<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED OCTOBER 31, 1997
[KEMPER STYLE BOX]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Offering investors the oppertunity for a high level
of current income and preservation and capital
KEMPER INCOME AND CAPITAL
PRESERVATION FUND
"...This reduction in foreign exposure helped the fund when the global market
decline occurred, while our larger allocation to Treasuries helped offset losses
in the corporate sector..."
[KEMPER LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
8
PORTFOLIO STATISTICS
9
PORTFOLIO OF
INVESTMENTS
12
REPORT OF
INDEPENDENT AUDITORS
13
FINANCIAL STATEMENTS
15
NOTES TO
FINANCIAL STATEMENTS
19
FINANCIAL HIGHLIGHTS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 1997
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.00%
CLASS B 6.99%
CLASS C 7.03%
LIPPER CORPORATE DEBT A RATED FUNDS CATEGORY AVERAGE* 8.52%
- --------------------------------------------------------------------------------
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT REPRESENT FUTURE PERFORMANCE.
RETURNS, RANKINGS AND NET ASSET VALUE FLUCTUATE. SHARES ARE REDEEMABLE AT
CURRENT NET ASSET VALUE, WHICH MAY BE MORE OR LESS THAN ORIGINAL COST.
*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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
10/31/97 10/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS A $8.54 $8.46
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS B $8.51 $8.43
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS C $8.53 $8.45
- --------------------------------------------------------------------------------
</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 #91 OF 131 FUNDS #124 OF 131 FUNDS #121 OF 131 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #14 OF 54 FUNDS N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #19 OF 34 FUNDS N/A N/A
- --------------------------------------------------------------------------------
15-YEAR #10 OF 25 FUNDS N/A N/A
- --------------------------------------------------------------------------------
20-YEAR #10 OF 20 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, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.5700 $0.4888 $0.4929
- --------------------------------------------------------------------------------
OCTOBER DIVIDEND: $0.0475 $0.0402 $0.0411
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 6.67% 5.67% 5.78%
- --------------------------------------------------------------------------------
SEC YIELD+: 5.42% 4.75% 4.77%
- --------------------------------------------------------------------------------
</TABLE>
+ CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN
AS AN ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON OCTOBER 31, 1997.
DISTRIBUTION RATE SIMPLY MEASURES THE LEVEL OF DIVIDENDS AND IS NOT A
COMPLETE MEASURE OF PERFORMANCE. THE SEC YIELD IS NET INVESTMENT INCOME PER
SHARE EARNED OVER THE MONTH ENDED OCTOBER 31, 1997, SHOWN AS AN ANNUALIZED
PERCENTAGE OF THE MAXIMUM OFFERING PRICE ON THAT DATE. THE SEC YIELD IS
COMPUTED IN ACCORDANCE WITH THE STANDARDIZED METHOD PRESCRIBED BY THE
SECURITIES AND EXCHANGE COMMISSION.
TERMS TO KNOW
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR FIXED-INCOME STYLE BOX
- --------------------------------------------------------------------------------
[MATURITY/QUALITY DIAGRAM]
Source: Morningstar, Inc., Chicago, IL (312) 696-6000. (Morningstar
Style Box is based on a portfolio date as of October 31, 1997.) The
Fixed-Income Style Box placement is based on a fund's average effective
maturity or duration and the average credit rating of the bond port- folio.
PLEASE NOTE THAT STYLE BOXES DO NOT REPRESENT AN EXACT ASSESSMENT OF RISK AND
DO NOT REPRESENT FUTURE PERFORMANCE. PLEASE CONSULT THE PROSPECTUS FOR A
DESCRIPTION OF INVESTMENT POLICIES.
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
Stephen B. Timbers is president, chief executive and chief investment officer of
Zurich Kemper Investments, Inc. (ZKI). ZKI and its affiliates manage
approximately $86 billion in assets, including $49 billion in retail mutual
funds. Timbers is a graduate of Yale University and holds an M.B.A. from
Harvard University.
DEAR SHAREHOLDERS,
Once again, investors experienced extreme market volatility in the month of
October. Unlike the October corrections of 1987 and 1989, this year's market
drop occurred at a time when the United States economy is remarkably healthy and
resilient. As we have noted, the U.S. economy has been moving forward for
several years with an alternating fast/slow pace that has proven successful in
removing whatever excesses build from quarter to quarter. As a consequence,
interest rates and the rate of inflation are both low and stable. Moreover, the
federal budget deficit has been reduced to such an extent that discussion has
now turned to what the government should do with a projected surplus in 1998.
Fortunately, no part of our strong economic foundation was shaken by the
market correction. If anything, the correction provided a short-lived and
relatively painless lesson about the vulnerability of a highly valued market.
When markets are high, everything -- economic news, corporate earnings and
liquidity -- must go right. When markets are high -- as our equity market was
for most of this year -- they are vulnerable to relatively minor
disappointments.
As you have read, of course, the direct source of the October correction was
Southeast Asia, where the world's highest growth economies had been stumbling
since the summer. These economies had become overextended, banks ran into
trouble with bad loans and the local governments failed to take prompt action.
The result was a domino effect of competitive devaluations of currencies,
crashing markets and political chaos.
But while Southeast Asia produced the event that led to the mini-panic in the
U.S. equity market -- resulting in a 7 percent loss on October 27 -- the world
quickly looked to the U.S. for solutions. When the U.S. market quickly
rebounded, other markets became less volatile. Considering U.S. economic
fundamentals and the relatively small effect that Southeast Asian problems have
on U.S. companies as a whole, rational investors had to expect our market to
bounce back. In fact, if the U.S. equity market had not been so highly valued,
we would have expected the market's reaction to the Asian problems to be quite
muted. For instance, if the Dow Jones Industrial Average had been closer to 7000
than to 8000, we would have expected that the market would have dropped only
slightly.
But as we have said before, today's markets move very fast. We experienced in
one day the kind of correction that we used to experience over a six-month
period. By Wednesday, November 19, the Dow Jones Industrial Average had climbed
back to where it was before Gray Monday, October 27, 1997. It took only 26 days
to recoup -- contrast that with the 463 days needed to recoup from Black Monday.
The market did not recover from its 22.6 percent October 19, 1987, market
correction until January 24, 1989. At this writing, the U.S. equity market
remains very volatile. We expect that condition to continue, as volatility is a
factor of higher valued markets. Despite what the last few years may have
suggested, markets do not go in just one direction.
Our recent experience supported many of the basic tenets of investing:
- Invest for the long term and don't react to the short-term noise. Investors
who got hurt in the October correction were those who had borrowed the
money they invested and were forced to sell at low prices. Investors who
were able to remain invested and did, lost only some of their
above-average gain for the year.
- Diversification helps reduce overall portfolio risk. Government securities
investors, for example, found the bond market to be a safe haven as the
bond market rallied during the stock market correction.
- Investing abroad is complex and requires expert advice. Currency
valuations, in particular, can have a significant effect on investment
returns.
Our forecast for the next several months calls for moderate economic growth,
stable interest rates and controlled inflation. While we cannot rule out the
possibility of another market event that would add to the excitement of equity
investing, we would expect the U.S. market to again demonstrate its resiliency.
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND SHAREHOLDER
DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR DEFLATION, CREDIT
EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON MUTUAL FUND
PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR INVESTMENT
RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE 10-YEAR TREASURY
RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES. THE OTHER DATA REPORT
YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (11/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.88 6.49 6.3 5.71
PRIME RATE(2) 8.5 8.5 8.25 8.65
INFLATION RATE(3)* 2.08 2.3 3.25 2.6
THE U.S. DOLLAR(4) 9.65 5.52 4.36 -2.58
CAPITAL GOODS ORDERS(5)* 9.92 7.16 3.3 8.09
INDUSTRIAL PRODUCTION(5)* 5.51 4.23 4.33 3.4
EMPLOYMENT GROWTH(6) 2.52 2.13 2.15 1.91
</TABLE>
(1) Falling interest rates in recent years have been a big plus for
financial assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6 percent. The low, moderate inflation of
the last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of October 31, 1997.
Sources: Economics Department, Zurich Kemper Investments, Inc.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT AND CHIEF INVESTMENT OFFICER
ZURICH KEMPER INVESTMENTS INC.
December 4, 1997
4
<PAGE> 5
PERFORMANCE UPDATE
[CESSINE PHOTO]
ROBERT CESSINE JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN JANUARY 1993. HE
IS SENIOR VICE PRESIDENT OF ZKI AND PORTFOLIO MANAGER OF KEMPER INCOME AND
CAPITAL PRESERVATION FUND. CESSINE RECEIVED BOTH A B.S. AND AN M.S. DEGREE FROM
THE UNIVERSITY OF WISCONSIN, MADISON, AND IS A CHARTERED FINANCIAL ANALYST.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
THE 12-MONTH REPORTING PERIOD, NOVEMBER 1, 1996 THROUGH OCTOBER 31, 1997, WAS
A TUMULTUOUS ONE FOR THE FIXED-INCOME MARKETS AND INVESTMENT GRADE BONDS IN
PARTICULAR. KEMPER INCOME AND CAPITAL PRESERVATION FUND PORTFOLIO MANAGER
ROBERT CESSINE EXPLAINS THE UPS AND DOWNS OF THE FISCAL YEAR AND HOW HE
POSITIONED THE FUND TO WEATHER THE STORMY TIMES.
Q HOW DID KEMPER INCOME AND CAPITAL PRESERVATION FUND PERFORM DURING THE
FISCAL YEAR ENDED OCTOBER 31, 1997?
A The fund performed relatively well given the significant market and
economic events that occurred during the year. Its Class A shares returned 8
percent for the year (unadjusted for any sales charge).
Performance was temporarily hindered by the Federal Reserve Board's (the Fed)
0.25 percent increase in short-term interest rates near the end of March. From
May through September, the fund performed well. In late October, there was a
global equity market sell-off that impacted the investment grade corporate
market. The fund struggled with the market and gave back some of its earlier
gains.
Q YOU MENTIONED THAT ECONOMIC AND MARKET EVENTS IMPACTED THE FUND. CAN YOU
EXPLAIN THE ENVIRONMENT IN MORE DETAIL AND WHAT IT MEANT SPECIFICALLY FOR THE
INVESTMENT GRADE CORPORATE MARKET?
A Two very significant events occurred during the year. The Fed raised
interest rates in late March and the economic crisis in Southeast Asia spawned a
global equity market sell-off on October 27, 1997. Despite these events, on a
year-over-year basis, corporate bonds gained. The Salomon Brothers high grade
corporate bond index posted a return of 10.82 percent for the year ended October
31, 1997. Specifically, here's what happened.
At the start of the fiscal year, November 1996, U.S. fixed-income markets
rallied in response to the outcome of the U.S. presidential and congressional
elections, in which the Republicans maintained control of Congress and President
Clinton was re-elected.
This bullish environment began to change in December, when Federal Reserve
Board Chairman Alan Greenspan implied in passing that financial assets might be
overvalued. The comment shook the market and caused yields to rise and
securities prices to fall. Early in 1997, Greenspan expressed his concern about
the historically tight spreads in the high yield corporate market and whether or
not its performance could be sustained. Since spreads in the investment grade
market were tight as well, the comment concerned investors in all types of
corporate bonds. Additionally, Greenspan commented for the second time that
investors were perhaps acting with "irrational exuberance" and that the values
of equity securities might be inflated. This caused further concern since a
decline in the value of equities would, in turn, likely impact the performance
of corporate bonds.
At about the same time, stronger than anticipated economic growth statistics
were released and Greenspan intimated that a tightening of interest rates might
be necessary to
5
<PAGE> 6
PERFORMANCE UPDATE
keep inflation at bay. The Fed's 0.25 percent tightening occurred in late March
and initiated a sharp sell-off in virtually all securities' markets. The hike
also caused a widening of corporate bond spreads, meaning the value of corporate
bonds declined somewhat. The investment grade market was hit harder than it
might have been if the stock market hadn't declined as it did.
While economic growth remained strong after the Fed tightening, inflation
remained uncharacteristically low and corporate earnings were healthy.
Investment grade corporate bonds began to recoup earlier losses and rallied
until October.
On October 8, Greenspan once again expressed his concern about whether the
current low level of inflation could continue with such a strong U.S. economy.
The market believed his comments to be a warning that he might raise short-term
interest rates again. That prospect was discounted on October 27, however, when
a global equity market sell-off was spawned by economic events in Southeast
Asia. The sell-off was dramatic and initiated declines in the corporate bond
market as well. Investors flocked to U.S. Treasuries which rallied through the
end of the fund's fiscal year.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUND DURING THE FISCAL YEAR?
A In the months leading up to the Fed's rate hike, we managed the fund with
a neutral duration. Duration is a measurement of a fund's sensitivity to
interest rates -- the shorter the duration, the less sensitive the fund is to
interest rate changes. In February, we shortened duration even further as it
became more clear that the increase in rates was imminent. We shortened duration
by increasing the level of cash and cash equivalents in the portfolio.
Typically, we try to keep the fund's cash position relatively low (5 percent or
below), to increase the amount of interest income that the fund can generate.
However, when rates rose in March, our larger cash position (about 12 percent)
helped reduce the impact of the tightening.
As economic growth continued and it was clear that inflation was not becoming
a problem, we extended duration again by redirecting the fund's cash to
corporate bond and Treasury investments. Both of these asset classes performed
very well into October as market yields moved lower in response to the positive
economic environment.
In early October, when Greenspan intimated that he might tighten rates, we
began reducing our exposure to our most illiquid and volatile corporate assets.
Some of these issues had significant foreign exposure. This reduction in foreign
exposure helped the fund when the global market decline occurred, while our
larger allocation to Treasuries helped offset losses in the corporate sector.
Q WHAT'S YOUR OUTLOOK FOR THE FUND AND THE INVESTMENT-GRADE CORPORATE
MARKET?
A We are optimistic about the prospects for investment-grade bonds. The
fundamentals of the market remain healthy. Corporate earnings are strong, the
economy is robust and inflation is negligible. Corporate bonds shrugged off the
impact of the March rate hike and rallied for much of the year. We anticipate
that investment grade corporate bonds will be well into recovery from the
October decline by the end of the year. And, we believe Kemper Income And
Capital Preservation Fund is well positioned to benefit from such a recovery.
The corporate investments the fund holds are high quality bonds from profitable
corporations in healthy market sectors.
6
<PAGE> 7
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED OCTOBER 31, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEARS LIFE OF CLASS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER INCOME AND CAPITAL PRESERVATION
FUND CLASS A 3.13% 6.97% 8.47% 9.26% (since 4/15/74)
- ----------------------------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL PRESERVATION
FUND CLASS B 3.99 N/A N/A 7.21 (since 5/31/94)
- ----------------------------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL PRESERVATION
FUND CLASS C 7.03 N/A N/A 7.81 (since 5/31/94)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000
INVESTMENT IN CLASS A SHARES FROM
1/1/76 TO 10/31/97
- -----------------------------------------------------------------------------------------------------------------------------
1/1/76 12/31/76 12/31/83 12/31/90 10/31/97
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper Income And Capital Preservation Fund Class A(1) 10,000 10,868 17,790 36,707 66,775
Lehman Brothers Aggregate Bond Index+ 10,000 10,077 22,776 49,729 76,208
Consumer Price Index++ 10,000 10,486 18,252 24,108 29,045
</TABLE>
[LINE GARAPH]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000
INVESTMENT IN CLASS B SHARES FROM
5/31/94 TO 10/31/97
- -----------------------------------------------------------------------------------------------------------------------------
5/31/94 12/31/95 12/31/96 10/31/97
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Income And Capital Preservation Fund Class B(1) 10,000 12,014 12,145 12,702
Lehman Brothers Aggregate Bond Index+ 10,000 11,939 12,370 13,370
Consumer Price Index++ 10,000 10,407 10,753 10,929
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS C(1)
- -----------------------------------------------------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000
INVESTMENT IN CLASS C SHARES FROM
5/31/94 TO 10/31/97
- -----------------------------------------------------------------------------------------------------------------------------
5/31/94 12/31/95 12/31/96 10/31/97
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Income And Capital Preservation Fund C(1) 10,000 12,041 12,174 12,934
Lehman Brothers Aggregate Bond Index+ 10,000 11,939 12,370 13,370
Consumer Price Index++ 10,000 10,407 10,753 10,929
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. RETURNS AND NET
ASSET VALUES 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 CLASS A SHARES ADJUSTMENT FOR THE MAXIMUM SALES
CHARGE OF 4.5 PERCENT AND FOR CLASS B SHARES ADJUSTMENT FOR THE
APPLICABLE CONTINGENT DEFERRED SALES CHARGE (CDSC) AS FOLLOWS: 1-YEAR, 3
PERCENT; 5-YEAR, 1 PERCENT; SINCE INCEPTION, 0 PERCENT. THERE IS NO
ADJUSTMENT FOR CLASS C SHARES. THE MAXIMUM CDSC FOR CLASS B SHARES IS 4
PERCENT. FOR CLASS C SHARES, THERE IS A 1 PERCENT CDSC ON CERTAIN
REDEMPTIONS WITHIN THE FIRST YEAR OF PURCHASE. DURING THE PERIODS NOTED,
SECURITIES PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION, SEE THE
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION AND THE FINANCIAL
HIGHLIGHTS AT THE END OF THIS REPORT.
(1) PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A SHARES AND THE CDSC IN EFFECT
AT THE END OF THE PERIOD FOR CLASS B SHARES. WHEN REVIEWING THE
PERFORMANCE CHART, PLEASE NOTE THAT THE INCEPTION DATE FOR THE LEHMAN
BROTHERS AGGREGATE BOND INDEX IS JANUARY 1, 1976. AS A RESULT, WE ARE
UNABLE TO ILLUSTRATE THE LIFE OF CLASS PERFORMANCE FOR KEMPER INCOME AND
CAPITAL PRESERVATION FUND CLASS A SHARES. IN COMPARING THE KEMPER INCOME
AND CAPITAL PRESERVATION FUND CLASS A AND CLASS B SHARES PERFORMANCE TO
THE LEHMAN BROTHERS AGGREGATE BOND INDEX AND THE CONSUMER PRICE INDEX,
YOU SHOULD ALSO NOTE THAT THE FUND'S PERFORMANCE REFLECTS THE APPLICABLE
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 LEHMAN BROTHERS, 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.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 10/31/97 ON 10/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
TREASURY BONDS AND NOTES 26% 13%
......................................................................................................
FOREIGN BONDS 8 9
......................................................................................................
CORPORATE BONDS 61 72
......................................................................................................
CASH AND EQUIVALENTS 5 6
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/97 ON 10/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 10/31/97 ON 10/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH AND EQUIVALENTS 5% 1%
......................................................................................................
1-10 YEARS 59 72
......................................................................................................
10-20 YEARS 15 17
......................................................................................................
20+ YEARS 21 10
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/97 ON 10/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 10/31/97 ON 10/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 8.2 years 13.2 years
- ------------------------------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER INCOME AND CAPITAL PRESERVATION FUND
Portfolio of Investments at October 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT--25.8% U.S. Treasury Notes
9.25%, 1998 $10,000 $ 10,278
6.25%, 2003 4,050 4,131
5.875%, 2004 5,000 5,016
6.125%, 2007 14,925 15,245
U.S. Treasury Bonds
10.75%, 2003 60,000 73,856
6.625%, 2027 34,175 36,236
6.375%, 2027 13,300 13,707
----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost: $158,449) 158,469
----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENTS--2.8%
Province of Nova Scotia, 8.75%, 2022 4,000 4,906
Province of Quebec, 8.625%, 2005 7,500 8,422
Republic of Poland, 4.00%, 2014 4,900 4,006
----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $16,965) 17,334
----------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------------------
BANKS--19.3%
<S> <C> <C> <C>
Abbey National, PLC, 7.35%, 2049 3,350 3,451
ABN-Amro Holding, N.V., 8.25%, 2009 7,000 7,519
BCH Cayman Islands, Ltd., 7.70%, 2006 2,480 2,596
Banco Central Hispano, 7.50%, 2005 7,500 7,744
Capital One Bank, 8.125%, 2000 7,500 7,764
Citicorp, 7.625%, 2005 7,500 7,966
Corporation Andina De Formento, 7.79%, 2017 9,500 9,670
Crestar Financial Corp., 8.75%, 2004 5,000 5,600
Den Danske Bank, 7.40%, 2010 4,950 5,090
First Fidelity Bancorporation, 9.625%, 1999 5,000 5,290
Fleet Financial Group, Inc., 8.625%, 2007 5,000 5,663
Kansallis Osake Bank, 10.00%, 2002 5,000 5,699
Kansallis Osake Pankki, 8.65%, 2049 5,000 5,196
NationsBank Corp., 9.50%, 2004 5,000 5,807
Peoples Bank Bridgeport, 7.20%, 2006 4,950 5,015
Riggs National Corp., 8.50%, 2006 7,000 7,401
Scotland International, 8.80%, 2004 2,850 3,164
Societe Generale, 7.85%, 2049 3,950 4,113
Svenska Handelbanken, 7.125%, 2049 7,950 7,991
Wells Fargo and Co., 8.75%, 2002 5,000 5,468
----------------------------------------------------------------------------
118,207
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS, MEDIA AND Comcast Cablevision, 8.50%, 2027 $ 2,400 $ 2,722
ELECTRONICS--8.0%
Comcast Cable, 8.875%, 2017 7,200 8,222
News American Holdings, Inc.
9.25%, 2013 3,500 4,057
8.25%, 2018 6,375 6,755
Tele-Communications, Inc., 9.80%, 2012 3,700 4,469
Time Warner Entertainment Co., L.P., 8.375%,
2023 1,975 2,158
Time Warner, Inc.
7.25%, 2017 3,950 3,884
9.15%, 2023 6,600 7,790
Viacom, Inc., 7.75%, 2005 2,500 2,513
Worldcom, Inc., 7.75%, 2007 and 2027 6,450 6,842
----------------------------------------------------------------------------
49,412
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS, SERVICES Dayton Hudson Corp., 7.25%, 2004 5,000 5,189
AND RETAIL--9.3%
Dimon, Inc., 8.875%, 2006 5,550 5,951
Federated Department Stores, 10.00%, 2001 7,500 8,290
Harman International, 7.32%, 2007 6,025 6,218
JC Penney, 7.95%, 2017 4,900 5,384
Marriott International, 6.75%, 2009 5,000 4,967
May Department Stores Co., 6.875%, 2005 4,950 5,046
RJR Nabisco, Inc., 8.00%, 2000 3,500 3,614
Royal Caribbean Cruises, Ltd., 8.25%, 2005 7,480 8,055
Staples, Inc., 7.125%, 2007 4,150 4,191
----------------------------------------------------------------------------
56,905
- --------------------------------------------------------------------------------------------------------------------------
DRUGS AND HEALTH CARE--1.5% MedPartners, Inc., 7.375%, 2006 3,400 3,296
Tenet Healthcare, 8.625%, 2003 6,000 6,318
----------------------------------------------------------------------------
9,614
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--12.6% AB Spintab, 7.50%, 2049 6,000 6,146
Aegon, N.V., 8.00%, 2006 5,000 5,481
African Development Bank, 9.30%, 2000 4,000 4,311
Associates Corp., N.A., 8.25%, 1999 5,000 5,211
Case Credit Corp., 6.75%, 2007 5,200 5,235
Felcor Suites, L.P.
7.375%, 2004 5,925 5,904
7.625%, 2007 2,275 2,265
Finova Capital Corp., 9.125%, 2002 5,000 5,498
General Electric Capital Corp., 8.625%, 2008 5,000 5,807
Lehman Brothers Holdings
7.25%, 2003 2,650 2,728
7.375%, 2007 7,500 7,749
Morgan Stanley Group, 6.875%, 2007 4,950 5,019
Simon DeBartolo, 7.125%, 2007 2,950 2,997
Tanger Properties, L.P., 7.875%, 2004 2,950 2,973
TriNet Corporate Realty Trust
7.30%, 2001 5,000 5,132
7.70%, 2017 4,900 5,040
----------------------------------------------------------------------------
77,496
- --------------------------------------------------------------------------------------------------------------------------
ENERGY AND CHEMICALS--3.7% Gulf Canada Resources, 8.35%, 2006 7,700 8,373
Repsol International Finance, 7.00%, 2005 5,000 5,199
USX Corp., 9.375%, 2012 7,500 9,106
----------------------------------------------------------------------------
22,678
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--6.3% Continental Airlines, Inc.
<S> <C> <C> <C>
7.75%, 2014 $ 3,986 $ 4,287
6.90%, 2018 3,950 4,012
Delta Airlines, 9.32%, 2009 4,284 4,771
Ford Motor Credit, 7.75%, 2005 5,000 5,327
General Motors Acceptance Corp., 8.875%, 2010 5,000 5,919
Penske Truck Leasing, 8.25%, 1999 5,000 5,210
United Airlines, 9.56%, 2018 7,500 9,029
--------------------------------------------------------------------------
38,555
- -----------------------------------------------------------------------------------------------------------------------
UTILITIES--5.7% Centerior Energy, 7.67%, 2004 5,900 6,065
Chesapeake and Potomac Telephone Company of
Virginia, 8.375%, 2029 5,000 6,013
Cleveland Electric Illumination, 7.88%, 2017 3,950 3,966
Commonwealth Edison, 7.375%, 2004 4,475 4,582
Niagara Mohawk Power, 8.00%, 2004 4,950 5,173
US West Capital Funding
7.90%, 2027 5,000 5,271
7.95%, 2097 3,400 3,637
--------------------------------------------------------------------------
34,707
--------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--66.4%
(Cost: $397,748) 407,574
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.52% to 5.73%
INSTRUMENTS--5.7%
Due--November and December, 1997
Enron Corp. 5,000 4,976
Other 30,000 29,925
--------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--5.7%
(Cost: $34,902) 34,901
--------------------------------------------------------------------------
TOTAL INVESTMENTS--100.7%
(Cost: $608,064) 618,278
--------------------------------------------------------------------------
LIABILITIES, LESS OTHER ASSETS--(.7%) (4,808)
--------------------------------------------------------------------------
NET ASSETS--100% $613,470
--------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $608,064,000 for federal income tax purposes
at October 31, 1997, the gross unrealized appreciation was $14,227,000, the
gross unrealized depreciation was $4,013,000 and the net unrealized appreciation
on investments was $10,214,000.
See accompanying Notes to Financial Statements.
11
<PAGE> 12
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, 1997, the related statements of operations
for the year then ended and changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the fiscal
periods since 1993. These financial statements and financial highlights are the
responsibility of the 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, 1997, by correspondence with the custodians 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, 1997, 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 1993, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 16, 1997
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
<S> <C>
Investments, at value
(Cost: $608,064) $618,278
- ------------------------------------------------------------------------
Receivable for:
Investments sold 19,551
- ------------------------------------------------------------------------
Interest 12,582
- ------------------------------------------------------------------------
Fund shares sold 1,095
- ------------------------------------------------------------------------
TOTAL ASSETS 651,506
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Cash overdraft 4,088
- ------------------------------------------------------------------------
Payable for:
Investments purchased 31,103
- ------------------------------------------------------------------------
Dividends 1,448
- ------------------------------------------------------------------------
Fund shares redeemed 721
- ------------------------------------------------------------------------
Management fee 271
- ------------------------------------------------------------------------
Administrative services fee 107
- ------------------------------------------------------------------------
Distribution services fee 58
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 172
- ------------------------------------------------------------------------
Trustees' fees and other 68
- ------------------------------------------------------------------------
Total liabilities 38,036
- ------------------------------------------------------------------------
NET ASSETS $613,470
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $608,390
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (16,153)
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 10,214
- ------------------------------------------------------------------------
Undistributed net investment income 11,019
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $613,470
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($514,558 divided by 60,272 shares outstanding) $8.54
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $8.94
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($83,295 divided by 9,790 shares outstanding) $8.51
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($9,083 divided by 1,065 shares outstanding) $8.53
- ------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($6,534 divided by 766 shares outstanding) $8.53
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------------------
Interest income $45,924
- --------------------------------------------------------------------------------------------
Expenses:
Management fee 3,162
- --------------------------------------------------------------------------------------------
Administrative services fee 1,209
- --------------------------------------------------------------------------------------------
Distribution services fee 653
- --------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,405
- --------------------------------------------------------------------------------------------
Reports to shareholders 117
- --------------------------------------------------------------------------------------------
Professional fees 45
- --------------------------------------------------------------------------------------------
Trustees' fees and other 29
- --------------------------------------------------------------------------------------------
Total expenses 6,620
- --------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 39,304
- --------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------------------------------------------------
Net realized gain on sales of investments 10,264
- --------------------------------------------------------------------------------------------
Net realized loss from futures transactions (8,330)
- --------------------------------------------------------------------------------------------
Net realized gain 1,934
- --------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 3,456
- --------------------------------------------------------------------------------------------
Net gain on investments 5,390
- --------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $44,694
- --------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------
1997 1996
<S> <C> <C>
- --------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------
Net investment income $ 39,304 40,644
- --------------------------------------------------------------------------------------------
Net realized gain 1,934 2,967
- --------------------------------------------------------------------------------------------
Change in net unrealized appreciation 3,456 (12,747)
- --------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 44,694 30,864
- --------------------------------------------------------------------------------------------
Net equalization credits (charges) 371 (1,036)
- --------------------------------------------------------------------------------------------
Distribution from net investment income (39,211) (40,681)
- --------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions 34,618 (65,576)
- --------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 40,472 (76,429)
- --------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------
Beginning of year 572,998 649,427
- --------------------------------------------------------------------------------------------
END OF YEAR (including undistributed net investment
income of $11,019 and $10,556, respectively) $613,470 572,998
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE Kemper Income and Capital Preservation Fund is an
FUND 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 sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares 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.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT INVESTMENT VALUATION. Investments are stated at
ACCOUNTING POLICIES 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. 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. Over-the-counter traded fixed income
options are valued based upon prices provided by
market makers. Other securities and assets are
valued at fair value as determined in good faith by
the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes discount amortization on
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 and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
FEDERAL INCOME TAXES. 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, 1997, amounting to approximately
$16,124,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 2002 through 2003.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends 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 MANAGEMENT AGREEMENT. The Fund has a management
AFFILIATES agreement with Zurich Kemper Investments, Inc.
(ZKI), and pays a management fee at an annual rate
of .55% of the first $250 million of average daily
net assets declining to .40% of average daily net
assets in excess of $12.5 billion. The Fund
incurred a management fee of $3,162,000 for the
year ended October 31, 1997.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Zurich Kemper Distributors,
Inc. (ZKDI). Underwriting commissions paid in
connection with the distribution of Class A shares
are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY ZKDI BY ZKDI TO FIRMS
---------------- -------------------
<S> <C> <C>
Year ended October 31, 1997 $53,000 1,283,000
</TABLE>
For services under the distribution services
agreement, the Fund pays ZKDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, ZKDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, ZKDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B and Class C shares and the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES PAID
RECEIVED BY ZKDI BY ZDKI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Year ended October 31, 1997 $866,000 648,000
</TABLE>
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with ZKDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays ZKDI a fee at an annual rate of up to
.25% of average daily net assets of each class.
ZKDI in turn has various 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 PAID BY ZKDI
ASF PAID BY THE -------------------------------
FUND TO ZKDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1997 $1,209,000 1,207,000 6,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENTS. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) is the
shareholder service agent of the Fund. Under the
agreement, ZKSvC received shareholder services fees
of $937,000 for the year ended October 31, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
For the year ended October 31, 1997, the Fund made
no direct payments to its officers and incurred
trustees' fees of $24,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT TRANSACTIONS For the year ended October 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $924,093
Proceeds on sales 921,659
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE The following table summarizes the activity in
TRANSACTIONS capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
--------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------
SHARES SOLD
---------------------------------------------------------------------------------
Class A 22,073 $ 182,796 8,700 $ 72,664
---------------------------------------------------------------------------------
Class B 3,288 27,633 6,081 52,041
---------------------------------------------------------------------------------
Class C 655 5,545 596 5,059
---------------------------------------------------------------------------------
Class I 133 1,118 205 1,771
---------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
---------------------------------------------------------------------------------
Class A 2,715 20,630 2,685 22,702
---------------------------------------------------------------------------------
Class B 420 3,525 441 3,738
---------------------------------------------------------------------------------
Class C 41 349 25 211
---------------------------------------------------------------------------------
Class I 55 465 78 661
---------------------------------------------------------------------------------
SHARES REDEEMED
---------------------------------------------------------------------------------
Class A (22,089) (180,977) (16,494) (137,467)
---------------------------------------------------------------------------------
Class B (2,604) (21,912) (8,647) (75,755)
---------------------------------------------------------------------------------
Class C (295) (2,495) (521) (4,568)
---------------------------------------------------------------------------------
Class I (243) (2,059) (780) (6,633)
---------------------------------------------------------------------------------
CONVERSION OF SHARES
---------------------------------------------------------------------------------
Class A 377 3,183 147 1,262
---------------------------------------------------------------------------------
Class B (378) (3,183) (147) (1,262)
---------------------------------------------------------------------------------
NET INCREASE (DECREASE)
FROM CAPITAL SHARE
TRANSACTIONS $ 34,618 $ (65,576)
---------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES The Fund has entered into exchange traded
CONTRACTS financial futures contracts in order to help
protect itself from anticipated market conditions
and, as such, bears the risk that arises from
entering into these contracts.
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and its broker as the market value
of the futures contract fluctuates. At October 31,
1997, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $2,112,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures positions
open at October 31, 1997 (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION LOSS AT
TYPE AMOUNT MONTH 10/31/97
----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond $74,745 December '97 $(2,260)
----------------------------------------------------------------------
U.S. Treasury Note 32,588 December '97 (937)
----------------------------------------------------------------------
Total $(3,197)
----------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------
CLASS A
-------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------
Net asset value, beginning of year $8.46 8.62 7.91 8.97 8.34
- ------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .57 .58 .61 .61 .63
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 (.15) .72 (1.03) .62
- ------------------------------------------------------------------------------------
Total from investment operations .65 .43 1.33 (.42) 1.25
- ------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .57 .59 .62 .59 .62
- ------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- .05 --
- ------------------------------------------------------------------------------------
Total dividends .57 .59 .62 .64 .62
- ------------------------------------------------------------------------------------
Net asset value, end of year $8.54 8.46 8.62 7.91 8.97
- ------------------------------------------------------------------------------------
TOTAL RETURN 8.00% 5.17 17.47 (4.86) 15.48
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------
Expenses .97% .96 .90 .94 .82
- ------------------------------------------------------------------------------------
Net investment income 6.75% 6.90 7.31 7.34 7.26
- ------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> ------------------------------------
CLASS B
------------------------------------
YEAR ENDED
OCTOBER 31, MAY 31 TO
-------------------- OCTOBER 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------
Net asset value, beginning of period $8.43 8.59 7.90 8.16
- ---------------------------------------------------------------------------------
Income from investment operations:
Net investment income .49 .50 .51 .23
- ---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 (.15) .72 (.26)
- ---------------------------------------------------------------------------------
Total from investment operations .57 .35 1.23 (.03)
- ---------------------------------------------------------------------------------
Less distribution from net investment
income .49 .51 .54 .23
- ---------------------------------------------------------------------------------
Net asset value, end of period $8.51 8.43 8.59 7.90
- ---------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.99% 4.20 16.12 (.45)
- ---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------
Expenses 1.90% 1.93 1.81 1.92
- ---------------------------------------------------------------------------------
Net investment income 5.82% 5.93 6.40 6.72
- ---------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------
CLASS C
-------------------------------------
YEAR ENDED OCTOBER 31,
----------------------- MAY 31 TO
OCTOBER 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------
Net asset value, beginning of period $8.45 8.61 7.90 8.16
- -----------------------------------------------------------------------------
Income from investment operations:
Net investment income .49 .50 .53 .23
- -----------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 (.15) .72 (.26)
- -----------------------------------------------------------------------------
Total from investment operations .57 .35 1.25 (.03)
- -----------------------------------------------------------------------------
Less distribution from net investment
income .49 .51 .54 .23
- -----------------------------------------------------------------------------
Net asset value, end of period $8.53 8.45 8.61 7.90
- -----------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.03% 4.23 16.45 (.44)
- -----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------
Expenses 1.86% 1.90 1.78 1.89
- -----------------------------------------------------------------------------
Net investment income 5.86% 5.96 6.43 6.75
- -----------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> ---------------------------------------
CLASS I
---------------------------------------
YEAR ENDED
OCTOBER 31, JULY 3 TO
------------------ OCTOBER 31,
1997 1996 1995
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.45 8.61 8.52
- -----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .59 .60 .19
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 (.15) .12
- -----------------------------------------------------------------------------------------------
Total from investment operations .67 .45 .31
- -----------------------------------------------------------------------------------------------
Less distribution from net investment
income .59 .61 .22
- -----------------------------------------------------------------------------------------------
Net asset value, end of period $8.53 8.45 8.61
- -----------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.26% 5.45 3.65
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------------
Expenses .70% .72 .62
- -----------------------------------------------------------------------------------------------
Net investment income 7.02% 7.14 6.87
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $613,470 572,998 649,427 510,432 569,145
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate 164% 74 182 163 190
- -----------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES & 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
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
OFFICERS
ROBERT C. CESSINE
Vice President
CHARLES R. MANZONI, JR.
Vice President
JOHN E. NEAL
Vice President
ROBERT C. PECK, JR.
Vice President
PHILIP J. COLLORA
Vice President
and Secretary
JEROME L. DUFFY
Treasurer
ELIZABETH C. WERTH
Assistant Secretary
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER ZURICH KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Income Funds prospectus.
KICPF - 2 (12/97) 1040980
