N-30D 1 c58362n-30d.txt ANNUAL REPORT DATED 10/31/00 1 LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM) ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED OCTOBER 31, 2000 Offering investors the opportunity for a high level of current income and preservation of capital KEMPER INCOME AND CAPITAL PRESERVATION FUND "... The Treasury yield curve inverted during the past year as inflation pressures mounted and short-term interest rates rose, providing an exceptional challenge for corporate and government bond investors. ..." [KEMPER FUNDS LOGO] 2 CONTENTS 3 ECONOMIC OVERVIEW 7 PERFORMANCE UPDATE 10 TERMS TO KNOW 12 PORTFOLIO STATISTICS 13 PORTFOLIO OF INVESTMENTS 17 FINANCIAL STATEMENTS 20 FINANCIAL HIGHLIGHTS 22 NOTES TO FINANCIAL STATEMENTS 27 REPORT OF INDEPENDENT AUDITORS AT A GLANCE KEMPER INCOME AND CAPITAL PRESERVATION FUND TOTAL RETURNS FOR THE YEAR ENDED OCTOBER 31, 2000 (UNADJUSTED FOR ANY SALES CHARGE) [BAR GRAPH]
KEMPER INCOME AND KEMPER INCOME AND KEMPER INCOME AND LIPPER CORPORATE DEBT CAPITAL PRESERVATION FUND CAPITAL PRESERVATION FUND CAPITAL PRESERVATION FUND A-RATED FUNDS CLASS A CLASS B CLASS C CATEGORY AVERAGE* ------------------------------------------- ------------------------- ------------------------- ------------------------ 5.31 4.60 4.68 5.52
PERFORMANCE IS HISTORICAL AND INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH CHANGING MARKET CONDITIONS, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. *LIPPER INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES IN NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF SALES CHARGES; IF SALES CHARGES HAD BEEN INCLUDED, RESULTS MAY HAVE BEEN LESS FAVORABLE. NET ASSET VALUE
AS OF AS OF 10/31/00 10/31/99 ........................................................... KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS A $7.99 $8.06 ........................................................... KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS B $7.96 $8.02 ........................................................... KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS C $7.99 $8.05 ...........................................................
KEMPER INCOME AND CAPITAL PRESERVATION FUND RANKINGS* COMPARED WITH ALL OTHER FUNDS IN THE LIPPER CORPORATE DEBT A-RATED FUNDS CATEGORY
CLASS A CLASS B CLASS C .......................................................................................... 1-YEAR #108 of 177 funds #136 of 177 funds #130 of 177 funds .......................................................................................... 5-YEAR #68 of 112 funds #107 of 112 funds #103 of 112 funds .......................................................................................... 10-YEAR #18 of 41 funds n/a n/a ..........................................................................................
KEMPER INCOME AND CAPITAL PRESERVATION FUND TOTAL RETURNS THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND AS OF OCTOBER 31, 2000.
CLASS A CLASS B CLASS C ............................................................ ONE-YEAR INCOME: $0.48 $0.42 $0.42 ............................................................ OCTOBER DIVIDEND: $0.04 $0.03 $0.04 ............................................................ ANNUALIZED DISTRIBUTION RATE+: 6.01% 4.52% 6.01% ............................................................ SEC YIELD+: 5.86% 5.42% 5.45% ............................................................
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON OCTOBER 31, 2000. DISTRIBUTION RATE SIMPLY MEASURES THE LEVEL OF DIVIDENDS AND IS NOT A COMPLETE MEASURE OF PERFORMANCE. THE SEC YIELD IS NET INVESTMENT INCOME PER SHARE EARNED OVER THE MONTH ENDED OCTOBER 31, 2000, SHOWN AS AN ANNUALIZED PERCENTAGE OF THE MAXIMUM OFFERING PRICE ON THAT DATE. THE SEC YIELD IS COMPUTED IN ACCORDANCE WITH THE STANDARDIZED METHOD PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION. YIELDS AND DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE. YOUR FUND'S STYLE FIXED STYLE BOX MORNINGSTAR FIXED-INCOME STYLE BOX Source: Data provided by Morningstar, Inc., Chicago, IL, (312) 696-6000. The Income Style Box(TM) placement is based on a fund's average effective maturity or duration and the average credit rating of the bond portfolio. PLEASE NOTE THAT STYLE BOXES DO NOT REPRESENT AN EXACT ASSESSMENT OF RISK AND DO NOT REPRESENT FUTURE PERFORMANCE. THE FUND'S PORTFOLIO CHANGES FROM DAY TO DAY. A LONGER-TERM VIEW IS REPRESENTED BY THE FUND'S MORNINGSTAR CATEGORY, WHICH IS BASED ON ITS ACTUAL INVESTMENT STYLE AS MEASURED BY ITS UNDERLYING PORTFOLIO HOLDINGS OVER THE PAST THREE YEARS. MORNINGSTAR HAS PLACED KEMPER INCOME AND CAPITAL PRESERVATION FUND IN THE INTERMEDIATE-TERM BOND CATEGORY. PLEASE CONSULT THE PROSPECTUS FOR A DESCRIPTION OF INVESTMENT POLICIES.
3 ECONOMIC OVERVIEW SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES. DEAR KEMPER FUNDS SHAREHOLDER: Times have been good. During the first half of 2000, the global economy grew faster than it has in over a decade. All regions participated. The United States, of course, was still powering ahead. The growth rate in Europe was nearly 4 percent. Asia fed off an electronics boom and a revitalized China. South America got a boost from an improved credit rating. New money pumped up energy producers from Mexico to the Middle East. Now for the bad news, which is that the best news is probably behind us. Global growth peaked in the spring, and in the United States, at least, the slowdown was abrupt. After 6 percent growth in the year ending June 30, the economy grew at a rate of just 2.43 percent during the summer. It seems that expensive energy, currency volatility and more widespread profit problems are bringing the exuberant global economy, including the United States, to heel. Let's explore these factors in more detail. OIL, OIL, TOIL AND TROUBLE Although oil prices have receded somewhat, everyone's still jittery, and with good reason: Of the seven recessions since World War II, six were preceded by a spike in crude oil prices. Oil prices have already been strong enough for long enough to crimp growth, and they're biting the rest of the world even harder than the United States. But there are two factors working to our advantage. First, oil prices are still historically low. Oil is slightly more than $30 per barrel today, but it peaked at over $75 per barrel back in 1980 (stated in today's dollars). Second, our dependence on oil has decreased: The United States uses only roughly half as much oil to produce a unit of GDP as it did thirty years ago. This gives us hope that the economy can escape recession this time around. What would make us worry more? Outright energy shortages or a political crisis. If either happens, the odds of a recession occurring would rise steeply. People panic or become excessively cautious when they have to fret. Can I fill up my oil tank? Will there be a war? Their loss of confidence can be much more devastating than price increases alone. CURRENCY CONCERNS Currency turmoil is a second danger to the economy. Central bankers have intervened to halt the euro's decline, and they're right that the euro is fundamentally undervalued. But intervention is a hazardous game. Let's hope they don't convince the markets that the euro should rise a lot very quickly. A suddenly weak dollar might make Europeans think about selling all those American stocks and bonds they've been buying, and would greatly complicate the Fed's inflation fight. BUSINESS: BIG PLANS BUT PROFIT DISAPPOINTMENTS Profit warnings escalated late this summer, and we believe there's fire amid that smoke. Sure, businesses have had a voracious appetite for money -- and until very recently, corporate treasurers were finding it easily: Banks increased business lending by 10.8 percent in the past year. Bond markets have suddenly become a lot more picky, especially for low-quality credits, but money is still available for investment grade borrowers. Capital goods orders reflect executives' enthusiasm -- while volatile month-to-month, they have been up an average of 15 to 20 percent compared to a year ago for the past six months. Still, we expect total capital spending to slow, from this year's estimated 14 percent to 12.5 percent in 2001. The reason? A profit squeeze is about to take some of the edge off executives' animal spirits. We've always been more cautious than Wall Street about 2001 profits, and our forecast hasn't changed. Profits are likely to be flat to down next year for several reasons. First, the growth slowdown will make it harder to keep up the productivity gains that have kept labor costs under control. We saw the first evidence of how productivity slows along with economic growth in the third quarter: Productivity gains dipped to just 3.3 percent from the second quarter's remarkable 6.1 percent. Second, interest expense will surge (thanks to higher rates and all that new debt. Third, depreciation costs are escalating. And finally, the excessively weak euro and higher oil costs will sap earnings. 3 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]
NOW (11/30/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO -------------- ------------ ---------- ----------- 10-year Treasury rate (1) 5.70 6.40 6.00 4.80 Prime rate (2) 9.50 9.25 8.50 8.00 Inflation rate (3)* 3.50 3.10 2.60 1.40 The U.S. dollar (4) 11.10 4.30 -0.70 1.20 Capital goods orders (5)* 7.00 17.10 12.30 -0.60 Industrial production (5)* 5.20 6.50 4.40 4.00 Employment growth (6)* 1.80 2.50 2.30 2.50
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL ASSETS. (2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS. (3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS, INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE LAST FEW YEARS HAS MEANT HIGH REAL RETURNS. (4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE VALUE OF U.S. FIRMS' FOREIGN PROFITS. (5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE. (6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES. *DATA AS OF 10/31/00. SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC. SAVING GRACES: FISCAL POLICY AND CONSUMER SPENDING While growth has peaked and is now slowing, we can be thankful that growth probably won't slow too much, thanks in part to a more stimulative fiscal policy and consumer spending. Fiscal policy is likely to be more stimulative. Of course, most economists agree that the last thing this pumped-up economy needs is another shot of stimulants -- too much stimulus, after all, is widely believed to cause inflation. But economists weren't running for office; politicians were. And inflation risk was about the last thing on the mind of either candidate in the heat of election campaigning. They wanted to win votes, and the time-tested way to do so was to make promises. Although we didn't have the name of the winner as of press time, neither candidate seems to be planning a lot of fiscal restraint -- but the good news is that neither candidate's plan is likely to be enacted until 2002 at the earliest. Second, consumers continue to spend, spend, spend. The personal savings rate keeps falling, from an already low 2.2 percent last year to a nearly invisible 0.1 percent this year. Critics of this admittedly squishy statistic claim it doesn't adequately capture households' growing wealth. As it turns out, however, the average American not only doesn't save much, but he's not getting wealthier in leaps and bounds, either. Net worth for the median family where the head of the household is over 45 (and where thoughts are presumably beginning to turn to retirement), rose less than $13,000 between 1995 and 1998. That's less than a 12 percent gain during the same three years the stock market nearly doubled and the market value of owner-occupied homes jumped 21 percent. Why didn't the average family get richer in that time? Because they were borrowing and spending like crazy. House values were up 21 percent -- but mortgage debt rose even faster, by 25 percent! Consumers' profligacy worries many financial professionals. Some people aren't saving enough for retirement because they have inflated expectations of future investment returns. Other people aren't saving enough for retirement because they don't realize just how much money they'll need. Either way, people aren't saving. Still, no one wants consumers to change their profligate ways too fast. After all, hearty consumer spending is a prime reason America's growth has stayed on a fast track so far. Most economists would like to see shoppers be a bit more moderate -- but only a bit. If Americans suddenly turned thrifty, the economy would lurch into reverse. 4 5 ECONOMIC OVERVIEW Luckily, there's little chance of that happening, unless lenders get cold feet. So far, they're hot to trot. In the past year, mortgage lending by banks rocketed nearly 17 percent while loans to consumers jumped 10 percent. Brokers are selling the loans banks don't want on their balance sheets to mortgage pools and the asset-backed securities market, where eager non-bank lenders are snapping them up. In the past year, these markets provided $625 billion of new credit, a leap of more than 12 percent. With so much money at their disposal, consumers didn't stay out of the shopping centers and restaurants for long. Consumer spending growth jumped up to 4.5 percent in the summer, and we expect it to stay well above 3 percent through 2001. OMINOUS SIGNS? Decelerations are always tricky, to be sure. But barring some unexpected shock, overall economic growth should to pop back into the 3.5 percent to 4 percent range in 2001. Why? Borrowing costs a little more than it did last year, but money is still freely available for good quality borrowers. Capital goods orders are strong, so there's a lot of life left in business spending. Shoppers are a little pickier, but they're still more interested in visiting the mall than in filling their piggy banks. And after the election, no matter who wins, fiscal policy is likely to be more stimulative than it has been for years. The price to pay will likely be a rise in core inflation (inflation excluding food and energy). We expect it to hit 3 percent next year, up from its recent rate of 2.5 percent. We believe we'll make it safely through 2001, but investors should keep their hands on the wheel and their eyes peeled. THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER INVESTMENTS, INC. AS OF DECEMBER 6, 2000, AND MAY NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION. TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048. THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. Sincerely, Scudder Kemper Investments, Economics Group 5 6 ECONOMIC OVERVIEW [THIS PAGE INTENTIONALLY LEFT BLANK] 6 7 PERFORMANCE UPDATE [CESSINE PHOTO] ROBERT CESSINE JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1993. HE IS A MANAGING DIRECTOR AND HAS SERVED AS LEAD PORTFOLIO MANAGER OF KEMPER INCOME AND CAPITAL PRESERVATION FUND SINCE 1994. HE IS A CHARTERED FINANCIAL ANALYST. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER CONDITIONS. SHORT-TERM INTEREST RATES ROSE SUBSTANTIALLY DURING THE PAST YEAR WHILE THE TREASURY'S BUYBACK PROGRAM HELPED SUPPORT LONG-TERM GOVERNMENT BOND PRICES. AT THE SAME TIME, THE DIFFERENCE IN INTEREST RATES BETWEEN INTERMEDIATE-TERM TREASURIES AND INVESTMENT-GRADE CORPORATE BONDS WIDENED TO ITS HIGHEST LEVEL IN SEVERAL YEARS. Q HOW DID THE U.S. BOND MARKET PERFORM DURING FISCAL YEAR 2000? A Preserving capital was challenging. Strong economic growth prompted the Federal Reserve to raise its short-term interest-rate target several times by a total of 125 basis points (1.25 percent) to 6.5 percent. However, between October 1999 and October 2000, long-term Treasury bond prices rose, inverting the yield curve for the first time since the mid-1990s. By October 31, 2000, six-month Treasury bills yielded 6.35 percent, some 59 basis points more than 10-year Treasury bonds. Mortgage interest rates for consumers reached their highest levels in five years, while housing and related consumer spending activity remained healthy. Oil prices soared past $35 a barrel. Overall consumer prices were relatively tame, but as the fiscal year drew to a close, many economists remained concerned about the inflationary impact of high oil prices and natural gas shortages. Q HOW DID KEMPER INCOME AND CAPITAL PRESERVATION FUND DO IN THIS ENVIRONMENT? A With dividends reinvested, Kemper Income And Capital Preservation Fund provided a competitive 5.31 percent total return (A shares at net asset value) for the 12 months ended October 31, 2000. This was slightly more than the 5.52 percent average return among mutual funds within the fund's Lipper peer group. For most of the fiscal year, we were underweight in long-term Treasuries and other government securities such as mortgages compared with our unmanaged benchmark, the Lehman Brothers Aggregate Bond index (which rose 7.30 percent for the period). Investment-grade corporate bonds made up the largest component of the fund's portfolio (about 43 percent of net assets), and the fund's return was higher than the return of the unmanaged Lehman Brothers Credit Bond index, which rose 5.49 percent for the 12 months ended October 31, 2000. U.S. TREASURY YIELDS YIELDS ON INTERMEDIATE TREASURIES INCREASED SUBSTANTIALLY BETWEEN OCTOBER 31, 1999 AND OCTOBER 31, 2000 [LINE GRAPH]
10/31/99 10/31/00 -------- -------- 3-month 5.08 6.38 6-month 5.27 6.35 1-year 5.41 6.16 2-year 5.78 5.91 5-year 5.94 5.81 10-year 6.02 5.76 30-year 6.16 5.79
SOURCE: BLOOMBERG BUSINESS NEWS 7 8 PERFORMANCE UPDATE Q WHY DID SHORT-TERM BOND YIELDS RISE WHILE LONG-TERM YIELDS FELL? A Since January, normal relationships between bonds of different maturities have been obscured. Usually, 30-year bonds provide more yield than securities maturing in 10 years or less. However, this past winter, 30-year bonds rallied after the Treasury began reducing auctions and buying back long-term bonds from investors. When investors realized that the government's reduction in auctions and buyback programs would reduce the supply of 30-year bonds, these securities suddenly became a scarce and more prized commodity. The Treasury Department has said it plans to buy back about $30 billion in 30-year Treasury bonds in calendar year 2000 and retire about $3 trillion in government debt by 2012. Q DID LONG-TERM INVESTMENT-GRADE CORPORATE DEBT RALLY, TOO? A High-quality, long-term corporate bond prices did not do well during the first half of fiscal year 2000. Prices began to recover in the summer and early autumn when it became clear that the Federal Reserve would not raise short-term interest rates beyond 6.50 percent. During the period, the difference in interest rates between high-quality, long-term corporate bonds and comparable-maturity Treasury bonds widened to more than 200 basis points (2.0 percent), the highest level since the Asian debt crisis in August 1998. Normally, high-quality, long-term corporate bonds yield 125 to 150 basis points more than comparable-maturity Treasuries. As spreads grew larger, we upgraded the average quality of the fund's corporate bond portfolio from A+ to AA and maintained a neutral duration position with respect to our benchmark and our peers. We were mindful of the fact that the Fed was on the move, and we sought to maximize the fund's flexibility to respond to dynamic market conditions without taking undue risk. Q DID SOME CORPORATE BONDS DO BETTER THAN OTHERS? A Among Kemper's many fixed-income funds, Kemper Income And Capital Preservation Fund had one of the highest exposures to energy bonds this past year, and these bonds provided strong returns. Our positioning helped the fund provide above-average results. As of October 31, 2000, about 4.9 percent of the fund's net assets were in corporate energy bonds. Holdings during the year included bonds issued by Conoco, Phillips Petroleum and Repsol, companies whose earnings and cash flows appear to be gaining strength as oil and gas prices have risen. Among the weakest areas for investment-grade corporate bonds during fiscal year 2000 were cyclical industries such as autos and chemicals and technology-oriented sectors such as telecommunications. Many bonds in these groups suffered from corporate earnings reports that did not meet analysts' expectations. Generally speaking, the higher the quality and the greater the perception that a company's earnings target would be met, the better the return on its bonds. Upgrading bond quality during the year helped us preserve principal. Q IS THERE ANY WAY TO ESTIMATE HOW MUCH A GIVEN CHANGE IN INTEREST RATES CAN AFFECT THE RETURN FROM INVESTMENT-GRADE BONDS? A A 100-basis-point increase in interest rates, a development that historically has taken at least several months to occur, generally results in a price decline of approximately 7 percent for a bond or fixed-income mutual fund that has an average maturity of 10 years. Bond prices and fixed-income mutual fund net asset values are also affected by market factors such as credit risk. For fiscal year 2000, the fund's results were fully in line with market conditions. 8 9 PERFORMANCE UPDATE Q DURING THE YEAR, YOU INCREASED THE FUND'S WEIGHTING IN MORTGAGES. WILL YOU EXPLAIN THE FUND'S POSITIONING IN THIS AREA? A Within the mortgage market, we attempted to avoid exposing the fund to adverse risks. Mortgage securities generally did well this past fiscal year because of their superior income characteristics and because relatively few home owners refinanced their properties. Overall, mortgage securities were attractive to risk-sensitive, income-oriented investors. Income potential rose to its highest level in five years, and volatility was less than that of Treasuries. To identify mortgage securities with the highest potential returns, we analyze prepayment expectations -- the rate at which home owners may pay off their mortgages early or refinance mortgages to take advantage of lower interest rates. We try to manage the fund's exposure to prepayment risk by analyzing refinancing possibilities. Q WHAT'S YOUR OUTLOOK FOR KEMPER INCOME AND CAPITAL PRESERVATION FUND FOR THE MONTHS AHEAD? A While it appears that the Federal Reserve has tamed inflation and that U.S. economic growth is slowing, a lot of variables remain that are unlikely to prompt a major drop in interest rates, particularly rising energy costs, potential gridlock in national fiscal policy and relatively high levels of consumer consumption. Higher oil prices usually translate into increased inflation risk, but this has been offset by other trends in the economy that have been supportive of low inflation, particularly high productivity levels and the government's record $237 billion budget surplus. Compared with a year ago, the fund's exposure to the corporate bond market is lower, while its positioning in high-quality mortgage securities is higher. As economic growth moderates, we believe this is a prudent positioning that can help allow the fund to meet its dual goals of providing attractive income and preserving principal. Mortgage securities have historically performed well in periods of relatively stable or modestly declining interest rates. We think that Kemper Income And Capital Preservation Fund's current portfolio mix helps puts it in a strong position to offer an attractive total return. FANNIE MAE MORTGAGE COMMITMENT RATES (60-DAY, 30-YEAR FIXED LOANS) OCTOBER 31, 1990, TO OCTOBER 31, 2000 [LINE GRAPH]
FNMA COMMITMENT 30 YR 60 DAY ---------------------------- 10/31/90 10.13 9.83 9.69 9.47 9.42 9.50 9.38 9.37 9.55 9.34 9.06 8.73 8.57 8.62 7.98 8.68 8.60 8.89 8.75 5/31/92 8.49 8.27 7.97 7.81 7.72 8.22 8.29 8.06 7.68 7.38 7.32 7.31 5/31/93 7.36 7.06 7.06 6.75 6.80 6.79 7.13 7.10 6.88 7.41 8.28 8.53 5/31/94 8.63 8.66 8.55 8.57 8.91 9.06 9.34 9.36 9.07 8.65 8.77 8.52 5/31/95 7.87 7.86 8.03 7.93 7.85 7.65 7.46 7.20 7.21 7.65 8.00 8.24 5/31/96 8.35 8.29 8.37 8.34 8.17 7.87 7.63 7.82 7.97 8.00 8.30 8.19 5/31/97 8.04 7.82 7.44 7.70 7.49 7.34 7.32 7.22 7.03 7.16 7.16 7.16 5/31/98 7.01 7.03 7.01 6.81 6.48 6.65 6.71 6.71 6.70 7.08 7.03 6.99 5/31/99 7.39 7.78 7.92 8.08 7.87 7.87 7.99 8.13 8.50 8.38 8.37 8.53 8.68 8.28 8.32 8.16 7.95 10/31/00 7.94
SOURCE: BLOOMBERG BUSINESS NEWS. THIS CHART SHOWS THE AVERAGE LOAN RATE A HOME BUYER COULD HAVE EXPECTED TO PAY FOR A 30-YEAR-TERM, FIXED-RATE LOAN FOR A HOME PURCHASE WITHIN 60 DAYS. 9 10 TERMS TO KNOW BASIS POINT The movement of interest rates or yields expressed in hundredths of a percent. For example, an increase in yield from 5 percent to 5.50 percent is 50 basis points. CREDIT SPREAD The difference in yields between higher-quality and lower-quality bonds, typically comparing the same types of bonds. For example, if AAA-rated corporate bonds yield 5 percent, and BBB-rated corporate bonds yield 6 percent, the credit spread is 1 percent. When the spread becomes less because the higher yield drops or the lower yield rises, the spread is said to narrow. When the opposite occurs, the spread is said to widen. DURATION The interest-rate sensitivity of a fixed-income investment or portfolio, measured in years. The longer the duration, the greater the portfolio's sensitivity to interest-rate fluctuations. FEDERAL FUNDS RATE The interest rate that banks charge each other on overnight loans. The Federal Reserve Board's Open Market Committee sets a target rate to either make credit more easily available or tighten monetary policy in an attempt to avoid economic imbalances such as high inflation. GROSS DOMESTIC PRODUCT (GDP) The market value of goods and services produced by a country during a specified period. It acts as a useful gauge when measuring the strength of an economy, especially when comparing different time periods. INVERTED YIELD CURVE A market phenomenon in which intermediate-term bonds (securities with one- to 10-year maturities) have higher income potential and current yields than long-term bonds (securities with 10- to 30-year maturities). Historically it has occurred during a period of rising short-term interest rates and been viewed as an indicator of a future economic slowdown. 10 11 PERFORMANCE UPDATE AVERAGE ANNUAL TOTAL RETURNS* FOR PERIODS ENDED OCTOBER 31, 2000 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS ---------------------------------------------------------------------------------------------------------- KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS A SHARES 0.57% 4.00% 7.30% 8.64% (since 4/15/74) .......................................................................................................... KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS B SHARES 1.62 3.91 n/a 5.51 (since 5/31/94) .......................................................................................................... KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS C SHARES 4.68 4.13 n/a 5.61 (since 5/31/94) ..........................................................................................................
KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS A GROWTH OF AN ASSUMED $10,000 INVESTMENT IN CLASS A SHARES FROM 04/15/74 TO 10/31/00 [LINE GRAPH]
KEMPER INCOME AND CAPITAL PRESERVATION FUND LEHMAN BROTHERS U.S. CONSUMER PRICE CLASS A1 AGGREGATE BOND INDEX+ INDEX++ ------------------------- --------------------- ------------------- 12/31/75 9548 10000 10000 10868 11560 10486 11323 11911 11189 11693 12077 12198 11952 12310 13820 11600 12643 15550 11953 13433 16937 12/31/82 15969 17815 17586 17790 19304 18252 19980 22228 18973 24346 27141 19694 27893 31285 19910 28757 32146 20793 31755 34681 21712 34472 39721 22721 12/31/90 36707 43279 24108 43281 50205 24847 46681 53921 25568 52147 59178 26270 50385 57452 26973 61144 68066 27658 62376 70537 28577 67756 77349 29063 73106 84065 29532 70973 83367 30324 10/31/00 74929 89889 31322
KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS B GROWTH OF AN ASSUMED $10,000 INVESTMENT IN CLASS B SHARES FROM 05/31/94 TO 10/31/00 [LINE GRAPH]
KEMPER INCOME AND CAPITAL PRESERVATION FUND LEHMAN BROTHERS U.S. CONSUMER PRICE CLASS B1 AGGREGATE BOND INDEX+ INDEX++ ------------------------- --------------------- ------------------- 5/31/94 10000 10000 10000 9968 9978 10034 10008 10077 10149 11200 11230 10339 12/31/95 12007 11938 10407 11572 11793 10624 12135 12372 10753 12422 12754 10868 13059 13566 10936 6/30/98 13482 14099 11051 13972 14744 11112 13473 14540 11268 13436 14622 11410 13692 15204 11688 10/31/00 14110 15766 11786
KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS C GROWTH OF AN ASSUMED $10,000 INVESTMENT IN CLASS C SHARES FROM 05/31/94 TO 10/31/00 [LINE GRAPH]
KEMPER INCOME AND CAPITAL PRESERVATION FUND LEHMAN BROTHERS U.S. CONSUMER PRICE CLASS C1 AGGREGATE BOND INDEX+ INDEX++ ------------------------- --------------------- ------------------- 5/31/94 10000 10000 10000 9981 9978 10034 10009 10077 10149 11204 11230 10339 12/31/95 12041 11938 10407 11609 11793 10624 12174 12372 10753 12464 12754 10868 13120 13566 10936 6/30/98 13529 14099 11051 14021 14744 11112 13523 14540 11268 13510 14622 11410 13773 15204 11688 10/31/00 14196 15766 11786
PERFORMANCE IS HISTORICAL AND INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH CHANGING MARKET CONDITIONS, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. *THE MAXIMUM SALES CHARGE FOR CLASS A SHARES IS 4.5%. FOR CLASS B SHARES, THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE IS 4%. CLASS C SHARES HAVE NO SALES CHARGE ADJUSTMENT, BUT REDEMPTIONS WITHIN ONE YEAR OF PURCHASE MAY BE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE OF 1%. SHARE CLASSES INVEST IN THE SAME UNDERLYING PORTFOLIO. DURING THE PERIODS NOTED, SECURITIES PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION, SEE THE PROSPECTUS, STATEMENT OF ADDITIONAL INFORMATION AND FINANCIAL HIGHLIGHTS AT THE END OF THIS REPORT. (1)PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE MAXIMUM SALES CHARGE FOR CLASS A SHARES AND THE CONTINGENT DEFERRED SALES CHARGE IN EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES. WHEN REVIEWING THE PERFORMANCE CHART, PLEASE NOTE THAT THE INCEPTION DATE FOR THE LEHMAN BROTHERS AGGREGATE BOND INDEX IS JANUARY 1, 1976. AS A RESULT, WE ARE UNABLE TO ILLUSTRATE THE LIFE-OF-CLASS PERFORMANCE FOR KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS A SHARES. IN COMPARING KEMPER INCOME AND CAPITAL PRESERVATION FUND CLASS A SHARES PERFORMANCE WITH THE LEHMAN BROTHERS AGGREGATE BOND INDEX AND THE U.S. CONSUMER PRICE INDEX, YOU SHOULD ALSO NOTE THAT THE FUND'S PERFORMANCE REFLECTS THE MAXIMUM SALES CHARGE, WHILE NO SUCH CHARGES ARE REFLECTED IN THE PERFORMANCE OF THE INDICES. +THE LEHMAN BROTHERS AGGREGATE BOND INDEX IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE OF INTERMEDIATE-TERM GOVERNMENT BONDS, INVESTMENT-GRADE CORPORATE DEBT SECURITIES AND MORTGAGE-BACKED SECURITIES. SOURCE: WIESENBERGER(R). ++THE U.S. CONSUMER PRICE INDEX IS A STATISTICAL MEASURE OF CHANGE, OVER TIME, IN THE PRICES OF GOODS AND SERVICES IN MAJOR EXPENDITURE GROUPS FOR ALL URBAN CONSUMERS. SOURCE: WIESENBERGER(R). 11 12 PORTFOLIO STATISTICS PORTFOLIO COMPOSITION*
ON 10/31/00 ON 10/31/99 CORPORATE BONDS 43% 60% ................................................................................ TREASURY BONDS AND NOTES 24 23 ................................................................................ MORTGAGES 23 14 ................................................................................ ASSET-BACKED SECURITIES 3 -- ................................................................................ FOREIGN BONDS 2 3 ................................................................................ CASH AND EQUIVALENTS 5 -- -------------------------------------------------------------------------------- 100% 100%
[PIE CHART] [PIE CHART] YEARS TO MATURITY
ON 10/31/00 ON 10/31/99 1-10 YEARS 89% 70% ................................................................................ 10-20 YEARS 2 12 ................................................................................ 20+ YEARS 9 18 -------------------------------------------------------------------------------- 100% 100%
[PIE CHART] [PIE CHART] AVERAGE MATURITY
ON 10/31/00 ON 10/31/99 AVERAGE MATURITY 8.1 years 8.7 years --------------------------------------------------------------------------------
*PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE. 12 13 PORTFOLIO OF INVESTMENTS KEMPER INCOME AND CAPITAL PRESERVATION FUND Portfolio of Investments at October 31, 2000
REPURCHASE AGREEMENTS--0.1% PRINCIPAL AMOUNT VALUE State Street Bank and Trust Company, 6.550%, to be repurchased at $475,086 on 11/01/2000* (Cost $475,000) $ 475,000 $ 475,000 --------------------------------------------------------------------------------- COMMERCIAL PAPER--4.5% American Telephone & Telegraph Corp., 6.560%, 11/07/2000 1,750,000 1,748,087 Daimler Chrysler, 6.440%, 11/02/2000 3,000,000 2,999,463 Ford Motor Credit Co., 6.500%, 11/06/2000 3,000,000 2,997,292 General Electric Capital Corp., 6.460%, 11/03/2000 3,200,000 3,198,852 General Motors Acceptance Corp., 6.420%, 11/01/2000 3,000,000 3,000,000 Sara Lee Corp., 6.520%, 11/08/2000 4,500,000 4,494,295 --------------------------------------------------------------------------------- TOTAL COMMERCIAL PAPER (Cost $18,437,989) 18,437,989 --------------------------------------------------------------------------------- U.S. GOVERNMENT & AGENCIES--46.5% Federal National Mortgage Association: 6.500%, 07/01/2030 23,854,939 22,938,015 7.000%, with various maturities to 09/01/2030 20,902,638 20,869,123 7.500% with various maturities to 09/01/2030 12,421,040 12,442,720 8.000% with various maturities to 08/01/2030 7,237,620 7,353,455 Government National Mortgage Association: 6.500%, with various maturities to 04/15/2029 6,534,148 6,308,504 7.000%, 12/15/2028 14,375,668 14,169,090 8.000% with various maturities to 08/15/2030 6,320,216 6,425,882 U.S. Treasury Bonds: 6.125%, 08/15/2029 27,755,000 28,743,633 6.250%, 05/15/2030 5,300,000 5,644,500 U.S. Treasury Notes: 5.750%, 08/15/2010 14,355,000 14,341,506 6.000%, 09/30/2002 16,300,000 16,310,106 6.750%, 05/15/2005 33,285,000 34,507,225 --------------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT & AGENCIES (Cost $187,309,246) 190,053,759 ---------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 13 14 PORTFOLIO OF INVESTMENTS
FOREIGN BONDS--U.S. $ DENOMINATED--2.1% PRINCIPAL AMOUNT VALUE Den Danske Bank, 6.375%, 06/15/2008 $ 4,125,000 $ 4,041,510 Province of Quebec, 8.625%, 01/19/2005 4,500,000 4,797,765 --------------------------------------------------------------------------------- TOTAL FOREIGN BONDS (Cost $9,042,521) 8,839,275 --------------------------------------------------------------------------------- ASSET BACKED--2.9% AUTOMOBILE RECEIVABLES--1.1% Daimler Chrysler Auto Trust Series 2000-D, 6.660%, 03/08/2006 2,000,000 1,999,928 Daimler Chrysler Auto Trust Series 2000-C, 6.820%, 09/06/2004 2,525,000 2,534,229 --------------------------------------------------------------------------------- 4,534,157 ------------------------------------------------------------------------------------------------------------------------ CREDIT CARD RECEIVABLES--1.8% Citibank Credit Card Issuance Trust Series 2000-A1, 6.900%, 10/17/2007 2,175,000 2,180,437 MBNA Master Credit Card Trust, 6.900%, 01/15/2008 5,200,000 5,232,500 --------------------------------------------------------------------------------- 7,412,937 --------------------------------------------------------------------------------- TOTAL ASSET BACKED (Cost $11,896,310) 11,947,094 --------------------------------------------------------------------------------- CORPORATE BONDS--43.9% CONSUMER DISCRETIONARY--0.9% Park Place Entertainment, Inc., 8.500%, 11/15/2006 1,200,000 1,193,292 Tricon Global Restaurants, 7.650%, 05/15/2008 2,900,000 2,688,967 --------------------------------------------------------------------------------- 3,882,259 ------------------------------------------------------------------------------------------------------------------------ CONSUMER STAPLES--1.4% Bass North America Inc., 6.625%, 03/01/2003 1,800,000 1,765,062 Unilever Capital Corp., 6.875%, 11/01/2005 3,825,000 3,797,498 --------------------------------------------------------------------------------- 5,562,560 ------------------------------------------------------------------------------------------------------------------------ COMMUNICATIONS--5.2% Deutsche Telekom International Finance, 7.750%, 06/15/2005 2,000,000 2,033,240 Nextel Communications, Inc., 9.375%, 11/15/2009 3,000,000 2,880,000 Qwest Communications International, 7.500%, 11/01/2008 4,100,000 4,055,146 Sprint Capital Corp., 6.125%, 11/15/2008 4,250,000 3,774,723 Teleglobe Inc., 7.200%, 07/20/2009 4,275,000 4,168,553 Vodafone Group PLC, 7.750%, 02/15/2010 4,100,000 4,162,689 --------------------------------------------------------------------------------- 21,074,351
14 The accompanying notes are an integral part of the financial statements. 15 PORTFOLIO OF INVESTMENTS
PRINCIPAL AMOUNT VALUE FINANCIAL--15.1% ABN AMRO, 8.250%, 08/01/2009 $ 7,000,000 $ 7,105,140 Bank of America Corp., 7.800%, 02/15/2010 4,275,000 4,341,519 Chase Manhattan Corp., 5.750%, 04/15/2004 4,100,000 3,935,836 Citigroup, Inc., 7.250%, 10/01/2010 4,150,000 4,123,565 Crestar Financial Corp., 8.750%, 11/15/2004 5,000,000 5,248,800 Firstar Bank, 7.125%, 12/01/2009 4,300,000 4,164,421 FleetBoston Financial Corp., 7.250%, 09/15/2005 3,675,000 3,694,367 General Electric Capital Corp., 7.000%, 02/03/2003 5,000,000 5,027,800 General Motors Acceptance Corp., 6.150%, 04/05/2007 4,100,000 3,799,798 Goldman Sachs Group, Inc., 7.800%, 01/28/2010 4,275,000 4,313,047 Merrill Lynch & Co., Inc., 6.000%, 02/17/2009 4,100,000 3,745,391 PNC Funding Corp.: 7.000%, 09/01/2004 2,900,000 2,875,060 7.500%, 11/01/2009 1,600,000 1,580,960 Verizon Bell Atlantic Financial Services, 7.600%, 03/15/2007 3,500,000 3,568,250 Wells Fargo Company, 7.250%, 08/24/2005 4,300,000 4,332,852 --------------------------------------------------------------------------------- 61,856,806 ------------------------------------------------------------------------------------------------------------------------ MEDIA--7.2% British Sky Broadcasting Group PLC, 6.875%, 02/23/2009 5,200,000 4,436,068 Charter Communications Holdings LLC, 8.250%, 04/01/2007 4,250,000 3,846,250 Clear Channel Communications, 8.000%, 11/01/2008 4,450,000 4,450,000 CSC Holdings Inc., 7.875%, 12/15/2007 8,000,000 7,740,000 News America Holdings, Inc., 9.250%, 02/01/2013 4,100,000 4,442,432 Time Warner, Inc., 9.125%, 01/15/2013 4,100,000 4,595,731 --------------------------------------------------------------------------------- 29,510,481 ------------------------------------------------------------------------------------------------------------------------ DURABLES--0.3% Daimler-Chrysler NA Holdings, 7.375%, 09/15/2006 1,025,000 1,024,918 --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------ MANUFACTURING--2.1% Dow Chemical, 7.000%, 08/15/2005 4,100,000 4,075,236 International Paper Co., 8.000%, 07/08/2003 4,325,000 4,380,965 --------------------------------------------------------------------------------- 8,456,201
The accompanying notes are an integral part of the financial statements. 15 16 PORTFOLIO OF INVESTMENTS
PRINCIPAL AMOUNT VALUE ENERGY--6.0% Conoco, Inc., 6.350%, 04/15/2009 $ 4,275,000 $ 4,065,568 Petroleum Geo-Services, 7.500%, 03/31/2007 4,100,000 4,026,159 Phillips Petroleum, 8.750%, 05/25/2010 4,275,000 4,662,486 Pioneer Natural Resources Co., 9.625%, 04/01/2010 4,650,000 4,905,750 Repsol International Finance, 7.450%, 07/15/2005 4,350,000 4,372,011 Williams Gas Pipeline Center, 7.375%, 11/15/2006 2,525,000 2,519,496 --------------------------------------------------------------------------------- 24,551,470 ------------------------------------------------------------------------------------------------------------------------ TRANSPORTATION--0.3% Delta Air Lines, 7.900%, 12/15/2009 1,350,000 1,251,139 --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------ UTILITIES--5.4% Alabama Power Co., 7.125%, 08/15/2004 3,500,000 3,503,150 Calpine Corp: 7.750%, 04/15/2009 2,415,000 2,270,849 8.625%, 08/15/2010 1,585,000 1,555,154 Cleveland Electric Illumination Co., 7.670%, 07/01/2004 5,900,000 5,954,870 Detroit Edison Co., 7.500%, 02/01/2005 4,300,000 4,329,885 Niagara Mohawk Power Corp., 6.625%, 07/01/2005 4,750,000 4,593,630 --------------------------------------------------------------------------------- 22,207,538 --------------------------------------------------------------------------------- TOTAL CORPORATE BONDS (Cost $179,394,421) 179,377,723 --------------------------------------------------------------------------------- TOTAL INVESTMENT PORTFOLIO--100.0% (Cost $406,555,487) (a) $409,130,840 ---------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS * Repurchase agreements are fully collateralized by U.S. Treasury or Government agency securities. (a) The cost for federal income tax purposes was $406,843,651. At October 31, 2000, net unrealized appreciation for all securities based on tax cost was $2,287,189. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over tax cost of $4,560,482 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over market value of $2,273,293. 16 The accompanying notes are an integral part of the financial statements. 17 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES October 31, 2000 ASSETS Investments, at value (cost $406,555,487) $409,130,840 ---------------------------------------------------------------------------- Cash 505 ---------------------------------------------------------------------------- Interest receivable 6,367,195 ---------------------------------------------------------------------------- Receivable for Fund shares sold 322,816 ---------------------------------------------------------------------------- Other assets 19,500 ---------------------------------------------------------------------------- TOTAL ASSETS 415,840,856 ---------------------------------------------------------------------------- LIABILITIES Payable for investments purchased 1,999,928 ---------------------------------------------------------------------------- Payable for Fund shares redeemed 1,021,894 ---------------------------------------------------------------------------- Accrued management fee 185,019 ---------------------------------------------------------------------------- Other accrued expenses 364,727 ---------------------------------------------------------------------------- Total liabilities 3,571,568 ---------------------------------------------------------------------------- NET ASSETS, AT VALUE $412,269,288 ---------------------------------------------------------------------------- NET ASSETS Net assets consist of: Undistributed net investment income $ 736,156 ---------------------------------------------------------------------------- Net unrealized appreciation (depreciation) on investment transactions 2,575,353 ---------------------------------------------------------------------------- Accumulated net realized gain (loss) (54,199,424) ---------------------------------------------------------------------------- Paid-in-capital 463,157,203 ---------------------------------------------------------------------------- NET ASSETS, AT VALUE $412,269,288 ---------------------------------------------------------------------------- NET ASSET VALUE AND OFFERING PRICE CLASS A SHARES Net asset value and redemption price per share ($309,039,722/38,679,435 shares outstanding of beneficial interest, $.01 par value, unlimited number of shares authorized) $7.99 ---------------------------------------------------------------------------- Maximum offering price per share (100/95.50 of $7.99) $8.37 ---------------------------------------------------------------------------- CLASS B SHARES Net asset value, offering and redemption price (subject to contingent deferred sales charge) per share ($77,880,387/9,784,594 shares outstanding of beneficial interest, $.01 par value, unlimited number of shares authorized) $7.96 ---------------------------------------------------------------------------- CLASS C SHARES Net asset value, offering and redemption price (subject to contingent deferred sales charge) per share ($19,186,137/2,402,405 shares outstanding of beneficial interest, $.01 par value, unlimited number of shares authorized) $7.99 ---------------------------------------------------------------------------- CLASS I SHARES Net asset value, offering and redemption price per share ($6,163,042/771,452 shares outstanding of beneficial interest, $.01 par value, unlimited number of shares authorized) $7.99 ----------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 17 18 FINANCIAL STATEMENTS STATEMENT OF OPERATIONS Year ended October 31, 2000 INVESTMENT INCOME Interest $ 32,391,997 ---------------------------------------------------------------------------- Total income 32,391,997 ---------------------------------------------------------------------------- Expenses: Management fee 2,353,939 ---------------------------------------------------------------------------- Services to shareholders 893,969 ---------------------------------------------------------------------------- Custodian fees 21,020 ---------------------------------------------------------------------------- Distribution services fees 795,494 ---------------------------------------------------------------------------- Administrative services fees 991,212 ---------------------------------------------------------------------------- Auditing 39,466 ---------------------------------------------------------------------------- Legal 7,993 ---------------------------------------------------------------------------- Trustees' fees and expenses 45,012 ---------------------------------------------------------------------------- Reports to shareholders 124,454 ---------------------------------------------------------------------------- Registration fees 54,568 ---------------------------------------------------------------------------- Other 16,046 ---------------------------------------------------------------------------- Total expenses, before expense reductions 5,343,173 ---------------------------------------------------------------------------- Expense reductions (34,540) ---------------------------------------------------------------------------- Total expenses, after expense reductions 5,308,633 ---------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 27,083,364 ---------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS Net realized gain (loss) from: Investments (35,159,669) ---------------------------------------------------------------------------- Futures 309,158 ---------------------------------------------------------------------------- (34,850,511) ---------------------------------------------------------------------------- Net unrealized appreciation (depreciation) during the period on: Investments 28,629,353 ---------------------------------------------------------------------------- Futures 8,000 ---------------------------------------------------------------------------- 28,637,353 ---------------------------------------------------------------------------- Net gain (loss) on investment transactions (6,213,158) ---------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 20,870,206 ----------------------------------------------------------------------------
18 The accompanying notes are an integral part of the financial statements. 19 FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31, -------------------------------------- 2000 1999 INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income (loss) $ 27,083,364 37,236,943 ------------------------------------------------------------------------------------------------------ Net realized gain (loss) on investment transactions (34,850,511) (11,349,608) ------------------------------------------------------------------------------------------------------ Net unrealized appreciation (depreciation) on investment transactions during the period 28,637,353 (39,633,000) ------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations 20,870,206 (13,745,665) ------------------------------------------------------------------------------------------------------ Distributions to shareholders: From net investment income: Class A (19,735,072) (29,322,003) ------------------------------------------------------------------------------------------------------ Class B (4,517,377) (5,576,571) ------------------------------------------------------------------------------------------------------ Class C (1,026,577) (976,857) ------------------------------------------------------------------------------------------------------ Class I (391,561) (461,927) ------------------------------------------------------------------------------------------------------ (25,670,587) (36,337,358) ------------------------------------------------------------------------------------------------------ Fund share transactions: Proceeds from shares sold 68,257,439 202,478,038 ------------------------------------------------------------------------------------------------------ Reinvestment of distributions 17,651,056 21,437,089 ------------------------------------------------------------------------------------------------------ Cost of shares redeemed (165,030,161) (371,697,769) ------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets from Fund share transactions (79,121,666) (147,782,642) ------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS (83,922,047) (197,865,665) ------------------------------------------------------------------------------------------------------ Net assets at beginning of period 496,191,335 694,057,000 ------------------------------------------------------------------------------------------------------ NET ASSETS AT END OF PERIOD (including undistributed net investment income of $736,156 and $655,943, respectively) $ 412,269,288 496,191,335 ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 19 20 FINANCIAL HIGHLIGHTS THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
CLASS A YEARS ENDED OCTOBER 31, ----------------------------------------------------------- 2000 1999 1998 1997 1996 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $8.06 8.67 8.54 8.46 8.62 -------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) .50(a) .51(a) .53 .57 .58 -------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investment transactions (.09) (.63) .14 .08 (.15) -------------------------------------------------------------------------------------------------------------------------- Total from investment operations .41 (.12) .67 .65 .43 -------------------------------------------------------------------------------------------------------------------------- Less distribution from net investment income (.48) (.49) (.54) (.57) (.59) -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of year $7.99 8.06 8.67 8.54 8.46 -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN % (B) 5.31 (1.45) 8.13 8.00 5.17 RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA Net assets, end of period ($ in thousands) 309,040 371,763 563,571 514,558 484,005 -------------------------------------------------------------------------------------------------------------------------- Ratio of expenses before expense reductions (%) 1.04 1.08 1.01 .97 .96 -------------------------------------------------------------------------------------------------------------------------- Ratio of expenses after expense reductions (%) 1.03 1.07 1.01 .97 .96 -------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) (%) 6.33 6.05 6.17 6.75 6.90 -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (%) 234 108 121 164 74 --------------------------------------------------------------------------------------------------------------------------
CLASS B YEARS ENDED OCTOBER 31, ----------------------------------------------------------- 2000 1999 1998 1997 1996 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $8.02 8.64 8.51 8.43 8.59 -------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) .44(a) .43(a) .46 .49 .50 -------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investment transactions (.08) (.63) .14 .08 (.15) -------------------------------------------------------------------------------------------------------------------------- Total from investment operations .36 (.20) .60 .57 .35 -------------------------------------------------------------------------------------------------------------------------- Less distribution from net investment income (.42) (.42) (.47) (.49) (.51) -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of year $7.96 8.02 8.64 8.51 8.43 -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN % (B) 4.60 (2.37) 7.20 6.99 4.20 RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA Net assets, end of period ($ in thousands) 77,880 97,975 106,171 83,295 76,437 -------------------------------------------------------------------------------------------------------------------------- Ratio of expenses before expense reductions (%) 1.81 1.93 1.88 1.90 1.93 -------------------------------------------------------------------------------------------------------------------------- Ratio of expenses after expense reductions (%) 1.80 1.92 1.88 1.90 1.93 -------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) (%) 5.56 5.20 5.30 5.82 5.93 -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (%) 234 108 121 164 74 --------------------------------------------------------------------------------------------------------------------------
20 21 FINANCIAL HIGHLIGHTS
CLASS C YEARS ENDED OCTOBER 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $8.05 8.66 8.53 8.45 8.61 ------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income (loss) .45(a) .44(a) .46 .49 .50 ------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investment transactions (.09) (.62) .14 .08 (.15) ------------------------------------------------------------------------------------------------------------------ Total from investment operations .36 (.18) .60 .57 .35 ------------------------------------------------------------------------------------------------------------------ Less distribution from net investment income (.42) (.43) (.47) (.49) (.51) ------------------------------------------------------------------------------------------------------------------ Net asset value, end of year $7.99 8.05 8.66 8.53 8.45 ------------------------------------------------------------------------------------------------------------------ TOTAL RETURN % (B) 4.68 (2.19) 7.20 7.03 4.23 RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA Net assets, end of period ($ in thousands) 19,186 19,875 16,759 9,083 5,611 ------------------------------------------------------------------------------------------------------------------ Ratio of expenses before expense reductions (%) 1.72 1.82 1.86 1.86 1.90 ------------------------------------------------------------------------------------------------------------------ Ratio of expenses after expense reductions (%) 1.71 1.82 1.86 1.86 1.90 ------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) (%) 5.63 5.30 5.32 5.86 5.96 ------------------------------------------------------------------------------------------------------------------ Portfolio turnover rate (%) 234 108 121 164 74 ------------------------------------------------------------------------------------------------------------------
CLASS I YEARS ENDED OCTOBER 31, ------------------------------------------------- 2000 1999 1998 1997 1996 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $8.05 8.67 8.53 8.45 8.61 --------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) .53(a) .53(a) .56 .59 .60 --------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investment transactions (.08) (.63) .15 .08 (.15) --------------------------------------------------------------------------------------------------------------- Total from investment operations .45 (.10) .71 .67 .45 --------------------------------------------------------------------------------------------------------------- Less distribution from net investment income (.51) (.52) (.57) (.59) (.61) --------------------------------------------------------------------------------------------------------------- Net asset value, end of year $7.99 8.05 8.67 8.53 8.45 --------------------------------------------------------------------------------------------------------------- TOTAL RETURN % (B) 5.81 (1.23) 8.62 8.26 5.45 RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA Net assets, end of period ($ in thousands) 6,163 6,578 7,556 6,534 6,945 --------------------------------------------------------------------------------------------------------------- Ratio of expenses before expense reductions (%) .66 .71 .66 .70 .72 --------------------------------------------------------------------------------------------------------------- Ratio of expenses after expense reductions (%) .66 .71 .66 .70 .72 --------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) (%) 6.69 6.41 6.52 7.02 7.14 --------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (%) 234 108 121 164 74 ---------------------------------------------------------------------------------------------------------------
(a) Based on monthly average shares outstanding during the period. (b) Total return does not reflect the effect of sales charge. 21 22 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1 SIGNIFICANT ACCOUNTING POLICIES Kemper Income and Capital Preservation Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end, diversified management investment company organized as a Massachusetts business trust. The Fund offers multiple classes of shares. Class A shares are offered to investors subject to an initial sales charge. Class B shares are offered without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions. Class B shares automatically convert to Class A shares six years after issuance. Class C shares are offered without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions within one year of purchase. Class C shares do not convert into another class. Class I shares are offered to a limited group of investors, are not subject to initial or contingent deferred sales charges and have lower ongoing expenses than other classes. Investment income, realized and unrealized gains and losses, and certain fund-level expenses and expense reductions, if any, are borne pro rata on the basis of relative net assets by the holders of all classes of shares except that each class bears certain expenses unique to that class such as distribution services, shareholder services, administrative services and certain other class specific expenses. Differences in class expenses may result in payment of different per share dividends by class. All shares of the Fund have equal rights with respect to voting subject to class specific arrangements. The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States which require the use of management estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements. SECURITY VALUATION. Investments are stated at value. Portfolio debt securities purchased with an original maturity greater than sixty days are valued by pricing agents approved by the officers of the Trust, whose quotations reflect broker/dealer-supplied valuations and electronic data processing techniques. If the pricing agents are unable to provide such quotations, the most recent bid quotation supplied by a bona fide market maker shall be used. Money market instruments purchased with an original maturity of sixty days or less are valued at amortized cost. All other securities are valued at their fair value as determined in good faith by the Valuation Committee of the Board of Trustees. FUTURES CONTRACTS. A futures contract is an agreement between a buyer or seller and an established futures exchange or its clearinghouse in which the buyer or seller agrees to take or make a delivery of a specific amount of a financial instrument at a specified price on a specific date (settlement date). During the period, the Fund purchased interest rate futures to manage the duration of the portfolio. In addition, the Fund also sold interest rate futures to hedge against declines in the value of portfolio securities. Upon entering into a futures contract, the Fund is required to deposit with a financial intermediary an amount ("initial margin") equal to a certain 22 23 NOTES TO FINANCIAL STATEMENTS percentage of the face value indicated in the futures contract. Subsequent payments ("variation margin") are made or received by the Fund dependent upon the daily fluctuations in the value of the underlying security and are recorded for financial reporting purposes as unrealized gains or losses by the Fund. When entering into a closing transaction, the Fund will realize a gain or loss equal to the difference between the value of the futures contract to sell and the futures contract to buy. Futures contracts are valued at the most recent settlement price. Certain risks may arise upon entering into futures contracts, including the risk that an illiquid secondary market will limit the Fund's ability to close out a futures contract prior to the settlement date and that a change in the value of a futures contract may not correlate exactly with the changes in the value of the securities or currencies hedged. When utilizing futures contracts to hedge, the Fund gives up the opportunity to profit from favorable price movements in the hedged positions during the term of the contract. REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund, through its custodian or sub-custodian bank, receives delivery of the underlying securities, the amount of which at the time of purchase and each subsequent business day is required to be maintained at such a level that the market value is equal to at least the principal amount of the repurchase price plus accrued interest. FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. Accordingly, the Fund paid no federal income taxes and no federal income tax provision was required. At October 31, 2000, the Fund had a net tax basis capital loss carryforward of approximately $53,911,000 which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until October 31, 2002 ($5,030,000), October 31, 2003 ($2,953,000), October 31, 2007 ($10,327,000) and October 31, 2008 ($35,601,000), the respective expiration dates, whichever occurs first. DISTRIBUTION OF INCOME AND GAINS. Distributions of net investment income, if any, are made monthly. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed, and, therefore, will be distributed to shareholders at least annually. The timing and characterization of certain income and capital gains distributions are determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Investment transactions are accounted for on the trade date. Interest income is recorded on the accrual basis. Realized gains and losses from investment transactions are recorded on an identified cost basis. All discounts are accreted for both tax and financial reporting purposes. 23 24 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 2 TRANSACTIONS WITH AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management agreement with Scudder Kemper Investments, Inc. (Scudder Kemper) and pays a monthly investment management fee of 1/12 of the annual rate of 0.55% of the first $250 million of average daily net assets declining to 0.40% of average daily net assets in excess of $12.5 billion. The Fund incurred a management fee of $2,353,939 for the year ended October 31, 2000, which was equivalent to an annualized effective rate of .53%. UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT. The Fund has an underwriting and distribution services agreement with Kemper Distributors, Inc. (KDI). Underwriting commissions retained by KDI in connection with the distribution of Class A shares for the year ended October 31, 2000 are $22,138. For services under the distribution services agreement, the Fund pays KDI a fee of 0.75% of average daily net assets of Class B and Class C shares pursuant to separate Rule 12b-1 plans for the Class B and Class C shares. Pursuant to the agreement, KDI enters into related selling group agreements with various firms at various rates for sales of Class B and Class C shares. In addition, KDI receives any contingent deferred sales charges (CDSC) from redemptions of Class B and Class C shares. Distribution fees and CDSC received by KDI for the year ended October 31, 2000 are $1,067,518, of which $61,416 is unpaid at October 31, 2000. ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an administrative services agreement with KDI. For providing information and administrative services to Class A, Class B and Class C shareholders, the Fund pays KDI a fee at an annual rate of up to 0.25% of average daily net assets of each class. KDI in turn has various agreements with financial services firms that provide these services and pays these firms based on assets of fund accounts the firms service. Administrative services fees paid by the Fund to KDI for the year ended October 31, 2000 are $991,212, of which $77,803 is unpaid at October 31, 2000. In addition $1,161 was paid to KDI affiliates. SHAREHOLDER SERVICES AGREEMENTS. Pursuant to a services agreement with the Fund's transfer agent, Kemper Service Company (KSvC) is the shareholder service agent of the Fund. Under the agreement, KSvC received shareholder services fees of $710,675 for the year ended October 31, 2000, of which $106,512 is unpaid at October 31, 2000. OFFICERS AND TRUSTEES. Certain officers or trustees of the Fund are also officers or directors of Scudder Kemper. For the year ended October 31, 2000, the Fund made no payments to its officers and incurred trustees' fees of $45,012 to independent trustees. -------------------------------------------------------------------------------- 3 INVESTMENT TRANSACTIONS For the year ended October 31, 2000, investment transactions (excluding short term instruments) are as follows: Purchases $927,210,483 Proceeds from sales 1,019,200,430 24 25 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 4 CAPITAL SHARE TRANSACTIONS The following table summarizes the activity in capital shares of the Fund:
YEAR ENDED OCTOBER 31, ------------------------------------------------------------ 2000 1999 ---------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT SHARES SOLD Class A 4,558,690 $ 36,324,891 14,580,650 $ 123,394,538 ------------------------------------------------------------------------------------- Class B 2,404,873 19,114,303 6,762,575 56,993,635 ------------------------------------------------------------------------------------- Class C 1,121,174 8,908,742 1,762,084 14,749,871 ------------------------------------------------------------------------------------- Class I 57,531 456,322 193,427 1,643,052 ------------------------------------------------------------------------------------- SHARES ISSUED IN REINVESTMENT OF DIVIDENDS Class A 1,671,003 13,242,065 1,938,830 16,192,394 ------------------------------------------------------------------------------------- Class B 414,586 3,272,542 501,483 4,172,048 ------------------------------------------------------------------------------------- Class C 94,071 744,889 73,482 610,689 ------------------------------------------------------------------------------------- Class I 49,449 391,560 55,338 461,958 ------------------------------------------------------------------------------------- SHARES REDEEMED Class A (14,127,686) (112,200,128) (36,036,959) (297,469,860) ------------------------------------------------------------------------------------- Class B (4,808,241) (37,995,379) (6,664,185) (55,199,247) ------------------------------------------------------------------------------------- Class C (1,282,272) (10,172,179) (1,300,801) (10,803,243) ------------------------------------------------------------------------------------- Class I (152,196) (1,209,294) (303,829) (2,528,477) ------------------------------------------------------------------------------------- CONVERSION OF SHARES Class A 434,613 $ 3,453,181 673,550 5,696,942 ------------------------------------------------------------------------------------- Class B (436,511) (3,453,181) (676,190) (5,696,942) ------------------------------------------------------------------------------------- NET INCREASE (DECREASE) FROM CAPITAL SHARE TRANSACTIONS $ (79,121,666) $(147,782,642) -------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 5 EXPENSE OFF-SET ARRANGEMENTS The Fund has entered into arrangements with its custodian and transfer agent whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the Fund's expenses. During the period, the Fund's custodian fees and transfer agent fees were reduced by $6,039 and $28,501, respectively, under these arrangements. -------------------------------------------------------------------------------- 6 LINE OF CREDIT The Fund and several Kemper funds (the "Participants") share in a $750 million revolving credit facility with Chase Manhattan Bank for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Participants are charged an annual commitment fee which is allocated, pro rata based upon net assets, among each of the Participants. Interest is calculated based on the market rates at the time of the borrowing. The Fund may borrow up to a maximum of 33 percent of its net assets under the agreement. 25 26 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 7 PLAN OF REORGANIZATION On November 29, 2000 the Trustees of the Fund approved an Agreement and Plan of Reorganization (the "Reorganization") between the Fund and the Scudder Income Fund, pursuant to which Scudder Income Fund would acquire all or substantially all of the assets and liabilities of the Fund in exchange for shares of the Scudder Income Fund. The proposed transaction is part of Scudder Kemper's initiative to restructure and streamline the management and operations of the funds it advises. The Reorganization can be consummated only if, among other things, it is approved by a majority vote of the shareholders of the Fund. A special meeting of the shareholders of the Fund to approve the Reorganization will be held on or about May 24, 2001. As a result of the Reorganization, each shareholder of the Kemper Income and Capital Preservation Fund will become a shareholder of the Scudder Income Fund and would hold, immediately after the closing of the Reorganization (the "Closing"), that number of full and fractional voting shares of the Scudder Income Fund having an aggregate net asset value equal to the aggregate net asset value of such shareholder's shares held in the Fund as of the close of business on the business day preceding the Closing. The Closing is expected to take place during the second quarter of 2001. In the event the shareholders of the Fund fail to approve the Reorganization, the Fund will continue to operate and the Fund's Trustees may resubmit the Plan for shareholder approval or consider other proposals. 26 27 REPORT OF INDEPENDENT AUDITORS THE BOARD OF TRUSTEES AND SHAREHOLDERS KEMPER INCOME AND CAPITAL PRESERVATION FUND We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Kemper Income And Capital Preservation Fund as of October 31, 2000, the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the fiscal periods since 1996. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of October 31, 2000, by correspondence with the custodian or other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Kemper Income And Capital Preservation Fund at October 31, 2000, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the fiscal periods since 1996, in conformity with accounting principles generally accepted in the United States. [/S/ ERNST & YOUNG] Chicago, Illinois December 15, 2000 27 28 TRUSTEES OFFICERS JOHN W. BALLANTINE MARK S. CASADY MAUREEN E. KANE Trustee President Assistant Secretary LEWIS A. BURNHAM PHILIP J. COLLORA CAROLINE PEARSON Trustee Vice President and Assistant Secretary Secretary DONALD L. DUNAWAY BRENDA LYONS Trustee JOHN R. HEBBLE Assistant Treasurer Trustee ROBERT B. HOFFMAN Trustee ROBERT C. CESSINE Vice President DONALD R. JONES Trustee KATHRYN L. QUIRK Vice President THOMAS W. LITTAUER Chairman, Trustee and WILLIAM F. TRUSCOTT Vice President Vice President SHIRLEY D. PETERSON LINDA J. WONDRACK Trustee Vice President WILLIAM T. SOMMERS Trustee
............................................................................................. LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ 222 North LaSalle Street Chicago, IL 60601 ............................................................................................. SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY P.O. Box 219557 Kansas City, MO 64121 ............................................................................................. CUSTODIAN AND STATE STREET BANK AND TRUST COMPANY TRANSFER AGENT 225 Franklin Street Boston, MA 02110 ............................................................................................. INDEPENDENT AUDITORS ERNST & YOUNG LLP 233 South Wacker Drive Chicago, IL 60606 ............................................................................................. PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC. 222 South Riverside Plaza Chicago, IL 60606-5808 www.kemper.com
TRUSTEES&OFFICERS [KEMPER FUNDS LOGO] Long-term investing in a short-term world(SM) Printed on recycled paper in the U.S.A. This report is not to be distributed unless preceded or accompanied by a Kemper Income Funds prospectus. KICPF - 2(12/22/00) 4928 LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)