<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED OCTOBER 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[LOGO]
OFFERING INVESTORS THE OPPORTUNITY FOR A HIGH LEVEL OF CURRENT INCOME AND
PRESERVATION OF CAPITAL
KEMPER
INCOME AND CAPITAL PRESERVATION FUND
"... The overall outlook appears quite favorable for corporate
bonds. The economy is growing well, and corporate profits remain
robust, which bodes well for the ability of companies to
comfortably meet their debt payments. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
7
Terms to Know
9
Portfolio Statistics
10
Portfolio of Investments
13
Financial Statements
15
Notes to Financial Statements
19
Financial Highlights
21
Report of Independent Auditors
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A -1.45
CLASS B -2.37
CLASS C -2.19
LIPPER CORPORATE DEBT A-RATED FUNDS CATEGORY AVERAGE* -0.92
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not guarantee future results.
investment returns and principal value will fluctuate so that shares, when
redeemed, may be worth 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; if sales charges had been included, results may have been less
favorable.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
10/31/99 10/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS A $8.06 $8.67
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS B $8.02 $8.64
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS C $8.05 $8.66
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL PRESERVATION
FUND RANKINGS*
- --------------------------------------------------------------------------------
COMPARED WITH 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 #106 of 164 funds #136 of 164 funds #129 of 164 funds
- --------------------------------------------------------------------------------
5-YEAR #31 of 100 funds #86 of 100 funds #80 of 100 funds
- --------------------------------------------------------------------------------
10-YEAR #12 of 42 funds N/A N/A
- --------------------------------------------------------------------------------
15-YEAR #10 of 26 funds N/A N/A
- --------------------------------------------------------------------------------
20-YEAR #11 of 20 funds N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF OCTOBER 31, 1999.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4880 $0.4203 $0.4251
- --------------------------------------------------------------------------------
OCTOBER DIVIDEND: $0.0400 $0.0351 $0.0359
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 5.96% 5.25% 5.35%
- --------------------------------------------------------------------------------
SEC YIELD+: 5.47% 4.46% 4.75%
- --------------------------------------------------------------------------------
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON OCTOBER 31, 1999. 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, 1999, 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.
YIELDS AND DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR INCOME STYLE BOX
- --------------------------------------------------------------------------------
[MATURITY QUALITY DIAGRAM]
Source: Data provided by Morningstar, Inc., Chicago, IL 312-696-6000. The 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. THE FUND'S PORTFOLIO CHANGES FROM DAY TO DAY.
A LONGER-TERM VIEW IS REPRESENTED BY THE FUND'S MORNINGSTAR CATEGORY, WHICH IS
BASED ON ITS ACTUAL INVESTMENT STYLE AS MEASURED BY ITS UNDERLYING PORTFOLIO
HOLDINGS OVER THE PAST THREE YEARS. MORNINGSTAR HAS PLACED KEMPER INCOME AND
CAPITAL PRESERVATION FUND IN THE INTERMEDIATE-TERM BOND CATEGORY. PLEASE CONSULT
THE PROSPECTUS FOR A DESCRIPTION OF INVESTMENT POLICIES.
<PAGE> 3
ECONOMIC OVERVIEW
Scudder Kemper Investments, the investment manager for Kemper Funds, is one of
the largest and most experienced investment management organizations in the
world, managing more than $290 billion in assets for institutional and corporate
clients, retirement and pension plans, insurance companies, mutual fund
investors and individuals. Scudder Kemper Investments offers a full range of
investment counsel and asset management capabilities based on a combination of
proprietary research and disciplined, long-term investment strategies.
DEAR KEMPER FUNDS SHAREHOLDER:
Markets have been aquiver about inflation risks. Growth in the United States
continues to exceed most expectations. Labor markets are visibly tight. These
are the precursors to inflation -- everybody knows it.
Everybody except us, that is. We don't buy it in principle, and reality is
proving our theory correct.
First, let's look at growth. The traditional economic view is that growth
causes inflation. Today, we're seeing exactly the opposite: Low inflation is
causing growth. Low inflation keeps interest rates down, and low interest rates
spur investment by making borrowing money cheap. Investment allows companies to
add capacity, keeping competition fierce. As a result, companies aren't raising
prices; they're competing for business by keeping goods attractive and prices
low. That's true for the old economy, in which consumers were buying t-shirts,
and the new economy, in which consumers are buying Internet services. Everywhere
they look, consumers see bargains -- in the malls, in the auto showrooms, at the
mortgage companies.
As for tight labor markets, the traditional economic view is that tight
labor -- i.e., many "help-wanted" signs -- forces companies to pay a premium for
talent. That, in turn, forces companies to raise their prices in order to
protect their profits. And raising prices results in inflation. In contrast, we
believe that tight labor markets won't cause wages to surge. Why?
To start with, temporary agencies have proliferated, accounting for 2.2
percent of jobs, up from 0.5 percent in the early 1980s. They get just the right
amount and type of labor to the right spot at the right time to get the job
done.
Immigration also keeps a lid on wage rates, since it replenishes the work
force much faster than births. Immigration is at its highest level ever; an
amazing 10 percent of the population is foreign-born. Nearly 1 million people
enter the United States legally each year, and another 300,000 just show up.
When they get here, they look for jobs. And often, they're willing to accept
lower-paying jobs than the average citizen.
Finally, and perhaps most importantly, wage rates are kept in check by
executives' intense profit focus. Payroll is a company's biggest expense. When
payroll skyrockets, profits decline -- and that would be bad for a CEO who
promised Wall Street double-digit earnings growth from now to the end of time.
If investors are disappointed in earnings growth, they sell their stock. And
when they sell their stock, the stock options that are an essential part of many
executives' compensation are as valuable as scrap paper.
Supporting our theory are two distinct and important sets of data released
in late October: The Bureau of Economic Analysis released its third-quarter
estimate of gross domestic product (GDP), the value of all goods and services
produced in the United States, and the Bureau of Labor Statistics released its
employment cost index (ECI), which measures what employers pay for their
workers' wages, salaries and benefits.
GDP grew at a 4.8 percent rate in the third quarter, up sharply from the
revised 1.9 percent second-quarter pace and just slightly above the consensus
estimate of 4.7 percent.
At the same time, however, the ECI rose by 0.8 percent in the July-September
period, down from a 1.1 percent increase in the second quarter. The
third-quarter gain also was lower than the 0.9 percent increase forecast by
economists in a Reuters poll. (The report, by the way, is said to be one of the
favorites of Federal Reserve Chairman Alan Greenspan, who uses it as a key
indicator of inflation pressures in the world's largest economy.)
In essence, then, the U.S. economy posted its strongest growth so far this
year in the third quarter, while wage costs remained tame. The combination of
strong consumer demand and the lowest unemployment in a generation just isn't
igniting wage-driven inflation.
Nevertheless, the Federal Reserve Board raised the federal funds rate and
the discount rate by one quarter of a point (0.25%) each at its Nov. 16 meeting.
Do we think the Fed made a bad decision? Actually, no.
First, the Fed has to guard against the possibility that the old
relationship between growth and inflation will soon reassert itself. Even if the
Fed shared our belief that
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 (11/30/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 6.00 5.50 4.80 5.90
Prime rate(2) 8.50 7.75 8.00 8.50
Inflation rate(3)* 2.60 2.30 1.50 2.00
The U.S. dollar(4) -0.7 -0.9 1.20 9.40
Capital goods orders(5)* 12.60 2.50 -0.6 6.40
Industrial production(5)* 3.30 2.90 3.50 6.90
Employment growth(6)* 2.10 2.10 2.30 2.70
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
*DATA AS OF 10/30/99.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
strong consumer demand and low unemployment isn't igniting wage-driven
inflation, the organization wouldn't be doing its job if it didn't act in the
face of any possibility that inflation might reassert itself.
More important, the Fed has to be concerned about the explosion in credit
we've seen during the last year. Almost everyone but Uncle Sam has been loading
up on debt. Companies have borrowed heavily to fund mergers, share buybacks and
new investments. Homeowners have taken out bigger mortgages on their houses and
new home equity loans. Equity shareholders have ramped up their margin debt.
Financial institutions have issued record amounts of new paper to fund their
aggressive growth. The Fed's decision to raise interest rates, thereby making
borrowing costlier, should take the frenzy out of this borrowing binge. That is
a good thing for future financial stability.
Indeed, the early positive market reaction to the Fed's move suggests that
the markets share our views that the Fed made the right decision.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
Scudder Kemper Investments Economics Group
The information contained in this piece has been taken from sources believed to
be reliable, but the accuracy of the information is not guaranteed. the opinions
and forecasts expressed are those of the economic advisors of Scudder Kemper
Investments, Inc. as of November 18, 1999, and may not actually come to pass.
this information is subject to change. no part of this material is intended as
an investment recommendation.
To obtain a Kemper Funds prospectus, download one from www.kemper.com, talk to
your financial representative or call Shareholder Services at (800) 621-1048.
The prospectus contains more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
4
<PAGE> 5
PERFORMANCE UPDATE
[CESSINE PHOTO]
ROBERT CESSINE JOINED SCUDDER KEMPER INVESTMENTS, INC. IN JANUARY 1993. HE IS A
MANAGING DIRECTOR AND LEAD PORTFOLIO MANAGER OF KEMPER INCOME AND CAPITAL
PRESERVATION FUND AND 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.
AS THE FISCAL YEAR BEGAN, INVESTOR FOCUS SHIFTED FROM TURBULENCE OVERSEAS TO
STRONG ECONOMIC GROWTH IN THE UNITED STATES. FEARS OF POTENTIALLY HIGHER
INFLATION PUSHED INTEREST RATES UP AND BOND PRICES DOWN THROUGHOUT THE FUND'S
FISCAL YEAR. IN THE FOLLOWING Q&A, THE MANAGEMENT TEAM DISCUSSES THE MARKET'S
PERFORMANCE AND THEIR INVESTMENT STRATEGY.
Q BEFORE WE GET INTO THE PERFORMANCE OF THE FUNDS, COULD YOU PROVIDE SOME
BACKGROUND ON HOW BONDS PERFORMED OVER THE LAST 12 MONTHS?
A The last 12 months were characterized by a nearly continuous rise in
interest rates across all maturities. Rising rates were a result of a turnaround
in investor expectations that occurred when the fiscal year began last fall. At
that time, the market was in the grip of a "flight to quality" (see Terms To
Know on page 7) brought on by turbulence in international markets. Russia had
defaulted on part of its debt, Asian economies and currency markets were
battered by uncertainty, and the stability of Latin American markets was coming
into question. In addition, much of Europe was converting to a new currency, the
euro, at year-end. For nervous investors, about the only safe bet in town was
U.S. Treasury bonds (See Terms To Know on page 7). As a result, money poured
into the U.S. Treasury market, and the powerful demand pushed yields down to
historically low levels. In fact, for much of October 1998, the yield on 30-year
U.S. Treasury bonds was actually below 5 percent for the first time in recent
memory.
To help combat the uncertainty regarding the global economy and to ward
off a worsening of the situation, the Federal Reserve cut interest rates three
times in the last quarter of 1998. The Fed's plan, in part, was to inject
liquidity into the global financial system by stimulating the U.S. economy - and
thereby other economies - and make the yields on foreign bonds look more
attractive in comparison with U.S. securities.
Q DID THE FED'S PLAN WORK?
A Yes, it did. In fact, it worked almost TOO well. Investors gained
confidence that foreign economies could bring their problems under control, and
assets shifted from the U.S. to other markets. At the same time, some investors
feared that the Fed's stimulus, which was uncharacteristically applied during a
time of strong U.S. economic growth, would ignite inflation. Both these factors
acted to push interest rates up in the U.S. from the end of October 1998 all the
way until the end of September 1999. As the fiscal year came to a close, the
Federal Reserve was compelled to put the brakes on the U.S. economy by raising
rates on August 24 and September 30.
Because bond prices fall when interest rates rise, these last 12 months
have been a challenging period for bond investors. It's been tough to try to
create positive returns for shareholders when fighting the constant headwind of
rising rates. This difficulty is reflected in the returns of bond indices. For
example, the Lehman Brothers Aggregate Bond Index*, which is a broad proxy for
the bond market as a whole, gained just 0.53 percent for the 12-month period
ended October 31, 1999. High-quality corporate bonds (in which our fund chiefly
invests)
5
<PAGE> 6
PERFORMANCE UPDATE
modestly underperformed that mark: the Lipper A-Rated Corporate Debt Fund
Average declining 0.92 percent. Long-maturity Treasuries were hit hardest; the
Lehman Brothers Long-Term Government Bond index* was down 6.10 percent for the
same period. However, higher-income-producing bonds and shorter-duration (See
Terms To Know on page 7) instruments fared better. High-yield corporate bonds
(See Terms To Know on page 7) returned 4.34 percent, as measured by the Lehman
Brothers High Yield Bond index*. Mortgages, which have shorter durations,
returned 3.07 percent, as measured by the Salomon Brothers Mortgage index*.
* THE LEHMAN AGGREGATE BOND INDEX IS A TOTAL RETURN INDEX INCLUDING FIXED-RATE
DEBT ISSUES RATED INVESTMENT-GRADE OR BETTER. IT CONTAINS GOVERNMENT,
CORPORATE AND MORTGAGE SECURITIES AND IS GENERALLY CONSIDERED REPRESENTATIVE
OF THE MARKET FOR INVESTMENT-GRADE BONDS AS A WHOLE. THE LEHMAN BROTHERS
LONG-TERM GOVERNMENT BOND INDEX IS A TOTAL RETURN INDEX GENERALLY CONSIDERED
REPRESENTATIVE OF THE MARKET FOR TREASURIES AND GOVERNMENT AGENCY SECURITIES
WITH MATURITIES GREATER THAN TEN YEARS. THE LEHMAN BROTHERS HIGH YIELD BOND
INDEX IS A TOTAL RETURN INDEX GENERALLY CONSIDERED REPRESENTATIVE FOR
HIGH-YIELD CORPORATE BONDS. THE SALOMON BROTHERS MORTGAGE INDEX IS A TOTAL
RETURN INDEX GENERALLY REPRESENTATIVE OF THE MARKET FOR MORTGAGE BACKED
SECURITIES. INVESTORS CANNOT INVEST IN THE INDICES.
Q WHAT DID THIS MEAN FOR THE CORPORATE BOND MARKET?
A High-yield bonds were the best performers among corporate bonds.
Shorter-maturity instruments suffered less than longer-maturity ones, so the
shorter a security's duration, the better it performed.
Q HOW DID KEMPER INCOME AND CAPITAL PRESERVATION FUND PERFORM, AND WHAT
STRATEGIES DID YOU USE TO MANAGE THE FUND DURING THIS DIFFICULT PERIOD?
A The fund's Class A shares had a negative total return of -1.45 percent
(unadjusted for sales charge) for the 12-month period ended October 31, 1999. In
comparison, the Lipper A-Rated Corporate Debt Fund Average returned -0.92
percent for the same period, so our performance put us in the lower half of that
peer group.
Our performance was hindered somewhat by two factors. First was the
relatively strong performance of the high-yield bond market during the first six
months of the fiscal year. Although we would have liked for the fund to generate
higher returns, we weren't willing to add risk to the portfolio by moving into
lower-quality or cyclical corporate sectors. In part, our unwillingness was
vindicated because the high-yield bond market struggled during the last six
months of the fiscal year.
The second factor inhibiting the fund's performance was its longer than
average duration at the start of 1999. We had lengthened duration at the end of
1998 to capitalize on falling rates. And while we didn't expect substantially
lower rates going into 1999, we were surprised that they rose so sharply in the
first quarter. During the remainder of the year, we stuck to a more neutral
duration, but in a rising interest rate environment, that lost performance in
the first quarter proved difficult to make up.
During the second half of the fiscal year, we fared better. We made some
good moves, including an increase in the credit quality of the fund slightly by
adding mortgages, and selectively building our exposure in BBB-rated bonds to
increase income.
Q WHAT'S YOUR OUTLOOK FOR THE NEW YEAR, AND HOW DO YOU PLAN TO RESPOND?
A The overall outlook appears quite favorable for corporate bonds. The
economy is growing well and corporate profits remain robust, which bodes well
for the ability of companies to comfortably meet their debt payments. For that
reason, we started to increase the portfolio's weighting in high-yield bonds
toward the end of the fiscal year. As I mentioned, high-yield bonds
underperformed during the last six months and now appear to offer compelling
value. The market has suffered a bump up in default rates over the last couple
of quarters, but the vibrant economy should help quell concerns regarding
well-run companies.
As for the fund's duration, we'll likely stay close to neutral. While the
outlook for corporate profits appears fairly clear, the outlook for interest
rates does not. The market is keying on every piece of economic data, looking
for signs of incipient inflation. So far, inflation has remained in check, but
unless we see some compelling evidence for interest rates to stay put, our
tendency would be to adjust the fund's duration only slightly. We think there is
enough value in the market currently that we can provide attractive returns
without taking any undue risks.
6
<PAGE> 7
TERMS TO KNOW
DURATION A measure of the interest rate sensitivity of a portfolio,
incorporating time to maturity and coupon size. The longer the duration, the
greater the interest rate risk.
EASE The effect produced when the Federal Reserve Board of Governors changes
monetary policy by decreasing the federal funds rate.
FEDERAL FUNDS (Fed funds) The funds that commercial banks are required to keep
on deposit at the Federal Reserve Bank in their district. In order to meet these
reserve requirements, occasionally banks need to borrow funds. These funds are
borrowed from banks that have an excess of the required amount on hand in what
is called the "Fed funds market." The interest rate on these loans is called the
"Fed funds rate" and is the key money market rate that influences all other
short-term rates.
FEDERAL FUNDS RATE The interest rate that banks charge each other for overnight
loans that are needed to meet reserve requirements. Often considered the most
sensitive indicator of the direction of interest rates.
FLIGHT-TO-QUALITY BUYING A general increase by investors in their allocation to
U.S. Treasuries and other high quality securities from riskier securities in
time of global economic uncertainty.
HIGH-YIELD BOND A bond issued by a company, often without a long track record of
sales and earnings or with questionable credit strength and that pays a higher
yield to investors to help compensate for their greater risk of loss to
principal and interest. High-yield bonds carry a credit rating of BB or lower
from either Moody's or Standard & Poor's bond rating services and are considered
to be "below investment grade" by these rating agencies. Such bonds may also be
unrated. The bonds present greater risk to principal and income than
higher-quality bonds.
U.S. TREASURIES Debt securities issued by the U.S. Treasury, including Treasury
bills, Treasury bonds and Treasury notes. They are considered the safest of all
securities. Their safety rests in the power of the U.S. government to obtain tax
revenues to repay its obligations, and in its historical record of always having
done so.
7
<PAGE> 8
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED OCTOBER 31, 1999 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS A SHARES -5.90% 6.32% 7.12% 8.77% (since 4/15/74)
- -------------------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS B SHARES -5.16 6.11 N/A 5.53 (since 5/31/94)
- -------------------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS C SHARES -2.19 6.38 N/A 5.78 (since 5/31/94)
- -------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH KEMPER FUND CLASS A]
<TABLE>
<CAPTION>
KEMPER INCOME AND CONSUMER PRICE INDEX++
CAPITAL PRESERVATION FUND LEHMAN BROTHERS ----------------------
CLASS A1 AGGREGATE INDEX+
------------------------- ----------------
<S> <C> <C> <C>
12/31/75 9548.00 10000.00 10000.00
10868.00 11560.00 10481.00
11323.00 11911.00 11191.00
11693.00 12077.00 12201.00
11952.00 12310.00 13824.00
11600.00 12643.00 15538.00
11953.00 13433.00 16927.00
15969.00 17815.00 17583.00
12/31/83 17790.00 19304.00 18250.00
19980.00 22228.00 18972.00
24346.00 27141.00 19687.00
27893.00 31285.00 19910.00
28757.00 32146.00 20788.00
31755.00 34681.00 21700.00
34472.00 39721.00 22709.00
36707.00 43279.00 24095.00
12/31/91 43281.00 50205.00 24834.00
46681.00 53921.00 25547.00
52147.00 59178.00 26256.00
50385.00 57452.00 26959.00
61144.00 68066.00 27624.00
62376.00 70538.00 28562.00
67756.00 77349.00 29048.00
73106.00 84065.00 29516.00
10/31/99 71153.00 83785.00 30381.00
</TABLE>
[LINE GRAPH KEMPER FUND CLASS B]
<TABLE>
<CAPTION>
KEMPER INCOME AND CONSUMER PRICE INDEX++
CAPITAL PRESERVATION FUND LEHMAN BROTHERS ----------------------
CLASS B1 AGGREGATE INDEX+
------------------------- ----------------
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
10008.00 10077.00 10149.00
12/31/95 12007.00 11938.00 10400.00
12135.00 12372.00 10753.00
12/31/97 13059.00 13567.00 10936.00
13972.00 14744.00 11112.00
10/31/99 13392.00 14695.00 11438.00
</TABLE>
[LINE GRAPH KEMPER FUND CLASS C]
<TABLE>
<CAPTION>
KEMPER INCOME AND CONSUMER PRICE INDEX++
CAPITAL PRESERVATION FUND LEHMAN BROTHERS ----------------------
CLASS C1 AGGREGATE INDEX+
------------------------- ----------------
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
10009.00 10077.00 10149.00
12/31/95 12041.00 11938.00 10400.00
12174.00 12372.00 10753.00
12/31/97 13120.00 13567.00 10936.00
14021.00 14744.00 11112.00
10/31/99 13561.00 14695.00 11438.00
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN ORIGINAL COST.
* AVERAGE ANNUAL TOTAL RETURN AND TOTAL RETURN MEASURE NET INVESTMENT INCOME
AND CAPITAL GAIN OR LOSS FROM PORTFOLIO INVESTMENTS OVER THE PERIODS
SPECIFIED, ASSUMING REINVESTMENT OF DIVIDENDS AND, WHERE INDICATED,
ADJUSTMENT FOR THE MAXIMUM SALES CHARGE. THE MAXIMUM SALES CHARGE FOR CLASS A
SHARES IS 4.5%. FOR CLASS B SHARES ADJUSTMENT FOR THE APPLICABLE CONTINGENT
DEFERRED SALES CHARGE (CDSC) AS FOLLOWS: 1-YEAR, 3%; 5-YEAR, 1%; SINCE
INCEPTION, 0 PERCENT AND FOR CLASS C SHARES NO ADJUSTMENT FOR SALES CHARGE.
THE MAXIMUM CDSC FOR CLASS B SHARES IS 4%. FOR CLASS C SHARES, THERE IS A 1%
CDSC ON CERTAIN REDEMPTIONS WITHIN THE FIRST YEAR OF PURCHASE. SHARE CLASSES
INVEST IN THE SAME UNDERLYING PORTFOLIO. AVERAGE ANNUAL TOTAL RETURNS REFLECT
ANNUALIZED CHANGE WHILE TOTAL RETURN REFLECTS AGGREGATE CHANGE. DURING THE
PERIODS NOTED, SECURITIES PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION, SEE
THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION AND THE FINANCIAL
HIGHLIGHTS AT THE END OF THIS REPORT.
(1)PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A SHARES AND THE CONTINGENT DEFERRED SALES
CHARGE IN EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES. WHEN REVIEWING
THE PERFORMANCE CHART, PLEASE NOTE THAT THE INCEPTION DATE FOR THE LEHMAN
BROTHERS AGGREGATE BOND INDEX IS DECEMBER 31, 1975. AS A RESULT, WE ARE
UNABLE TO ILLUSTRATE THE LIFE OF CLASS PERFORMANCE FOR KEMPER INCOME AND
CAPITAL PRESERVATION FUND CLASS A SHARES. IN COMPARING THE KEMPER INCOME AND
CAPITAL PRESERVATION FUND CLASS A SHARES PERFORMANCE WITH 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
WIESENBERGER.
++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 WIESENBERGER.
8
<PAGE> 9
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/99 ON 10/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS 60% 44%
- --------------------------------------------------------------------------------
TREASURY BONDS AND NOTES 23 35
- --------------------------------------------------------------------------------
MORTGAGES 14 9
- --------------------------------------------------------------------------------
FOREIGN BONDS 3 6
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS -- 6
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/99 ON 10/31/98
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/99 ON 10/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 70% 62%
................................................................................
10-20 YEARS 12 13
................................................................................
20+ YEARS 18 19
................................................................................
CASH AND EQUIVALENTS -- 6
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/99 ON 10/31/98
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/99 ON 10/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 8.7 years 8.8 years
- --------------------------------------------------------------------------------
</TABLE>
*Portfolio composition is subject to change.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER INCOME AND CAPITAL PRESERVATION FUND
PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
GOVERNMENT OBLIGATIONS--40.2% AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY U.S. Treasury Notes,
OBLIGATIONS--36.6% 7.5%, 2005 10,000 $ 10,627
7.875%, 2004 29,000 31,247
10.75%, 2003 60,000 68,812
Federal National Mortgage Association Agency
Notes,
5.75%, 2008 7,750 7,283
6.00%, 2008 15,250 14,535
Federal National Mortgage Association Pass
Through Certificates,
6.00%, 2029 18,721 17,448
6.50%, 2013 and 2027 6,492 6,278
7.00%, 2012 and 2027 10,761 10,628
Government National Mortgage Association
Pass Through Certificates,
7.00%, 2029 4,227 4,147
7.50%, 2028 3,052 3,060
Tennessee Valley Authority, 6.25%, 2017 4,900 4,537
----------------------------------------------------------------------------
178,602
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT Province of Novia Scotia, 8.75%, 2022 4,000 4,515
OBLIGATIONS--3.6% Province of Quebec, 8.625%, 2005 7,500 8,117
(PRINCIPAL AMOUNT IN U.S. DOLLARS) Repsol International Finance, 7.00%, 2005 5,000 4,896
----------------------------------------------------------------------------
17,528
----------------------------------------------------------------------------
TOTAL GOVERNMENT OBLIGATIONS
(Cost: $212,063) 196,130
----------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--59.8%
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AEROSPACE AND DEFENSE--1.3% Raytheon Co., 6.30%, 2005 6,600 6,252
----------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS, MEDIA AND AT&T Corp., 6.000%, 2009 4,500 4,160
ELECTRONICS--17.9% BellSouth Telecommunications, Inc.
6.375%, 2028 5,500 4,786
Cablevision Systems Corp., 7.875%, 2007 8,000 7,800
Chesapeake & Potomic Telephone 8.375%, 2029 5,000 5,448
Comcast Cable Communications, 8.50%, 2027 2,400 2,572
News America Holdings Inc.,
9.25%, 2013 4,100 4,505
8.15%, 2036 5,700 5,497
Tele-Communications, Inc., 9.80%, 2012 12,500 14,992
Time Warner Inc.,
9.125%, 2013 7,150 8,030
9.150%, 2023 10,200 11,705
Sprint Capital Corp., 6.875%, 2028 9,200 8,404
WorldCom, Inc.
6.40%, 2005 5,450 5,297
7.75%, 2027 3,950 4,054
-------------------------------------------------------------------------
87,250
-------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS, SERVICES AND (a) Dayton Hudson Corp., 7.25%, 2004 5,000 5,073
RETAIL--7.1% Federated Department Stores, Inc. 6.125%, 2001 5,000 4,940
May Department Stores Co., 6.875%, 2005 4,950 4,923
</TABLE>
10
<PAGE> 11
(DOLLARS IN THOUSANDS)
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Phillip Morris Companies, Inc., 7.20%, 2007 7,300 $ 6,983
Royal Caribbean Cruises, Ltd., 8.250%, 2005 7,480 7,711
Sony Corp., 6.125%, 2003 5,100 5,025
--------------------------------------------------------------------------
34,655
--------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
DURABLES--3.9% Delphi Automotive Systems Corp. 6.50%, 2009 3,500 3,222
Lear Corp., 7.96%, 2005 8,250 8,041
TRW, Inc., 7.125%, 2009 8,200 7,903
--------------------------------------------------------------------------
19,166
--------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
ENERGY AND CHEMICALS--1.9% Conoco Inc., 5.90%, 2004 2,000 1,925
Petroleum Geo-Services, 7.50%, 2007 7,500 7,447
--------------------------------------------------------------------------
9,372
--------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--19.6% (a) ABN AMRO, 8.25%, 2009 7,000 7,169
(a) African Development Bank, 9.30%, 2000 4,000 4,086
(a) Crestar Financial Corp., 8.75%, 2004 5,000 5,369
Den Danske Bank, 6.375%, 2008 8,250 7,740
FINOVA Capital Corp., 9.125%, 2002 5,000 5,231
Firstar Bank Milwaukee, 6.25%, 2002 4,700 4,626
Ford Motor Credit Co., 7.75%, 2005 5,000 5,168
General Electric Capital Corp.
8.750%, 2007 2,100 2,315
8.625%, 2008 3,050 3,368
General Motors Acceptance Corp. 8.875%, 2010 5,000 5,586
(a) Household Finance Corp., 6.50%, 2008 16,000 15,093
Kansallis Osake Bank, 10.00%, 2002 5,000 5,334
NationsBank Corp., 9.50%, 2004 5,000 5,445
Northern Trust Co., 6.25%, 2008 5,500 5,129
Scotland International, 8.80%, 2004 2,850 3,028
Svenska Handelsbanken, 7.125%, 2049 3,950 3,716
Wells Fargo & Company, 8.75%, 2002 5,000 5,248
6.875%, 2006 2,350 2,311
--------------------------------------------------------------------------
95,962
--------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--2.9% Continental Airlines, Inc.,
(a) 6.90%, 2017 3,907 3,705
(a) 7.75%, 2014 3,813 3,772
Delta Air Lines,
9.32%, 2009 3,582 3,851
9.75%, 2021 2,400 2,693
--------------------------------------------------------------------------
14,021
--------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--5.2% Cincinnati Bell, Inc., 6.30%, 2028 3,700 2,746
(a) Cleveland Electric Illumination Co.
7.67%, 2004 5,900 5,901
Commonwealth Edison Co., 7.375%, 2004 3,225 3,269
7.00%, 2005 1,100 1,083
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
El Paso Electric Co., 8.90%, 2006 7,150 $ 7,479
GTE North, Inc., 6.90%, 2008 5,200 5,125
--------------------------------------------------------------------------
25,603
--------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $302,402) 292,281
--------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $514,465) $488,411
--------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $515,143 for federal income tax purposes at
October 31, 1999, the gross unrealized appreciation was $1,372, the gross
unrealized depreciation was $28,104 and the net unrealized depreciation on
investments was $26,732.
(a) At October 31, 1999, these securities have been pledged to cover, in whole
or in part, initial margin requirements for open futures contracts.
At October 31, 1999, open futures contracts purchased are as follows (in
thousands):
<TABLE>
<CAPTION>
EXPIRATION AGGREGATE MARKET
FUTURES MONTH CONTRACTS FACE VALUE($) VALUE($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury Bond December '99 100 (11,351) (11,359)
- -------------------------------------------------------------------------------------------------------------------
Total unrealized depreciation on open future contracts purchased (8)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investment, at value
(Cost: $514,465) $488,411
- ------------------------------------------------------------------------
Cash 329
- ------------------------------------------------------------------------
Receivable for:
Fund shares sold 371
- ------------------------------------------------------------------------
Interest 12,136
- ------------------------------------------------------------------------
TOTAL ASSETS 501,247
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES
- ------------------------------------------------------------------------
Payable for:
- ------------------------------------------------------------------------
Fund shares redeemed 3,384
- ------------------------------------------------------------------------
Dividends 757
- ------------------------------------------------------------------------
Daily variation margin on open futures contracts 130
- ------------------------------------------------------------------------
Management fee 235
- ------------------------------------------------------------------------
Other accrued expenses 550
- ------------------------------------------------------------------------
Total liabilities 5,056
- ------------------------------------------------------------------------
NET ASSETS $496,191
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income $ 656
- ------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investment securities (26,054)
- ------------------------------------------------------------------------
Futures (8)
- ------------------------------------------------------------------------
Accumulated net realized loss (19,349)
- ------------------------------------------------------------------------
Paid-in capital 540,946
- ------------------------------------------------------------------------
NET ASSETS, AT VALUE $496,191
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET ASSET VALUE
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share ($371,763 /
46,143 shares outstanding) $8.06
- ------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
4.71% of net asset value or 4.50% of offering price) $8.44
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($97,975 /
12,210 shares outstanding) $8.02
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($19,875 /
2,469 shares outstanding) $8.05
- ------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share ($6,578 /
817 shares outstanding) $8.05
- ------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
NET INVESTMENT INCOME
Interest $ 45,068
- ----------------------------------------------------------------------------------------------
Expenses:
Management fee 3,432
- ----------------------------------------------------------------------------------------------
Trustees' fees 45
- ----------------------------------------------------------------------------------------------
Custodian and transfer agent and related expenses 1,552
- ----------------------------------------------------------------------------------------------
Reports to shareholders 226
- ----------------------------------------------------------------------------------------------
Auditing 69
- ----------------------------------------------------------------------------------------------
Legal 12
- ----------------------------------------------------------------------------------------------
Registration fees 10
- ----------------------------------------------------------------------------------------------
Distribution fees 984
- ----------------------------------------------------------------------------------------------
Administrative services fee 1,409
- ----------------------------------------------------------------------------------------------
Other 122
- ----------------------------------------------------------------------------------------------
Expenses, before expense reductions 7,861
- ----------------------------------------------------------------------------------------------
Expense reductions (30)
- ----------------------------------------------------------------------------------------------
Expenses, net 7,831
- ----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 37,237
- ----------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
- ----------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investment securities (16,634)
- ----------------------------------------------------------------------------------------------
Futures 5,284
- ----------------------------------------------------------------------------------------------
(11,350)
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the
period on:
Investment securities (39,625)
- ----------------------------------------------------------------------------------------------
Futures (8)
- ----------------------------------------------------------------------------------------------
Net gain (loss) on investment transactions (50,983)
- ----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (13,746)
- ----------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
- ----------------------------------------------------------------------------------------------
Operations:
Net investment income $ 37,237 39,451
- ----------------------------------------------------------------------------------------------
Net realized gain (loss) (11,350) 8,202
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the
period (39,633) 3,357
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (13,746) 51,010
- ----------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income (36,337) (40,288)
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from capital share
transactions (147,783) 69,865
- ----------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (197,866) 80,587
- ----------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------
Net assets at beginning of year 694,057 613,470
- ----------------------------------------------------------------------------------------------
Net assets at end of year 496,191 694,057
- ----------------------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME $ 656 0
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUND Kemper Income And Capital Preservation Fund (the
"fund") is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an
open-end, diversified management investment company
organized as a Massachusetts business trust.
The fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
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 offered 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 offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the fund have
equal rights with respect to voting subject to
class specific arrangements.
The fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the fund in the
preparation of its financial statements.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES SECURITY VALUATION. Investments are stated at
value. Portfolio debt securities purchased with an
original maturity greater than sixty days are
valued by pricing agents approved by the officers
of the Trust, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the most
recent bid quotation supplied by a bona fide market
maker shall be used. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost. All other
securities are valued at their fair value as
determined in good faith by the Valuation Committee
of the Board of Trustees.
FUTURES CONTRACTS. A futures contract is an
agreement between a buyer or seller and an
established futures exchange or its clearinghouse
in which the buyer or seller agrees to take or make
a delivery of a specific amount of a financial
instrument at a specified price on a specific date
(settlement date). During the period, the fund
purchased interest rate futures to manage the
duration of the portfolio. In addition, the fund
also sold interest rate futures to hedge against
declines in the value of portfolio securities.
Upon entering into a futures contract, the fund is
required to deposit with a financial intermediary
an amount ("initial margin") equal to a certain
percentage of the face value indicated in the
futures contract. Subsequent payments
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
("variation margin") are made or received by the
fund dependent upon the daily fluctuations in the
value of the underlying security and are recorded
for financial reporting purposes as unrealized
gains or losses by the fund. When entering into a
closing transaction, the fund will realize a gain
or loss equal to the difference between the value
of the futures contract to sell and the futures
contract to buy. Futures contracts are valued at
the most recent settlement price.
Certain risks may arise upon entering into futures
contracts, including the risk that an illiquid
secondary market will limit the fund's ability to
close out a futures contract prior to the
settlement date and that a change in the value of a
futures contract may not correlate exactly with the
changes in the value of the securities or
currencies hedged. When utilizing futures contracts
to hedge, the fund gives up the opportunity to
profit from favorable price movements in the hedged
positions during the term of the contract.
FEDERAL INCOME TAXES. The fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the fund paid no federal income taxes
and no federal income tax provision was required.
At October 31, 1999, the fund had a net tax basis
capital loss carry forward of approximately
$19,357,000 which may be applied against any
realized net capital taxable gains of each
succeeding year until fully utilized or until
October 31, 2002 ($5,031,000), October 31, 2003
($2,953,000) and October 31, 2007 ($10,327,000),
the respective expiration dates, whichever occurs
first.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made monthly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Realized gains and losses
from investment transactions are recorded on an
identified cost basis. All discounts are accreted
for both tax and financial reporting purposes.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the 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 $3,432,000 for the
year ended October 31, 1999.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc.
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
(KDI). Underwriting commissions retained by KDI in
connection with the distribution of Class A shares
for the year ended October 31, 1999 are $62,000.
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 separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the year ended October 31, 1999 are $1,280,000,
of which $82,000 is unpaid.
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 paid by the
fund to KDI for the year ended October 31, 1999 are
$1,409,000, and of which $77,000 is unpaid.
Additionally, $1,000 was paid to KDI affiliates.
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 $973,000
for the year ended October 31, 1999.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the year ended October 31,
1999, the fund made no payments to its officers and
incurred trustees' fees of $45,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended October 31, 1999, investment
transactions (excluding short term instruments) are
as follows (in thousands):
<TABLE>
<S> <C>
Purchases $322,188
Proceeds from sales 422,468
</TABLE>
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
----------------------------------------------------
1999 1998
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
SHARES SOLD
------------------------------------------------------------------------------------
Class A 14,580 $ 123,394 18,576 $ 156,805
------------------------------------------------------------------------------------
Class B 6,763 56,994 7,612 65,658
------------------------------------------------------------------------------------
Class C 1,762 14,750 1,290 11,135
------------------------------------------------------------------------------------
Class I 193 1,643 779 6,803
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
------------------------------------------------------------------------------------
Class A 1,939 16,192 2,368 21,766
------------------------------------------------------------------------------------
Class B 501 4,172 457 3,685
------------------------------------------------------------------------------------
Class C 73 611 55 489
------------------------------------------------------------------------------------
Class I 56 461 50 395
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
SHARES REDEEMED
------------------------------------------------------------------------------------
Class A (36,037) (297,470) (17,035) (145,297)
------------------------------------------------------------------------------------
Class B (6,665) (55,199) (4,763) (41,165)
------------------------------------------------------------------------------------
Class C (1,301) (10,803) (475) (4,141)
------------------------------------------------------------------------------------
Class I (304) (2,528) (723) (6,268)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
CONVERSION OF SHARES
------------------------------------------------------------------------------------
Class A 674 5,697 806 6,945
------------------------------------------------------------------------------------
Class B (676) (5,697) (809) (6,945)
------------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $(147,783) $ 69,865
------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 LINE OF CREDIT The fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility for temporary or emergency
purposes, including the meeting of redemption
requests that otherwise might require the untimely
disposition of securities. The Participants are
charged an annual commitment fee which is allocated
pro rata among each of the Participants. Interest
is calculated based on the market rates at the time
of the borrowing. The fund may borrow up to a
maximum of 33 percent of its net assets under the
agreement.
- --------------------------------------------------------------------------------
7 EXPENSE OFF-SET
ARRANGEMENTS The fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the fund's
expenses. During the period, the fund's custodian
fees were reduced by $30,000, under these
arrangements.
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------------------
CLASS A
----------------------------------------------------------
YEAR ENDED OCTOBER 31,
1999 1998 1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $8.67 8.54 8.46 8.62 7.91
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .51 .53 .57 .58 .61
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.63) .14 .08 (.15) .72
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations (.12) .67 .65 .43 1.33
- ---------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .49 .54 .57 .59 .62
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of year $8.06 8.67 8.54 8.46 8.62
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN (1.45%) 8.13 8.00 5.17 17.47
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Expenses, before expense reductions 1.08% 1.01 .97 .96 .90
- ---------------------------------------------------------------------------------------------------------------
Expenses, net 1.07% 1.01 .97 .96 .90
- ---------------------------------------------------------------------------------------------------------------
Net investment income 6.05% 6.17 6.75 6.90 7.31
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
CLASS B
----------------------------------------------------------
YEAR ENDED OCTOBER 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.64 8.51 8.43 8.59 7.90
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .43 .46 .49 .50 .51
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.63) .14 .08 (.15) .72
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations (.20) .60 .57 .35 1.23
- ---------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .42 .47 .49 .51 .54
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.02 8.64 8.51 8.43 8.59
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN (2.37)% 7.20 6.99 4.20 16.12
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Expenses, before expense reductions 1.93% 1.88 1.90 1.93 1.81
- ---------------------------------------------------------------------------------------------------------------
Expenses, net 1.92% 1.88 1.90 1.93 1.81
- ---------------------------------------------------------------------------------------------------------------
Net investment income 5.20% 5.30 5.82 5.93 6.40
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------
CLASS C
-----------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 8.66 8.53 8.45 8.61 7.90
- -------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .44 .46 .49 .50 .53
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.62) .14 .08 (.15) .72
- -------------------------------------------------------------------------------------------
Total from investment operations (.18) .60 .57 .35 1.25
- -------------------------------------------------------------------------------------------
Less distribution from net investment
income .43 .47 .49 .51 .54
- -------------------------------------------------------------------------------------------
Net asset value, end of year $ 8.05 8.66 8.53 8.45 8.61
- -------------------------------------------------------------------------------------------
TOTAL RETURN (2.19)% 7.20 7.03 4.23 16.45
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------
Expenses, before expense reductions 1.82% 1.86 1.86 1.90 1.78
- -------------------------------------------------------------------------------------------
Expenses, net 1.82% 1.86 1.86 1.90 1.78
- -------------------------------------------------------------------------------------------
Net investment income 5.30% 5.32 5.86 5.96 6.43
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
CLASS I
-----------------------------------------
YEAR ENDED OCTOBER 31, JULY 3 TO
--------------------------- OCTOBER 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 8.67 8.53 8.45 8.61 8.52
- -------------------------------------------------------------------------------------------
Income from net investment operations:
Net investment income .53 .56 .59 .60 .19
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.63) .15 .08 (.15) .12
- -------------------------------------------------------------------------------------------
Total from investment operations (.10) .71 .67 .45 .31
- -------------------------------------------------------------------------------------------
Less distribution from net investment
income .52 .57 .59 .61 .22
- -------------------------------------------------------------------------------------------
Net asset value, end of year $ 8.05 8.67 8.53 8.45 8.61
- -------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (1.23)% 8.62 8.26 5.45 3.65
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------
Expenses, before expense reductions .71% .66 .70 .72 .62
- -------------------------------------------------------------------------------------------
Expenses, net .71 .66 .70 .72 .62
- -------------------------------------------------------------------------------------------
Net investment income 6.41% 6.52 7.02 7.14 6.87
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $496,191 694,057 613,470 572,998 649,427
- -------------------------------------------------------------------------------------------
Portfolio turnover rate 108% 121 164 74 182
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Per share
data was determined based on average shares outstanding during the year ended
October 31, 1999.
- --------------------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
20
<PAGE> 21
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, 1999, 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 1995. 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, 1999, by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Income And Capital Preservation Fund at October 31, 1999, 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 1995, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
December 16, 1999
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES&OFFICERS
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY MAUREEN E. KANE
Trustee President Assistant Secretary
LEWIS A. BURNHAM PHILIP J. COLLORA CAROLINE PEARSON
Trustee Vice President and Assistant Secretary
Secretary
DONALD L. DUNAWAY BRENDA LYONS
Trustee JOHN R. HEBBLE Assistant Treasurer
Treasurer
ROBERT B. HOFFMAN
Trustee ROBERT C. CESSINE
Vice President
DONALD R. JONES
Trustee ANN M. MCCREARY
Vice President
THOMAS W. LITTAUER
Trustee and Vice President ROBERT C. PECK, JR.
Vice President
SHIRLEY D. PETERSON
Trustee KATHRYN L. QUIRK
Vice President
CORNELIA SMALL
Trustee and Vice President LINDA J. WONDRACK
Vice President
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 219557
Kansas City, MO 64121
- --------------------------------------------------------------------------------
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
- --------------------------------------------------------------------------------
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A. This report is not to be distributed
unless preceded or accompanied by a Kemper Income Funds prospectus.
KICPF - 2 (12/23/99) 1096640
