss) .72 (1.03) .62 .11 .53
Total from investment operations 1.33 (.42) 1.25 .78 1.27
- --------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .62 .59 .62 .66 .75
Distribution from net realized gain -- .05 -- -- --
Total dividends .62 .64 .62 .66 .75
Net asset value, end of year $ 8.62 7.91 8.97 8.34 8.22
==========================================================================================================================
TOTAL RETURN 17.47% (4.86) 15.48 9.83 17.26
- --------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
Expenses .90% .94 .82 .82 .82
Net investment income 7.31 7.34 7.26 8.01 9.21
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------- ------------------- --------
CLASS B CLASS C CLASS I
------------------- ------------------- --------
YEAR MAY 31, YEAR MAY 31, JULY 3,
ENDED 1994 TO ENDED 1994 TO 1995 TO
OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31,
1995 1994 1995 1994 1995
- ------------------------------------------------------------------------------------- ------------------- --------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------- ------------------- --------
<S> <C> <C> <C>
Net asset value, beginning of period $ 7.90 8.16 7.90 8.16 8.52
Income from investment operations:
Net investment income .51 .23 .53 .23 .19
Net realized and unrealized gain (loss) .72 (.26) .72 (.26) .12
Total from investment operations 1.23 (.03) 1.25 (.03) .31
- ------------------------------------------------------------------------------------- ------------------- --------
Less distribution from net investment income .54 .23 .54 .23 .22
Net asset value, end of period $ 8.59 7.90 8.61 7.90 8.61
===================================================================================== =================== ========
TOTAL RETURN (NOT ANNUALIZED) 16.12% (.45) 16.45 (.44) 3.65
- ------------------------------------------------------------------------------------- ------------------- --------
ANNUALIZED RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------- ------------------- --------
Expenses 1.81% 1.92 1.78 1.89 .62
Net investment income 6.40 6.72 6.43 6.75 6.87
- ------------------------------------------------------------------------------------- ------------------- --------
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $649,427 510,432 569,145 482,009 432,490
Portfolio turnover rate 182% 163 190 178 115
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
22
<PAGE> 23
Shareholders' Meeting
SPECIAL SHAREHOLDERS' MEETING
On September 19, 1995 a special shareholders' meeting was held. Kemper Income
and Capital Preservation Fund shareholders were asked to vote on four separate
issues: election of nine Trustees to the Board of Trustees, ratification of
Ernst & Young LLP as independent auditors, approval of a new investment
management agreement with Kemper Financial Services, Inc. or its successor on
the same terms as the current agreement and for Class B and Class C
shareholders only, approval of a new 12b-1 distribution plan with Kemper
Distributors, Inc. or its successor on the same terms as the current plan. We
are pleased to report that all nominees were elected and all other items were
approved. Following are the results for each issue:
- - Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 43,476,098 1,146,809
Lewis A. Burnham 43,480,561 1,142,346
Donald L. Dunaway 43,502,872 1,120,035
Robert B. Hoffman 43,516,259 1,106,648
Donald R. Jones 43,507,334 1,115,573
David B. Mathis 43,449,325 1,173,582
Shirley D. Peterson 43,422,551 1,200,356
William P. Sommers 43,480,561 1,142,346
Stephen B. Timbers 43,507,334 1,115,573
</TABLE>
- - Ratification of the selection of Ernst & Young LLP as independent
auditors for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
42,614,107 494,762 1,514,038
</TABLE>
- - Approval of new investment management agreement
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
41,813,554 982,506 1,826,847
</TABLE>
- - Approval of new 12b-1 distribution plan
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Class B
Shares 2,932,161 76,385 128,196
Class C
Shares 315,964 573 4,692
</TABLE>
23
<PAGE> 24
Trustees and Officers
TRUSTEES
STEPHEN B. TIMBERS
President and Trustee
DAVID W. BELIN
Trustee
LEWIS A. BURNHAM
Trustee
DONALD L. DUNAWAY
Trustee
ROBERT B. HOFFMAN
Trustee
DONALD R. JONES
Trustee
DAVID B. MATHIS
Trustee
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
OFFICERS
JOHN E. PETERS
Vice President
J. PATRICK BEIMFORD, JR.
Vice President
ROBERT C. CESSINE
Vice President
PHILIP J. COLLORA
Vice President
and Secretary
CHARLES F. CUSTER
Vice President and
Assistant Secretary
JEROME L. DUFFY
Treasurer
ELIZABETH C. WERTH
Assistant Secretary
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LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
1-800-621-1048
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
INVESTMENT MANAGER KEMPER FINANCIAL SERVICES, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street
Chicago, IL 60603
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Kemper Fixed Income Funds prospectus. 10068180
KICPF - 2 (12/95) Printed in the U.S.A.
