<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED OCTOBER 31, 2000
Offering investors the opportunity for a high level
of current income and preservation of capital
KEMPER INCOME AND
CAPITAL PRESERVATION FUND
"... The Treasury yield curve inverted during the past year as inflation
pressures mounted and short-term interest rates rose, providing an exceptional
challenge for corporate and government bond investors. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
7
PERFORMANCE UPDATE
10
TERMS TO KNOW
12
PORTFOLIO STATISTICS
13
PORTFOLIO OF INVESTMENTS
17
FINANCIAL STATEMENTS
20
FINANCIAL HIGHLIGHTS
22
NOTES TO FINANCIAL STATEMENTS
27
REPORT OF INDEPENDENT AUDITORS
AT A GLANCE
KEMPER INCOME AND CAPITAL
PRESERVATION FUND TOTAL RETURNS
FOR THE YEAR ENDED OCTOBER 31, 2000
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER INCOME AND KEMPER INCOME AND KEMPER INCOME AND LIPPER CORPORATE DEBT
CAPITAL PRESERVATION FUND CAPITAL PRESERVATION FUND CAPITAL PRESERVATION FUND A-RATED FUNDS
CLASS A CLASS B CLASS C CATEGORY AVERAGE*
------------------------------------------- ------------------------- ------------------------- ------------------------
<S> <C> <C> <C>
5.31 4.60 4.68 5.52
</TABLE>
PERFORMANCE IS HISTORICAL AND INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL
GAINS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH CHANGING MARKET
CONDITIONS, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
*LIPPER 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
10/31/00 10/31/99
...........................................................
<S> <C> <C> <C> <C>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS A $7.99 $8.06
...........................................................
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS B $7.96 $8.02
...........................................................
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS C $7.99 $8.05
...........................................................
</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> <C> <C>
1-YEAR #108 of 177 funds #136 of 177 funds #130 of 177 funds
..........................................................................................
5-YEAR #68 of 112 funds #107 of 112 funds #103 of 112 funds
..........................................................................................
10-YEAR #18 of 41 funds n/a n/a
..........................................................................................
</TABLE>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND TOTAL RETURNS
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF OCTOBER 31, 2000.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
............................................................
<S> <C> <C> <C> <C> <C>
ONE-YEAR INCOME: $0.48 $0.42 $0.42
............................................................
OCTOBER DIVIDEND: $0.04 $0.03 $0.04
............................................................
ANNUALIZED DISTRIBUTION
RATE+: 6.01% 4.52% 6.01%
............................................................
SEC YIELD+: 5.86% 5.42% 5.45%
............................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON OCTOBER 31, 2000. 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, 2000, 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.
<TABLE>
<S> <C>
YOUR FUND'S STYLE
FIXED STYLE BOX
MORNINGSTAR FIXED-INCOME STYLE BOX
Source: Data provided by Morningstar,
Inc., Chicago, IL, (312) 696-6000. The
Income Style Box(TM) 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.
</TABLE>
<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:
Times have been good. During the first half of 2000, the global economy grew
faster than it has in over a decade. All regions participated. The United
States, of course, was still powering ahead. The growth rate in Europe was
nearly 4 percent. Asia fed off an electronics boom and a revitalized China.
South America got a boost from an improved credit rating. New money pumped up
energy producers from Mexico to the Middle East.
Now for the bad news, which is that the best news is probably behind us.
Global growth peaked in the spring, and in the United States, at least, the
slowdown was abrupt. After 6 percent growth in the year ending June 30, the
economy grew at a rate of just 2.43 percent during the summer. It seems that
expensive energy, currency volatility and more widespread profit problems are
bringing the exuberant global economy, including the United States, to heel.
Let's explore these factors in more detail.
OIL, OIL, TOIL AND TROUBLE
Although oil prices have receded somewhat, everyone's still jittery, and with
good reason: Of the seven recessions since World War II, six were preceded by a
spike in crude oil prices.
Oil prices have already been strong enough for long enough to crimp growth,
and they're biting the rest of the world even harder than the United States. But
there are two factors working to our advantage. First, oil prices are still
historically low. Oil is slightly more than $30 per barrel today, but it peaked
at over $75 per barrel back in 1980 (stated in today's dollars). Second, our
dependence on oil has decreased: The United States uses only roughly half as
much oil to produce a unit of GDP as it did thirty years ago. This gives us hope
that the economy can escape recession this time around.
What would make us worry more? Outright energy shortages or a political
crisis. If either happens, the odds of a recession occurring would rise steeply.
People panic or become excessively cautious when they have to fret. Can I fill
up my oil tank? Will there be a war? Their loss of confidence can be much more
devastating than price increases alone.
CURRENCY CONCERNS
Currency turmoil is a second danger to the economy. Central bankers have
intervened to halt the euro's decline, and they're right that the euro is
fundamentally undervalued. But intervention is a hazardous game. Let's hope they
don't convince the markets that the euro should rise a lot very quickly. A
suddenly weak dollar might make Europeans think about selling all those American
stocks and bonds they've been buying, and would greatly complicate the Fed's
inflation fight.
BUSINESS: BIG PLANS BUT PROFIT DISAPPOINTMENTS
Profit warnings escalated late this summer, and we believe there's fire amid
that smoke.
Sure, businesses have had a voracious appetite for money -- and until very
recently, corporate treasurers were finding it easily: Banks increased business
lending by 10.8 percent in the past year. Bond markets have suddenly become a
lot more picky, especially for low-quality credits, but money is still available
for investment grade borrowers. Capital goods orders reflect executives'
enthusiasm -- while volatile month-to-month, they have been up an average of 15
to 20 percent compared to a year ago for the past six months.
Still, we expect total capital spending to slow, from this year's estimated 14
percent to 12.5 percent in 2001. The reason? A profit squeeze is about to take
some of the edge off executives' animal spirits.
We've always been more cautious than Wall Street about 2001 profits, and our
forecast hasn't changed. Profits are likely to be flat to down next year for
several reasons. First, the growth slowdown will make it harder to keep up the
productivity gains that have kept labor costs under control. We saw the first
evidence of how productivity slows along with economic growth in the third
quarter: Productivity gains dipped to just 3.3 percent from the second quarter's
remarkable 6.1 percent. Second, interest expense will surge (thanks to higher
rates and all that new debt. Third, depreciation costs are escalating. And
finally, the excessively weak euro and higher oil costs will sap earnings.
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 (11/30/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 5.70 6.40 6.00 4.80
Prime rate (2) 9.50 9.25 8.50 8.00
Inflation rate (3)* 3.50 3.10 2.60 1.40
The U.S. dollar (4) 11.10 4.30 -0.70 1.20
Capital goods orders (5)* 7.00 17.10 12.30 -0.60
Industrial production (5)* 5.20 6.50 4.40 4.00
Employment growth (6)* 1.80 2.50 2.30 2.50
</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 10/31/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
SAVING GRACES: FISCAL POLICY AND CONSUMER SPENDING
While growth has peaked and is now slowing, we can be thankful that growth
probably won't slow too much, thanks in part to a more stimulative fiscal policy
and consumer spending.
Fiscal policy is likely to be more stimulative. Of course, most economists
agree that the last thing this pumped-up economy needs is another shot of
stimulants -- too much stimulus, after all, is widely believed to cause
inflation. But economists weren't running for office; politicians were. And
inflation risk was about the last thing on the mind of either candidate in the
heat of election campaigning. They wanted to win votes, and the time-tested way
to do so was to make promises. Although we didn't have the name of the winner as
of press time, neither candidate seems to be planning a lot of fiscal
restraint -- but the good news is that neither candidate's plan is likely to be
enacted until 2002 at the earliest.
Second, consumers continue to spend, spend, spend. The personal savings rate
keeps falling, from an already low 2.2 percent last year to a nearly invisible
0.1 percent this year. Critics of this admittedly squishy statistic claim it
doesn't adequately capture households' growing wealth. As it turns out, however,
the average American not only doesn't save much, but he's not getting wealthier
in leaps and bounds, either.
Net worth for the median family where the head of the household is over 45
(and where thoughts are presumably beginning to turn to retirement), rose less
than $13,000 between 1995 and 1998. That's less than a 12 percent gain during
the same three years the stock market nearly doubled and the market value of
owner-occupied homes jumped 21 percent. Why didn't the average family get richer
in that time? Because they were borrowing and spending like crazy. House values
were up 21 percent -- but mortgage debt rose even faster, by 25 percent!
Consumers' profligacy worries many financial professionals. Some people aren't
saving enough for retirement because they have inflated expectations of future
investment returns. Other people aren't saving enough for retirement because
they don't realize just how much money they'll need. Either way, people aren't
saving.
Still, no one wants consumers to change their profligate ways too fast. After
all, hearty consumer spending is a prime reason America's growth has stayed on a
fast track so far. Most economists would like to see shoppers be a bit more
moderate -- but only a bit. If Americans suddenly turned thrifty, the economy
would lurch into reverse.
4
<PAGE> 5
ECONOMIC OVERVIEW
Luckily, there's little chance of that happening, unless lenders get cold
feet. So far, they're hot to trot. In the past year, mortgage lending by banks
rocketed nearly 17 percent while loans to consumers jumped 10 percent. Brokers
are selling the loans banks don't want on their balance sheets to mortgage pools
and the asset-backed securities market, where eager non-bank lenders are
snapping them up. In the past year, these markets provided $625 billion of new
credit, a leap of more than 12 percent.
With so much money at their disposal, consumers didn't stay out of the
shopping centers and restaurants for long. Consumer spending growth jumped up to
4.5 percent in the summer, and we expect it to stay well above 3 percent through
2001.
OMINOUS SIGNS?
Decelerations are always tricky, to be sure. But barring some unexpected
shock, overall economic growth should to pop back into the 3.5 percent to 4
percent range in 2001. Why? Borrowing costs a little more than it did last year,
but money is still freely available for good quality borrowers. Capital goods
orders are strong, so there's a lot of life left in business spending. Shoppers
are a little pickier, but they're still more interested in visiting the mall
than in filling their piggy banks. And after the election, no matter who wins,
fiscal policy is likely to be more stimulative than it has been for years. The
price to pay will likely be a rise in core inflation (inflation excluding food
and energy). We expect it to hit 3 percent next year, up from its recent rate of
2.5 percent. We believe we'll make it safely through 2001, but investors should
keep their hands on the wheel and their eyes peeled.
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 DECEMBER 6, 2000, 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.
Sincerely,
Scudder Kemper Investments, Economics Group
5
<PAGE> 6
ECONOMIC OVERVIEW
[THIS PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
PERFORMANCE UPDATE
[CESSINE PHOTO]
ROBERT CESSINE JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1993. HE IS A MANAGING
DIRECTOR AND HAS SERVED AS LEAD PORTFOLIO MANAGER OF KEMPER INCOME AND CAPITAL
PRESERVATION FUND SINCE 1994. HE 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.
SHORT-TERM INTEREST RATES ROSE SUBSTANTIALLY DURING
THE PAST YEAR WHILE THE TREASURY'S BUYBACK PROGRAM
HELPED SUPPORT LONG-TERM GOVERNMENT BOND PRICES. AT
THE SAME TIME, THE DIFFERENCE IN INTEREST RATES
BETWEEN INTERMEDIATE-TERM TREASURIES AND
INVESTMENT-GRADE CORPORATE BONDS WIDENED TO ITS
HIGHEST LEVEL IN SEVERAL YEARS.
Q
HOW DID THE U.S. BOND MARKET PERFORM DURING FISCAL YEAR 2000?
A
Preserving capital was challenging. Strong economic growth prompted the
Federal Reserve to raise its short-term interest-rate target several times by a
total of 125 basis points (1.25 percent) to 6.5 percent. However, between
October 1999 and October 2000, long-term Treasury bond prices rose, inverting
the yield curve for the first time since the mid-1990s. By October 31, 2000,
six-month Treasury bills yielded 6.35 percent, some 59 basis points more than
10-year Treasury bonds. Mortgage interest rates for consumers reached their
highest levels in five years, while housing and related consumer spending
activity remained healthy. Oil prices soared past $35 a barrel. Overall consumer
prices were relatively tame, but as the fiscal year drew to a close, many
economists remained concerned about the inflationary impact of high oil prices
and natural gas shortages.
Q
HOW DID KEMPER INCOME AND CAPITAL PRESERVATION FUND DO IN THIS
ENVIRONMENT?
A
With dividends reinvested, Kemper Income And Capital Preservation Fund
provided a competitive 5.31 percent total return (A shares at net asset value)
for the 12 months ended October 31, 2000. This was slightly more than the 5.52
percent average return among mutual funds within the fund's Lipper peer group.
For most of the fiscal year, we were underweight in long-term Treasuries and
other government securities such as mortgages compared with our unmanaged
benchmark, the Lehman Brothers Aggregate Bond index (which rose 7.30 percent for
the period). Investment-grade corporate bonds made up the largest component of
the fund's portfolio (about 43 percent of net assets), and the fund's return was
higher than the return of the unmanaged Lehman Brothers Credit Bond index, which
rose 5.49 percent for the 12 months ended October 31, 2000.
U.S. TREASURY YIELDS
YIELDS ON INTERMEDIATE TREASURIES INCREASED SUBSTANTIALLY BETWEEN OCTOBER 31,
1999 AND OCTOBER 31, 2000
[LINE GRAPH]
<TABLE>
<CAPTION>
10/31/99 10/31/00
-------- --------
<S> <C> <C>
3-month 5.08 6.38
6-month 5.27 6.35
1-year 5.41 6.16
2-year 5.78 5.91
5-year 5.94 5.81
10-year 6.02 5.76
30-year 6.16 5.79
</TABLE>
SOURCE: BLOOMBERG BUSINESS NEWS
7
<PAGE> 8
PERFORMANCE UPDATE
Q
WHY DID SHORT-TERM BOND YIELDS RISE WHILE LONG-TERM YIELDS FELL?
A
Since January, normal relationships between bonds of different maturities
have been obscured. Usually, 30-year bonds provide more yield than securities
maturing in 10 years or less. However, this past winter, 30-year bonds rallied
after the Treasury began reducing auctions and buying back long-term bonds from
investors. When investors realized that the government's reduction in auctions
and buyback programs would reduce the supply of 30-year bonds, these securities
suddenly became a scarce and more prized commodity. The Treasury Department has
said it plans to buy back about $30 billion in 30-year Treasury bonds in
calendar year 2000 and retire about $3 trillion in government debt by 2012.
Q
DID LONG-TERM INVESTMENT-GRADE CORPORATE DEBT RALLY, TOO?
A
High-quality, long-term corporate bond prices did not do well during the
first half of fiscal year 2000. Prices began to recover in the summer and early
autumn when it became clear that the Federal Reserve would not raise short-term
interest rates beyond 6.50 percent. During the period, the difference in
interest rates between high-quality, long-term corporate bonds and
comparable-maturity Treasury bonds widened to more than 200 basis points (2.0
percent), the highest level since the Asian debt crisis in August 1998.
Normally, high-quality, long-term corporate bonds yield 125 to 150 basis points
more than comparable-maturity Treasuries.
As spreads grew larger, we upgraded the average quality of the fund's
corporate bond portfolio from A+ to AA and maintained a neutral duration
position with respect to our benchmark and our peers. We were mindful of the
fact that the Fed was on the move, and we sought to maximize the fund's
flexibility to respond to dynamic market conditions without taking undue risk.
Q
DID SOME CORPORATE BONDS DO BETTER THAN OTHERS?
A
Among Kemper's many fixed-income funds, Kemper Income And Capital
Preservation Fund had one of the highest exposures to energy bonds this past
year, and these bonds provided strong returns. Our positioning helped the fund
provide above-average results. As of October 31, 2000, about 4.9 percent of the
fund's net assets were in corporate energy bonds. Holdings during the year
included bonds issued by Conoco, Phillips Petroleum and Repsol, companies whose
earnings and cash flows appear to be gaining strength as oil and gas prices have
risen.
Among the weakest areas for investment-grade corporate bonds during fiscal
year 2000 were cyclical industries such as autos and chemicals and
technology-oriented sectors such as telecommunications. Many bonds in these
groups suffered from corporate earnings reports that did not meet analysts'
expectations. Generally speaking, the higher the quality and the greater the
perception that a company's earnings target would be met, the better the return
on its bonds. Upgrading bond quality during the year helped us preserve
principal.
Q
IS THERE ANY WAY TO ESTIMATE HOW MUCH A GIVEN CHANGE IN INTEREST RATES CAN
AFFECT THE RETURN FROM INVESTMENT-GRADE BONDS?
A
A 100-basis-point increase in interest rates, a development that
historically has taken at least several months to occur, generally results in a
price decline of approximately 7 percent for a bond or fixed-income mutual fund
that has an average maturity of 10 years. Bond prices and fixed-income mutual
fund net asset values are also affected by market factors such as credit risk.
For fiscal year 2000, the fund's results were fully in line with market
conditions.
8
<PAGE> 9
PERFORMANCE UPDATE
Q
DURING THE YEAR, YOU INCREASED THE FUND'S WEIGHTING IN MORTGAGES. WILL YOU
EXPLAIN THE FUND'S POSITIONING IN THIS AREA?
A
Within the mortgage market, we attempted to avoid exposing the fund to
adverse risks. Mortgage securities generally did well this past fiscal year
because of their superior income characteristics and because relatively few home
owners refinanced their properties. Overall, mortgage securities were attractive
to risk-sensitive, income-oriented investors. Income potential rose to its
highest level in five years, and volatility was less than that of Treasuries.
To identify mortgage securities with the highest potential returns, we analyze
prepayment expectations -- the rate at which home owners may pay off their
mortgages early or refinance mortgages to take advantage of lower interest
rates. We try to manage the fund's exposure to prepayment risk by analyzing
refinancing possibilities.
Q
WHAT'S YOUR OUTLOOK FOR KEMPER INCOME AND CAPITAL PRESERVATION FUND FOR
THE MONTHS AHEAD?
A
While it appears that the Federal Reserve has tamed inflation and that
U.S. economic growth is slowing, a lot of variables remain that are unlikely to
prompt a major drop in interest rates, particularly rising energy costs,
potential gridlock in national fiscal policy and relatively high levels of
consumer consumption. Higher oil prices usually translate into increased
inflation risk, but this has been offset by other trends in the economy that
have been supportive of low inflation, particularly high productivity levels and
the government's record $237 billion budget surplus.
Compared with a year ago, the fund's exposure to the corporate bond market is
lower, while its positioning in high-quality mortgage securities is higher. As
economic growth moderates, we believe this is a prudent positioning that can
help allow the fund to meet its dual goals of providing attractive income and
preserving principal. Mortgage securities have historically performed well in
periods of relatively stable or modestly declining interest rates. We think that
Kemper Income And Capital Preservation Fund's current portfolio mix helps puts
it in a strong position to offer an attractive total return.
FANNIE MAE MORTGAGE COMMITMENT RATES
(60-DAY, 30-YEAR FIXED LOANS) OCTOBER 31, 1990, TO OCTOBER 31, 2000
[LINE GRAPH]
<TABLE>
<CAPTION>
FNMA COMMITMENT 30 YR 60 DAY
----------------------------
<S> <C>
10/31/90 10.13
9.83
9.69
9.47
9.42
9.50
9.38
9.37
9.55
9.34
9.06
8.73
8.57
8.62
7.98
8.68
8.60
8.89
8.75
5/31/92 8.49
8.27
7.97
7.81
7.72
8.22
8.29
8.06
7.68
7.38
7.32
7.31
5/31/93 7.36
7.06
7.06
6.75
6.80
6.79
7.13
7.10
6.88
7.41
8.28
8.53
5/31/94 8.63
8.66
8.55
8.57
8.91
9.06
9.34
9.36
9.07
8.65
8.77
8.52
5/31/95 7.87
7.86
8.03
7.93
7.85
7.65
7.46
7.20
7.21
7.65
8.00
8.24
5/31/96 8.35
8.29
8.37
8.34
8.17
7.87
7.63
7.82
7.97
8.00
8.30
8.19
5/31/97 8.04
7.82
7.44
7.70
7.49
7.34
7.32
7.22
7.03
7.16
7.16
7.16
5/31/98 7.01
7.03
7.01
6.81
6.48
6.65
6.71
6.71
6.70
7.08
7.03
6.99
5/31/99 7.39
7.78
7.92
8.08
7.87
7.87
7.99
8.13
8.50
8.38
8.37
8.53
8.68
8.28
8.32
8.16
7.95
10/31/00 7.94
</TABLE>
SOURCE: BLOOMBERG BUSINESS NEWS. THIS CHART SHOWS THE AVERAGE LOAN RATE A HOME
BUYER COULD HAVE EXPECTED TO PAY FOR A 30-YEAR-TERM, FIXED-RATE LOAN FOR A HOME
PURCHASE WITHIN 60 DAYS.
9
<PAGE> 10
TERMS TO KNOW
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5 percent to 5.50 percent is
50 basis points.
CREDIT SPREAD The difference in yields between higher-quality and lower-quality
bonds, typically comparing the same types of bonds. For example, if AAA-rated
corporate bonds yield 5 percent, and BBB-rated corporate bonds yield 6 percent,
the credit spread is 1 percent. When the spread becomes less because the higher
yield drops or the lower yield rises, the spread is said to narrow. When the
opposite occurs, the spread is said to widen.
DURATION The interest-rate sensitivity of a fixed-income investment or
portfolio, measured in years. The longer the duration, the greater the
portfolio's sensitivity to interest-rate fluctuations.
FEDERAL FUNDS RATE The interest rate that banks charge each other on overnight
loans. The Federal Reserve Board's Open Market Committee sets a target rate to
either make credit more easily available or tighten monetary policy in an
attempt to avoid economic imbalances such as high inflation.
GROSS DOMESTIC PRODUCT (GDP) The market value of goods and services produced by
a country during a specified period. It acts as a useful gauge when measuring
the strength of an economy, especially when comparing different time periods.
INVERTED YIELD CURVE A market phenomenon in which intermediate-term bonds
(securities with one- to 10-year maturities) have higher income potential and
current yields than long-term bonds (securities with 10- to 30-year maturities).
Historically it has occurred during a period of rising short-term interest rates
and been viewed as an indicator of a future economic slowdown.
10
<PAGE> 11
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED OCTOBER 31, 2000 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS A SHARES 0.57% 4.00% 7.30% 8.64% (since 4/15/74)
..........................................................................................................
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS B SHARES 1.62 3.91 n/a 5.51 (since 5/31/94)
..........................................................................................................
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS C SHARES 4.68 4.13 n/a 5.61 (since 5/31/94)
..........................................................................................................
</TABLE>
KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS A
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN CLASS A
SHARES FROM 04/15/74 TO 10/31/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER INCOME AND
CAPITAL PRESERVATION FUND LEHMAN BROTHERS U.S. CONSUMER PRICE
CLASS A1 AGGREGATE BOND INDEX+ INDEX++
------------------------- --------------------- -------------------
<S> <C> <C> <C>
12/31/75 9548 10000 10000
10868 11560 10486
11323 11911 11189
11693 12077 12198
11952 12310 13820
11600 12643 15550
11953 13433 16937
12/31/82 15969 17815 17586
17790 19304 18252
19980 22228 18973
24346 27141 19694
27893 31285 19910
28757 32146 20793
31755 34681 21712
34472 39721 22721
12/31/90 36707 43279 24108
43281 50205 24847
46681 53921 25568
52147 59178 26270
50385 57452 26973
61144 68066 27658
62376 70537 28577
67756 77349 29063
73106 84065 29532
70973 83367 30324
10/31/00 74929 89889 31322
</TABLE>
KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS B
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN CLASS B
SHARES FROM 05/31/94 TO 10/31/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER INCOME AND
CAPITAL PRESERVATION FUND LEHMAN BROTHERS U.S. CONSUMER PRICE
CLASS B1 AGGREGATE BOND INDEX+ INDEX++
------------------------- --------------------- -------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9968 9978 10034
10008 10077 10149
11200 11230 10339
12/31/95 12007 11938 10407
11572 11793 10624
12135 12372 10753
12422 12754 10868
13059 13566 10936
6/30/98 13482 14099 11051
13972 14744 11112
13473 14540 11268
13436 14622 11410
13692 15204 11688
10/31/00 14110 15766 11786
</TABLE>
KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS C
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN CLASS C
SHARES FROM 05/31/94 TO 10/31/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER INCOME AND
CAPITAL PRESERVATION FUND LEHMAN BROTHERS U.S. CONSUMER PRICE
CLASS C1 AGGREGATE BOND INDEX+ INDEX++
------------------------- --------------------- -------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9981 9978 10034
10009 10077 10149
11204 11230 10339
12/31/95 12041 11938 10407
11609 11793 10624
12174 12372 10753
12464 12754 10868
13120 13566 10936
6/30/98 13529 14099 11051
14021 14744 11112
13523 14540 11268
13510 14622 11410
13773 15204 11688
10/31/00 14196 15766 11786
</TABLE>
PERFORMANCE IS HISTORICAL AND INCLUDES
REINVESTMENT OF DIVIDENDS AND CAPITAL
GAINS. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE WITH CHANGING
MARKET CONDITIONS, SO THAT WHEN
REDEEMED, SHARES MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST.
*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. DURING THE
PERIODS NOTED, SECURITIES PRICES
FLUCTUATED. FOR ADDITIONAL
INFORMATION, SEE THE PROSPECTUS,
STATEMENT OF ADDITIONAL INFORMATION
AND 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 KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS A SHARES
PERFORMANCE WITH THE LEHMAN BROTHERS
AGGREGATE BOND INDEX AND THE U.S.
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:
WIESENBERGER(R).
++THE U.S. 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:
WIESENBERGER(R).
11
<PAGE> 12
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 10/31/00 ON 10/31/99
<S> <C> <C> <C> <C>
CORPORATE BONDS 43% 60%
................................................................................
TREASURY BONDS AND NOTES 24 23
................................................................................
MORTGAGES 23 14
................................................................................
ASSET-BACKED SECURITIES 3 --
................................................................................
FOREIGN BONDS 2 3
................................................................................
CASH AND EQUIVALENTS 5 --
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
YEARS TO MATURITY
<TABLE>
<CAPTION>
ON 10/31/00 ON 10/31/99
<S> <C> <C> <C> <C>
1-10 YEARS 89% 70%
................................................................................
10-20 YEARS 2 12
................................................................................
20+ YEARS 9 18
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 10/31/00 ON 10/31/99
<S> <C> <C> <C> <C>
AVERAGE MATURITY 8.1 years 8.7 years
--------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
KEMPER INCOME AND CAPITAL PRESERVATION FUND
Portfolio of Investments at October 31, 2000
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS--0.1% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
State Street Bank and Trust Company,
6.550%, to be repurchased at $475,086 on
11/01/2000*
(Cost $475,000) $ 475,000 $ 475,000
---------------------------------------------------------------------------------
<CAPTION>
COMMERCIAL PAPER--4.5%
<S> <C> <C> <C> <C> <C>
American Telephone & Telegraph Corp.,
6.560%, 11/07/2000 1,750,000 1,748,087
Daimler Chrysler,
6.440%, 11/02/2000 3,000,000 2,999,463
Ford Motor Credit Co.,
6.500%, 11/06/2000 3,000,000 2,997,292
General Electric Capital Corp.,
6.460%, 11/03/2000 3,200,000 3,198,852
General Motors Acceptance Corp.,
6.420%, 11/01/2000 3,000,000 3,000,000
Sara Lee Corp.,
6.520%, 11/08/2000 4,500,000 4,494,295
---------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $18,437,989) 18,437,989
---------------------------------------------------------------------------------
<CAPTION>
U.S. GOVERNMENT & AGENCIES--46.5%
<S> <C> <C> <C> <C> <C>
Federal National Mortgage Association:
6.500%, 07/01/2030 23,854,939 22,938,015
7.000%, with various maturities to
09/01/2030 20,902,638 20,869,123
7.500% with various maturities to
09/01/2030 12,421,040 12,442,720
8.000% with various maturities to
08/01/2030 7,237,620 7,353,455
Government National Mortgage Association:
6.500%, with various maturities to
04/15/2029 6,534,148 6,308,504
7.000%, 12/15/2028 14,375,668 14,169,090
8.000% with various maturities to
08/15/2030 6,320,216 6,425,882
U.S. Treasury Bonds:
6.125%, 08/15/2029 27,755,000 28,743,633
6.250%, 05/15/2030 5,300,000 5,644,500
U.S. Treasury Notes:
5.750%, 08/15/2010 14,355,000 14,341,506
6.000%, 09/30/2002 16,300,000 16,310,106
6.750%, 05/15/2005 33,285,000 34,507,225
---------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCIES
(Cost $187,309,246) 190,053,759
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
FOREIGN BONDS--U.S. $ DENOMINATED--2.1% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Den Danske Bank,
6.375%, 06/15/2008 $ 4,125,000 $ 4,041,510
Province of Quebec,
8.625%, 01/19/2005 4,500,000 4,797,765
---------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $9,042,521) 8,839,275
---------------------------------------------------------------------------------
<CAPTION>
ASSET BACKED--2.9%
<S> <C> <C> <C> <C> <C>
AUTOMOBILE RECEIVABLES--1.1%
Daimler Chrysler Auto Trust Series 2000-D,
6.660%, 03/08/2006 2,000,000 1,999,928
Daimler Chrysler Auto Trust Series 2000-C,
6.820%, 09/06/2004 2,525,000 2,534,229
---------------------------------------------------------------------------------
4,534,157
------------------------------------------------------------------------------------------------------------------------
CREDIT CARD RECEIVABLES--1.8%
Citibank Credit Card Issuance
Trust Series 2000-A1,
6.900%, 10/17/2007 2,175,000 2,180,437
MBNA Master Credit Card Trust,
6.900%, 01/15/2008 5,200,000 5,232,500
---------------------------------------------------------------------------------
7,412,937
---------------------------------------------------------------------------------
TOTAL ASSET BACKED
(Cost $11,896,310) 11,947,094
---------------------------------------------------------------------------------
<CAPTION>
CORPORATE BONDS--43.9%
<S> <C> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--0.9%
Park Place Entertainment, Inc.,
8.500%, 11/15/2006 1,200,000 1,193,292
Tricon Global Restaurants,
7.650%, 05/15/2008 2,900,000 2,688,967
---------------------------------------------------------------------------------
3,882,259
------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--1.4%
Bass North America Inc.,
6.625%, 03/01/2003 1,800,000 1,765,062
Unilever Capital Corp.,
6.875%, 11/01/2005 3,825,000 3,797,498
---------------------------------------------------------------------------------
5,562,560
------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--5.2%
Deutsche Telekom International Finance,
7.750%, 06/15/2005 2,000,000 2,033,240
Nextel Communications, Inc.,
9.375%, 11/15/2009 3,000,000 2,880,000
Qwest Communications International,
7.500%, 11/01/2008 4,100,000 4,055,146
Sprint Capital Corp.,
6.125%, 11/15/2008 4,250,000 3,774,723
Teleglobe Inc.,
7.200%, 07/20/2009 4,275,000 4,168,553
Vodafone Group PLC,
7.750%, 02/15/2010 4,100,000 4,162,689
---------------------------------------------------------------------------------
21,074,351
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
FINANCIAL--15.1%
ABN AMRO,
8.250%, 08/01/2009 $ 7,000,000 $ 7,105,140
Bank of America Corp.,
7.800%, 02/15/2010 4,275,000 4,341,519
Chase Manhattan Corp.,
5.750%, 04/15/2004 4,100,000 3,935,836
Citigroup, Inc.,
7.250%, 10/01/2010 4,150,000 4,123,565
Crestar Financial Corp.,
8.750%, 11/15/2004 5,000,000 5,248,800
Firstar Bank,
7.125%, 12/01/2009 4,300,000 4,164,421
FleetBoston Financial Corp.,
7.250%, 09/15/2005 3,675,000 3,694,367
General Electric Capital Corp.,
7.000%, 02/03/2003 5,000,000 5,027,800
General Motors Acceptance Corp.,
6.150%, 04/05/2007 4,100,000 3,799,798
Goldman Sachs Group, Inc.,
7.800%, 01/28/2010 4,275,000 4,313,047
Merrill Lynch & Co., Inc.,
6.000%, 02/17/2009 4,100,000 3,745,391
PNC Funding Corp.:
7.000%, 09/01/2004 2,900,000 2,875,060
7.500%, 11/01/2009 1,600,000 1,580,960
Verizon Bell Atlantic Financial Services,
7.600%, 03/15/2007 3,500,000 3,568,250
Wells Fargo Company,
7.250%, 08/24/2005 4,300,000 4,332,852
---------------------------------------------------------------------------------
61,856,806
------------------------------------------------------------------------------------------------------------------------
MEDIA--7.2%
British Sky Broadcasting Group PLC,
6.875%, 02/23/2009 5,200,000 4,436,068
Charter Communications Holdings LLC,
8.250%, 04/01/2007 4,250,000 3,846,250
Clear Channel Communications,
8.000%, 11/01/2008 4,450,000 4,450,000
CSC Holdings Inc.,
7.875%, 12/15/2007 8,000,000 7,740,000
News America Holdings, Inc.,
9.250%, 02/01/2013 4,100,000 4,442,432
Time Warner, Inc.,
9.125%, 01/15/2013 4,100,000 4,595,731
---------------------------------------------------------------------------------
29,510,481
------------------------------------------------------------------------------------------------------------------------
DURABLES--0.3%
Daimler-Chrysler NA Holdings,
7.375%, 09/15/2006 1,025,000 1,024,918
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--2.1%
Dow Chemical,
7.000%, 08/15/2005 4,100,000 4,075,236
International Paper Co.,
8.000%, 07/08/2003 4,325,000 4,380,965
---------------------------------------------------------------------------------
8,456,201
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
ENERGY--6.0%
Conoco, Inc.,
6.350%, 04/15/2009 $ 4,275,000 $ 4,065,568
Petroleum Geo-Services,
7.500%, 03/31/2007 4,100,000 4,026,159
Phillips Petroleum,
8.750%, 05/25/2010 4,275,000 4,662,486
Pioneer Natural Resources Co.,
9.625%, 04/01/2010 4,650,000 4,905,750
Repsol International Finance,
7.450%, 07/15/2005 4,350,000 4,372,011
Williams Gas Pipeline Center,
7.375%, 11/15/2006 2,525,000 2,519,496
---------------------------------------------------------------------------------
24,551,470
------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--0.3%
Delta Air Lines,
7.900%, 12/15/2009 1,350,000 1,251,139
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
UTILITIES--5.4%
Alabama Power Co.,
7.125%, 08/15/2004 3,500,000 3,503,150
Calpine Corp:
7.750%, 04/15/2009 2,415,000 2,270,849
8.625%, 08/15/2010 1,585,000 1,555,154
Cleveland Electric Illumination Co.,
7.670%, 07/01/2004 5,900,000 5,954,870
Detroit Edison Co.,
7.500%, 02/01/2005 4,300,000 4,329,885
Niagara Mohawk Power Corp.,
6.625%, 07/01/2005 4,750,000 4,593,630
---------------------------------------------------------------------------------
22,207,538
---------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $179,394,421) 179,377,723
---------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $406,555,487) (a) $409,130,840
---------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
(a) The cost for federal income tax purposes was $406,843,651. At October 31,
2000, net unrealized appreciation for all securities based on tax cost was
$2,287,189. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost of
$4,560,482 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over market value of $2,273,293.
16 The accompanying notes are an integral part of the financial statements.
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2000
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $406,555,487) $409,130,840
----------------------------------------------------------------------------
Cash 505
----------------------------------------------------------------------------
Interest receivable 6,367,195
----------------------------------------------------------------------------
Receivable for Fund shares sold 322,816
----------------------------------------------------------------------------
Other assets 19,500
----------------------------------------------------------------------------
TOTAL ASSETS 415,840,856
----------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased 1,999,928
----------------------------------------------------------------------------
Payable for Fund shares redeemed 1,021,894
----------------------------------------------------------------------------
Accrued management fee 185,019
----------------------------------------------------------------------------
Other accrued expenses 364,727
----------------------------------------------------------------------------
Total liabilities 3,571,568
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $412,269,288
----------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income $ 736,156
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions 2,575,353
----------------------------------------------------------------------------
Accumulated net realized gain (loss) (54,199,424)
----------------------------------------------------------------------------
Paid-in-capital 463,157,203
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $412,269,288
----------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($309,039,722/38,679,435 shares outstanding of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $7.99
----------------------------------------------------------------------------
Maximum offering price per share (100/95.50 of $7.99) $8.37
----------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share
($77,880,387/9,784,594 shares outstanding of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $7.96
----------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share
($19,186,137/2,402,405 shares outstanding of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $7.99
----------------------------------------------------------------------------
CLASS I SHARES
Net asset value, offering and redemption price per share
($6,163,042/771,452 shares outstanding of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $7.99
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $ 32,391,997
----------------------------------------------------------------------------
Total income 32,391,997
----------------------------------------------------------------------------
Expenses:
Management fee 2,353,939
----------------------------------------------------------------------------
Services to shareholders 893,969
----------------------------------------------------------------------------
Custodian fees 21,020
----------------------------------------------------------------------------
Distribution services fees 795,494
----------------------------------------------------------------------------
Administrative services fees 991,212
----------------------------------------------------------------------------
Auditing 39,466
----------------------------------------------------------------------------
Legal 7,993
----------------------------------------------------------------------------
Trustees' fees and expenses 45,012
----------------------------------------------------------------------------
Reports to shareholders 124,454
----------------------------------------------------------------------------
Registration fees 54,568
----------------------------------------------------------------------------
Other 16,046
----------------------------------------------------------------------------
Total expenses, before expense reductions 5,343,173
----------------------------------------------------------------------------
Expense reductions (34,540)
----------------------------------------------------------------------------
Total expenses, after expense reductions 5,308,633
----------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 27,083,364
----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (35,159,669)
----------------------------------------------------------------------------
Futures 309,158
----------------------------------------------------------------------------
(34,850,511)
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments 28,629,353
----------------------------------------------------------------------------
Futures 8,000
----------------------------------------------------------------------------
28,637,353
----------------------------------------------------------------------------
Net gain (loss) on investment transactions (6,213,158)
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 20,870,206
----------------------------------------------------------------------------
</TABLE>
18 The accompanying notes are an integral part of the financial statements.
<PAGE> 19
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------
2000 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 27,083,364 37,236,943
------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (34,850,511) (11,349,608)
------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period 28,637,353 (39,633,000)
------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 20,870,206 (13,745,665)
------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income:
Class A (19,735,072) (29,322,003)
------------------------------------------------------------------------------------------------------
Class B (4,517,377) (5,576,571)
------------------------------------------------------------------------------------------------------
Class C (1,026,577) (976,857)
------------------------------------------------------------------------------------------------------
Class I (391,561) (461,927)
------------------------------------------------------------------------------------------------------
(25,670,587) (36,337,358)
------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 68,257,439 202,478,038
------------------------------------------------------------------------------------------------------
Reinvestment of distributions 17,651,056 21,437,089
------------------------------------------------------------------------------------------------------
Cost of shares redeemed (165,030,161) (371,697,769)
------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (79,121,666) (147,782,642)
------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (83,922,047) (197,865,665)
------------------------------------------------------------------------------------------------------
Net assets at beginning of period 496,191,335 694,057,000
------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $736,156 and $655,943, respectively) $ 412,269,288 496,191,335
------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 19
<PAGE> 20
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
YEARS ENDED OCTOBER 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $8.06 8.67 8.54 8.46 8.62
--------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .50(a) .51(a) .53 .57 .58
--------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.09) (.63) .14 .08 (.15)
--------------------------------------------------------------------------------------------------------------------------
Total from investment operations .41 (.12) .67 .65 .43
--------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income (.48) (.49) (.54) (.57) (.59)
--------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.99 8.06 8.67 8.54 8.46
--------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 5.31 (1.45) 8.13 8.00 5.17
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 309,040 371,763 563,571 514,558 484,005
--------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.04 1.08 1.01 .97 .96
--------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.03 1.07 1.01 .97 .96
--------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 6.33 6.05 6.17 6.75 6.90
--------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 234 108 121 164 74
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
YEARS ENDED OCTOBER 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $8.02 8.64 8.51 8.43 8.59
--------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .44(a) .43(a) .46 .49 .50
--------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.08) (.63) .14 .08 (.15)
--------------------------------------------------------------------------------------------------------------------------
Total from investment operations .36 (.20) .60 .57 .35
--------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income (.42) (.42) (.47) (.49) (.51)
--------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.96 8.02 8.64 8.51 8.43
--------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 4.60 (2.37) 7.20 6.99 4.20
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 77,880 97,975 106,171 83,295 76,437
--------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.81 1.93 1.88 1.90 1.93
--------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.80 1.92 1.88 1.90 1.93
--------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 5.56 5.20 5.30 5.82 5.93
--------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 234 108 121 164 74
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
YEARS ENDED OCTOBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $8.05 8.66 8.53 8.45 8.61
------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .45(a) .44(a) .46 .49 .50
------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.09) (.62) .14 .08 (.15)
------------------------------------------------------------------------------------------------------------------
Total from investment operations .36 (.18) .60 .57 .35
------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income (.42) (.43) (.47) (.49) (.51)
------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.99 8.05 8.66 8.53 8.45
------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 4.68 (2.19) 7.20 7.03 4.23
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 19,186 19,875 16,759 9,083 5,611
------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.72 1.82 1.86 1.86 1.90
------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.71 1.82 1.86 1.86 1.90
------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 5.63 5.30 5.32 5.86 5.96
------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 234 108 121 164 74
------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS I
YEARS ENDED OCTOBER 31,
-------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $8.05 8.67 8.53 8.45 8.61
---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .53(a) .53(a) .56 .59 .60
---------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.08) (.63) .15 .08 (.15)
---------------------------------------------------------------------------------------------------------------
Total from investment operations .45 (.10) .71 .67 .45
---------------------------------------------------------------------------------------------------------------
Less distribution from net investment income (.51) (.52) (.57) (.59) (.61)
---------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.99 8.05 8.67 8.53 8.45
---------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 5.81 (1.23) 8.62 8.26 5.45
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 6,163 6,578 7,556 6,534 6,945
---------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .66 .71 .66 .70 .72
---------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .66 .71 .66 .70 .72
---------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 6.69 6.41 6.52 7.02 7.14
---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 234 108 121 164 74
---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of sales charge.
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1
SIGNIFICANT
ACCOUNTING POLICIES 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 accounting principles generally
accepted in the United States which require the use
of management estimates. The policies described
below are followed consistently by the Fund in the
preparation of its financial statements.
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
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
percentage of the face value indicated in the
futures contract. Subsequent payments ("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.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
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, 2000, the Fund had a net tax basis
capital loss carryforward of approximately
$53,911,000 which may be applied against any
realized net taxable capital gains of each
succeeding year until fully utilized or until
October 31, 2002 ($5,030,000), October 31, 2003
($2,953,000), October 31, 2007 ($10,327,000) and
October 31, 2008 ($35,601,000), 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 accounting principles
generally accepted in the United States. 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. 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.
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2
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 0.55%
of the first $250 million of average daily net
assets declining to 0.40% of average daily net
assets in excess of $12.5 billion. The Fund
incurred a management fee of $2,353,939 for the
year ended October 31, 2000, which was equivalent
to an annualized effective rate of .53%.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the year ended October 31,
2000 are $22,138.
For services under the distribution services
agreement, the Fund pays KDI a fee of 0.75% 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, 2000 are $1,067,518,
of which $61,416 is unpaid at October 31, 2000.
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
0.25% 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, 2000
are $991,212, of which $77,803 is unpaid at October
31, 2000. In addition $1,161 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 $710,675
for the year ended October 31, 2000, of which
$106,512 is unpaid at October 31, 2000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the year ended October 31,
2000, the Fund made no payments to its officers and
incurred trustees' fees of $45,012 to independent
trustees.
--------------------------------------------------------------------------------
3
INVESTMENT
TRANSACTIONS For the year ended October 31, 2000, investment
transactions (excluding short term instruments) are
as follows:
Purchases $927,210,483
Proceeds from sales 1,019,200,430
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4
CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------
2000 1999
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 4,558,690 $ 36,324,891 14,580,650 $ 123,394,538
-------------------------------------------------------------------------------------
Class B 2,404,873 19,114,303 6,762,575 56,993,635
-------------------------------------------------------------------------------------
Class C 1,121,174 8,908,742 1,762,084 14,749,871
-------------------------------------------------------------------------------------
Class I 57,531 456,322 193,427 1,643,052
-------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 1,671,003 13,242,065 1,938,830 16,192,394
-------------------------------------------------------------------------------------
Class B 414,586 3,272,542 501,483 4,172,048
-------------------------------------------------------------------------------------
Class C 94,071 744,889 73,482 610,689
-------------------------------------------------------------------------------------
Class I 49,449 391,560 55,338 461,958
-------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (14,127,686) (112,200,128) (36,036,959) (297,469,860)
-------------------------------------------------------------------------------------
Class B (4,808,241) (37,995,379) (6,664,185) (55,199,247)
-------------------------------------------------------------------------------------
Class C (1,282,272) (10,172,179) (1,300,801) (10,803,243)
-------------------------------------------------------------------------------------
Class I (152,196) (1,209,294) (303,829) (2,528,477)
-------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 434,613 $ 3,453,181 673,550 5,696,942
-------------------------------------------------------------------------------------
Class B (436,511) (3,453,181) (676,190) (5,696,942)
-------------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ (79,121,666) $(147,782,642)
-------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5
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 and transfer agent fees were reduced by $6,039
and $28,501, respectively, under these
arrangements.
--------------------------------------------------------------------------------
6
LINE OF CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility with Chase Manhattan Bank 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 based upon net assets,
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.
25
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7
PLAN OF
REORGANIZATION On November 29, 2000 the Trustees of the Fund
approved an Agreement and Plan of Reorganization
(the "Reorganization") between the Fund and the
Scudder Income Fund, pursuant to which Scudder
Income Fund would acquire all or substantially all
of the assets and liabilities of the Fund in
exchange for shares of the Scudder Income Fund. The
proposed transaction is part of Scudder Kemper's
initiative to restructure and streamline the
management and operations of the funds it advises.
The Reorganization can be consummated only if,
among other things, it is approved by a majority
vote of the shareholders of the Fund. A special
meeting of the shareholders of the Fund to approve
the Reorganization will be held on or about May 24,
2001.
As a result of the Reorganization, each shareholder
of the Kemper Income and Capital Preservation Fund
will become a shareholder of the Scudder Income
Fund and would hold, immediately after the closing
of the Reorganization (the "Closing"), that number
of full and fractional voting shares of the Scudder
Income Fund having an aggregate net asset value
equal to the aggregate net asset value of such
shareholder's shares held in the Fund as of the
close of business on the business day preceding the
Closing. The Closing is expected to take place
during the second quarter of 2001. In the event the
shareholders of the Fund fail to approve the
Reorganization, the Fund will continue to operate
and the Fund's Trustees may resubmit the Plan for
shareholder approval or consider other proposals.
26
<PAGE> 27
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, 2000, 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 1996. 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 auditing standards generally
accepted in the United States. 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, 2000, by correspondence with the custodian or other
auditing procedures. 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, 2000, 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 1996, in conformity with accounting principles
generally accepted in the United States.
[/S/ ERNST & YOUNG]
Chicago, Illinois
December 15, 2000
27
<PAGE> 28
<TABLE>
<S> <C> <C>
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
Trustee
ROBERT B. HOFFMAN
Trustee ROBERT C. CESSINE
Vice President
DONALD R. JONES
Trustee KATHRYN L. QUIRK
Vice President
THOMAS W. LITTAUER
Chairman, Trustee and WILLIAM F. TRUSCOTT
Vice President Vice President
SHIRLEY D. PETERSON LINDA J. WONDRACK
Trustee Vice President
WILLIAM T. SOMMERS
Trustee
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
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 AND STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT 225 Franklin Street
Boston, MA 02110
.............................................................................................
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
</TABLE>
TRUSTEES&OFFICERS
[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(12/22/00) 4928
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
