-----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, VM/2YIb/a9sAbG57WrMFu49+xNqMlGjbsJivpf2RvYzJm8FXg3rGv02PBa/XyYxU WrLLTFC9X38CvYbjlKE0VA== 0000950124-96-000096.txt : 19960111 0000950124-96-000096.hdr.sgml : 19960111 ACCESSION NUMBER: 0000950124-96-000096 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951031 FILED AS OF DATE: 19960108 SROS: NONE 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: 1940 Act SEC FILE NUMBER: 811-02305 FILM NUMBER: 96501725 BUSINESS ADDRESS: STREET 1: 120 S LASALLE ST CITY: CHICAGO STATE: IL ZIP: 60603 BUSINESS PHONE: 3127811121 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 KEMPER INCOME & CAPITAL ANNUAL REPORT 1 Kemper Income and Capital Preservation Fund ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED OCTOBER 31, 1995 Offering investors the opportunity for a high level of current income and preservation of capital "...The move out of mortgages and increased investment in Treasuries was extremely beneficial for the fund in terms of total return...as were the fund's corporate bonds..." [KEMPER MUTUAL FUND LOGO] 2 Table of Contents 3 General Economic Overview 5 Performance Update 8 Terms to Know 10 Industry Sectors 11 Portfolio of Investments 15 Report of Independent Auditors 16 Financial Statements 18 Notes to Financial Statements 22 Financial Highlights At A Glance Kemper Income and Capital Preservation Fund Total Returns for the year ended October 31, 1995 (unadjusted for any sales charge):
LIPPER CORPORATE DEBT A RATED FUNDS CATEGORY Class A Class B Class C AVERAGE* 17.47% 16.12% 16.45% 15.80%
[BAR GRAPH] *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. Returns and rankings are historical and do not reflect future performance. NET ASSET VALUE
As of As of 10/31/95 10/31/94 - ------------------------------------------------------------------------------------- KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS A $8.62 $7.91 - ------------------------------------------------------------------------------------- KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS B $8.59 $7.90 - ------------------------------------------------------------------------------------- KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS C $8.61 $7.90 - -------------------------------------------------------------------------------------
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 # 19 OF # 38 OF # 33 OF 111 FUNDS 111 FUNDS 111 FUNDS - ---------------------------------------------------- 5-YEAR # 10 OF 47 FUNDS N/A N/A - ---------------------------------------------------- 10-YEAR # 8 OF 25 FUNDS N/A N/A - ----------------------------------------------------
DIVIDEND AND YIELD REVIEW THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND AS OF OCTOBER 31, 1995.
CLASS A CLASS B CLASS C - ------------------------------------------------------------- 1 YEAR INCOME: $0.6180 $0.5402 $0.5442 - ------------------------------------------------------------- OCTOBER DIVIDEND: $0.0515 $0.0448 $0.0453 - ------------------------------------------------------------- ANNUALIZED DISTRIBUTION RATE+: 7.17% 6.26% 6.31% - ------------------------------------------------------------- SEC YIELD+: 5.75% 5.10% 5.12% - -------------------------------------------------------------
+Current annualized distribution rate is the latest monthly dividend shown as an annualized percentage of net asset value on October 31, 1995. 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, 1995 shown as an annualized percentage of the maximum offering price on that date. The SEC yield is computed in accordance with a standardized method prescribed by the Securities and Exchange Commission. About Your Report SHAREHOLDER REPORTS REVISED Your fund's annual report is the best source for tracking the progress of your investment. This report includes several changes that have been made in an effort to provide additional information to you as well as to explain significant changes to the fund over the last fiscal year. In addition, the performance update includes commentary from your fund's portfolio manager on what might be expected in the coming months. Specifically, your report now includes: - - Terms you need to know related to your fund - - A look at your fund's portfolio composition and how it has changed - - The years to maturity and the duration of the fund's underlying investments If you have any comments about the revised format, please write to: Kemper Mutual Funds Shareholder Communications 120 South LaSalle Street Chicago, IL 60603 3 General Economic Overview [PHOTO of Stephen B. Timbers] STEPHEN B. TIMBERS IS CHIEF EXECUTIVE AND CHIEF INVESTMENT OFFICER OF KEMPER FINANCIAL SERVICES, INC. (KFS). KFS AND ITS AFFILIATES MANAGE APPROXIMATELY $63 BILLION IN ASSETS, INCLUDING $44 BILLION IN RETAIL MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD UNIVERSITY. DEAR SHAREHOLDER, Investors enjoyed generally positive performance in both the fixed income and stock markets in 1995. The returns of most leading securities markets worldwide are significantly higher than they were in 1994. We have an excellent environment for financial assets. After several quarters of robust growth, the United States economy seems to be growing at a pace that investors find comfortable. Contrary to isolated reports that caused some observers to become concerned, we believe the economy is in no jeopardy of recession. Its health was confirmed with the news that the economy grew (as measured by real gross domestic product [GDP]) at an annual rate of 4.2% in the third quarter. This follows much lower growth in the first two quarters, as the economy was adjusting to the Federal Reserve Board's series of interest rate increases. The slowdown, in fact, was acknowledged by the Fed when it eased short-term rates by a small but symbolic 25 basis points in July. Now we know that the economy was rebounding from July through September. Growth without a corresponding increase in inflation is very encouraging. Although we are well along in the economic cycle and at a point when prices often start hiking up, inflationary pressures have actually been reduced somewhat. It is likely that the Fed will reduce rates again, possibly as early as December 19. An additional rate cut would provide stimulation for the economy and acknowledge the serious discussion -- if not resolution -- on reducing the federal budget deficit. Even with a rate cut, our forecast calls for lower growth ranging between 2% to 3% for the next few quarters, with the momentum likely to come from exports and nonresidential construction. MARKET OUTLOOK Slow growth and low inflation is the optimal combination for investors in the fixed income markets, and we expect them to continue to perform well. We believe that the opportunities for common stock investors will be increasingly concentrated in higher quality investments. After hitting new highs and showing considerable strength for most of the year, the stock market has shown some vulnerability and then gone on to set records. However, it's inevitable -- the current bull market will come to an end some day. In fact, some sectors may be overextended today. As we view the new year, companies cannot necessarily count on the economy to provide above-average earnings support. Rather, stocks that have proven themselves with a pattern of consistent earnings are likely to attract investor support. Specifically, sectors that produce more consistent earnings, such as health care, consumer nondurables, selected technology and selected capital goods can be expected to do well. Picking the right sectors to invest in will be the key challenge for equity investors during the next few quarters. International investing continues to be quite complex. After sinking to its post-World War II low in April, the value of the U.S. dollar has gained strength against most foreign currencies. While a stronger dollar favors the U.S. economy because it reduces the cost of American imports and attracts foreign capital, a strong dollar in relation to a local currency has the effect of devaluing a foreign investment. The value of the dollar and the attractiveness of U.S. investments to foreign investors will be key factors in the next few months. 3 4 General 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.
Now (11/30/95) 6 months ago 1 year ago 2 years ago 10-YEAR TREASURY RATE (1) 5.93 6.17 7.81 5.77 PRIME RATE (2) 8.75 9.00 8.50 6.00 INFLATION RATE (3) 2.74 3.18 2.60 2.74 THE U.S. DOLLAR (4) -1.57 - 9.31 -4.52 1.71 CAPITAL GOODS ORDERS (5) (*) 7.60 17.84 13.53 23.75 INDUSTRIAL PRODUCTION (6) 2.20 3.31 6.58 2.98 EMPLOYMENT GROWTH (7) 1.50 2.29 3.15 2.58
[BAR GRAPH] (1) Falling interest rates in recent years have been a big plus for financial assets. (2) The interest rate that commercial lenders charge their best borrowers. (3) Inflation reduces an investor's real return. In the last five years, inflation has been as high as 6%. The low, moderate inflation of the last few years has meant high real returns. (4) Changes in the exchange value of the dollar impact U.S. exporters and the value of U.S. firms' foreign profits. (5) These influence corporate profits and equity performance. (6) An influence on corporate profits and equity performance. (7) An influence on family income and retail sales. *Data as of October 31, 1995 SOURCE: ECONOMICS DEPARTMENT, KEMPER FINANCIAL SERVICES, INC. - ------------------------------------------------------------------------------- We are in the midst of a global recovery, and the same fundamentals that have driven markets higher in the U.S. can be found in many foreign countries currently. However, leading international economies continue to lag the U.S. Japan and Germany, whose economies typically follow U.S. growth, are not as robust as in past cycles. Moreover, conditions in emerging market countries underline the importance of careful research and experience in understanding how these markets work. Political leadership also has some bearing on the progress of the economy and the state of the financial markets. In the months preceding a presidential election year, it has been common for incumbents to attempt to stimulate growth. Given our Republican Congress and Democratic President, however, we do not consider this as likely this time. With the rest of the country, we are closely following political initiatives to produce a balanced federal budget. This is a political wild card, but we would expect both the stock and fixed-income markets to react with enthusiasm if progress can be made. With that as an economic backdrop, we encourage you to read the following detailed report of your fund, including a question-and-answer interview with your fund's portfolio manager. Thank you for your continued support. We appreciate the opportunity to serve your investment needs. Sincerely, /s/ Stephen B. Timbers STEPHEN B. TIMBERS CHIEF INVESTMENT AND EXECUTIVE OFFICER December 12, 1995 4 5 Performance Update [PHOTO of Robert Cessine] ROBERT CESSINE JOINED KEMPER FINANCIAL SERVICES, INC. (KFS) IN JANUARY 1993. HE IS NOW A SENIOR VICE PRESIDENT OF KFS AND THE PORTFOLIO MANAGER OF KEMPER INCOME AND CAPITAL PRESERVATION FUND. MR. CESSINE RECEIVED BOTH HIS B.S. AND M.S. DEGREES FROM THE UNIVERSITY OF WISCONSIN, MADISON, WISCONSIN AND IS A CHARTERED FINANCIAL ANALYST. DURING THE LAST YEAR, LOW INFLATION AND FALLING INTEREST RATES CREATED AN ENVIRONMENT THAT LED TO ONE OF THE BEST BOND MARKETS IN HISTORY. KEMPER INCOME AND CAPITAL PRESERVATION FUND PORTFOLIO MANAGER ROBERT CESSINE EXPLAINS HOW HE EXTENDED THE FUND'S DURATION TO CAPITALIZE ON THE DECLINING INTEREST RATE ENVIRONMENT AND TO ENHANCE PERFORMANCE. Q. THE FUND'S FISCAL YEAR -- NOVEMBER 1, 1994, THROUGH OCTOBER 31, 1995 -- STARTED AS INTEREST RATES PEAKED AND CONTINUED DURING A PERIOD OF FALLING RATES. WHAT WAS BEHIND THIS SHIFT IN INTEREST RATE DIRECTION AND HOW DID IT IMPACT THE BOND MARKET? A. Throughout 1994, economic growth was robust. The Federal Reserve Board -- in an effort to circumvent inflation -- raised the federal funds rate six times during 1994 and once in February 1995, resulting in a total increase of 3 percent. Such interest rate hikes hurt the market and bond prices fell dramatically. It was the worst year in modern times for U.S. bonds. Yet 1995 was a very good year for bonds. The Fed's tightening led to a soft landing for the economy -- slow economic growth and low inflation. And, as growth slowed, interest rates began to fall and the performance of fixed-income investments improved. Bond prices increased throughout 1995 as market interest rates fell, making bonds more appealing investments. Q. THE FUND'S CLASS A SHARES RETURNED 17.47 PERCENT FOR THE FISCAL YEAR. HOW DOES THAT COMPARE TO SIMILAR BOND FUNDS AND WHAT DID YOU DO TO ENHANCE THE FUND'S PERFORMANCE? A. We are pleased with the fund's annual total return. All share classes of the fund ranked in the top 8 percent among all fixed-income funds during the fiscal year ended October 31, 1995, as measured by Lipper Analytical Services, Inc. Its Class A Shares ranked #149, Class B Shares ranked #330 and Class C Shares ranked #273 out of all 4,253 fixed-income funds for the year. When compared to Lipper's Corporate Debt A Rated Category, the fund's Class A Shares placed #19, Class B Shares placed #38 and Class C Shares placed #33 out of 111 funds for the fiscal year. The portfolio's average duration was critical to the fund's strong performance. Duration is a measurement of a portfolio's sensitivity to interest rates. The shorter the duration, the less sensitive it is to interest rate 5 6 Performance Update changes. When interest rates began to rise in 1994, we adopted a defensive strategy and shortened the fund's average duration. And as interest rates peaked in November 1994, the fund's duration was 4.3 years. We maintained a short duration until February, when economic indicators revealed that growth had begun to slow. At that point, we began extending the fund's duration because we expected interest rates to fall. As a result of our optimism, the fund was well prepared to exploit the Spring bond rally that heightened in May. The fund's duration at that time had been extended to 6.4 years. As we continued to extend duration, the fund outperformed the average of its peers from April through October, when the fund's duration reached 6.6 years. Q. HOW DID YOU ADJUST THE DURATION? A. The most significant adjustment was our sale of the fund's mortgage holdings. In April, mortgages represented 12 percent of the fund. But by May, we had sold all of the fund's mortgage holdings to invest in Treasuries, which were beginning to outperform as interest rates fell. We sold 30-year Government National Mortgage Association (GNMA) mortgage-backed securities with coupon rates of 7.5 and 8.5 percent. In their place we purchased intermediate- and long-term U.S. Treasuries with longer average durations. This made sense because as interest rates fall, there is a higher risk of mortgage prepayments. If that happens, the fund must reinvest at less attractive market rates. Moreover, in a declining interest rate environment, the prices of mortgages do not keep pace with Treasury prices. The move out of mortgages and increased investment in Treasuries was extremely beneficial for the fund in terms of total return. Had we kept our investment in mortgages, each GNMA bond would have appreciated in price by less than $2 between the first part of May and the end of the fiscal year. In contrast, the Treasuries we purchased and held increased in price by approximately $4.50-$5.50. Although yields on the Treasuries weren't as high as on the mortgages, you can see how beneficial price appreciation was to shareholders. Q. THE FUND INVESTS IN SEVERAL DIFFERENT TYPES OF ASSETS. WHICH SECTOR CONTRIBUTED MOST TO PERFORMANCE THIS YEAR? A. The corporate bond sector was the strongest performer for many reasons. First, as the Fed achieved a soft landing for the economy, inflationary pressures eased and corporate earnings continued to grow. This provided an excellent environment for corporate bonds overall. Because of their strong performance, we maintained a high level of investment in corporate bonds throughout the year -- between 52-74 percent of the portfolio. And the fund's corporate bond holdings outperformed the other sectors by generating a higher rate of income as well as significant price appreciation. The second factor contributing to this sector's performance was our high level of investment in BBB-rated bonds, which represented between 23- 30 percent of the fund's portfolio during the year. The lowest rated of all investment grade bonds, BBB-rated issues outperformed all other high grade bonds for the fiscal year. BBB-rated bonds returned 19.34 percent, while investment grade bonds as a whole returned 18.79 percent, according to the Lehman Brothers Investment Grade Corporate Index. Outstanding returns from several specific industries also enhanced returns in the fund's corporate bond sector. The media and cable industry returned over 22 percent during the fiscal year, according to the Lehman Brothers Investment Grade Index. Strong cash flows and debt reduction programs within the industry contributed to its performance. We doubled our investment in this sector to 8.5 percent of the fund because we expect continued cash flow growth and credit quality improvement from these companies. The paper and forest products industry also enjoyed strong performance as demand for paper increased and there was a limited supply of new manufacturing capacity. Although we did not increase the level of our investment in this sector, we bought and sold several issues at prices that enhanced the fund's total return. Some of the fund's stronger performing bonds, in terms of income and price appreciation, were those within the airline sector. After several unprofitable 6 7 Performance Update years, the airline industry has reduced costs and increased operating profits to levels not seen since 1989. In response to the severe credit quality decline experienced in previous years, Delta and United Airlines embarked upon ambitious programs to reduce operating expenses. Simultaneously, airline traffic grew and industry capacity declined, resulting in higher revenues and significantly higher profits. This helped the fund's investment in those airlines. For instance, a Delta issue we purchased in March appreciated in price by 14 percent through the end of the year. This price appreciation, combined with the issue's attractive coupon rate of 9.75 percent, provided a total return of nearly 20 percent in just seven months. Finally, the fund's outstanding corporate bond performance was enhanced by the ongoing research efforts of a dedicated team of credit analysts. Together they consider economic factors such as interest rates, the strength of the economy and the relative valuations -- and attractiveness -- of the fund's potential investments. The research they provide enhances the investment selection process, which is critical to good total return performance. Q. WERE THERE ANY DISAPPOINTMENTS DURING THE YEAR? A. We wish we would have identified earlier that the economy was slowing. If we had extended duration in November, 1994, rather than February, 1995, the fund could have provided an even higher return. Although the fund realized gains in December, 1994 and January, 1995, performance for the two months slipped slightly under that of our peers. Fortunately by extending duration ahead of the spring bond rally, the fund recovered the ground it lost to its competitors early in the year. Q. THE FUND'S DIVIDEND REMAINED CONSTANT DURING THE YEAR WHILE INTEREST RATES DECLINED AND THE FUND'S INCOME-GENERATING MORTGAGES WERE SOLD. WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO MAINTAIN THE FUND'S DISTRIBUTION? A. Maintaining a high rate of income for the fund is a priority to us, but we also manage for total return. In the past, mortgage investments have been an important supplement to the fund's dividend income. However, selling mortgages and investing in Treasuries significantly enhanced the fund's total return. Yet, we were still able to preserve the fund's distribution rate by maintaining our portfolio of higher coupon Treasuries and corporate bonds. Together, these two sources more than made up for any income lost by selling rather than holding the mortgages. Q. DO YOU ANTICIPATE THAT NEXT YEAR WILL BE AS POSITIVE FOR THE FUND? A. The economic outlook is very good. We anticipate continued slow to moderate economic growth, a benign level of inflation and interest rates that should continue to fall. Further contributing to this scenario is the likelihood that a meaningful balanced federal budget agreement will be reached. If that happens, it is possible that interest rates may move even lower during 1996. This would be a very positive environment for fixed-income investments. Q. WHAT ARE THE RISKS TO THAT ASSUMPTION? A. The risk would be that economic growth significantly accelerates but, at this point, that's not what the economic data suggest. Exports and housing construction markets are somewhat strong but it is unlikely that these two forces alone could move the economy in a different direction. If the economy would take off, we'd shorten the average maturity of the fund and probably increase our level of mortgage investments, which generally perform better than other fixed-income asset classes when interest rates rise. 7 8 Terms to Know BOND RALLY A sharp, short-lived rise in bond values after a period of either little movement or falling values. DURATION Duration is a measure of the interest rate sensitivity of a fixed-income portfolio incorporating time to maturity and coupon size. The larger the duration number, the greater the interest rate risk. TOTAL RETURN A fund's total return figure measures both the net investment income and any realized and unrealized appreciation or depreciation of the underlying investments in its portfolio for the period, assuming the reinvestment of all dividends. It represents the aggregate percentage or dollar value change over the period. YIELD A fund's yield is a measure of the net investment income per share earned over a specific one month or 30-day period expressed as a percentage of the maximum offering price of the fund's shares at the end of the period. Performance Update - ------------------------------------------------------------------------------ AVERAGE ANNUAL TOTAL RETURNS* - ------------------------------------------------------------------------------ FOR PERIODS ENDED OCTOBER 31, 1995 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
LIFE OF 1-YEAR 5-YEAR 10-YEAR CLASS - ------------------------------------------------------------------------------------- KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS A 12.22% 9.69% 9.23% 9.51% (SINCE 4/15/74) - ------------------------------------------------------------------------------------- KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS B 13.13 N/A N/A 8.72 (SINCE 5/31/94) - ------------------------------------------------------------------------------------- KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS C 16.45 N/A N/A 10.98 (SINCE 5/31/94) - -------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------ GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS A FROM 1/1/76 THROUGH 10/31/95 - ------------------------------------------------------------------------------
1/1/76 12/31/81 12/31/86 12/31/91 10/31/95 KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS A(1) 10,000 11,952 27,893 43,281 $ 58,789 LEHMAN BROTHERS AGGREGATE BOND INDEX+ 10,000 13,418 31,253 50,188 $ 66,120 CONSUMER PRICE INDEX++ 10,000 16,937 19,910 24,847 $ 27,694
[LINE GRAPH] Past performance is not predictive of future performance. Returns and net asset value fluctuate. Shares are redeemable at current net asset value, which may be more or less than original cost. * Average annual total return measures net investment income and capital gain or loss from portfolio investments, assuming reinvestment of all dividends and for A Shares adjustment for the maximum sales charge of 4.5% and for B Shares adjustment for the applicable contingent deferred sales charge as follows: 1-year, 3%; 5-year, 1%; since inception, 0%. During the periods noted, securities prices fluctuated. For additional information, see the Prospectus and Statement of Additional Information and the Financial Highlights at the end of this report. (1)Performance includes reinvestment of dividends and adjustment for the maximum sales charge for A Shares and the contingent deferred sales charge in effect at the end of the period for B Shares. In comparing the Kemper Income and Capital Preservation Fund performance to the Lehman Brothers Aggregate Bond 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 Lipper Analytical Services, Inc. ++ The Consumer Price Index is a statistical measure of change, over time, in the prices of goods and services in major expenditure groups for all urban consumers. Source is Towers Data Systems. 8 9 Performance Update GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS B FROM 5/31/94 THROUGH 10/31/95
5/31/94 12/31/94 10/31/95 ------- -------- -------- KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS B(1) 10,000 10,008 $ 11,261 LEHMAN BROTHERS AGGREGATE BOND INDEX+ 10,000 10,077 $ 11,600 CONSUMER PRICE INDEX++ 10,000 10,149 $ 10,420
[LINE GRAPH] GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS C FROM 5/31/94 THROUGH 10/31/95
5/31/94 12/31/94 10/31/95 ------- -------- -------- KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS C(1) 10,000 10,009 $ 11,594 LEHMAN BROTHERS AGGREGATE BOND INDEX+ 10,000 10,077 $ 11,600 CONSUMER PRICE INDEX++ 10,000 10,149 $ 10,420
[LINE GRAPH] 9 10 Industry Sectors PORTFOLIO COMPOSITION
- ------------------------------------------------------------------------------ ON 10/31/95 ON 10/31/94 - ------------------------------------------------------------------------------ MORTGAGE-BACKED --% 6% TREASURY BONDS AND NOTES 18 12 FOREIGN BONDS 5 2 CORPORATE BONDS 65 62 CASH AND EQUIVALENTS 12 18 - ------------------------------------------------------------------------------ 100% 100%
[PIE CHART] [PIE CHART] ON 10/31/95 ON 10/31/94 YEARS TO MATURITY
- ------------------------------------------------------------------------------ ON 10/31/95 ON 10/31/94 - ------------------------------------------------------------------------------ CASH AND EQUIVALENTS 12% 18% 1-10 YEARS 49 41 10-20 YEARS 20 26 20+ YEARS 19 15 - ------------------------------------------------------------------------------ 100% 100%
[PIE CHART] [PIE CHART] ON 10/31/95 ON 10/31/94 DURATION
- ------------------------------------------------------------------------------ ON 10/31/95 ON 10/31/94 - ------------------------------------------------------------------------------ DURATION 6.6 YEARS 4.2 YEARS - ------------------------------------------------------------------------------
10 11 Portfolio of Investments KEMPER INCOME AND CAPITAL PRESERVATION FUND PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 1995 (DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------- PRINCIPAL GOVERNMENT OBLIGATIONS AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS U.S. Treasury Notes and Bonds 8.875%, 1997 $10,000 $10,611 9.25%, 1998 30,000 32,691 10.75%, 2003 45,000 57,832 6.875%, 2025 5,000 5,357 7.625%, 2025 50,100 58,092 ---------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT OBLIGATIONS--25.3% (Cost: $159,964) 164,583 ============================================================================ FOREIGN GOVERNMENT Republic of Finland, 7.875%, 2004 5,000 5,473 OBLIGATIONS Republic of Italy, 6.875%, 2023 5,000 4,625 Province of Manitoba, 7.75%, 2016 5,000 5,412 Province of Nova Scotia, 8.25%, 2019 4,000 4,481 ---------------------------------------------------------------------------- TOTAL FOREIGN GOVERNMENT OBLIGATIONS--3.1% (Cost: $19,449) 19,991 ============================================================================ - ------------------------------------------------------------------------------------------------------------- CORPORATE OBLIGATIONS - ------------------------------------------------------------------------------------------------------------- BANKS - 15.5% Abbey National First Capital, 8.20%, 2004 5,000 5,513 ABN-Amro Holding N.V., 8.25%, 2009 7,000 7,603 Banco Central Hispano, 7.50%, 2005 7,500 7,656 Barnett Bank, 6.90%, 2005 7,500 7,539 Capital One Bank, 8.125%, 2000 7,500 7,929 Citicorp, 7.625%, 2005 5,000 5,303 Crestar Financial Corporation, 8.75%, 2004 5,000 5,636 Dresdner Bank, N.Y., 7.25%, 2015 5,000 5,074 First Fidelity Bancorporation, 9.625%, 1999 5,000 5,535 First USA Bank, 8.10%, 1997 7,500 7,684 Fleet Financial Group, Inc., 8.625%, 2007 5,000 5,656 Kansallis Osake Pankki, 8.65%, 2050 5,000 5,271 NationsBank Corporation, 9.50%, 2004 5,000 5,877 Riggs National Corp., 8.50%, 2006 7,000 7,276 Svenska Handelbamken, 8.35%, 2004 5,000 5,485 Wells Fargo and Company, 8.75%, 2002 5,000 5,551 ---------------------------------------------------------------------------- 100,588 ============================================================================ COMMUNICATIONS, MEDIA Continental Cablevision, Inc., 9.50%, 2013 3,685 3,860 AND ELECTRONICS - 8.5% Cox Communications, 6.875%, 2005 7,500 7,497 Digital Equipment Corporation, 7.125%, 2002 7,000 6,919 News American Holdings, Inc., 9.25%, 2013 7,500 8,534 Rogers Cablesystems Limited, 10.00%, 2005 3,500 3,657 Tele-Communications, Inc., 9.80%, 2012 4,350 4,976 Telewest PLC, zero coupon, 2007 8,000 4,700
11 12 Portfolio of Investments
(DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------ Time Warner Entertainment Company, L.P., 8.375%, 2033 $7,500 $7,598 Viacom International Inc., 8.00%, 2006 7,500 7,444 --------------------------------------------------------------------------- 55,185 =========================================================================== CONSUMER PRODUCTS, American Home Products, 7.90%, 2005 7,500 8,167 RETAILING AND Black & Decker Corp., 7.50%, 2003 7,000 7,240 SERVICES - 10.5% Federated Department Stores, 10.00%, 2001 7,500 8,025 Grand Metropolitan Investment Corp., 7.45%, 2035 5,000 5,412 May Department Stores, 7.50%, 2015 7,500 7,733 Philip Morris Inc. 8.25%, 2003 3,500 3,809 7.25%, 2003 4,000 4,100 Philips Electronics N.V., 8.375%, 2006 7,000 7,796 RJR Nabisco, Inc. 8.00%, 2000 3,500 3,671 8.75%, 2005 7,500 7,446 Sears Roebuck Acceptance Corporation, 6.75%, 2005 5,000 5,003 --------------------------------------------------------------------------- 68,402 =========================================================================== DRUGS AND HEALTH Columbia Healthcare, 6.910%, 2005 7,500 7,580 CARE - 1.9% Tenet Healthcare, 8.625%, 2003 4,750 4,869 --------------------------------------------------------------------------- 12,449 =========================================================================== FINANCIAL SERVICES - Aegon N.V., 8.00%, 2006 5,000 5,456 9.8% African Development Bank, 9.30%, 2000 4,000 4,471 Associates Corporation, N.A., 8.25%, 1999 5,000 5,350 Commercial Credit, 7.375%, 2005 5,000 5,227 Donaldson, Lufkin & Jenrette, 6.875%, 2005 5,000 4,975 Finova Capital Corporation, 6.625%, 2001 5,000 5,022 General Electric Capital Corporation, 8.625%, 2008 5,000 5,835 Household Finance, 8.00%, 2004 5,000 5,428 Inter-American Development Bank, 7.00%, 2025 7,500 7,555 International Bank for Reconstruction & Development, 14.90%, 1997 3,500 3,957 Lehman Brothers Holdings, 7.125%, 2003 5,000 5,022 United States Leasing International, Inc., 8.75%, 2001 5,000 5,554 --------------------------------------------------------------------------- 63,852 =========================================================================== MANUFACTURING AND American Standard Inc., 10.875%, 1999 3,000 3,270 CONSTRUCTION Case Corporation, 7.25%, 2005 5,000 5,125 MATERIALS - 4.4% CSR America, 6.875%, 2005 7,500 7,570 EG & G Inc., 6.80%, 2005 5,000 4,950 Grumman Corporation, 10.375%, 1999 5,000 5,035 Owens-Illinois, Inc., 11.00%, 2003 2,000 2,220 --------------------------------------------------------------------------- 28,170 ===========================================================================
12 13 Portfolio of Investments
(DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------- OIL, GAS AND Parker & Parsley Petroleum, 8.875%, 2005 $5,000 $5,421 PETROLEUM Petronas Dagangan Bhd, 7.75%, 2015 5,000 5,227 SERVICES - 3.7% Repsol International Finance, 7.00%, 2005 5,000 5,141 USX Corporation, 9.375%, 2012 7,500 8,472 ----------------------------------------------------------------------------- 24,261 ============================================================================= PAPER AND FOREST Boise Cascade Company PRODUCTS - 2.8% 9.850%, 2002 2,000 2,305 9.45%, 2009 5,500 6,503 James River Corporation, 9.25%, 2021 3,500 4,164 West Fraser Timber Co. Ltd., 7.25%, 2002 5,000 5,021 ----------------------------------------------------------------------------- 17,993 ============================================================================= TRANSPORTATION - 6.8% Delta Airlines 9.32%, 2009 4,553 4,956 9.75%, 2021 3,000 3,430 Ford Motor Credit, 7.75%, 2005 5,000 5,344 General American Transportation Corp., 10.29%, 1999 5,000 5,613 General Motors Acceptance Corporation, 8.875%, 2010 5,000 5,894 The Hertz Corporation, 7.00%, 2003 5,000 5,032 Penske Truck Leasing, 8.25%, 1999 5,000 5,294 United Airlines 11.21%, 2014 4,000 4,818 9.56%, 2018 3,500 3,727 ----------------------------------------------------------------------------- 44,108 ============================================================================= UTILITIES - 2.5% Chesapeake and Potomic Telephone Company of Virginia, 8.375%, 2029 5,000 5,916 Commonwealth Edison Company, 8.125%, 2007 5,000 5,140 Tenaga, Nasional Berhad, 7.50%, 2025 5,000 4,970 ----------------------------------------------------------------------------- 16,026 ============================================================================= TOTAL CORPORATE OBLIGATIONS--66.4% (Cost: $416,689) 431,034 ============================================================================= MONEY MARKET Yield-5.72% to 5.85%, Due November 1995 INSTRUMENTS Conagra Inc. 2,800 2,800 Cooper Industries 5,000 4,994 Goldman Sachs Group L.P. 2,300 2,299 Quaker Oats 3,000 2,997
13 14 Portfolio of Investments
(DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------- Sheffield Receivables $5,000 $4,994 Working Capital Management Company L.P. 2,000 2,000 ----------------------------------------------------------------------------- TOTAL MONEY MARKET INSTRUMENTS--3.1% (Cost: $20,085) 20,084 ============================================================================= TOTAL INVESTMENTS--97.9% (Cost: $616,187) 635,692 ============================================================================= CASH AND OTHER ASSETS, LESS LIABILITIES--2.1% 13,735 ============================================================================= NET ASSETS--100% $649,427 =============================================================================
- ------------------------------------------------------------------------------ NOTE TO PORTFOLIO OF INVESTMENTS - ------------------------------------------------------------------------------ Based on the cost of investments of $616,187,000 for federal income tax purposes at October 31, 1995, the aggregate gross unrealized appreciation was $22,135,000, aggregate gross unrealized depreciation was $2,630,000 and the net unrealized appreciation of investments was $19,505,000. See accompanying Notes to Financial Statements. 14 15 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, 1995, 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 1991. 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, 1995, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Kemper Income and Capital Preservation Fund at October 31, 1995, 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 1991, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois November 28, 1995 15 16 Financial Statements STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1995 (IN THOUSANDS)
- ----------------------------------------------------------------------- ASSETS - ----------------------------------------------------------------------- Investments, at value (Cost: $616,187) $ 635,692 Cash 1,270 Receivable for: Fund shares sold 1,106 Investments sold 5,910 Interest 13,176 TOTAL ASSETS 657,154 ======================================================================= - ----------------------------------------------------------------------- LIABILITIES AND NET ASSETS - ----------------------------------------------------------------------- Payable for: Dividends 1,208 Fund shares redeemed 395 Investments purchased 5,446 Management fee 288 Administrative services fee 104 Custodian and transfer agent fees and related expenses 166 Other 120 Total Liabilities 7,727 - ----------------------------------------------------------------------- NET ASSETS $ 649,427 ======================================================================= - ----------------------------------------------------------------------- ANALYSIS OF NET ASSETS - ----------------------------------------------------------------------- Paid-in capital $ 639,348 Accumulated net realized loss on investments (21,045) Net unrealized appreciation on investments 19,505 Undistributed net investment income 11,619 NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 649,427 ======================================================================= - ----------------------------------------------------------------------- THE PRICING OF SHARES - ----------------------------------------------------------------------- CLASS A SHARES Net asset value and redemption price per share ($535,786 / 62,158 shares outstanding) Maximum offering price per share $8.62 (net asset value, plus 4.71% of net asset value or 4.50% of offering price) $9.03 ======================================================================= CLASS B SHARES Net asset value and redemption price (subject to contingent deferred sales charge) per share ($97,425 / 11,336 shares outstanding) $8.59 ======================================================================= CLASS C SHARES Net asset value and redemption price per share ($4,860 / 564 shares outstanding) $8.61 ======================================================================= CLASS I SHARES Net asset value and redemption price per share ($11,356 / 1,318 shares outstanding) $8.61 =======================================================================
See accompanying Notes to Financial Statements. 16 17 Financial Statements STATEMENT OF OPERATIONS Year ended October 31, 1995 (IN THOUSANDS)
- ----------------------------------------------------------------------- NET INVESTMENT INCOME - ----------------------------------------------------------------------- Interest income $ 44,957 Expenses: Management fee 2,923 Administrative services fee 954 Distribution services fee 301 Custodian and transfer agent fees and related expenses 964 Professional fees 45 Reports to shareholders 96 Trustees' fees and other 38 Total expenses 5,321 - ----------------------------------------------------------------------- NET INVESTMENT INCOME 39,636 ======================================================================= - ----------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS - ----------------------------------------------------------------------- Net realized loss on sales of investments (1,822) Net realized loss from futures transactions (1,132) Net realized loss (2,954) Change in net unrealized depreciation on investments 49,840 Net gain on investments 46,886 - ----------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 86,522 =======================================================================
STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS)
YEAR ENDED OCTOBER 31, 1995 1994 - -------------------------------------------------------------------------------------------- OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY - -------------------------------------------------------------------------------------------- Net investment income $ 39,636 $ 39,819 Net realized loss (2,954) (18,072) Change in net unrealized depreciation 49,840 (49,533) Net increase (decrease) in net assets resulting from operations 86,522 (27,786) Net equalization charges (381) (125) Distribution from net investment income (40,603) (37,976) Distribution from net realized gain -- (3,161) Total dividends to shareholders (40,603) (41,137) Net increase from capital share transactions 93,457 10,335 TOTAL INCREASE (DECREASE) IN NET ASSETS 138,995 (58,713) ============================================================================================ - -------------------------------------------------------------------------------------------- NET ASSETS - -------------------------------------------------------------------------------------------- Beginning of year 510,432 569,145 END OF YEAR (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $11,619 AND $13,222, RESPECTIVELY) $ 649,427 510,432 ============================================================================================
17 18 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 or a contingent deferred sales charge but are subject to higher ongoing expenses than Class A shares and do not convert into another class. Class I shares, which 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. Each share represents an identical interest in the investments of the Fund and has the same rights. - ------------------------------------------------------------------------------ 2 SIGNIFICANT ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at value. Fixed income securities are valued by using market quotations, or independent pricing services that use prices provided by market makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics. Portfolio securities that are traded on a national securities exchange are valued at the last sale price on the exchange where primarily traded or, if there is no recent sale, at the last current bid quotation. Portfolio securities that are primarily traded on foreign securities exchanges are generally valued at the preceding closing values of such securities on their respective exchanges where primarily traded. Securities not so traded are valued at the last current bid quotation if market quotations are available. Exchange traded options are valued at the last sale price unless there is no sale price, in which event prices provided by market makers are used. Over-the-counter traded options are valued based upon prices provided by market makers. Financial futures and options thereon are valued at the settlement price established each day by the board of trade or exchange on which they are traded. Other securities and assets are valued at fair value as determined in good faith by the Board of Trustees. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Investment transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis and includes premium and discount amortization on money market instruments and mortgage-backed securities; it also includes original issue and market discount amortization on long-term 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 shares will be reduced by the amount of any applicable contingent deferred sales charge. On each day the New York Stock Exchange is open 18 19 Notes to Financial Statements for trading, the net asset value per share is determined as of the earlier of 3:00 p.m. Chicago time or the close of the Exchange. The net asset value per share is determined separately for each class by dividing the Fund's net assets attributable to that class by the number of shares of the class outstanding. FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS. The Fund has complied with the special provisions of the Internal Revenue Code available to investment companies and therefore no federal income tax provision is required. The accumulated net realized loss on sales of investments for federal income tax purposes at October 31, 1995, amounting to approximately $21,025,000 is available to offset future taxable gains. If not applied, the loss carryover expires during the period 2002 through 2003. The Fund declares and pays dividends on a monthly basis. Net realized capital gains, if any, will be distributed at least annually. Differences in dividends per share are due to different class expenses. Dividends payable to its shareholders are recorded by the Fund on the ex-dividend date. Dividends are determined in accordance with income tax principles which may treat certain transactions differently than generally accepted accounting principles. EQUALIZATION ACCOUNTING. A portion of proceeds from sales and cost of redemptions of Fund shares is credited or charged to undistributed net investment income so that income per share available for distribution is not affected by sales or redemptions of shares. - ------------------------------------------------------------------------------- 3 TRANSACTIONS WITH AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management agreement with Kemper Financial Services, Inc. (KFS) and pays a management fee at an annual rate of .55% of the first $250 million of average daily net assets declining gradually to .40% of average daily net assets in excess of $12.5 billion. The Fund incurred a management fee of $2,923,000 for the year ended October 31, 1995. 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 COMMISSIONS ALLOWED BY KDI PAID TO RETAINED TO RETAIL FIRMS AFFILIATES BY KDI (INCLUDING AFFILIATES) OF KDI ----------- ---------------------- ----------- Year ended October 31, 1995 $96,000 767,000 110,000
For services under the distribution services agreement, the Fund pays KDI a fee of .75% of average daily net assets of 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) 19 20 Notes to Financial Statements from redemptions of Class B shares. Distribution fees and commissions paid in connection with the sale of Class B and Class C shares and the CDSC received in connection with the redemption of Class B shares are as follows:
COMMISSIONS DISTRIBUTION AND DISTRIBUTION AMOUNTS FEES AND FEES PAID BY PAID TO CDSC RECEIVED KDI TO FIRMS AFFILIATES BY KDI (INCLUDING AFFILIATES) OF KDI ------------- ---------------------- ---------- Year ended October 31, 1995 $387,000 888,000 114,000
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 ASF PAID BY ASF PAID BY THE KDI TO FIRMS PAID TO FUND TO KDI (INCLUDING AFFILIATES) AFFILIATES OF KDI ----------- ---------------------- ----------------- Year ended October 31, 1995 $954,000 980,000 108,000
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. For the year ended October 31, 1995, the transfer agent remitted shareholder services fees to KSvC of $840,000. OFFICERS AND TRUSTEES. Certain officers or trustees of the Fund are also officers or directors of KFS. During the year ended October 31, 1995, the Fund made no direct payments to its officers and incurred trustees' fees of $21,000 to independent trustees. - ------------------------------------------------------------------------------- 4 INVESTMENT TRANSACTIONS For the year ended October 31, 1995, investment transactions (excluding short-term instruments) are as follows (in thousands): Purchases $1,026,727 Proceeds from sales 953,000 20 21 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, 1995 1994 ------------------------ ------------------------ SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------- SHARES SOLD ------------------------------------------------------------------------------- Class A 11,111 $ 90,463 11,289 $ 93,290 Class B 13,152 110,374 4,160 33,723 Class C 1,023 8,763 50 408 Class I 1,374 11,709 -- -- ------------------------------------------------------------------------------- SHARES ISSUED IN REINVESTMENT OF DIVIDENDS ------------------------------------------------------------------------------- Class A 2,950 24,216 3,192 26,688 Class B 254 2,120 19 149 Class C 10 92 1 5 Class I 26 224 -- -- ------------------------------------------------------------------------------- SHARES REDEEMED ------------------------------------------------------------------------------- Class A (15,124) (121,197) (14,812) (121,231) Class B (3,307) (28,190) (2,831) (22,697) Class C (520) (4,413) -- -- Class I (82) (704) -- -- ------------------------------------------------------------------------------- CONVERSION OF SHARES ------------------------------------------------------------------------------- Class A 106 883 5 42 Class B (106) (883) (5) (42) ------------------------------------------------------------------------------- NET INCREASE FROM CAPITAL SHARE TRANSACTIONS $ 93,457 $ 10,335 ===============================================================================
21 22 Financial Highlights
-------------------------------------------------------- CLASS A -------------------------------------------------------- YEAR ENDED OCTOBER 31, 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE - -------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of year $ 7.91 8.97 8.34 8.22 7.70 Income from investment operations: Net investment income .61 .61 .63 .67 .74 Net realized and unrealized gain (loss) .72 (1.03) .62 .11 .53 Total from investment operations 1.33 (.42) 1.25 .78 1.27 - -------------------------------------------------------------------------------------------------------------------------- Less dividends: Distribution from net investment income .62 .59 .62 .66 .75 Distribution from net realized gain -- .05 -- -- -- Total dividends .62 .64 .62 .66 .75 Net asset value, end of year $ 8.62 7.91 8.97 8.34 8.22 ========================================================================================================================== TOTAL RETURN 17.47% (4.86) 15.48 9.83 17.26 - -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS - -------------------------------------------------------------------------------------------------------------------------- Expenses .90% .94 .82 .82 .82 Net investment income 7.31 7.34 7.26 8.01 9.21 - --------------------------------------------------------------------------------------------------------------------------
------------------- ------------------- -------- CLASS B CLASS C CLASS I ------------------- ------------------- -------- YEAR MAY 31, YEAR MAY 31, JULY 3, ENDED 1994 TO ENDED 1994 TO 1995 TO OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31, 1995 1994 1995 1994 1995 - ------------------------------------------------------------------------------------- ------------------- -------- PER SHARE OPERATING PERFORMANCE - ------------------------------------------------------------------------------------- ------------------- -------- Net asset value, beginning of period $ 7.90 8.16 7.90 8.16 8.52 Income from investment operations: Net investment income .51 .23 .53 .23 .19 Net realized and unrealized gain (loss) .72 (.26) .72 (.26) .12 Total from investment operations 1.23 (.03) 1.25 (.03) .31 - ------------------------------------------------------------------------------------- ------------------- -------- Less distribution from net investment income .54 .23 .54 .23 .22 Net asset value, end of period $ 8.59 7.90 8.61 7.90 8.61 ===================================================================================== =================== ======== TOTAL RETURN (NOT ANNUALIZED) 16.12% (.45) 16.45 (.44) 3.65 - ------------------------------------------------------------------------------------- ------------------- -------- ANNUALIZED RATIOS TO AVERAGE NET ASSETS - ------------------------------------------------------------------------------------- ------------------- -------- Expenses 1.81% 1.92 1.78 1.89 .62 Net investment income 6.40 6.72 6.43 6.75 6.87 - ------------------------------------------------------------------------------------- ------------------- -------- - --------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA FOR ALL CLASSES - --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- Net assets at end of year (in thousands) $649,427 510,432 569,145 482,009 432,490 Portfolio turnover rate 182% 163 190 178 115 - ---------------------------------------------------------------------------------------------------------------------------
NOTE: Total return does not reflect the effect of any sales charges. 22 23 Shareholders' Meeting SPECIAL SHAREHOLDERS' MEETING On September 19, 1995 a special shareholders' meeting was held. Kemper Income and Capital Preservation Fund shareholders were asked to vote on four separate issues: election of nine Trustees to the Board of Trustees, ratification of Ernst & Young LLP as independent auditors, approval of a new investment management agreement with Kemper Financial Services, Inc. or its successor on the same terms as the current agreement and for Class B and Class C shareholders only, approval of a new 12b-1 distribution plan with Kemper Distributors, Inc. or its successor on the same terms as the current plan. We are pleased to report that all nominees were elected and all other items were approved. Following are the results for each issue: - - Election of Trustees
For Withheld David W. Belin 43,476,098 1,146,809 Lewis A. Burnham 43,480,561 1,142,346 Donald L. Dunaway 43,502,872 1,120,035 Robert B. Hoffman 43,516,259 1,106,648 Donald R. Jones 43,507,334 1,115,573 David B. Mathis 43,449,325 1,173,582 Shirley D. Peterson 43,422,551 1,200,356 William P. Sommers 43,480,561 1,142,346 Stephen B. Timbers 43,507,334 1,115,573
- - Ratification of the selection of Ernst & Young LLP as independent auditors for the fund
For Against Abstain 42,614,107 494,762 1,514,038
- - Approval of new investment management agreement
For Against Abstain 41,813,554 982,506 1,826,847
- - Approval of new 12b-1 distribution plan
For Against Abstain Class B Shares 2,932,161 76,385 128,196 Class C Shares 315,964 573 4,692
23 24 Trustees and Officers TRUSTEES STEPHEN B. TIMBERS President and Trustee DAVID W. BELIN Trustee LEWIS A. BURNHAM Trustee DONALD L. DUNAWAY Trustee ROBERT B. HOFFMAN Trustee DONALD R. JONES Trustee DAVID B. MATHIS Trustee SHIRLEY D. PETERSON Trustee WILLIAM P. SOMMERS Trustee OFFICERS JOHN E. PETERS Vice President J. PATRICK BEIMFORD, JR. Vice President ROBERT C. CESSINE Vice President PHILIP J. COLLORA Vice President and Secretary CHARLES F. CUSTER Vice President and Assistant Secretary JEROME L. DUFFY Treasurer ELIZABETH C. WERTH Assistant Secretary - ------------------------------------------------------------------------------- LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ 222 North LaSalle Street Chicago, IL 60601 SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY P.O. Box 419557 Kansas City, MO 64141 1-800-621-1048 CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY 127 West 10th Street Kansas City, MO 64105 INDEPENDENT AUDITORS ERNST & YOUNG LLP 233 South Wacker Drive Chicago, IL 60606 INVESTMENT MANAGER KEMPER FINANCIAL SERVICES, INC. PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC. 120 South LaSalle Street Chicago, IL 60603 [ RECYCLE LOGO ] Printed on recycled paper. This report is not to be distributed unless preceded or accompanied by a [KEMPER MUTUAL FUNDS LOGO] Kemper Fixed Income Funds prospectus. 10068180 KICPF - 2 (12/95) Printed in the U.S.A. -----END PRIVACY-ENHANCED MESSAGE-----