<PAGE> 1
KEMPER
INCOME AND CAPITAL
PRESERVATION FUND
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED OCTOBER 31, 1996
OFFERING INVESTORS THE OPPORTUNITY FOR A HIGH LEVEL OF CURRENT INCOME
AND PRESERVATION OF CAPITAL
" . . . Changes in the economy, changes in investors' expectations
about the economy and the collapse of federal budget and
deficit reduction negotiations were the events
that shaped the bond market . . ."
[KEMPER FUNDS LOGO]
<PAGE> 2
TABLE OF
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, 1996 (unadjusted for any sales charge):
[BAR GRAPH]
<TABLE>
<CAPTION>
Lipper
Corporate
Class Class Class Debt A Rated Funds
A B C Category Average*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5.17% 4.20% 4.23% 4.82%
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not reflect 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
10/31/96 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS A $ 8.46 $ 8.62
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS B $ 8.43 $ 8.59
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS C $ 8.45 $ 8.61
- --------------------------------------------------------------------------------
</TABLE>
*Lipper Analytical Services, Inc. returns and rankings are based upon changes in
net asset value with all dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable.
- --------------------------------------------------------------------------------
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
SHARES SHARES SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #38 OF #86 OF #81 OF
111 FUNDS 111 FUNDS 111 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #12 OF N/A N/A
49 FUNDS
- --------------------------------------------------------------------------------
10-YEAR #11 OF N/A N/A
26 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
The following table shows per share dividend and yield information for the fund
as of October 31, 1996.
<TABLE>
<CAPTION>
A B C
SHARES SHARES SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.5860 $0.5065 $0.5096
- --------------------------------------------------------------------------------
OCTOBER DIVIDEND: $0.0475 $0.0411 $0.0414
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATED+: 6.74% 5.85% 5.88%
- --------------------------------------------------------------------------------
SEC YIELD+: 6.17% 5.50% 5.52%
- --------------------------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as an
annualized percentage of net asset value on October 31, 1996. 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, 1996, shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with a
standardized method prescribed by the Securities and Exchange Commission.
TERMS TO KNOW
DURATION Duration is a measure of the interest rate sensitivity of a fixed-
income portfolio incorporating time to maturity and coupon size. The larger the
duration number, the greater the interest rate risk.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period, assuming the
reinvestment of all dividends. It represents the aggregate percentage or dollar
value change over the period.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
2
<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 $76 BILLION IN ASSETS, INCLUDING $42 BILLION IN RETAIL
MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
As we approach the close of 1996, it's remarkable how eventful the year has been
and yet, economically, we are essentially where we were one year ago.
The fundamentals of the economy are remarkably similar today to what they
were in 1995. Long-term interest rates are approximately 6.5% compared to 6.3%
in November 1995. The economy is growing at a rate of approximately 2.2%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and one year ago is that prices of
the stocks are on average up 20%. While price movements were more volatile in
1996 than in the past few years, the patient investor was amply rewarded. The
prime element sending the stock market higher was strong positive cash flows.
This liquidity in an environment of modestly increasing corporate profits and
relatively stable interest rates pushed stocks higher for most of the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in
recent years but positive nonetheless.
- INTEREST RATES. Rates should remain stable, and short-term interest rates
may even decline.
- LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, will continue to create strong demand
for securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
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 (11/30/96) 6 MONTHS AGO 1 YEAR AGO 2 YEAR AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.2 6.91 5.71 7.81
PRIME RATE(2) 8.25 8.25 8.65 8.5
INFLATION RATE(3) 3.19 2.75 2.6 2.67
THE U.S. DOLLAR(4) 3.46 9.15 -2.58 -4.52
CAPITAL GOODS ORDERS(5)* 7.61 3.93 11.3 12.38
INDUSTRIAL PRODUCTION(5)* 3.6 3.35 1.71 6.58
EMPLOYMENT GROWTH(6) 2.11 2.08 1.92 3.4
</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 October 31, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter 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.
December 10, 1996
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
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 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.
ON THE HEELS OF DYNAMIC PERFORMANCE IN 1995, CORPORATE BONDS ENDURED A MORE
DIFFICULT PERIOD IN 1996. KEMPER INCOME AND CAPITAL PRESERVATION FUND PORTFOLIO
MANAGER ROBERT CESSINE DISCUSSES HOW SHIFTS IN INTEREST RATE DIRECTION,
ECONOMIC GROWTH, AND MARKET PSYCHOLOGY DROVE PERFORMANCE IN THE CORPORATE BOND
MARKET.
Q. IT SEEMS AS IF PERFORMANCE WITHIN THE BOND MARKET HAS FLUCTUATED QUITE A
BIT DURING THE FUND'S FISCAL YEAR -- NOVEMBER 1, 1995, THROUGH OCTOBER 31, 1996.
WOULD YOU EXPLAIN WHAT'S BEEN BEHIND THE VOLATILE PERFORMANCE?
A. Changes in the economy, changes in investors' expectations about the
economy and the collapse of federal budget and deficit reduction negotiations
were the events that shaped the bond market during the last 12 months.
From the start of the fiscal year and into January 1996, interest rates
fell quite dramatically. The decline was the result of decelerating economic
growth and fear within the market that a recession was imminent. In addition,
the market gained strength as it appeared that a federal budget agreement would
be reached in Washington. All of these factors fueled higher market prices and
yields fell accordingly.
In late January, however, economic data were released which indicated that
the slowdown in economic growth witnessed in late 1995 was likely the result of
severe weather conditions as opposed to any fundamental weakness in the economy.
Additionally, federal budget negotiations stalled, and an impasse developed,
which effectively eliminated the chances for a balanced budget in 1996.
Furthermore, in his testimony before congress, Federal Reserve Board Chairman
Alan Greenspan intimated that the pace of economic growth was improving. This
caused some investors to conclude that another reduction in interest rates was
not imminent. The simultaneous timing of these events prompted investors to
sell, and as they did interest rates rose dramatically.
Another sharp spike in market rates occurred in early March, when the U.S.
Department of Labor announced an unanticipated and dramatic increase in
employment growth. Many bond investors saw this data as evidence that the
economy was truly gaining momentum. The news caused a sell-off in the market
because more rapid economic growth is associated with higher inflation, which
erodes the value of fixed-income investments.
From April through August, rates fluctuated as investors tried to
anticipate changes in economic growth, inflation and the likelihood of an
interest rate tightening by the Federal Reserve Board (the Fed). Although
slightly volatile, interest rates moved up and down within a somewhat narrow
trading range. By September, inflation was still under control and economic
growth had begun to moderate, which calmed investors' fears of an intervention
by the Fed.
Q. HOW DID THESE SHIFTS IN ECONOMIC EXPECTATIONS IMPACT THE PERFORMANCE OF
KEMPER INCOME AND CAPITAL PRESERVATION FUND?
A. The fund performed well during the first and last months of its fiscal
period. Unfortunately, performance suffered from February through June as the
market anticipated a stronger economy and debated the possibility of an interest
rate hike. Like most of the fixed-income market, we had expected that the
5
<PAGE> 6
PERFORMANCE UPDATE
declining interest rate environment of 1995 would continue well into the first
quarter of 1996. We positioned the fund for that scenario by maintaining a long
duration stance -- beyond the average of our peers. Remember, duration is a
measurement of a fund's sensitivity to interest rates. The longer the duration,
the more sensitive it is to interest rate changes. This means that as interest
rates rose, the fund's performance began to suffer.
We were impacted most by the sharp rise in yields that resulted when the
budget negotiations fell apart in February. So, we reduced the duration of the
fund and positioned it for a higher rate environment. This helped minimize the
fund's losses that occurred when the market traded down after the employment
release in March. As it appeared that economic growth was moderating, we
extended the fund's duration to a neutral, rather than a defensive, position.
This extension of duration helped the fund's performance from July through
October.
Q. WHAT WERE THE BEST PERFORMING MARKET SECTORS DURING THE YEAR?
A. Corporate bonds and mortgage-backed securities were the best performing
sectors in which the fund may invest. Corporate bonds outperformed U.S.
Treasuries for the 12-month period ended October 31, 1996, and returned 6.22
percent. Treasuries returned 5.06 percent and mortgage-backed securities
returned 6.92 percent according to Lehman Brothers.
Q. DID THE FUND BENEFIT FROM THE STRONG PERFORMANCE IN MORTGAGES?
A. The fund did not own any mortgages during the fiscal year. We eliminated
mortgages last year to take advantage of the outperformance of Treasuries.
For a very short time, early in 1996, mortgages were relatively inexpensive, but
we chose not to purchase them at that point. We passed on the opportunity
because we were not convinced that rates would rise significantly enough to
warrant the purchase. Mortgages tend to outperform other types of high quality
fixed-income securities when rates rise because they have relatively short
durations. Conversely, they tend to underperform as rates fall, for the same
reason and also because it is more likely that mortgage owners will refinance at
lower market interest rates.
When the upward direction of rates became apparent in early spring, the
prices of mortgage securities were already too high to provide a suitable total
return for the fund. If interest rates continue to fall, the relative prices of
mortgages should continue to fall. If mortgage prices cheapen enough, we would
then consider the possibility of adding them back into the portfolio.
Q. WERE THERE ANY INDUSTRIES WITHIN THE CORPORATE SECTOR THAT PERFORMED
PARTICULARLY WELL?
A. The banking sector continued to provide strong performance during the
period, and we added more Yankee bank issues to the portfolio. Yankee banks are
foreign banks that issue debt in the United States, denominated in U.S. dollars.
We continued to add these to the portfolio because they offered potential for
appreciation. Because they're foreign, the banks seem to be less understood by
the market. As a result, they're less expensive to buy than many domestic bank
issues.
In addition to the financial sector, the airline industry and companies in
extractive industries like metals, mining and energy also performed well. Lower
rated bonds also performed better than higher rated bonds as yield spreads
narrowed throughout the year.
Q. WHAT FACTORS LED TO THE REDUCTION OF THE FUND'S DIVIDEND IN MARCH?
A. As you know, dividend distributions are dependent on the fund's earnings.
Kemper Income and Capital Preservation Fund's dividend had not been reduced in
over three years, since December 1992. In that time, market interest rates fell
substantially. The dividend was reduced by one-half the amount that interest
rates have fallen since the last cut.
Q. WHAT IS YOUR OUTLOOK FOR THE INVESTMENT-GRADE BOND MARKET?
A. The fundamental outlook for corporate bonds is good. We expect economic
growth to remain moderate and don't look for any meaningful inflationary
pressures to surface. The re-election of President Bill Clinton and a Republican
congress should also be positive, especially if steps toward balancing the
budget are taken. On a technical basis, spreads between corporate bonds and U.S.
Treasuries are tight. What that means is that the returns of the two types of
securities are very close. The coupon paid by corporates is now about the only
difference in return between the two types of securities. However, even with
these tight spreads, demand is still very strong for corporate bonds, which is
good for the market and the fund.
Q. WHAT WILL BE YOUR STRATEGY GOING FORWARD?
A. We intend to concentrate on finding value in the market -- issues with
growth potential that may be undervalued today. Our credit research staff will
be integral in helping to locate the winners.
6
<PAGE> 7
PERFORMANCE UPDATE
KEMPER INCOME AND CAPITAL PRESERVATION FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
For periods ended October 31, 1996 (adjusted for the maximum sales charge)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEARS CLASS
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL PRESERVATION
FUND CLASS A SHARES 0.39% 7.31% 7.92% 9.31% (since 4/15/74)
- ------------------------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL PRESERVATION
FUND CLASS B SHARES 1.25 N/A N/A 6.88 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL PRESERVATION
FUND CLASS C SHARES 4.23 N/A N/A 8.14 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Income and Capital Preservation Fund Class A
from 1/1/76 through 10/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1/1/76 12/31/80 12/31/85 12/31/90 10/31/96
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -Kemper Income and Capital Preservation Fund Class A(1) $10,000 11,600 24,346 36,707 61,825
- -Lehman Brothers Aggregate Bond Index+ $10,000 69,976
- -Consumer Price Index++ $10,000 15,550 19,694 24,108 28,522
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Income and Capital Preservation Fund Class B
from 5/31/94 Through 10/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 10/31/96
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -Kemper Income and Capital Preservation Fund Class B(1) $10,000 10,000 12,007 11,746
- -Lehman Brothers Aggregate Bond Index+ $10,000 10,077 11,839 12,277
- -Consumer Price Index++ $10,000 10,149 10,407 10,732
- --------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Income and Capital Preservation Fund Class C
from 5/31/94 through 10/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 10/31/96
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -Kemper Income and Capital Preservation Fund Class C(1) $10,000 10,009 12,041 12,084
- -Lehman Brothers Aggregate Bond Index+ $10,000 10,077 11,839 12,277
- -Consumer Price Index++ $10,000 10,149 10,407 10,732
- --------------------------------------------------------------------------------------------------------
</TABLE>
Past performance is not predictive of future performance. Returns and net asset
value fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
*Average annual total return measures net investment income and capital gain
or loss from portfolio investments, assuming reinvestment of all dividends
and for A shares adjustment for the maximum sales charge of 4.5% and for B
shares adjustment for the applicable contingent deferred sales charge as
follows: 1-year, 3%; 5-year, 1%; since inception, 0%. For C shares purchased
on or after April 1, 1996, there is a 1% 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 A shares and the contingent deferred sales charge
in effect at the end of the period for 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 performance to the Lehman Brothers Aggregate
Bond Index and the Consumer Price Index, you should also note that the
fund's performance reflects the maximum sales charge, while no such charges
are reflected in the performance of the indices.
+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 10/31/96 ON 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
TREASURY BONDS AND NOTES 13% 18%
- --------------------------------------------------------------------------------
FOREIGN BONDS 9 5
- --------------------------------------------------------------------------------
CORPORATE BONDS 72 65
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 6 12
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE GRAPH] [PIE GRAPH]
ON 10/31/96 ON 10/31/95
- --------------------------------------------------------------------------------
YEARS TO MATURITY
<TABLE>
<CAPTION>
ON 10/31/96 ON 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH AND EQUIVALENTS 1% 12%
- --------------------------------------------------------------------------------
1-10 YEARS 72 49
- --------------------------------------------------------------------------------
10-20 YEARS 17 20
- --------------------------------------------------------------------------------
20+ YEARS 10 19
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE GRAPH] [PIE GRAPH]
ON 10/31/96 ON 10/31/95
- --------------------------------------------------------------------------------
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 10/31/96 ON 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 13.2 YEARS 12.4 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, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL
GOVERNMENT OBLIGATIONS AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT--18.5% U.S. Treasury Notes, 9.25%, 1998 $30,000 $ 31,772
U.S. Treasury Bonds, 10.75%, 2003 60,000 74,419
-----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost: $107,510) 106,191
-----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENTS--5.7% Republic of Argentina, 11.00%, 2006 3,500 3,430
Province of Nova Scotia, 8.75%, 2022 4,000 4,671
Province of Quebec, 8.625%, 2005 7,500 8,296
Republic of Finland, 7.875%, 2004 5,000 5,390
Republic of Italy, 6.875%, 2023 5,000 4,734
United Mexican States, 11.375%, 2016 6,000 5,981
-----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $31,908) 32,502
-----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------
BANKS--21.2% Abbey National First Capital, 8.20%, 2004 1,600 1,729
Abbey National PLC., 7.35%, 2006 3,350 3,405
ABN-Amro Holding N.V., 8.25%, 2009 7,000 7,508
BCH Cayman Islands Limited, 7.70%, 2006 2,480 2,567
Banco Central Hispano, 7.50%, 2005 7,500 7,661
Bangkok Bank, 7.25%, 2005 7,500 7,370
Capital One Bank, 8.125%, 2000 7,500 7,815
Citicorp, 7.625%, 2005 7,500 7,829
Corporation Andina De Formento
7.375%, 2000 3,000 3,053
7.10%, 2003 2,000 2,000
Crestar Financial Corporation, 8.75%, 2004 5,000 5,550
First Fidelity Bancorporation, 9.625%, 1999 5,000 5,413
Fleet Financial Group, Inc., 8.625%, 2007 5,000 5,541
Kansallis Osake Bank, 10.00%, 2002 5,000 5,742
Kansallis Osake Pankki, 8.65%, 2050 5,000 5,254
NationsBank Corporation
7.50%, 2006 2,500 2,587
9.50%, 2004 5,000 5,746
Riggs National Corp., 8.50%, 2006 7,000 7,289
Royal Bank of Scotland, 7.375%, 2049 5,000 5,048
Societe Generale, 7.40%, 2006 6,240 6,396
SunTrust Banks, 7.25%, 2006 4,950 5,066
Svenska Handelbanken, 8.35%, 2004 5,000 5,448
Wells Fargo and Company, 8.75%, 2002 5,000 5,474
-----------------------------------------------------------------------------
121,491
- --------------------------------------------------------------------------------------------------------------
COMMUNICATIONS, MEDIA
AND ELECTRONICS--5.4% News American Holdings, Inc., 9.25%, 2013 7,500 8,453
Tele-Communications, Inc., 9.80%, 2012 6,000 6,191
360 Communications, 7.50%, 2006 8,250 8,191
Time Warner Entertainment Co, L.P., 8.375%, 2023 3,750 3,840
Time Warner Inc., 9.125%, 2013 3,750 4,110
-----------------------------------------------------------------------------
30,785
- --------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER PRODUCTS,
SERVICES AND RETAIL--8.4% Circus Circus Enterprises, 6.45%, 2006 $ 3,950 $ 3,758
Dayton Hudson Corp., 7.25%, 2004 5,000 5,050
Dimon Inc., 8.875%, 2006 5,500 5,651
Federated Department Stores
10.00%, 2001 7,500 8,208
8.50%, 2003 3,000 3,119
Grand Metropolitan Investment Corp., 8.625%, 2001 5,000 5,427
La Quinta Motor Inns, 7.25%, 2004 5,000 5,002
RJR Nabisco, Inc., 8.00%, 2000 3,500 3,637
Royal Caribbean Cruises Ltd., 8.25%, 2005 7,480 8,004
-----------------------------------------------------------------------------
47,856
- --------------------------------------------------------------------------------------------------------------
DRUGS AND HEALTH CARE--2.2%
MedPartners, Inc., 7.375%, 2006 6,450 6,504
Tenet Healthcare, 8.625%, 2003 6,000 6,330
-----------------------------------------------------------------------------
12,834
- --------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--14.3% AB Spintab, 7.50%, 2049 6,000 6,073
Aegon NV, 8.00%, 2006 5,000 5,351
African Development Bank, 9.30%, 2000 4,000 4,374
Associates Corporation, N.A., 8.25%, 1999 5,000 5,269
Equitable Life, 6.95%, 2005 5,000 4,953
ERAC USA Finance, 7.50%, 2003 7,500 7,727
Finova Capital Corporation, 9.125%, 2002 5,000 5,538
General Electric Capital Corporation, 8.625%, 2008 5,000 5,713
Guangdong International Trust & Investment
Corporation, 8.75%, 2016 5,000 5,095
Household Finance, 8.00%, 2004 5,000 5,340
International Bank for Reconstruction &
Development, 14.90%, 1997 3,500 3,679
Lehman Brothers Holdings, 7.25%, 2003 5,000 5,064
Salomon Inc., 7.50%, 2003 6,490 6,607
Sears Roebuck Acceptance Corporation, 8.45%, 1998 3,000 3,126
TriNet Corporate Realty Trust
7.30%, 2001 5,000 5,077
7.95%, 2006 3,000 3,091
-----------------------------------------------------------------------------
82,077
- --------------------------------------------------------------------------------------------------------------
MANUFACTURING AND
CAPITAL GOODS--2.6% BHP Finance USA, 7.875%, 2002 7,500 7,967
Lockheed Corp., 7.70%, 2008 6,500 6,852
-----------------------------------------------------------------------------
14,819
- --------------------------------------------------------------------------------------------------------------
ENERGY AND CHEMICALS--8.8% Citgo Petroleum Corporation, 7.875%, 2006 4,000 4,118
Gulf Canada Resources, 8.35%, 2006 7,450 7,746
ISP Holdings, 9.00%, 2003 1,950 1,965
Oryx Energy Co., 8.375%, 2004 6,000 6,240
Parker & Parsley Petroleum
8.25%, 2007 2,990 3,237
8.875%, 2005 5,000 5,576
Petronas Dagangan Berhad, 7.75%, 2015 7,500 7,701
Repsol International Finance, 7.00%, 2005 5,000 5,054
USX Corporation, 9.375%, 2012 7,500 8,566
-----------------------------------------------------------------------------
50,203
- --------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PAPER AND FOREST
PRODUCTS--3.7% Boise Cascade Company
9.85%, 2002 $ 2,000 $ 2,265
9.45%, 2009 5,500 6,352
Fletcher Challenge Capital Canada Inc., 8.25%,
2016 5,000 5,339
James River Corporation, 9.25%, 2021 6,000 6,980
-----------------------------------------------------------------------------
20,936
- --------------------------------------------------------------------------------------------------------------
TRANSPORTATION--6.4% Delta Airlines
9.32%, 2009 4,441 4,946
9.75%, 2021 6,000 7,225
Ford Motor Credit, 7.75%, 2005 5,000 5,248
General Motors Acceptance Corporation,
8.875%, 2010 5,000 5,769
Penske Truck Leasing, 8.25%, 1999 5,000 5,292
United Airlines, 9.56%, 2018 7,500 8,471
-----------------------------------------------------------------------------
36,951
- --------------------------------------------------------------------------------------------------------------
UTILITIES--1.8% Chesapeake and Potomac Telephone Company of
Virginia, 8.375%, 2029 5,000 5,807
Tenaga, Nasional Berhad, 7.50%, 2096 5,000 4,770
-----------------------------------------------------------------------------
10,577
-----------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--74.8%
(Cost: $421,046) 428,529
-----------------------------------------------------------------------------
TOTAL INVESTMENTS--99.0%
(Cost: $560,464) 567,222
-----------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES--1.0% 5,776
-----------------------------------------------------------------------------
NET ASSETS--100% $ 572,998
-----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $560,464,000 for federal income tax purposes
at October 31, 1996, the gross unrealized appreciation was $12,654,000, the
gross unrealized depreciation was $5,896,000 and the net unrealized appreciation
of investments was $6,758,000.
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, 1996, 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 1992. 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, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Income and Capital Preservation Fund at October 31, 1996, 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 1992, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 17, 1996
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $560,464) $567,222
- -------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 375
- -------------------------------------------------------------------------------------------------------
Interest 13,424
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 581,021
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Cash overdraft 5,377
- -------------------------------------------------------------------------------------------------------
Payable for:
Dividends 1,064
- -------------------------------------------------------------------------------------------------------
Fund shares redeemed 816
- -------------------------------------------------------------------------------------------------------
Investments purchased 142
- -------------------------------------------------------------------------------------------------------
Management fee 253
- -------------------------------------------------------------------------------------------------------
Administrative services fee 70
- -------------------------------------------------------------------------------------------------------
Distribution services fee 51
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 203
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 47
- -------------------------------------------------------------------------------------------------------
Total liabilities 8,023
- -------------------------------------------------------------------------------------------------------
NET ASSETS $572,998
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $573,772
- -------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (18,088)
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 6,758
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 10,556
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $572,998
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($484,005 / 57,196 shares outstanding) $8.46
- -------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or 4.50% of offering price) $8.86
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to contingent deferred sales charge) per
share
($76,437 / 9,064 shares outstanding) $8.43
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to contingent deferred sale charge) per
share
($5,611 / 664 shares outstanding) $8.45
- -------------------------------------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($6,945 / 821 shares outstanding) $8.45
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Interest income $47,097
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 3,194
- -------------------------------------------------------------------------------------------------------
Administrative services fee 1,145
- -------------------------------------------------------------------------------------------------------
Distribution services fee 603
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,270
- -------------------------------------------------------------------------------------------------------
Professional fees 38
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 128
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 75
- -------------------------------------------------------------------------------------------------------
Total expenses 6,453
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 40,644
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments 6,015
- -------------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (3,048)
- -------------------------------------------------------------------------------------------------------
Net realized gain 2,967
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (12,747)
- -------------------------------------------------------------------------------------------------------
Net loss on investments (9,780)
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $30,864
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------------------
Net investment income $ 40,644 39,636
- --------------------------------------------------------------------------------------------------------
Net realized gain (loss) 2,967 (2,954)
- --------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (12,747) 49,840
- --------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 30,864 86,522
- --------------------------------------------------------------------------------------------------------
Net equalization charges (1,036) (381)
- --------------------------------------------------------------------------------------------------------
Distribution from net investment income (40,681) (40,603)
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions (65,576) 93,457
- --------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (76,429) 138,995
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------------------
Beginning of year 649,427 510,432
- --------------------------------------------------------------------------------------------------------
END OF YEAR
(including undistributed net investment income of
$10,556 and $11,619, respectively) $572,998 649,427
- --------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
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, for shares sold on or
after April 1, 1996, 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 options are valued at
the last sale price unless there is no sale price,
in which event prices provided by market makers are
used. Over-the-counter traded options are valued
based upon prices provided by market makers.
Financial futures and options thereon are valued at
the settlement price established each day by the
board of trade or exchange on which they are
traded. Other securities and assets are valued at
fair value as determined in good faith by the Board
of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes 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
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
deferred sales charge. On each day the New York
Stock Exchange is open for trading, the net asset
value per share is determined as of the earlier of
3:00 p.m. Chicago time or the close of the
Exchange. The net asset value per share is
determined separately for each class by dividing
the Fund's net assets attributable to that class by
the number of shares of the class outstanding.
FEDERAL INCOME TAXES. 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, 1996, amounting to approximately
$18,058,000 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
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 $3,194,000 for the
year ended October 31, 1996.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS ------------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- --------------
<S> <C> <C> <C>
Year ended October 31, 1996 $ 115,000 914,000 74,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, KDI 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
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
Class C shares and the CDSC received in connection
with the redemption of such shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES
DISTRIBUTION FEES PAID BY KDI
AND CDSC ----------------------------
RECEIVED BY KDI TO ALL FIRMS TO AFFILIATES
----------------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1996 $ 750,000 1,435,000 89,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund accounts the firms
service. Administrative services fees (ASF) paid
are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY ----------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1996 $ 1,145,000 1,167,000 39,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENTS. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of $924,000
for the year ended October 31, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
For the year ended October 31, 1996, the Fund made
no direct payments to its officers and incurred
trustees' fees of $29,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended October 31, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $436,012
Proceeds on sales 477,665
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995
---------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
SHARES SOLD
-----------------------------------------------------------------------------
Class A 8,700 $ 72,664 11,111 $ 90,463
-----------------------------------------------------------------------------
Class B 6,081 52,041 13,152 110,374
-----------------------------------------------------------------------------
Class C 596 5,059 1,023 8,763
-----------------------------------------------------------------------------
Class I 205 1,771 1,374 11,709
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-----------------------------------------------------------------------------
Class A 2,685 22,702 2,950 24,216
-----------------------------------------------------------------------------
Class B 441 3,738 254 2,120
-----------------------------------------------------------------------------
Class C 25 211 10 92
-----------------------------------------------------------------------------
Class I 78 661 26 224
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SHARES REDEEMED
-----------------------------------------------------------------------------
Class A (16,494) (137,467) (15,124) (121,197)
-----------------------------------------------------------------------------
Class B (8,647) (75,755) (3,307) (28,190)
-----------------------------------------------------------------------------
Class C (521) (4,568) (520) (4,413)
-----------------------------------------------------------------------------
Class I (780) (6,633) (82) (704)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
CONVERSION OF SHARES
-----------------------------------------------------------------------------
Class A 147 1,262 106 883
-----------------------------------------------------------------------------
Class B (147) (1,262) (106) (883)
-----------------------------------------------------------------------------
NET INCREASE
(DECREASE) FROM CAPITAL
SHARE TRANSACTIONS $ (65,576) $ 93,457
-----------------------------------------------------------------------------
</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 October 31,
1996, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $2,176,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures position open
at October 31, 1996 (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN AT
TYPE AMOUNT MONTH 10/31/96
------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond $ 37,527 December '96 $ 2,023
</TABLE>
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------------
CLASS A
--------------------------------------------------
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $8.62 7.91 8.97 8.34 8.22
- ------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .58 .61 .61 .63 .67
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.15) .72 (1.03) .62 .11
- ------------------------------------------------------------------------------------------------------
Total from investment operations .43 1.33 (.42) 1.25 .78
- ------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .59 .62 .59 .62 .66
- ------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- .05 -- --
- ------------------------------------------------------------------------------------------------------
Total dividends .59 .62 .64 .62 .66
- ------------------------------------------------------------------------------------------------------
Net asset value, end of year $8.46 8.62 7.91 8.97 8.34
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN 5.17% 17.47 (4.86) 15.48 9.83
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------------
Expenses .96% .90 .94 .82 .82
- ------------------------------------------------------------------------------------------------------
Net investment income 6.90 7.31 7.34 7.26 8.01
- ------------------------------------------------------------------------------------------------------
</TABLE>
[CAPTION]
<TABLE>
<CAPTION>
--------------------------- -------------------------- -----------------------------
CLASS B CLASS C CLASS I
--------------------------- -------------------------- -----------------------------
YEAR ENDED MAY 31 TO YEAR ENDED MAY 31 TO YEAR ENDED JULY 3 TO
OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31,
1996 1995 1994 1996 1995 1994 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------- -------------------------- -----------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------- -------------------------- -----------------------------
Net asset value,
beginning of period $8.59 7.90 8.16 8.61 7.90 8.16 8.61 8.52
- -------------------------------------------------------- -------------------------- -----------------------------
Income from investment
operations:
Net investment income .50 .51 .23 .50 .53 .23 .60 .19
- -------------------------------------------------------- -------------------------- -----------------------------
Net realized and unrealized
gain (loss) (.15) .72 (.26) (.15) .72 (.26) (.15) .12
- -------------------------------------------------------- -------------------------- -----------------------------
Total from investment
operations .35 1.23 (.03) .35 1.25 (.03) .45 .31
- -------------------------------------------------------- -------------------------- -----------------------------
Less distribution from
net investment income .51 .54 .23 .51 .54 .23 .61 .22
- -------------------------------------------------------- -------------------------- -----------------------------
Net asset value, end of
period $8.43 8.59 7.90 8.45 8.61 7.90 8.45 8.61
- -------------------------------------------------------- -------------------------- -----------------------
TOTAL RETURN (NOT ANNUALIZED) 4.20% 16.12 (.45) 4.23 16.45 (.44) 5.45 3.65
- -------------------------------------------------------- -------------------------- -----------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------- -------------------------- -----------------------
Expenses 1.93% 1.81 1.92 1.90 1.78 1.89 .72 .62
- -------------------------------------------------------- -------------------------- -----------------------------
Net investment income 5.93 6.40 6.72 5.96 6.43 6.75 7.14 6.87
- -------------------------------------------------------- -------------------------- -----------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $572,998 649,427 510,432 569,145 482,009
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 74% 182 163 190 178
- --------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
19
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
DAVID W. BELIN ROBERT C. CESSINE
Trustee Vice President
LEWIS A. BURNHAM CHARLES R. MANZONI, JR.
Trustee Vice President
DONALD L. DUNAWAY JOHN E. NEAL
Trustee Vice President
ROBERT B. HOFFMAN PHILIP J. COLLORA
Trustee Vice President
and Secretary
DONALD R. JONES
Trustee JEROME L. DUFFY
Treasurer
DOMINIQUE P. MORAX
Trustee ELIZABETH C. WERTH
Assistant Secretary
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
1-800-621-1048
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
(RECYCLE LOGO)
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Funds prospectus.
KICPF - 2 (12/96) [KEMPER FUNDS LOGO]
1026000
Printed in the U.S.A.
