-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AJTInd7KGadfTKZ4eRtOqiB+TBM9v/bPuIeNShwHny3glVgBvz6ss4Y+qeWc8kWb XUP+OCJnwfdwDaqIvIucMA== 0000950124-99-000035.txt : 19990106 0000950124-99-000035.hdr.sgml : 19990106 ACCESSION NUMBER: 0000950124-99-000035 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEMPER INCOME & CAPITAL PRESERVATION FUND INC CENTRAL INDEX KEY: 0000055185 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 362797860 STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-02305 FILM NUMBER: 99500960 BUSINESS ADDRESS: STREET 1: 222 SOUTH RIVERSIDE PLAZA CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3125371569 MAIL ADDRESS: STREET 1: 222 SOUTH RIVERSIDE PLAZA CITY: CHICAGO STATE: IL ZIP: 60606 FORMER COMPANY: FORMER CONFORMED NAME: KEMPER INCOME SECURITIES INC DATE OF NAME CHANGE: 19740214 FORMER COMPANY: FORMER CONFORMED NAME: SUPERVISED INVESTORS CONVERTIBLE FUND IN DATE OF NAME CHANGE: 19721106 N-30D 1 ANNUAL REPORT DATED 10/31/98 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] 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] - -------------------------------------------------------------------------------- CLASS A 8.13% CLASS B 7.20% CLASS C 7.20% LIPPER CORPORATE DEBT A RATED FUNDS CATEGORY AVERAGE* 7.72% - --------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------- NET ASSET VALUE - -------------------------------------------------------------------------------- AS OF AS OF 10/31/98 10/31/97 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- KEMPER INCOME AND CAPITAL PRESERVATION FUND RANKINGS - -------------------------------------------------------------------------------- COMPARED TO ALL OTHER FUNDS IN THE LIPPER CORPORATE DEBT A RATED FUNDS CATEGORY*
CLASS A CLASS B CLASS 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 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- DIVIDEND AND YIELD REVIEW - -------------------------------------------------------------------------------- THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND AS OF OCTOBER 31, 1998.
CLASS A CLASS B CLASS 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% - --------------------------------------------------------------------------------
+ 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). 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 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]
NOV 98 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO 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
(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 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 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 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 8 PERFORMANCE UPDATE - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS* - -------------------------------------------------------------------------------- FOR PERIODS ENDED OCTOBER 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
LIFE OF 1-YEAR 5-YEAR 10-YEAR CLASS - -------------------------------------------------------------------------------------------------------- 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) - --------------------------------------------------------------------------------------------------------
[LINE GRAPH] - -------------------------------------------------------------------------------- GROWTH OF AN ASSUMED $10,000 INVESTMENT IN CLASS A SHARES FROM 1/1/76 TO 10/31/98 - --------------------------------------------------------------------------------
1/1/76 12/31/83 12/31/90 10/31/98 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
[LINE GRAPH] - -------------------------------------------------------------------------------- GROWTH OF AN ASSUMED $10,000 INVESTMENT IN CLASS B SHARES FROM 5/31/94 TO 10/31/98 - --------------------------------------------------------------------------------
5/31/94 12/31/96 12/31/97 10/31/98 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
[LINE GRAPH] - -------------------------------------------------------------------------------- GROWTH OF AN ASSUMED $10,000 INVESTMENT IN CLASS C SHARES FROM 5/31/94 TO 10/31/98 - --------------------------------------------------------------------------------
5/31/94 12/31/96 12/31/97 10/31/98 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
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 9 PORTFOLIO STATISTICS PORTFOLIO COMPOSITION*
- -------------------------------------------------------------------------------- ON 10/31/98 ON 10/31/97 - -------------------------------------------------------------------------------- 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%
[PIE CHART] [PIE CHART] ON 10/31/98 ON 10/31/97 YEARS TO MATURITY
- -------------------------------------------------------------------------------- ON 10/31/98 ON 10/31/97 - -------------------------------------------------------------------------------- 1-10 YEARS 62% 59% - -------------------------------------------------------------------------------- 11-20 YEARS 13 15 - -------------------------------------------------------------------------------- 21+ YEARS 19 21 - -------------------------------------------------------------------------------- CASH AND EQUIVALENTS 6 5 - -------------------------------------------------------------------------------- 100% 100%
[PIE CHART] [PIE CHART] ON 10/31/98 ON 10/31/97 AVERAGE MATURITY
- -------------------------------------------------------------------------------- ON 10/31/98 ON 10/31/97 - -------------------------------------------------------------------------------- AVERAGE MATURITY 8.8 years 8.2 years - --------------------------------------------------------------------------------
* Portfolio composition is subject to change. 9 10 PORTFOLIO OF INVESTMENTS KEMPER INCOME AND CAPITAL PRESERVATION FUND PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 1998 (DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------ GOVERNMENT OBLIGATIONS--45.2% PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------ 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
10 11 PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------ 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
11 12 PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------ 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 ---------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 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 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 14 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1998 (IN THOUSANDS) - ------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------
See accompanying Notes to Financial Statements. 14 15 FINANCIAL STATEMENTS STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 1998 (IN THOUSANDS) - ----------------------------------------------------------------------- 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 - -----------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS)
YEAR ENDED OCTOBER 31, 1998 1997 - ---------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements. 15 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 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:
COMMISSIONS COMMISSIONS ALLOWED RETAINED BY KDI BY KDI TO FIRMS --------------- ------------------- Year ended October 31, 1998 $70,000 578,000
For services under the distribution services agreement, the fund pays KDI a fee of .75% of average daily net assets of Class B and Class C shares pursuant to separate Rule 12b-1 plans for the Class B and Class C shares. Pursuant to the agreement, KDI enters into related selling group agreements with various firms at various rates for sales of Class B and Class C shares. In addition, KDI 17 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:
DISTRIBUTION FEES COMMISSIONS AND AND CDSC DISTRIBUTION FEES PAID RECEIVED BY KDI BY KDI TO FIRMS ----------------- ---------------------- Year ended October 31, 1998 $999,000 1,115,000
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:
ASF PAID BY ASF PAID BY THE FUND TO KDI KDI TO FIRMS ---------------- --------------- Year ended October 31, 1998 $1,406,000 1,434,000
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 19 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 5 CAPITAL SHARE TRANSACTIONS The following table summarizes the activity in capital shares of the fund (in thousands):
YEAR ENDED OCTOBER 31, 1998 1997 --------------------- ----------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 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):
FACE EXPIRATION TYPE AMOUNT MONTH LOSS ------------------------------------------------------------------------ U.S. Treasury Bond $38,047 December '98 $ (624) ------------------------------------------------------------------------ U.S. Treasury Note 21,044 December '98 (624) ------------------------------------------------------------------------ TOTAL $(1,248) ------------------------------------------------------------------------
19 20 FINANCIAL HIGHLIGHTS
--------------------------------------- CLASS A --------------------------------------- YEAR ENDED OCTOBER 31, 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------
20 21 FINANCIAL HIGHLIGHTS
--------------------------------------------- CLASS B --------------------------------------------- YEAR ENDED OCTOBER 31, MAY 31 TO --------------------------- OCTOBER 31, 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------
21 22 FINANCIAL HIGHLIGHTS
----------------------------------------- CLASS C ----------------------------------------- YEAR ENDED OCTOBER 31, MAY 31 TO --------------------------- OCTOBER 31, 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------
22 23 FINANCIAL HIGHLIGHTS
---------------------------------- CLASS I ---------------------------------- YEAR ENDED OCTOBER 31, JULY 3 TO -------------------- OCTOBER 31, 1998 1997 1996 1995 - -------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA FOR ALL CLASSES - ---------------------------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------
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 24 TRUSTEES AND OFFICERS TRUSTEES OFFICERS 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
- ----------------------------------------------------------------------------------------- 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
[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 -----END PRIVACY-ENHANCED MESSAGE-----