<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED OCTOBER 31, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
OFFERING INVESTORS THE OPPORTUNITY FOR A HIGH LEVEL
OF CURRENT INCOME AND PRESERVATION OF CAPITAL
KEMPER INCOME AND CAPITAL PRESERVATION FUND
"... with the 'flight to quality' this year, the fund's
higher quality worked to its advantage. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
9
PORTFOLIO STATISTICS
10
PORTFOLIO OF
INVESTMENTS
13
REPORT OF
INDEPENDENT AUDITORS
14
FINANCIAL STATEMENTS
16
NOTES TO
FINANCIAL STATEMENTS
20
FINANCIAL
HIGHLIGHTS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.13%
CLASS B 7.20%
CLASS C 7.20%
LIPPER CORPORATE DEBT A RATED FUNDS CATEGORY AVERAGE* 7.72%
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not guarantee future results.
Investment returns and principal values 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 and, if they had, results may have been less favorable.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
10/31/98 10/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS A $8.67 $8.54
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS B $8.64 $8.51
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS C $8.66 $8.53
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL
PRESERVATION FUND RANKINGS
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER CORPORATE DEBT A RATED FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #66 of #96 of #96 of
150 funds 150 funds 150 funds
- --------------------------------------------------------------------------------
3-YEAR #55 of N/A N/A
120 funds
- --------------------------------------------------------------------------------
5-YEAR #22 of N/A N/A
71 funds
- --------------------------------------------------------------------------------
10-YEAR #20 of N/A N/A
39 funds
- --------------------------------------------------------------------------------
15-YEAR #10 of N/A N/A
26 funds
- --------------------------------------------------------------------------------
20-YEAR #12 of N/A N/A
20 funds
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF OCTOBER 31, 1998.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $.5420 $.4661 $.4674
- --------------------------------------------------------------------------------
OCTOBER DIVIDEND: $.0440 $.0380 $.0380
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 6.09% 5.28% 5.27%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.45% 3.79% 3.79%
- --------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on October 31, 1998. 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, 1998, 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.
TERMS TO KNOW
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.
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 Occurs when the Federal Reserve Board of Governors changes monetary policy
by decreasing the federal funds rate.
FLIGHT-TO-QUALITY BUYING Describes investors who increase their allocation to
U.S. Treasuries and other high quality securities from riskier securities in
times of global economic uncertainty.
HIGH YIELD BONDS Issued by companies, often without long track records of sales
and earnings, or by those with questionable credit strength and pay 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.
RECESSION A downturn in economic activity, defined by many economists as at
least two consecutive quarters of decline in a country's Gross Domestic Product
(GDP).
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS.
SILVIA HOLDS A BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND A MASTER'S DEGREE IN ECONOMICS FROM BROWN UNIVERSITY IN
PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS WITH THE HARRIS
BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $245 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES, AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
If you're like most investors, you may be wondering if you should allow yourself
to breathe a sigh of relief as 1998 comes to a close. After several months of
generally declining stock prices and extreme volatility, the U.S. stock market
seems to have rediscovered its resiliency. In the fourth quarter, the Standard &
Poor's 500, an unmanaged index generally representative of the U.S. stock
market, bounced back into the 1100-point range, up nearly 20 percent from its
third-quarter low of 957. The blue chip Dow Jones Industrial Average enjoyed a
comparable rise. Investor confidence suddenly overtook the investor uncertainty
that had plagued the markets at summer's end. While financial volatility appears
to be continuing, the mood for investors definitely has improved.
To what can we attribute the change? Simply this -- the cumulative effect of
some good news, not the least of which was a long-awaited series of interest
rate reductions by the Federal Reserve Board. In September, the Fed reduced the
federal funds rate a modest quarter of a percentage point, however, this first
cut disappointed some investors who were expecting a more dramatic gesture. Two
weeks later, the Fed came back with an additional quarter of a percentage point
reduction. This was an unexpected cut that seemed to have a positive effect on
Wall Street. In November, a third rate cut of a quarter of a percentage point
also boosted investor confidence. Investors were further surprised by
better-than-expected corporate earnings reports early in the fourth quarter.
Finally, economic data regarding retail sales, employment and home sales
suggested continued economic growth and very little prospect of recession.
Although there was no good news to be garnered from the sensationalized
presidential scandal, as the shock of Kenneth Starr's report wore off, the
nation seemed to refocus its attention on other matters. In this sense, another
veil of despair was lifted.
In many ways, 1998's market activity provides a study in how investor
perceptions can upstage economic realities. Certainly, the tumultuous lessons of
Russia and Southeast Asia renewed investors' awareness of risk in 1998, which
was an important wake-up call. At all times, investors must understand and
consider risk. But over the course of 1998, U.S. economic fundamentals have
essentially remained strong. In fact, inflation has remained low for the entire
year. Economic growth has been solid. Our consumer confidence has remained
fairly high, although not quite as high as last year. The nation's budget
surplus for 1998 came in at $60 billion, with another budget surplus expected
for fiscal 1999.
Growth in the nation's gross domestic product (GDP), which represents the
total value of all goods and services produced within the U.S. economy, has
remained remarkably steady. GDP is expected to have grown at an annualized rate
of between 2.5 percent and 3.5 percent for the second half of 1998 and is
anticipated to hover around 2 percent for the first half of 1999. The consumer
price index (CPI) remains in a range of 1.5 percent to 2 percent.
While employment growth has slowed a bit, the slowdown in wage gains may
provide the Fed with an incentive to reduce interest rates even further. U.S.
corporate profits have generally been flat, so we may see a decrease in capital
spending. Banks appear to be only a little less willing to lend, so the threat
of a general credit crunch is minimal.
Investors may take comfort in the fact that the U.S. markets and economy have
withstood the test of 1998's tumultuous third quarter. Similarly, while certain
countries, such as Malaysia, Indonesia, Brazil and Russia, are still suffering
from economic crises, others, including the Philippines, South Korea, Thailand
and China, appear to have survived. As long as the Fed and the Group of Seven
leading industrial nations (G7) are committed to avoiding recession on national
and global levels respectively, investors have a good chance of experiencing a
more stable economic environment.
At home, there has been somewhat of a slowdown in manufacturing, as reduced
U.S. exports reflect foreign economic turmoil. But the global impact of the
Asian crisis still has not hit the U.S. as hard as was expected. Indeed, Asian
turmoil has not affected U.S. trade as much as it has lowered import prices and
helped reduce global interest rates.
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>
NOV 98 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1)* 4.53 5.64 6.03 6.53
PRIME RATE(2)* 8.12 8.50 8.50 8.25
INFLATION RATE(3)* 1.49 1.50 2.08 2.99
THE U.S. DOLLAR(4) 0.83 6.86 9.65 3.46
CAPITAL GOODS ORDERS(5)* 2.51 7.47 10.64 9.19
INDUSTRIAL PRODUCTION(5)* 2.12 4.97 6.72 4.93
EMPLOYMENT GROWTH(6) 2.28 2.65 2.70 2.33
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
* DATA AS OF OCTOBER 31, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
In Europe, the much anticipated Economic and Monetary Union (EMU) is on the
move, with a focus on more flexibility and growth potential for the region.
European equities may be the beneficiaries of increased spending, as governments
seek to foster growth and reduce unemployment.
If you're a long-term investor in today's short-term world, go ahead and
breathe that sigh of relief as 1998 comes to an end -- but get ready for 1999.
It's going to be an interesting year as the EMU emerges, the race for the next
presidency heats up and the year 2000 approaches. And, remember: Investors don't
like uncertainty, be it economic or political. The threat of impeachment, new
acts of terrorism or any other hints of crisis could prompt a downward spike in
our markets in the short run. In the long run, the keys to investment
performance remain moderate growth, low inflation and limited taxation and
regulation.
I would like to take this opportunity to thank you for choosing to invest with
Kemper Funds. We appreciate the opportunity to serve your investment needs.
Sincerely,
/s/ John E. Silvia
JOHN E. SILVIA
MANAGING DIRECTOR
SCUDDER KEMPER INVESTMENTS, INC
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 DR. JOHN SILVIA AS OF DECEMBER 2, 1998, AND
MAY NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF
THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION.
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. CESSINE RECEIVED BOTH A B.S. AND AN M.S. DEGREE FROM THE
UNIVERSITY OF WISCONSIN, MADISON, AND IS A CHARTERED FINANCIAL ANALYST.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
KEMPER INCOME AND CAPITAL PRESERVATION FUND CAME THROUGH ITS FISCAL YEAR ENDED
OCTOBER 31, 1998 UNSCATHED IN A MARKET ENVIRONMENT THAT PLAYED FAVORITES ONLY TO
TREASURY SECURITIES. LEAD PORTFOLIO MANAGER ROBERT CESSINE DISCUSSES HOW HE WAS
ABLE TO NAVIGATE THE FUND THROUGH THE CHOPPY WATERS AND PROSPER IN THIS ECONOMIC
ENVIRONMENT.
Q KEMPER INCOME AND CAPITAL PRESERVATION FUND'S GAIN OF 8.13 PERCENT (CLASS
A SHARES, UNADJUSTED FOR ANY SALES CHARGE) BEAT THE 7.72 PERCENT GAIN OF THE
LIPPER ANALYTICAL SERVICES CORPORATE DEBT A RATED FUNDS CATEGORY AVERAGE FOR THE
ONE-YEAR PERIOD NOVEMBER 1, 1997 THROUGH OCTOBER 31, 1998. HOW WOULD YOU
DESCRIBE THE FUND'S PERFORMANCE?
A The fund performed well in a difficult market environment. The fund is
compared with a very broad group of funds. Some are very long duration funds,
some more intermediate like Kemper Income And Capital Preservation Fund. Some
have proportions in high yields that are greater than ours or none at all.
Kemper Income And Capital Preservation Fund has a higher exposure to corporate
bonds than a lot of its peers, and the corporate bond sector was one of the
hardest hit during the year.
Q WHY, IF CORPORATES WERE SUCH AN UNDERPERFORMER AND KEMPER INCOME AND
CAPITAL PRESERVATION FUND HAS SUCH A HIGH ALLOCATION OF THEM IN ITS PORTFOLIO
COMPARED TO ITS PEERS, DID THE FUND PERFORM BETTER THAN ITS PEER GROUP?
A We strive to maintain a higher-quality portfolio than some of our peers,
which does not necessarily help the fund's ranking against its peers every year.
But with the 'flight to quality' this year, the fund's higher quality worked to
its advantage.
Q YOU TALKED ABOUT A FLIGHT TO QUALITY SIX MONTHS AGO. DID THAT CONTINUE
THROUGH THE YEAR, AND HOW ELSE WOULD YOU DESCRIBE THE ECONOMIC ENVIRONMENT OF
THE FUND'S FISCAL YEAR?
A As you remember, flight-to-quality buying is a term describing investors
who increase their allocation to U.S. Treasuries and other high quality
securities from riskier asset classes in times of global economic uncertainty.
Problems first became apparent in July 1997, well before the start of the fund's
fiscal year, when Thailand devalued its currency. Then on 'Gray Monday,' October
27, 1997, severe declines were registered in world markets as a result of
economic crisis in Southeast Asia. The uncertainty in the markets drove many
investors to U.S. Treasuries, hence, the flight to quality. This flight to
quality continued into and throughout most of the fund's fiscal year.
The result of the flight to quality was a Treasury rally that pushed the
benchmark 30-year Treasury yield to new lows through September 1998, which meant
their prices were at new highs since a bond's yield and price are inversely
related.
For a period during the first part of 1998, confidence returned to the
markets and investors returned to buying equities and emerging market
investments. However, as it became clear Asia's financial crisis was having
adjunct affects on the U.S. economy, most notably a slow down of the domestic
economy,
5
<PAGE> 6
PERFORMANCE UPDATE
uncertainty returned to the markets in August when the world refocused on
economic and financial problems in Russia and Latin America. The tottering of
the equity and bond markets moved the Federal Reserve Board to do something
twice within one month that it had not done since January 1996 -- cut interest
rates, by 0.25 percent on September 29 and by the same amount on October 16. The
second cut finally had the effect the Fed was looking for -- appeasing markets
and showing America's commitment to supporting economies worldwide. Global
financial markets rebounded with the second cut, and liquidity returned to the
markets. The rate cuts were critical elements in orchestrating a soft landing
for the economy.
Q DURING THIS PERIOD, HOW DID THE CORPORATE BOND MARKET PERFORM?
A For most of the fund's fiscal year, on a duration-adjusted basis to
equalize interest rate sensitivity, the corporate market generally
underperformed Treasuries and mortgages. In fact, in August 1998, we saw the
worst corporate market performance for the decade. Spreads widened between
high-grade corporates and Treasuries, which basically means that corporate bonds
lost value relative to Treasury bonds. Adding to its troubles, about one-
quarter of the corporate market is foreign-issued.
Q WHAT SORTS OF PORTFOLIO ADJUSTMENTS DID YOU MAKE DURING THE YEAR?
A We increased the fund's allocation to Treasuries expecting continued
strong performance and reduced its allocation to corporate bonds. There were
several points during the year when what happened overseas dramatically affected
the corporate market. All through the spring, we lightened up on corporates, and
that worked in our favor during a very difficult August and October in the
corporate market.
We also lengthened the fund's duration for most of the year to take
advantage of the flight to quality in the market and the deflationary tone set
by events overseas. Remember, longer durations have more interest rate risk than
shorter durations, and prices for bonds vary inversely with interest rates. When
interest rates go down, their prices go up. By increasing the portfolio's
duration, we increased its sensitivity to a drop in interest rates. But because
we expected interest rates would decline (and their prices increase), we felt we
could improve the fund's total return possibilities. Indeed, throughout most of
the fund's fiscal year, we saw interest rates decline.
Q DURING THE FIRST HALF OF THE FUND'S FISCAL YEAR, YOU MADE A POINT OF
INCREASING THE PORTFOLIO'S ALLOCATION TO MORTGAGES TO ENHANCE THE FUND'S INCOME
LEVEL. DID YOUR STRATEGY WORK?
A We had planned to increase the fund's allocation to mortgages even more
when we could find mortgages at favorable prices. However, we weren't able to do
that. The mortgage market basically responded to the tremendous tightening in
the Treasury market the same way corporates did. We'll want to increase
mortgages when we enter a stable or rising interest rate environment.
Q WHAT TYPES OF COMPANIES ARE YOU INTERESTED IN?
A For the last quarter of the year, we avoided cyclical companies and
companies whose earnings depend on shipments overseas. We replaced them with
stable revenue-generating firms like telephone and electric companies.
Looking ahead, it all depends upon the strength of the economy. Stable
utility-type investments and stable industries in the service sectors, cable and
media companies for example, tend to perform well in a recessionary, or at least
weakening, economic environment.
Q YOU MENTIONED 'RECESSION.' DO YOU SEE THE ECONOMY HEADED IN THAT
DIRECTION?
A The generally accepted definition of a recession is two consecutive
quarters with negative growth. So, by that definition, I don't believe we're
headed for a recession. But, we're not sure with the environment we're in,
whether we'll have 1 or 2 percent growth or stronger growth. We don't know how
weak the economy will get.
Q DO YOU LOOK FOR ANYTHING DIFFERENT IN YOUR FOREIGN BONDS THAN YOU DO IN
YOUR DOMESTIC ONES, AND DID THE YEAR'S ROCKY CONDITIONS OVERSEAS AFFECT THE
FUND'S ALLOCATION TO FOREIGN BONDS?
A We try to maintain a 5 or 6 percent allocation to foreign bonds. These are
not foreign currency bonds, they're all dollar-denominated bonds. So we look for
the same things we do as in a domestic bond. What we tend to end up with are
good quality investment-grade companies located outside the U.S.
6
<PAGE> 7
PERFORMANCE UPDATE
Q WHAT IS YOUR OUTLOOK FOR KEMPER INCOME AND CAPITAL PRESERVATION FUND AND
THE CORPORATE BOND MARKET?
A Like I mentioned, the economy seems to be slowing a bit. The flight to
quality has dissipated, but the Fed's easings will likely keep the domestic
economy out of a recession. The money that poured into Treasury bonds during the
year will likely be redeployed into corporate or mortgage bonds, which will
improve those markets. We would like to pursue a strategy of increasing
mortgages in Kemper Income And Capital Preservation Fund when we've entered a
stable or rising interest rate environment. The main sign we're looking for in
the corporate market is whether corporate profits improve. The economic outlook
for the end of 1998 is looking more robust, so our outlook for corporate
earnings is slightly more positive. If that holds true, we'll look for a natural
entry point into the corporate market.
7
<PAGE> 8
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED OCTOBER 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEAR CLASS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER INCOME AND CAPITAL PRESERVATION
FUND CLASS A SHARES 3.29% 5.57% 8.03% 9.21% (since 4/15/74)
- --------------------------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL PRESERVATION
FUND CLASS B SHARES 4.20 N/A N/A 7.23 (since 5/31/94)
- --------------------------------------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL PRESERVATION
FUND CLASS C SHARES 7.20 N/A N/A 7.67 (since 5/31/94)
- --------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
CLASS A SHARES FROM 1/1/76 TO 10/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1/1/76 12/31/83 12/31/90 10/31/98
<S> <C> <C> <C> <C>
Kemper Income And Capital Preservation Fund Class A(1) 9548 17790 36707 72199
9895 17916 38371
9960 17782 38889
10408 18898 41083
10868 19980 43281
10870 20628 42818
11145 22498 44408
11280 22922 46346
11323 24346 46681
11411 25952 48931
11422 26733 50492
11693 27239 52248
11693 27893 52147
11952 28555 50478
12389 28292 49955
12300 27649 50163
11952 28757 50385
10861 29944 52804
12534 30505 56719
11394 31440 58033
11600 31755 61144
11426 32273 59193
11480 33876 59219
10644 33851 60390
11953 34472 62376
12214 34113 61940
12588 35412 64155
14572 35163 66249
15969 67756
16802 68701
17132 70257
17386 73077
Lehman Brothers Aggregate Bond Index+ 10000 10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000 10000
10000 10000
10000 10000
10000 10000
10000 10000
Consumer Price Index++ 10000 18252 24108 29477
10072 18486 24324
10234 18685 24504
10378 18919 24721
10486 18973 24847
10721 19171 25099
10937 19387 25261
11063 19513 25459
11189 19694 25568
11423 19604 25874
11748 19730 26018
11982 19856 26144
12198 19910 26270
12577 20198 26522
13027 20450 26667
13441 20721 26919
13820 20793 26973
14432 20991 27279
14901 21261 27477
15135 21586 27604
15550 21712 27658
15946 22036 28054
16324 22360 28234
16793 22523 28432
16937 22721 28577
17027 23189 28829
17477 23405 28883
17640 23910 29045
17586 29063
17640 29225
17928 29369
18144 29477
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
CLASS B SHARES FROM 5/31/94 TO 10/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/96 12/31/97 10/31/98
<S> <C> <C> <C> <C>
KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS B(1) 10000.00 12144.90 13072.80 13631.90
9968.22 12031.80 13225.50
9974.25 12434.00 13495.50
10009.40 12810.80 14009.30
10453.50
11204.30
11426.10
12013.80
11615.70
11580.60
11797.20
LEHMAN BROTHERS AGGREGATE BOND INDEX+ 10000.00 12370.00 13567.00 14616.00
9978.00 12302.00 13776.00
10039.00 12755.00 14098.00
10077.00 13179.00 14694.00
10585.00
11230.00
11451.00
11939.00
11726.00
11793.00
12010.00
CONSUMER PRICE INDEX++ 10000.00 10753.00 10936.00 11092.00
10034.00 10847.00 10997.00
10129.00 10868.00 11051.00
10149.00 10929.00 11092.00
10264.00
10339.00
10386.00
10407.00
10556.00
10624.00
10698.00
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
CLASS C SHARES FROM 5/31/94 TO 10/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/96 12/31/97 10/31/98
<S> <C> <C> <C> <C>
KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS C(1) 10000.00 12174.00 13120.00 13865.00
9981.00 12061.00 13258.00
9987.00 12464.00 13529.00
10009.00 12841.00 14043.00
10467.00
11204.00
11453.00
12041.00
11643.00
11609.00
11826.00
LEHMAN BROTHERS AGGREGATE BOND INDEX+ 10000.00 12370.00 13567.00 14616.00
9978.00 12302.00 13776.00
10039.00 12755.00 14098.00
10077.00 13179.00 14694.00
10585.00
11230.00
11451.00
11939.00
11726.00
11793.00
12010.00
CONSUMER PRICE INDEX++ 10000.00 10753.00 10936.00 11092.00
10034.00 10847.00 10997.00
10129.00 10868.00 11051.00
10149.00 10929.00 11092.00
10264.00
10339.00
10386.00
10407.00
10556.00
10624.00
10698.00
</TABLE>
Past performance is not a guarantee of future results. Investment returns and
principal values 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, the maximum contingent deferred sales
charge is 4%. Class C shares have no sales charge adjustment, but
redemptions within one year of purchase may be subject to a contingent
deferred sales charge of 1%. share classes invest in the same underlying
portfolio. Average annual total return reflects 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 January 1, 1976. As a result, we are unable
to illustrate the life of class performance for Kemper Income And Capital
Preservation Fund Class A shares. In comparing the Kemper Income And Capital
Preservation Fund Class A shares performance to the Lehman Brothers
Aggregate Bond Index and the Consumer Price Index, you should also note that
the fund's performance reflects the maximum sales charge, while no such
charges are reflected in the performance of the index.
+ The Lehman Brothers Aggregate Bond Index is an unmanaged index generally
representative of intermediate-term government bonds, investment grade
corporate debt securities and mortgage backed securities. Source is 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 Towersdata.
8
<PAGE> 9
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/98 ON 10/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS 44% 61
- --------------------------------------------------------------------------------
TREASURY BONDS AND NOTES 35 24
- --------------------------------------------------------------------------------
MORTGAGES 9 --
- --------------------------------------------------------------------------------
FOREIGN BONDS 6 8
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 6 5
- --------------------------------------------------------------------------------
TREASURIES 1-3 -- 2
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/98 ON 10/31/97
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/98 ON 10/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 62% 59%
- --------------------------------------------------------------------------------
11-20 YEARS 13 15
- --------------------------------------------------------------------------------
21+ YEARS 19 21
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 6 5
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/98 ON 10/31/97
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/98 ON 10/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 8.8 years 8.2 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, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS--45.2% PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT AND U.S. Treasury Bonds
AGENCY OBLIGATIONS--43.2% 10.75%, 2003 $60,000 $ 75,375
6.375%, 2027 27,650 31,862
6.125%, 2027 14,770 16,621
U.S. Treasury Notes
5.25%, 2003 7,750 8,087
7.875%, 2004 29,900 35,156
7.50%, 2005 18,305 21,274
5.625%, 2008 48,085 51,834
Federal National Mortgage Association
Agency Notes
5.75%, 2008 7,750 8,060
6.00%, 2008 15,250 16,182
Federal National Mortgage Association
Pass Through Certificates
6.50%, 2013 and 2027 7,576 7,654
7.00%, 2012 and 2027 13,867 14,167
7.50%, 2027 87 89
Government National Mortgage Association
Pass Through Certificates
7.00%, 2027 4,697 4,808
7.50%, 2028 3,616 3,723
Tennessee Valley Authority, 6.25%, 2017 4,900 5,170
---------------------------------------------------------------------------
300,062
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT Province of Nova Scotia, 8.75%, 2022 4,000 5,086
OBLIGATIONS--2.0% Province of Quebec, 8.625%, 2005 7,500 8,590
(PRINCIPAL AMOUNT IN U.S. DOLLARS) ---------------------------------------------------------------------------
13,676
---------------------------------------------------------------------------
TOTAL GOVERNMENT OBLIGATIONS
(Cost: $306,312) 313,738
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--47.8%
- ------------------------------------------------------------------------------------------------------------------------
AEROSPACE AND Raytheon Co., 6.75%, 2007 6,100 6,395
DEFENSE--.9%
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
BANKS--13.4% ABN-AMRO Bank, 8.25%, 2009 7,000 7,550
Abbey National, PLC, 6.69%, 2005 2,000 2,066
BCH Cayman Islands, Ltd.
7.50%, 2005 4,700 4,877
7.70%, 2006 2,480 2,612
Capital One Bank, 8.125%, 2000 7,500 7,651
Crestar Financial Corp., 8.75%, 2004 5,000 5,599
Den Danske Bank, 6.375%, 2008 8,250 8,160
First Fidelity Bancorporation, 9.625%,
1999 5,000 5,151
Firstar Bank Corp., 6.25%, 2002 4,700 4,818
Kansallis Osake Bank, 10.00%, 2002 5,000 5,605
Kansallis Osake Pankki, 8.65%, 2049 5,000 5,105
NationsBank Corp., 9.50%, 2004 5,000 5,831
Northern Trust Corp., 6.25%, 2008 5,500 5,680
Riggs National Corp., 8.50%, 2006 7,000 7,143
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Scotland International, 8.80%, 2004 $ 2,850 $ 3,239
Svenska Handelsbanken, 7.125%, 2049 3,950 3,717
Wells Fargo & Co.
8.75%, 2002 5,000 5,494
6.875%, 2006 2,350 2,483
---------------------------------------------------------------------------
92,781
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS, MEDIA AND Comcast Cablevision, 8.50%, 2027 2,400 2,942
ELECTRONICS--10.3%
GTE North, Inc., 6.90%, 2008 5,200 5,704
News American Holdings, Inc.
9.25%, 2013 4,100 4,820
8.15%, 2036 5,700 5,920
Tele-Communications, Inc., 9.80%, 2012 12,500 16,221
Time Warner Entertainment Co., L.P.
9.125%, 2013 7,150 8,796
9.15%, 2023 7,500 9,388
WorldCom, Inc.
6.40%, 2005 1,000 1,043
7.75%, 2007 4,450 4,977
7.75%, 2027 3,950 4,430
6.95%, 2028 6,900 7,030
---------------------------------------------------------------------------
71,271
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS, Dayton Hudson Corp., 7.25%, 2004 5,000 5,354
SERVICES AND RETAIL--6.2%
Federated Department Stores, 6.125%, 2001 5,000 5,076
May Department Stores Co., 6.875%, 2005 4,950 5,291
Phillip Morris Cos., 7.20%, 2007 7,300 7,741
Royal Caribbean Cruises, Ltd., 8.25%, 2005 7,480 8,056
Sears Roebuck Acceptance Corp., 7.00%,
2007 5,850 6,219
Sony Corp., 6.125%, 2003 5,100 5,215
---------------------------------------------------------------------------
42,952
- ------------------------------------------------------------------------------------------------------------------------
ENERGY AND CHEMICALS--1.7% Repsol International Finance, 7.00%, 2005 5,000 5,353
USX Corp., 6.85%, 2008 6,100 6,078
---------------------------------------------------------------------------
11,431
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--3.0% African Development Bank, 9.30%, 2000 4,000 4,267
Associates Corp., N.A., 8.25%, 1999 5,000 5,175
FINOVA Capital Corp., 9.125%, 2002 5,000 5,425
General Electric Capital Corp.
8.75%, 2007 2,100 2,523
8.625%, 2008 3,050 3,686
---------------------------------------------------------------------------
21,076
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TRANSPORTATION--6.2% Continental Airlines, Inc.
7.75%, 2014 $ 3,891 $ 4,189
6.90%, 2018 3,950 4,053
Delta Airlines
9.32%, 2009 3,949 4,481
9.75%, 2021 7,200 8,317
Ford Motor Credit, 7.75%, 2005 5,000 5,547
General Motors Acceptance Corp., 8.875%,
2010 5,000 6,221
Lockheed Martin, 7.25%, 2006 4,850 5,253
Penske Truck Leasing, 8.25%, 1999 5,000 5,168
---------------------------------------------------------------------------
43,229
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--6.1% Bell South Telecommunications, 6.375%,
2028 5,500 5,603
Centerior Energy, 7.67%, 2004 5,900 6,162
Chesapeake and Potomac Telephone Company
of Virginia, 8.375%, 2029 5,000 6,328
Commonwealth Edison
7.375%, 2004 3,225 3,423
7.00%, 2005 1,100 1,161
El Paso Electric Co., 8.90%, 2006 7,150 7,910
Northwest Pipeline Corp., 6.625%, 2007 4,900 5,002
U.S. West Capital Funding Inc., 6.875%,
2028 6,500 6,774
---------------------------------------------------------------------------
42,363
---------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $325,353) 331,498
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.01% to 6.20%
INSTRUMENTS--4.9% Due--November 1998
(Cost: $34,268) 34,300 34,268
---------------------------------------------------------------------------
TOTAL INVESTMENTS--97.9%
(Cost: $665,933) 679,504
---------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--2.1% 14,553
---------------------------------------------------------------------------
NET ASSETS--100% $694,057
---------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $665,933,000 for federal income tax purposes
at October 31, 1998, the gross unrealized appreciation was $18,455,000, the
gross unrealized depreciation was $4,884,000 and the net unrealized appreciation
on investments was $13,571,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
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, 1998, 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 1994. 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, 1998, by correspondence with the custodians. 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, 1998, 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 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 14, 1998
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $665,933) $679,504
- ------------------------------------------------------------------------
Cash 506
- ------------------------------------------------------------------------
Receivable for:
Interest 14,478
- ------------------------------------------------------------------------
Fund shares sold 2,156
- ------------------------------------------------------------------------
Investments sold 474
- ------------------------------------------------------------------------
TOTAL ASSETS 697,118
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Dividends 1,527
- ------------------------------------------------------------------------
Fund shares redeemed 503
- ------------------------------------------------------------------------
Investments purchased 193
- ------------------------------------------------------------------------
Management fee 307
- ------------------------------------------------------------------------
Administrative services fee 130
- ------------------------------------------------------------------------
Distribution services fee 76
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 257
- ------------------------------------------------------------------------
Trustees' fees 68
- ------------------------------------------------------------------------
Total liabilities 3,061
- ------------------------------------------------------------------------
NET ASSETS $694,057
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $688,497
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (8,011)
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 13,571
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $694,057
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($563,571 / 64,987 shares outstanding) $8.67
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $9.08
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($106,171 / 12,287 shares outstanding) $8.64
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($16,759 / 1,935 shares outstanding) $8.66
- ------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($7,556 / 872 shares outstanding) $8.67
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Interest income $46,924
- -----------------------------------------------------------------------
Expenses:
Management fee 3,472
- -----------------------------------------------------------------------
Administrative services fee 1,406
- -----------------------------------------------------------------------
Distribution services fee 798
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,544
- -----------------------------------------------------------------------
Reports to shareholders 169
- -----------------------------------------------------------------------
Professional fees 43
- -----------------------------------------------------------------------
Trustees' fees and other 41
- -----------------------------------------------------------------------
Total expenses 7,473
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 39,451
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized gain on sales of investments 15,282
- -----------------------------------------------------------------------
Net realized loss from futures transactions (7,080)
- -----------------------------------------------------------------------
Net realized gain 8,202
- -----------------------------------------------------------------------
Change in net unrealized appreciation on investments 3,357
- -----------------------------------------------------------------------
Net gain on investments 11,559
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $51,010
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------
Net investment income $ 39,451 39,304
- ----------------------------------------------------------------------------------------
Net realized gain 8,202 1,934
- ----------------------------------------------------------------------------------------
Change in net unrealized appreciation 3,357 3,456
- ----------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 51,010 44,694
- ----------------------------------------------------------------------------------------
Net equalization credits -- 371
- ----------------------------------------------------------------------------------------
Distribution from net investment income (40,288) (39,211)
- ----------------------------------------------------------------------------------------
Net increase from capital share transactions 69,865 34,618
- ----------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 80,587 40,472
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------
Beginning of year 613,470 572,998
- ----------------------------------------------------------------------------------------
END OF YEAR (including undistributed net investment income
of $11,019 for the year ended October 31, 1997) $694,057 613,470
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Income and Capital Preservation Fund is an
open-end management investment company organized as
a business trust under the laws of Massachusetts.
The fund offers four classes of shares. Class A
shares are sold to investors subject to an initial
sales charge. Class B shares are sold without an
initial sales charge but are subject to higher
ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are sold to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES SECURITY VALUATION. Investments are stated at
value. Portfolio debt securities are valued by
pricing agents approved by the officers of the
fund, which 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. Futures contracts are valued
at the most recent settlement price. All other
securities are valued at their fair value as
determined in good faith by the Valuation Committee
of the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes discount amortization on
fixed income securities. Realized gains and losses
from investment transactions are reported on an
identified cost basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the 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'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, 1998, the fund had a tax basis net
loss carryforward of approximately $7,984,000,
which may be applied against any realized net
taxable gains of each succeeding year until fully
utilized, or it will expire during the period 2002
through 2003.
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
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. Prior to November 1, 1997,
the fund used equalization accounting to keep a
continuing shareholder's per share interest in
undistributed net investment income unaffected by
shareholder activity. This was accomplished by
allocating a portion of the proceeds from sales and
the cost of redemptions of fund shares to
undistributed net investment income. As of November
1, 1997, the fund discontinued using equalization.
This change has no effect on the fund's net assets,
net asset value per share or distributions to
shareholders. Discontinuing the use of equalization
accounting will result in simpler financial
statements. The cumulative effect of the
discontinuance of equalization accounting was to
decrease undistributed net investment income and
increase paid-in capital previously reported
through October 31, 1997 by $11,769,000.
- --------------------------------------------------------------------------------
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 $3,472,000 for the
year ended October 31, 1998.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's businesses to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, the fund's
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Trustees of the fund has
approved a new investment management agreement with
Scudder Kemper, which is substantially identical to
the former investment management agreement, except
for the dates of execution and termination.
Shareholders approved the new investment management
agreement through a proxy solicitation that
concluded in mid-December.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY KDI BY KDI TO FIRMS
--------------- -------------------
<S> <C> <C>
Year ended October 31, 1998 $70,000 578,000
</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 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
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees, CDSC and commissions
related to Class B and Class C shares are as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES PAID
RECEIVED BY KDI BY KDI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Year ended October 31, 1998 $999,000 1,115,000
</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 ASF PAID BY
THE FUND TO KDI KDI TO FIRMS
---------------- ---------------
<S> <C> <C>
Year ended October 31, 1998 $1,406,000 1,434,000
</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
$1,051,000 for the year ended October 31, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the year ended October 31,
1998, the fund made no direct payments to its
officers and incurred trustees' fees of $27,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended October 31, 1998, investment
transactions (excluding short term instruments) are
as follows (in thousands):
Purchases $819,754
Proceeds from sales 776,533
18
<PAGE> 19
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,
1998 1997
--------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 18,576 $ 156,805 22,073 $ 182,796
--------------------------------------------------------------------------------
Class B 7,612 65,658 3,288 27,633
--------------------------------------------------------------------------------
Class C 1,290 11,135 655 5,545
--------------------------------------------------------------------------------
Class I 779 6,803 133 1,118
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 2,368 21,766 2,715 20,630
--------------------------------------------------------------------------------
Class B 457 3,685 420 3,525
--------------------------------------------------------------------------------
Class C 55 489 41 349
--------------------------------------------------------------------------------
Class I 50 395 55 465
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (17,035) (145,297) (22,089) (180,977)
--------------------------------------------------------------------------------
Class B (4,763) (41,165) (2,604) (21,912)
--------------------------------------------------------------------------------
Class C (475) (4,141) (295) (2,495)
--------------------------------------------------------------------------------
Class I (723) (6,268) (243) (2,059)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 806 6,945 377 3,183
--------------------------------------------------------------------------------
Class B (809) (6,945) (378) (3,183)
--------------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $ 69,865 $ 34,618
--------------------------------------------------------------------------------
</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,
1998, the market value of assets pledged by the
fund to cover margin requirements for open futures
positions was $1,407,000. The fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures positions
open at October 31, 1998 (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION
TYPE AMOUNT MONTH LOSS
------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond $38,047 December '98 $ (624)
------------------------------------------------------------------------
U.S. Treasury Note 21,044 December '98 (624)
------------------------------------------------------------------------
TOTAL $(1,248)
------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------
CLASS A
---------------------------------------
YEAR ENDED OCTOBER 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------
Net asset value, beginning of year $8.54 8.46 8.62 7.91 8.97
- ----------------------------------------------------------------------------------
Income from investment operations:
Net investment income .53 .57 .58 .61 .61
- ----------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .14 .08 (.15) .72 (1.03)
- ----------------------------------------------------------------------------------
Total from investment operations .67 .65 .43 1.33 (.42)
- ----------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .54 .57 .59 .62 .59
- ----------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- .05
- ----------------------------------------------------------------------------------
Total dividends .54 .57 .59 .62 .64
- ----------------------------------------------------------------------------------
Net asset value, end of year $8.67 8.54 8.46 8.62 7.91
- ----------------------------------------------------------------------------------
TOTAL RETURN 8.13% 8.00 5.17 17.47 (4.86)
- ----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------
Expenses 1.01% .97 .96 .90 .94
- ----------------------------------------------------------------------------------
Net investment income 6.17% 6.75 6.90 7.31 7.34
- ----------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------
CLASS B
---------------------------------------------
YEAR ENDED OCTOBER 31, MAY 31 TO
--------------------------- OCTOBER 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------
Net asset value, beginning of period $8.51 8.43 8.59 7.90 8.16
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .49 .50 .51 .23
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .14 .08 (.15) .72 (.26)
- ----------------------------------------------------------------------------------------
Total from investment operations .60 .57 .35 1.23 (.03)
- ----------------------------------------------------------------------------------------
Less distribution from net investment
income .47 .49 .51 .54 .23
- ----------------------------------------------------------------------------------------
Net asset value, end of period $8.64 8.51 8.43 8.59 7.90
- ----------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.20% 6.99 4.20 16.12 (.45)
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------
Expenses 1.88% 1.90 1.93 1.81 1.92
- ----------------------------------------------------------------------------------------
Net investment income 5.30% 5.82 5.93 6.40 6.72
- ----------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------
CLASS C
-----------------------------------------
YEAR ENDED OCTOBER 31, MAY 31 TO
--------------------------- OCTOBER 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.53 8.45 8.61 7.90 8.16
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .49 .50 .53 .23
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .14 .08 (.15) .72 (.26)
- ---------------------------------------------------------------------------------------------
Total from investment operations .60 .57 .35 1.25 (.03)
- ---------------------------------------------------------------------------------------------
Less distribution from net investment income .47 .49 .51 .54 .23
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $8.66 8.53 8.45 8.61 7.90
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.20% 7.03 4.23 16.45 (.44)
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses 1.86% 1.86 1.90 1.78 1.89
- ---------------------------------------------------------------------------------------------
Net investment income 5.32% 5.86 5.96 6.43 6.75
- ---------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------
CLASS I
----------------------------------
YEAR ENDED OCTOBER
31, JULY 3 TO
-------------------- OCTOBER 31,
1998 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------
Net asset value, beginning of period $8.53 8.45 8.61 8.52
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .56 .59 .60 .19
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .15 .08 (.15) .12
- --------------------------------------------------------------------------------------
Total from investment operations .71 .67 .45 .31
- --------------------------------------------------------------------------------------
Less distribution from net investment income .57 .59 .61 .22
- --------------------------------------------------------------------------------------
Net asset value, end of period $8.67 8.53 8.45 8.61
- --------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.62% 8.26 5.45 3.65
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------
Expenses .66% .70 .72 .62
- --------------------------------------------------------------------------------------
Net investment income 6.52% 7.02 7.14 6.87
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $694,057 613,470 572,998 649,427 510,432
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 121% 164 74 182 163
- ----------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
- --------------------------------------------------------------------------------
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.
23
<PAGE> 24
TRUSTEES AND OFFICERS
<TABLE>
TRUSTEES OFFICERS
<S> <C> <C>
DANIEL PIERCE MARK S. CASADY ROBERT C. PECK, JR.
Chairman and Trustee President Vice President
DAVID W. BELIN PHILIP J. COLLORA KATHRYN L. QUIRK
Trustee Vice President and Vice President
Secretary
LEWIS A. BURNHAM LINDA J. WONDRACK
Trustee JOHN R. HEBBLE Vice President
Treasurer
DONALD L. DUNAWAY MAUREEN E. KANE
Trustee ROBERT C. CESSINE Assistant Secretary
Vice President
ROBERT B. HOFFMAN CAROLINE PEARSON
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
DONALD R. JONES ELIZABETH C. WERTH
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
SHIRLEY D. PETERSON BRENDA LYONS
Trustee Assistant Treasurer
WILLIAM P. SOMMERS
Trustee
EDMOND D. VILLANI
Trustee
</TABLE>
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- -----------------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- -----------------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania Avenue
Kansas City, MO 64105
- -----------------------------------------------------------------------------------------
INDEPENDENT ERNST & YOUNG LLP
AUDITORS 233 South Wacker Drive
Chicago, IL 60606
- -----------------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com
</TABLE>
[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(12/98) 1061670
