<PAGE> 1
KEMPER
INCOME AND CAPITAL
PRESERVATION FUND
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED APRIL 30, 1997
Offering Investors The Opportunity For A High Level Of Current Income And
Preservation Of Capital
" . . . We managed the fund with a
neutral to defensive duration for the entire
six-month period because we felt that economic growth
was gaining momentum . . ."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
7
Portfolio Statistics
8
Portfolio of Investments
11
Financial Statements
13
Notes to Financial Statements
17
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1997
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 1.25%
CLASS B 0.77%
CLASS C 0.79%
LIPPER CORPORATE
DEBT A RATED FUNDS
CATEGORY AVERAGE* 1.31%
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not represent future performance.
Returns and net asset value fluctuate. Shares are redeemable at current net
asset value, which may be more or less than original cost.
* 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
04/30/97 10/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS A $8.28 $8.46
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS B $8.25 $8.43
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS C $8.27 $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 #60 OF #107 OF #106 OF
122 FUNDS 122 FUNDS 122 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #12 OF N/A N/A
51 FUNDS
- --------------------------------------------------------------------------------
10-YEAR #12 OF N/A N/A
27 FUNDS
- --------------------------------------------------------------------------------
15-YEAR #7 OF N/A N/A
23 FUNDS
- --------------------------------------------------------------------------------
20-YEAR #7 OF N/A N/A
17 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF APRIL 30, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------
<S> <C> <C> <C>
SIX-MONTH INCOME: $0.2850 $0.2446 $0.2467
- --------------------------------------------------
APRIL DIVIDEND: $0.0475 $0.0397 $0.0407
- --------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 6.88% 5.77% 5.91%
- --------------------------------------------------
SEC YIELD+: 6.24% 5.59% 5.62%
- --------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown
as an annualized percentage of net asset value on April 30, 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 April 30, 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.
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR FIXED-INCOME FUNDS STYLE BOX
- --------------------------------------------------------------------------------
Maturity
Short Intermediate Long
Quality High --- --- ---
Medium --- --- X
Low --- --- ---
Source: Morningstar, Inc., Chicago, IL (312) 696-6000. (Morningstar Style
Box is based on a portfolio date as of April 30, 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 portfolio.
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 INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $80 BILLION IN ASSETS, INCLUDING $45 BILLION IN RETAIL MUTUAL
FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD
UNIVERSITY.
DEAR SHAREHOLDER,
The agreement between the White House and Republican leaders in Congress to
balance the federal budget has effectively ended the market correction that
began in the first quarter. Such sudden progress on balancing the budget, an
initiative that the bond market was anticipating resolution on more than one
year ago, is positive news.
The next several weeks will find Congress and the Clinton administration
negotiating toward a final agreement. Unlike previous failed proposals that
sought to balance the budget principally by increasing income taxes, the current
plan -- which starts from the base of a relatively small deficit -- proposes to
slow the growth of federal spending. As such, its prospects are promising.
Natural skeptics are waiting to see specific legislation to see if the
agreement has teeth. While we are optimistic, we need to temper our enthusiasm.
Much of the good news associated with a balanced budget was quickly discounted
in the higher prices in the stock and bond markets.
Of particular interest to equity investors is the agreement to reduce the
maximum tax rate on capital gains. Although details of the reduction are yet to
be known, the prospect of more favorable tax treatment on gains will have the
short-term effect of supporting stocks -- investors can be expected to postpone
selling until they can qualify for the lower tax rate. With equity sales
essentially "frozen" until the effective date is known, the stock market should
have a considerable underpinning. Once an effective date is determined, we would
expect the pent-up selling to occur. However, then we shall enjoy the long-term
positive effect of the lower tax rate on gains.
Talk of a balanced budget has shifted the spotlight away from the Federal
Reserve Board's upward pressure on interest rates. Having declined to raise
rates in May, the Fed may still act again at a later date. However, this action
may be the last for a while because the economy seems to be slowing down in the
second quarter, after the rapid 5.6 percent growth in the first quarter of the
year. A slower economy would reduce the threat of inflation and reduce the need
for further rate hikes by the Fed.
In fact, a review of the standard measures of the economy shows little to
be concerned about. As has been the pattern for more than five years, a few
strong quarters followed by a few weak quarters have produced an overall 2
percent to 3 percent rate of growth in gross domestic product (GDP). Job
creation and the unemployment rate are consistent with a moderately expanding
economy. Corporate profits continue to grow at an expected 4 to 5 percent rate
in 1997. The Consumer Price Index continues to track at a 2.5 percent to 3.0
percent rate.
Just as we see a limited downside to today's rising interest rate
environment, so is there a limited upside in the near future. The effect of
higher rates will have to work itself through the economy. Higher rates have
significant implications for corporate profitability, debt issuance, credit
extension and international trade. Post-correction cash flows into the financial
markets will be a subject of great scrutiny. One of the factors driving the
stock market to its recent all-time high was the unprecedented high level of
investment through mutual funds, 401(k)s and qualified contribution plans. It is
realistic to expect that, on the margin, some of that cash will find a home in
short-term, liquid investments while the stock market sorts itself out.
Leadership in the stock market has been quite narrow and concentrated for
the past six months in large, multinational companies with familiar consumer
brand names. The recent rally after the announcement of a balanced budget
agreement suggests that valuations of smaller capitalization stocks are
compelling and the market is broadening.
Higher interest rates are, of course, anathema to the fixed-income market.
However, bond investors in the last few weeks have been cheered by the balanced
budget proposal and by expectations that interest rates would not go much
higher. We expect the bond market to trade in a very narrow range -- with
long-term interest rates no lower than 6.50 percent
3
<PAGE> 4
ECONOMIC OVERVIEW
and no higher than 7.25 percent. One positive effect of the stock market
correction was the widening of spreads available on high yield bonds. As a
consequence, high yield bonds today are more reasonably priced.
A natural response to increased volatility in the U.S. equity market is to
look abroad. In fact, the valuations of many international markets are more
attractive than the U.S. However, the weak German and Japanese economies make it
difficult to identify many exciting near-term opportunities without careful
research.
Our recommendation to shareholders is to stay the course and to fight the
temptation to try to time when and where you should be invested without help.
Financial assets react much quicker today to events. Volatility has returned to
the market and with it heightened uncertainty. Now is the time to rely on your
financial representative for the expertise and the long-term investing
discipline that he or she can provide.
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recessions 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 (5/31/97) 6 MONTHS AGO 1 YEAR AGO 2 YEAR AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.71 6.3 6.91 6.17
PRIME RATE(2) 8.5 8.25 8.25 9
INFLATION RATE(3) 2.3 3.31 2.75 3.04
THE U.S. DOLLAR(4) 6.55 4.36 9.15 -9.31
CAPITAL GOODS ORDERS(5)* 8.28 2.42 3.93 17.47
INDUSTRIAL PRODUCTION(5) 4.28 4.36 3.34 2.88
EMPLOYMENT GROWTH(6) 2.13 2.15 2.09 2.7
</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%. 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 April 30, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this commentary as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
June 9, 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 THE PORTFOLIO MANAGER OF KEMPER INCOME AND
CAPITAL PRESERVATION FUND. MR. CESSINE RECEIVED BOTH A B.S. AND AN M.S. DEGREE
FROM THE UNIVERSITY OF WISCONSIN, MADISON, WISCONSIN 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 SIX-MONTH REPORTING PERIOD, NOVEMBER 1, 1996 THROUGH APRIL 30,
1997, WAS CHARACTERIZED BY HIGHER INTEREST RATES AND A VOLATILE EQUITY MARKET.
KEMPER INCOME AND CAPITAL PRESERVATION FUND PORTFOLIO MANAGER ROBERT CESSINE
EXPLAINS THE EVENTS THAT OCCURRED AND HOW HE ADJUSTED THE FUND FOR A HIGHER
INTEREST RATE ENVIRONMENT DURING THE PERIOD.
Q HOW DID KEMPER INCOME AND CAPITAL PRESERVATION FUND PERFORM DURING THE
SEMIANNUAL REPORTING PERIOD NOVEMBER 1, 1996 THROUGH APRIL 30, 1997?
A It was a difficult period for the fund. Class A shares (unadjusted for
sales charge) returned 1.25 percent. Performance was most dramatically
impacted by the Federal Reserve Board's (the Fed) 0.25 percent increase in
short-term interest rates near the end of March. But the fund struggled
more than some of its peers due to its significant investment in
high-grade corporate bonds--about 70 percent of the portfolio. High-grade
corporate bonds were hurt by the Fed tightening and also by the
simultaneous decline in the stock market. However, we remain optimistic
about the long-term performance of the fund's corporate bond allocation.
We believe that the one-two punch the fund and corporate bonds experienced
in March was a temporary set-back, not the beginning of a long-term bear
market.
Q WOULD YOU EXPLAIN THE CONTRIBUTING FACTORS LEADING UP TO THE
RECENT MARKET WEAKNESS?
A The Federal Reserve Board's interest rate increase in late March was the
most significant basis for the market's weakness. But the magnitude of
the sell-off that occurred as a result of the rate increase was also
fueled by comments made by Federal Reserve Board Chairman Alan Greenspan
in February. Greenspan expressed his concern about the historically tight
spreads in the high yield corporate market and whether or not that strong
performance could be sustained. Since spreads in the investment-grade bond
market were tight as well, the comment concerned investors in all types of
corporate bonds. In addition, 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 keep inflation at bay. The Fed's tightening occurred in March
and initiated a sharp sell-off in virtually all securities markets and a
widening of corporate bond spreads. The high grade market was hit harder than it
might have been if the stock market hadn't declined as it did.
5
<PAGE> 6
PERFORMANCE UPDATE
Q WHEN DID YOU BEGIN PREPARING THE FUND FOR A POSSIBLE INCREASE IN INTEREST
RATES?
A We managed the fund with a neutral to defensive duration for the entire
six-month period because we felt that economic growth was gaining
momentum. 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 the fund's duration even further
as it became more clear that the increase in rates was imminent.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUND TO SHORTEN ITS DURATION?
A The most significant adjustment we made was to increase the level of cash
and cash equivalents in the portfolio. At the start of the period, cash
and short-term Treasuries (maturities of three years or less) represented
6 percent of the portfolio. By the end of March, when rates were
increased, cash and short-term Treasuries accounted for 12 percent of the
fund's holdings.
Typically, we try to keep the fund's cash position relatively low, to help
maintain a high level of interest income. However, when rates fell in March, our
larger cash position helped reduce the impact of the drop in investment
valuations.
Q HINDSIGHT BEING 20/20, WHAT DO YOU WISH YOU WOULD HAVE DONE DIFFERENTLY
WITH THE FUND?
A Looking back, I wish that we would have been invested in mortgage
securities. Mortgages outperformed all other high quality income asset classes
during the first four months of 1997, and they would have cushioned the fund
somewhat from the impact of the Fed's tightening and the decline in the stock
market.
We chose not to invest in mortgages during the period because we felt that
they were priced too high to provide a suitable total return for the fund.
Additionally, we did not anticipate that interest rates would rise significantly
enough to sustain their performance. Mortgages tend to outperform other types of
high quality fixed-income securities during times of declining volatility or
when rates rise because they have relatively short durations. Conversely, they
tend to underperform as rates fall for the same reason and because it is more
likely that mortgage owners will refinance when rates move lower. Should
mortgages cheapen over the next several months, we may add some to the
portfolio.
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. Remember,
the reason that the Fed increased short-term rates was because the economy had
begun to grow at a faster pace. This pick-up in growth caused concern that
inflation might begin to creep up as well. But at this point, inflation remains
relatively benign. Economic growth, on the other hand, is positive for companies
issuing debt. Stronger growth generates consumer spending, which fuels corporate
earnings and enables companies to meet their coupon payments. Growth at a
controlled rate, which is what we've been experiencing, is fundamentally good
for corporate bonds and for the fund.
6
<PAGE> 7
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 4/30/97 ON 10/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
TREASURY BONDS AND NOTES 14% 13%
- --------------------------------------------------------------------------------
FOREIGN BONDS 5 9
- --------------------------------------------------------------------------------
CORPORATE BONDS 67 72
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 14 6
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 4/30/97 ON 10/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH AND EQUIVALENTS 7% 1%
- --------------------------------------------------------------------------------
1-10 YEARS 64 72
- --------------------------------------------------------------------------------
10-20 YEARS 14 17
- --------------------------------------------------------------------------------
20+ YEARS 15 10
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 4/30/97 ON 10/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 4/30/97 ON 10/31/96
<S> <C> <C>
AVERAGE MATURITY 7.8 YEARS 13.2 YEARS
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS
KEMPER INCOME AND CAPITAL PRESERVATION FUND
Portfolio of Investments at April 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GOVERNMENT OBLIGATIONS PRINCIPAL AMOUNT VALUE
U.S. GOVERNMENT--20.8% U.S. Treasury Notes
9.25%, 1998 $10,000 $ 10,384
9.125%, 1999 29,500 31,067
5.875%, 2004 3,950 3,785
U.S. Treasury Bonds
10.75%, 2003 60,000 72,141
6.50%, 2026 10,500 9,860
------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost: $129,976) 127,237
------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
CANADIAN GOVERNMENT--2.0% Province of Nova Scotia, 8.75%, 2022 4,000 4,471
Province of Quebec, 8.625%, 2005 7,500 8,063
------------------------------------------------------------------------
TOTAL CANADIAN GOVERNMENT OBLIGATIONS
(Cost: $12,885) 12,534
------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
CORPORATE OBLIGATIONS
BANKS--19.5% Abbey National First Capital, 8.20%, 2004 1,600 1,687
Abbey National PLC, 7.35%, 2049 3,350 3,302
ABN-Amro Holding N.V., 8.25%, 2009 7,000 7,233
BCH Cayman Islands Ltd., 7.70%, 2006 2,480 2,489
Banco Central Hispano, 7.50%, 2005 7,500 7,445
Bangkok Bank
7.25%, 2005 2,500 2,397
8.375%, 2027 3,900 3,773
Capital One Bank, 8.125%, 2000 7,500 7,667
Citicorp, 7.625%, 2005 7,500 7,632
Corporation Andina De Formento, 7.79%, 2017 9,500 9,385
Crestar Financial Corp., 8.75%, 2004 5,000 5,354
First Fidelity Bancorporation, 9.625%, 1999 5,000 5,307
Fleet Financial Group, Inc., 8.625%, 2007 5,000 5,380
Kansallis Osake Bank, 10.00%, 2002 5,000 5,591
Kansallis Osake Pankki, 8.65%, 2049 5,000 5,179
NationsBank Corp., 9.50%, 2004 5,000 5,606
Peoples Bank Bridgeport., 7.20%, 2006 4,950 4,744
Riggs National Corp., 8.50%, 2006 7,000 7,052
Societe Generale, 7.85%, 2049 4,900 4,933
SunTrust Banks, 7.25%, 2006 4,950 4,924
Svenska Handelbanken
8.35%, 2004 5,000 5,283
7.125%, 2049 1,950 1,882
Wells Fargo and Co., 8.75%, 2002 5,000 5,350
------------------------------------------------------------------------
119,595
- -----------------------------------------------------------------------------------------------------------------
COMMUNICATIONS, MEDIA Comcast Cablevision, 8.375%, 2007 4,900 4,945
AND ELECTRONICS--6.0%
News American Holdings, Inc., 9.25%, 2013 10,450 11,340
Tele-Communications, Inc., 9.80%, 2012 6,000 6,520
Time Warner Entertainment Co., L.P., 8.375%, 2023 3,750 3,740
Time Warner Inc., 9.15%, 2023 4,950 5,283
Worldcom Inc., 7.75%, 2007 4,950 4,947
------------------------------------------------------------------------
36,775
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER PRODUCTS, Dayton Hudson Corp., 7.25%, 2004 $ 5,000 $ 4,960
SERVICES AND RETAIL--10.9%
Dimon Inc., 8.875%, 2006 5,550 5,679
Federated Department Stores
10.00%, 2001 7,500 8,144
8.50%, 2003 3,000 3,121
Grand Metropolitan Investment Corp., 8.625%, 2001 5,000 5,309
JC Penney
7.60%, 2007 2,500 2,531
7.95%, 2017 4,950 5,004
La Quinta Motor Inns, 7.25%, 2004 5,000 4,884
Marriott International, 6.75%, 2009 5,000 4,618
Philip Morris, 7.75%, 2027 7,450 7,007
RJR Nabisco, Inc.
8.75%, 2005 3,950 3,846
8.00%, 2000 3,500 3,583
Royal Caribbean Cruises Ltd., 8.25%, 2005 7,480 7,791
------------------------------------------------------------------------
66,477
- -----------------------------------------------------------------------------------------------------------------
DRUGS AND HEALTH CARE--2.7% MedPartners, Inc., 7.375%, 2006 7,450 7,328
Tenet Healthcare
8.625%, 2003 and 2007 8,950 9,058
------------------------------------------------------------------------
16,386
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--11.8% AB Spintab, 7.50%, 2049 6,000 5,920
Aegon N.V., 8.00%, 2006 5,000 5,208
African Development Bank, 9.30%, 2000 4,000 4,273
Associates Corp., N.A., 8.25%, 1999 5,000 5,181
Equitable Life, 6.95%, 2005 5,000 4,816
Finova Capital Corp., 9.125%, 2002 5,000 5,399
General Electric Capital Corp., 8.625%, 2008 5,000 5,544
Household Finance, 8.00%, 2004 5,000 5,171
Lehman Brothers Holdings, 7.375%, 2007 7,500 7,332
Morgan Stanley Group, 6.875%, 2007 4,950 4,763
Salomon Inc., 7.50%, 2003 7,450 7,466
Sears Roebuck Acceptance Corp., 8.45%, 1998 3,000 3,085
TriNet Corporate Realty Trust
7.30%, 2001 5,000 5,020
7.95%, 2006 3,000 3,064
------------------------------------------------------------------------
72,242
- -----------------------------------------------------------------------------------------------------------------
ENERGY AND CHEMICALS--10.8% Citgo Petroleum Corp., 7.875%, 2006 4,000 4,038
Enersis S.A., 7.40%, 2016 4,950 4,710
Freeport-McMoRan, Inc., 7.20%, 2026 7,450 7,276
Gulf Canada Resources, 8.35%, 2006 7,450 7,631
Oryx Energy Co., 8.375%, 2004 6,000 6,107
Parker & Parsley Petroleum
8.875%, 2005 5,000 5,379
8.25%, 2007 3,940 4,098
Petronas Dagangan Berhad, 7.125%, 2006 7,500 7,373
Reliance Industries Ltd., 10.25%, 1997 2,000 2,021
Repsol International Finance, 7.00%, 2005 5,000 4,944
Tennessee Gas Pipeline, 7.00%, 2027 4,400 4,329
USX Corp., 9.375%, 2012 7,500 8,467
------------------------------------------------------------------------
66,373
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TRANSPORTATION--6.5% Delta Airlines
9.32%, 2009 $ 4,303 $ 4,657
9.75%, 2021 6,000 7,026
Ford Motor Credit, 7.75%, 2005 5,000 5,115
General Motors Acceptance Corp., 8.875%, 2010 5,000 5,638
Northwest Airlines, 8.375%, 2004 3,950 3,906
Penske Truck Leasing, 8.25%, 1999 5,000 5,177
United Airlines, 9.56%, 2018 7,500 8,347
------------------------------------------------------------------------
39,866
- -----------------------------------------------------------------------------------------------------------------
UTILITIES--1.7% Chesapeake and Potomac Telephone Company of
Virginia, 8.375%, 2029 5,000 5,575
US West Capital Funding, 7.90%, 2027 5,000 4,931
------------------------------------------------------------------------
10,506
------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--69.9%
(Cost: $431,096) 428,220
------------------------------------------------------------------------
<CAPTION>
MONEY MARKET INSTRUMENTS
Yield--5.50% to 5.75%
Due--May 1997
Baxter International Inc. 5,000 4,994
Beneficial Corp. 5,000 4,997
Enserch Corp. 5,000 4,991
GTE Corp. 5,000 4,990
Other 27,000 26,949
------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--7.7%
(Cost: $46,922) 46,921
------------------------------------------------------------------------
TOTAL INVESTMENTS--100.4%
(Cost: $620,879) 614,912
------------------------------------------------------------------------
LIABILITIES, LESS OTHER ASSETS--(.4)% (2,603)
------------------------------------------------------------------------
NET ASSETS--100% $612,309
------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $620,879,000 for federal income tax purposes
at April 30, 1997, the gross unrealized appreciation was $5,118,000 the gross
unrealized depreciation was $11,085,000 and the net unrealized depreciation of
investments was $5,967,000.
See accompanying Notes to Financial Statements.
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1997
(in thousands)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $620,879) $614,912
- ------------------------------------------------------------------------
Receivable for:
Investments sold 33,548
- ------------------------------------------------------------------------
Fund shares sold 2,141
- ------------------------------------------------------------------------
Interest 13,910
- ------------------------------------------------------------------------
TOTAL ASSETS 664,511
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Cash overdraft 2,692
- ------------------------------------------------------------------------
Payable for:
Investments purchased 48,379
- ------------------------------------------------------------------------
Fund shares redeemed 477
- ------------------------------------------------------------------------
Management fee 261
- ------------------------------------------------------------------------
Administrative services fee 99
- ------------------------------------------------------------------------
Distribution services fee 52
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 172
- ------------------------------------------------------------------------
Trustees' fees and other 70
- ------------------------------------------------------------------------
Total liabilities 52,202
- ------------------------------------------------------------------------
NET ASSETS $612,309
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $625,189
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (18,627)
- ------------------------------------------------------------------------
Net unrealized depreciation on investments (5,967)
- ------------------------------------------------------------------------
Undistributed net investment income 11,714
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $612,309
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($521,970 / 63,074 shares outstanding) $8.28
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or 4.50%
of offering price) $8.67
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share
($77,737 / 9,427 shares outstanding) $8.25
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sale charge) per share
($6,041 / 731 shares outstanding) $8.27
- ------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($6,561 / 794 shares outstanding) $8.26
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Interest income $22,865
- -----------------------------------------------------------------------
Expenses:
Management fee 1,566
- -----------------------------------------------------------------------
Administrative services fee 578
- -----------------------------------------------------------------------
Distribution services fee 315
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 712
- -----------------------------------------------------------------------
Professional fees 25
- -----------------------------------------------------------------------
Reports to shareholders 56
- -----------------------------------------------------------------------
Trustees' fees and other 14
- -----------------------------------------------------------------------
Total expenses 3,266
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 19,599
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized loss on sales of investments (373)
- -----------------------------------------------------------------------
Net realized loss from futures transactions (166)
- -----------------------------------------------------------------------
Net realized loss (539)
- -----------------------------------------------------------------------
Change in net unrealized appreciation on investments (12,725)
- -----------------------------------------------------------------------
Net loss on investments (13,264)
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 6,335
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
APRIL 30, OCTOBER 31,
1997 1996
<S> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
Net investment income $ 19,599 40,644
- -------------------------------------------------------------------------------------------------
Net realized gain (loss) (539) 2,967
- -------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (12,725) (12,747)
- -------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,335 30,864
- -------------------------------------------------------------------------------------------------
Net equalization credits (charges) 1,095 (1,036)
- -------------------------------------------------------------------------------------------------
Distribution from net investment income (19,536) (40,681)
- -------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions 51,417 (65,576)
- -------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 39,311 (76,429)
- -------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------
Beginning of period 572,998 649,427
- -------------------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment income of
$11,714 and $10,556, respectively) $612,309 572,998
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
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 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
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 financial futures and
options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Over-the-counter
traded 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
all 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
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
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. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended April 30, 1997. The accumulated net
realized loss on sales of investments for federal
income tax purposes at April 30, 1997, amounting to
approximately $18,597,000 is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 2002 through
2005.
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
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
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 $1,566,000 for the six
months ended April 30, 1997.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Zurich Kemper Distributors,
Inc. (ZKDI) (formerly known as Kemper Distributors,
Inc.). 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>
Six months ended April 30, 1997 $26,000 1,092,000
</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
AND CDSC COMMISSIONS AND
RECEIVED BY DISTRIBUTION FEES
ZKDI PAID BY ZKDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Six months ended April 30, 1997 $436,000 317,000
</TABLE>
14
<PAGE> 15
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
THE FUND TO ASF PAID BY
ZKDI ZKDI TO FIRMS
----------- -------------
<S> <C> <C>
Six months ended April 30, 1997 $578,000 577,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENTS. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) (formerly
known as Kemper Service Company) is the shareholder
service agent of the Fund. Under the agreement,
ZKSvC received shareholder services fees of
$470,000 for the six months ended April 30, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
For the year ended April 30, 1997, the Fund made no
direct payments to its officers and incurred
trustees' fees of $11,000 to independent trustees.
- --------------------------------------------------------------------------------
4
INVESTMENT
TRANSACTIONS For the year ended April 30, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $254,950
Proceeds on sales 241,084
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5
CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, OCTOBER 31,
--------------------- -----------------------
1997 1996
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------
SHARES SOLD
Class A 13,713 $111,988 8,700 $ 72,664
------------------------------------------------------------------------------
Class B 1,627 13,662 6,081 52,041
------------------------------------------------------------------------------
Class C 240 2,029 596 5,059
------------------------------------------------------------------------------
Class I 89 751 205 1,771
------------------------------------------------------------------------------
----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 1,354 11,335 2,685 22,702
------------------------------------------------------------------------------
Class B 205 1,708 441 3,738
------------------------------------------------------------------------------
Class C 18 153 25 211
------------------------------------------------------------------------------
Class I 28 233 78 661
------------------------------------------------------------------------------
----------------------------------------------------------------------------
SHARES REDEEMED
Class A (9,276) (76,017) (16,494) (137,467)
------------------------------------------------------------------------------
Class B (1,381) (11,600) (8,647) (75,755)
------------------------------------------------------------------------------
Class C (191) (1,604) (521) (4,568)
------------------------------------------------------------------------------
Class I (144) (1,221) (780) (6,633)
------------------------------------------------------------------------------
----------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 87 735 147 1,262
------------------------------------------------------------------------------
Class B (88) (735) (147) (1,262)
------------------------------------------------------------------------------
NET INCREASE
(DECREASE) FROM CAPITAL
SHARE TRANSACTIONS $ 51,417 $ (65,576)
------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6
FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded 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 April 30,
1997, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $2,134,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures position open
at April 30, 1997 (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN (LOSS)
TYPE AMOUNT MONTH AT 4/30/97
-------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond $ 54,875 June '97 $ 234
-------------------------------------------------------------------------
U.S. Treasury Note 21,100 June '97 (293)
-------------------------------------------------------------------------
Total $ (59)
-------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------------------
CLASS A
----------------------------------------------------------
SIX MONTHS YEAR ENDED OCTOBER 31,
ENDED ----------------------------
APRIL 30, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.46 8.62 7.91 8.97 8.34
- -----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .29 .58 .61 .61 .63
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.18) (.15) .72 (1.03) .62
- -----------------------------------------------------------------------------------------------------------
Total from investment operations .11 .43 1.33 (.42) 1.25
- -----------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .29 .59 .62 .59 .62
- -----------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- .05 --
- -----------------------------------------------------------------------------------------------------------
Total dividends .29 .59 .62 .64 .62
- -----------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.28 8.46 8.62 7.91 8.97
- -----------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.25% 5.17 17.47 (4.86) 15.48
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses .98% .96 .90 .94 .82
- -----------------------------------------------------------------------------------------------------------
Net investment income 6.80% 6.90 7.31 7.34 7.26
- -----------------------------------------------------------------------------------------------------------
</TABLE>
[CAPTION]
<TABLE>
<CAPTION>
----------------------------------------------------------
CLASS B
----------------------------------------------------------
YEAR ENDED
SIX MONTHS OCTOBER 31, MAY 31 TO
ENDED --------------- OCTOBER 31,
APRIL 30, 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 .24 .50 .51 .23
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.18) (.15) .72 (.26)
- -----------------------------------------------------------------------------------------------------
Total from investment operations .06 .35 1.23 (.03)
- -----------------------------------------------------------------------------------------------------
Less distribution from net investment income .24 .51 .54 .23
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $8.25 8.43 8.59 7.90
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) .77% 4.20 16.12 (.45)
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.94% 1.93 1.81 1.92
- -----------------------------------------------------------------------------------------------------
Net investment income 5.84% 5.93 6.40 6.72
- -----------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------------
CLASS C
-----------------------------------------------------
YEAR ENDED
SIX MONTHS OCTOBER 31, MAY 31 TO
ENDED ------------ OCTOBER 31,
APRIL 30, 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <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 .25 .50 .53 .23
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.18) (.15) .72 (.26)
- ------------------------------------------------------------------------------------------------------
Total from investment operations .07 .35 1.25 (.03)
- ------------------------------------------------------------------------------------------------------
Less distribution from net investment income .25 .51 .54 .23
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.27 8.45 8.61 7.90
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) .79% 4.23 16.45 (.44)
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.89% 1.90 1.78 1.89
- ------------------------------------------------------------------------------------------------------
Net investment income 5.89% 5.96 6.43 6.75
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------
CLASS I
-----------------------------------------------------
SIX MONTHS YEAR ENDED JULY 3 TO
ENDED OCTOBER 31, OCTOBER 31,
APRIL 30, 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 .28 .60 .19
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.18) (.15) .12
- -----------------------------------------------------------------------------------------------
Total from investment operations .10 .45 .31
- -----------------------------------------------------------------------------------------------
Less distribution from net investment income .29 .61 .22
- -----------------------------------------------------------------------------------------------
Net asset value, end of period $8.26 8.45 8.61
- -----------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.24% 5.45 3.65
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses .82% .72 .62
- -----------------------------------------------------------------------------------------------
Net investment income 6.76% 7.14 6.87
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR ENDED OCTOBER 31,
ENDED -----------------------------------------
APRIL 30, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in
thousands) $612,309 572,998 649,427 510,432 569,145
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 87% 74 182 163 190
- ------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD JR.
President and Trustee Vice President
DAVID W. BELIN
Trustee ROBERT C. CESSINE
LEWIS A. BURNHAM Vice President
Trustee
CHARLES R. MANZONI, JR.
DONALD L. DUNAWAY Vice President
Trustee
JOHN E. NEAL
ROBERT B. HOFFMAN Vice President
Trustee
PHILIP J. COLLORA
DONALD R. JONES Vice President
Trustee and Secretary
DOMINIQUE P. MORAX JEROME L. DUFFY
Trustee Treasurer
SHIRLEY D. PETERSON ELIZABETH C. WERTH
Trustee Assistant Secretary
WILLIAM P. SOMMERS
Trustee
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT ZURICH KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Funds prospectus.
KICPF - 3 (6/97) 1033390
Printed in the U.S.A. [KEMPER FUNDS LOGO]
TRUSTEES&OFFICERS
