<PAGE> 1
KEMPER TARGET EQUITY FUND
KEMPER RETIREMENT FUND
SERIES I, II, III, IV AND V
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED DECEMBER 31, 1996
Provides a guaranteed return of investment on the designated maturity date to
investors who reinvest all dividends and hold their shares to the maturity date,
and seeks to provide long-term growth of capital
" . . . This was a market that favored
large company stocks which was an obvious advantage
for the funds due to our equity focus on blue chip
companies."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
8
Largest Stock Holdings
10
Portfolios of Investments
18
Financial Statements
22
Notes to Financial Statements
25
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER RETIREMENT FUND SERIES I-V
TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1996
(UNADJUSTED FOR ANY SALES CHARGE)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SERIES I 8.52%
SERIES II 7.32%
SERIES III 8.26%
SERIES IV 8.05%
SERIES V 8.66%
- --------------------------------------------------------------------------------
</TABLE>
Returns are historical and do not represent 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.
* Total return measures net investment income and capital gain or loss from
portfolio investments, assuming reinvestment of all dividends. During the
period 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUES
- --------------------------------------------------------------------------------
AS OF AS OF
12/31/96 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
SERIES I $10.30 $11.46
- --------------------------------------------------------------------------------
SERIES II $11.86 $13.01
- --------------------------------------------------------------------------------
SERIES III $10.00 $10.95
- --------------------------------------------------------------------------------
SERIES IV $ 9.98 $10.70
- --------------------------------------------------------------------------------
SERIES V $ 9.48 $10.20
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
During the period ended December 31, 1996, the funds made the following
distributions per share:
<TABLE>
<CAPTION>
INCOME SHORT-TERM LONG-TERM
DIVIDEND CAPITAL GAIN CAPITAL GAIN
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SERIES I $0.44 $0.84 $0.84
- --------------------------------------------------------------------------------
SERIES II $0.59 $0.73 $0.77
- --------------------------------------------------------------------------------
SERIES III $0.43 $0.69 $0.72
- --------------------------------------------------------------------------------
SERIES IV $0.38 $0.52 $0.67
- --------------------------------------------------------------------------------
SERIES V $0.39 $0.65 $0.55
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
BETA A measure of a fund's sensitivity to market movements. A high beta (above
1.0) indicates moderate or high price volatility. A beta of 1.5 forecasts a 1.5
percent change in the return on an asset for every 1 percent change in the
return on the market.
CORRECTION A reverse movement, usually downward, in the price of a group of
stocks or the overall market. Corrections are to be expected over a long term.
PRICE/EARNINGS RATIO (P/E) The price of a stock divided by its earnings per
share. The P/E ratio, also known as the MULTIPLE, is a measure of how much an
investor is paying for a company's earning power.
SECTOR A specific industry group.
SEMICONDUCTOR A material that is neither a good conductor of electricity, nor a
good insulator, and whose conduction properties can therefore be manipulated
easily. Semiconductor devices are the essential parts that make it possible to
build small, inexpensive electronic machines.
VOLATILITY Characteristic of a security, commodity or market to rise or fall
sharply in price within a short period of time. A measure of the relative
volatility of a stock to the overall market is its beta.
ZERO-COUPON BOND A bond that makes no periodic interest payments but instead is
sold at a deep discount from its face value. The buyer of such a bond receives
the rate of return by the gradual appreciation of the security due to the
accrual of interest. The security is redeemed at face value at maturity.
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $79 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:
As we progress through the first quarter of 1997, the fundamentals of the
economy are remarkably similar to what they were one year ago. Long-term
interest rates are in the same 6.5% to 7% range they were in during the first
half of 1996. We believe the economy is growing at a rate of approximately 2.5%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and last year is that prices of
the stocks are on average up 20%. While price movements were more volatile in
1996 than in the past few years, the patient investor was amply rewarded. The
prime element sending the stock market higher was strong positive cash flows.
This liquidity in an environment of modestly increasing corporate profits and
relatively stable interest rates pushed stocks higher for most of the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in
recent years but positive nonetheless.
- INTEREST RATES. Rates should remain stable, and short-term interest rates
may even decline.
- LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, will continue to create strong demand
for securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The
10-year Treasury rate and the prime rate are prevailing interest rates.
The other data report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (1/31/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.58 6.64 5.81 7.47
PRIME RATE(2) 8.25 8.25 8.25 9.00
INFLATION RATE(3)* 3.24 2.95 2.72 2.87
THE U.S. DOLLAR(4) 4.59 4.26 0.82 (5.54)
CAPTIAL GOODS ORDERS(5)* 0.58 15.00 4.72 21.53
INDUSTRIAL PRODUCTION(5)* 4.32 3.38 0.39 5.60
EMPLOYMENT GROWTH(6) 2.50 2.17 1.78 3.49
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. 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 December 31, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
February 5, 1997
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
4
<PAGE> 5
PERFORMANCE UPDATE
[CHESTER PHOTO]
TRACY MCCORMICK CHESTER JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1994 AND
IS A SENIOR VICE PRESIDENT OF ZKI, VICE PRESIDENT OF KEMPER TARGET EQUITY FUND
AND PORTFOLIO MANAGER OF KEMPER RETIREMENT FUND SERIES I-V. MCCORMICK CHESTER
RECEIVED BOTH HER B.A. AND M.B.A. DEGREES FROM MICHIGAN STATE UNIVERSITY.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
KEMPER RETIREMENT FUND SERIES I-V HAVE A DISCIPLINED APPROACH TO BUYING STOCKS
THAT THE INVESTMENT MANAGER BELIEVES HAVE MORE THAN 20 PERCENT UPSIDE POTENTIAL
AND SELLING HOLDINGS AT OR NEAR EXPECTED VALUATIONS. THIS STRATEGY HELPED
PORTFOLIO MANAGER TRACY MCCORMICK CHESTER GUIDE THE FUNDS THROUGH A VOLATILE
MARKET IN THE SECOND HALF OF 1996.
Q RETURNS, UNADJUSTED FOR SALES CHARGE, FOR THE EQUITY-ONLY PORTION OF THE
PORTFOLIOS RANGED FROM 14.02 PERCENT (SERIES V) TO 14.25 PERCENT (SERIES III)
FOR THE SIX-MONTH PERIOD. WHAT DID YOU SEE HAPPENING IN THE MARKET DURING THE
SECOND HALF OF 1996 AND HOW DID YOU POSITION THE EQUITY HOLDINGS IN THE FUNDS TO
ACHIEVE SUCH STRONG RETURNS?
A The past six months required active management because there was a great
deal of rotation and increased volatility in the market. We saw significant
corrections within groups and within individual stocks at different points
during the second half of the year. Retail, a strong performer in the first half
of the year, seemed fully valued by midyear so we reduced our exposure to it.
Exposure to some of the big conglomerates was also reduced because they had
reached expected valuations. Conversely, we had been light in financial stocks
early in the year because we expected them to be hurt by economic concerns. As
we got to the end of the first quarter, financial stocks had indeed
underperformed. The market was reacting to concerns about inflation and the
possibility that the Federal Reserve Board (the Fed) would increase interest
rates. We didn't feel it was likely that the Fed would make such a move because
the economy seemed to be weakening after a growth period, so we added financial
holdings that we felt were fundamentally well positioned.
Throughout the second half of 1996, we were careful about the amount of
exposure we had to technology. Our weightings were somewhat light and focused
mainly on service companies and some with lower price/earnings ratios relative
to the market. As the period progressed, we started raising our exposure to more
aggressive technology names. We added such names as Analog Devices, National
Semiconductor and Texas Instruments, because the companies had gone through a
year-long inventory correction cycle and it seemed likely their performance
would improve. Aerospace was another sector that performed well for us. For
example, Boeing has consistently had solid returns. We also expanded our
exposure in this sector to include some supplier names such as United
Technologies and Sundstrand.
Q BEYOND THE SECTOR PERFORMANCE, WHAT WERE THE EXCEPTIONAL PERFORMERS?
A This was a market that favored large company stocks which was an obvious
advantage for the funds due to our equity focus on blue chip companies. Our
consumer staples, which included Clorox, Avon and Procter
5
<PAGE> 6
PERFORMANCE UPDATE
& Gamble, did well as the market became more defensive midyear. In the gaming
industry, we had a good run with Circus Circus Enterprises. Acting on news of
restructuring in the Hilton Hotels, we added exposure to this hotel chain and
enjoyed some nice gains there, too. Ryder System is a good example of a stock we
have included in the funds that is not getting a great deal of attention from
the market, but we believe it has a lot of upside potential. We started building
a position in Ryder over the summer because of positive restructuring involving
the sale of their consumer rental unit. Based on our research, we feel Ryder is
poised for growth if they succeed in becoming more of a pure logistics
management company.
Q WHEN EVALUATING THE EQUITY HOLDINGS IN KEMPER RETIREMENT FUND SERIES I-V,
WHAT DO YOU LOOK FOR WHEN MAKING BUYING AND SELLING DECISIONS?
A One of the elements we look for in our larger positions in the funds is a
consistent ability to outperform the funds' overall equity returns. We want to
make sure our larger positions are pulling their weight. If we don't see that
kind of performance, we reevaluate the positions and move out those holdings
that appear to be fully valued.
Q WERE THERE ANY OPPORTUNITIES YOU MISSED IN MANAGING THE FUNDS' EQUITY
COMPONENT DURING THE PERIOD?
A Well, I do wish we had been a little more aggressive in buying some of the
undervalued technology stocks in early fall when technology prices were way
down. I was somewhat restrained because I was reluctant to go out on a limb and
take on the risk. I am very conscious of managing the risk to the funds. A move
that hurt us slightly was a somewhat premature selling of our consumer staples.
They continued to keep climbing after we sold so we missed part of the run. We
did a good job of buying names like Avon and Clorox and made a fair amount of
money on them but we didn't hold them long enough. It was disappointing to miss
a portion of that move but if you are committed to stepping away from a stock
when it reaches the expected targets, you avoid holding it too long and ending
up with something that has already reached its peak. Being overly optimistic is
usually dangerous in the market.
Q ALTHOUGH THEY ARE AN UNMANAGED COMPONENT OF THE PORTFOLIOS, CAN YOU DISCUSS
THE PERFORMANCE OF THE ZERO-COUPON BONDS DURING THIS PERIOD AND HOW THEY
AFFECTED THE FUNDS' OVERALL RETURNS?
A Throughout the year there was a great deal of speculation about interest
rates. After easing rates early in the year, there was a feeling in the second
half that the Fed would tighten rates because the economy was, perhaps, too
healthy and rates had crept up again. Zero-coupon bonds are very sensitive to
movements in rates -- when rates go down, the value of the bonds increases.
However, through the third quarter of 1996, the opposite was happening which
hurt bond performance and slightly dragged on the performance of the funds. The
Fed did not move to adjust rates because of a slowdown in growth in the fourth
quarter. This sort of leveling off late in the year provided a slight boost to
bond performance.
Q WHAT IS YOUR MARKET OUTLOOK FOR THE COMING MONTHS AND WHAT ARE YOU DOING
WITH THE FUNDS TO POSITION THEM FOR THE NEW YEAR?
A I am raising my beta a little bit in technology. The sector went through a
pretty significant correction in 1996 and I think 1997 could be a better year --
particularly for semiconductors. Both National Semiconductor and Texas
Instruments are companies in the portfolio that could benefit. The market seems
to reflect a slowdown in the economy and a belief that interest rates are going
to stay at this level or lower. I am reexamining some of the consumer cyclicals,
like Federated Department Stores, that have experienced significant corrections.
I'm also focusing on stocks which have not received a great deal of attention
from Wall Street. This is where our research provides a lot of added value.
Examples include McKesson, a distributor which recently acquired the assets of
Foxmeyer, another distributor, out of bankruptcy. We believe this acquisition
could greatly increase sales and earnings for McKesson. Another example is
Jefferson-Pilot, an insurance company that we
6
<PAGE> 7
PERFORMANCE UPDATE
believe has significant earnings leverage as it redeploys excess capital.
The zero-coupon bond performance will depend on the course of interest
rates. There is the possibility that the Fed will tighten rates which would hurt
bond performance but we don't expect them to make any moves until they have
evaluated the economic data from the first quarter of 1997.
Q HOW DO YOU EXPECT THE FUNDS TO RESPOND IF THE MARKET SLIPS IN 1997?
A We believe that our disciplined valuation approach will help us in a down
market. When holdings reach expected targets, we eliminate or reduce our
position in spite of the temptation to raise targets because a stock has been a
good performer. We also try not to buy a stock unless we believe there is 20 to
25 percent upside potential. This has been a market where, at any point, one
sector can look good and then another can spring up with a strong outlook as
well, so we have been moving around. If this pattern continues, we will continue
shifting the portfolio to help take advantage of the greatest opportunities.
7
<PAGE> 8
LARGEST STOCK HOLDINGS
THE FUNDS' LARGEST STOCK HOLDINGS*
Percentages based on the funds' total common stock holdings on December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Holdings Series I Series II Series III Series IV Series V
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sundstrand Corp. 2.00% 2.17% 2.11% 2.10% 2.08%
Perkin-Elmer Corp. 1.98% 2.08% 1.98% 1.97% 1.99%
General Electric Co. 1.86% 1.72% 1.97% 1.96% 2.08%
Mobil Corp. 1.81% 1.89% 1.83% 1.91% 1.78%
Unilever N.V. 1.74% 2.10% 1.85% 1.84% 1.75%
Harris Corp. 1.74% 1.85% 1.84% 1.83% 1.74%
Consolidated Stores 1.60% 1.57% 1.62% 1.61% 1.54%
McKesson Corp. 1.59% 1.69% 1.50% 1.49% 1.60%
Cincinnati Bell 1.58% 1.44% 1.56% 1.55% 1.59%
Westinghouse Electric 1.58% 1.55% 1.45% 1.44% 1.59%
Crown Cork & Seal 1.57% 1.55% 1.56% 1.55% 1.58%
St. Jude Medical 1.53% 1.51% 1.62% 1.61% 1.54%
GM Hughes Electronics 1.53% 1.69% 1.62% 1.61% 1.53%
Texas Instruments 1.50% 1.43% 1.59% 1.58% 1.50%
Pitney Bowes 1.48% 1.63% 1.56% 1.56% 1.48%
</TABLE>
*The funds' holdings are subject to change.
8
<PAGE> 9
LARGEST STOCK HOLDINGS
DESCRIPTION OF YOUR FUND'S LARGEST HOLDINGS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Holdings
- --------------------------------------------------------------------------------------------
<S> <C>
Sundstrand Corp. Designs, manufactures and sells proprietary systems
and components for aerospace and industrial
applications.
Perkin-Elmer Corp. Develops, manufactures and sells analytical
instrumentation, and life science systems.
General Electric Co. Operates in major businesses including power
generators, appliances, lighting, plastics, medical
systems, aircraft engines, financial services and
broadcasting.
Mobil Corp. Produces, transports, refines and markets petroleum
and natural gas and related products.
Unilever N.V. Engaged in branded consumer goods, primarily foods,
drinks, detergents and personal products.
Harris Corp. Engaged in advanced research, development, design
and production of high-technology systems for
government and commercial organizations.
Consolidated Stores Engaged in the purchase and sale of close-out
merchandise and other retail and wholesale
operations.
McKesson Corp. Involved in three businesses including distribution
and marketing of pharmaceuticals; bottling and
distribution of drinking water; and, with a 55%
stake in Armor All, markets automotive appearance
products.
Cincinnati Bell Provides telecommunications services, information
systems and marketing services.
Westinghouse Electric Manufactures, sells and services electronic
equipment and components for the generation,
utilization and control of electricity.
Crown Cork & Seal Engaged in the manufacture and sale of metal,
plastics and composite containers, crowns, closures
and packaging machinery.
St. Jude Medical Designs, manufactures and markets medical devices
for cardiovascular and vascular applications.
GM Hughes Electronics Designs, manufactures and markets electronic
systems for automotive, telecommunications and
defense applications; a leading manufacturer and
private owner and operator of commercial
communications satellites.
Texas Instruments A high-technology company with product and services
that include semiconductors, defense electronic
systems, software productivity tools and peripheral
products.
Pitney Bowes A manufacturing and marketing company that provides
mailing, copying, dictating and facsimile systems;
item identification and tracking systems and
supplies; mailroom, reprographics and related
management services; and product financing.
</TABLE>
9
<PAGE> 10
PORTFOLIOS OF INVESTMENTS
KEMPER RETIREMENT FUND--
SERIES I THROUGH SERIES V
Portfolios of Investments at December 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION> ----------------------
SERIES I
----------------------
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT
OBLIGATIONS--43.4%,
58.0%, 53.9%,
58.9% AND 51.8%
U.S. Treasury, zero coupon, 1999 through 2004
(Cost: $44,074, $91,472, $61,575, $81,582 and
$61,860) $56,500 $47,677
-----------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NUMBER
COMMON STOCKS OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC INDUSTRIES--3.2%,
2.6%, 2.6%, 2.5%
AND 2.7%
Air Products & Chemicals 4,000 277
Betz Laboratories 9,400 550
Cementos Mexicanos, S.A. de C.V., "B," ADR 3,400 13
Crown Cork & Seal Co. 16,000 870
W.R. Grace & Co. 14,000 724
Pall Corp. 30,000 765
Randstad Holding N.V. 93 7
Rentokil Group PLC 1,900 14
Technip S.A. 116 11
Temple-Inland Inc. 6,000 325
Toray Industries 2,000 12
-----------------------------------------------------------------------------
3,568
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--5.7%, 4.5%,
5.1%, 4.5% AND 4.9%
Boeing Co. 6,000 638
Emerson Electric Co. 7,500 726
GM Hughes Electronics Corp. 15,000 844
General Electric Co. 10,400 1,028
B.F. Goodrich Co. 18,100 733
Honda Motor Co., Ltd. 500 14
Matsushita Electric Industrial Co., Ltd. 800 13
Mitsubishi Heavy Industries 1,500 12
Murata Manufacturing 400 13
Sundstrand Corp. 26,000 1,105
(a)Tubos de Acero de Mexico, S.A., ADR 800 13
(a)U.S. Filter Corp. 10,000 317
(a)USA Waste Services 8,000 255
United Technologies Corp. 8,000 528
-----------------------------------------------------------------------------
6,239
</TABLE>
10
<PAGE> 11
PORTFOLIOS OF INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------ ----------------------- ----------------------- -------------------------
SERIES II SERIES III SERIES IV SERIES V
- ------------------------ ----------------------- ----------------------- -------------------------
- --------------------------------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$121,500 $97,716 $89,900 $65,733 $117,600 $80,482 $112,300 $67,960
- --------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------
NUMBER NUMBER NUMBER NUMBER
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
5,100 353 3,400 235 4,000 277 4,000 277
10,500 614 8,500 497 8,900 521 9,400 550
4,000 16 3,400 13 3,400 13 3,400 13
19,000 1,033 15,000 816 15,000 816 16,000 870
18,000 931 13,000 673 13,000 673 14,000 724
37,000 943 27,000 688 27,000 688 29,000 740
108 8 93 7 93 7 93 7
2,200 17 1,900 14 1,900 14 1,900 14
136 13 116 11 116 11 116 11
8,000 433 5,000 271 5,000 271 6,000 325
2,000 12 2,000 12 2,000 12 2,000 12
- --------------------------------------------------------------------------------------------------------
4,373 3,237 3,303 3,543
- --------------------------------------------------------------------------------------------------------
7,200 766 6,300 670 6,000 638 6,000 638
8,800 851 7,300 706 7,300 706 7,700 745
20,000 1,125 15,000 844 15,000 844 15,000 844
11,600 1,147 10,400 1,028 10,400 1,028 11,600 1,147
22,700 919 18,100 733 18,100 733 18,100 733
500 14 500 14 500 14 500 14
900 15 800 13 800 13 800 13
2,000 16 1,500 12 1,500 12 1,500 12
500 17 400 13 400 13 400 13
34,000 1,445 26,000 1,105 26,000 1,105 27,000 1,147
800 13 800 13 800 13 800 13
12,000 381 10,000 317 10,000 317 10,000 317
9,000 287 7,000 223 7,000 223 8,000 255
10,000 660 8,000 528 8,000 528 8,000 528
- --------------------------------------------------------------------------------------------------------
7,656 6,219 6,187 6,419
</TABLE>
11
<PAGE> 12
PORTFOLIOS OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------
SERIES I
---------------------------
NUMBER
OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER CYCLICALS--6.2%,
4.8%, 5.2%, 4.6%
AND 5.1%
(a)AutoZone Inc. 15,000 $ 413
(a)CUC International 10,000 238
CVS Corporation 17,000 703
Circuit City Stores 24,000 723
(a)Consolidated Stores Corporation 27,500 887
Deluxe Corporation 9,200 301
(a)Federated Department Stores 20,000 683
Hilton Hotels 25,000 653
(a)ITT Corporation 8,000 347
(a)Liberty Media Group, "A" 15,000 428
Magna International Inc., "A" 10,000 557
Reed International PLC 778 15
Westinghouse Electric Corp. 44,000 874
-----------------------------------------------------------------------------
6,822
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER DURABLES--.9%,
.7%, .8%, .7%
AND .8%
Brunswick Corp. 27,000 648
Goodyear Tire & Rubber Company 7,000 360
-----------------------------------------------------------------------------
1,008
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--2.5%,
2.0%, 2.1%, 1.9%
AND 2.1%
Philip Morris Companies 7,300 822
Procter & Gamble 3,500 376
Seagram Company Ltd. 7,000 271
Tyson Foods 9,300 318
Unilever N.V., ADR 5,500 964
-----------------------------------------------------------------------------
2,751
- ----------------------------------------------------------------------------------------------------------------------
ENERGY--2.6%,
2.1%, 2.2%, 2.0%
AND 2.1%
AMOCO Corp. 8,000 644
Amerada Hess Corp. 14,000 810
British Petroleum 1,050 13
Enron Oil & Gas Co. 15,000 379
Mobil Corp. 8,200 1,002
-----------------------------------------------------------------------------
2,848
- ----------------------------------------------------------------------------------------------------------------------
FINANCE--4.0%,
3.1%, 3.5%, 3.1%
AND 3.3%
Allstate Corp. 7,000 405
American Express Company 12,000 678
Bank of Boston 7,000 450
Bank of Ireland 1,843 17
CITIC Pacific Ltd. 2,000 12
Cheung Kong Holdings Ltd. 1,000 9
Development Bank of Singapore 1,000 14
First Chicago NBD Corp. 7,000 376
ITT Hartford Group 9,000 607
Internationale Nederlanden Groep N.V. 487 18
Jefferson-Pilot Corp. 14,000 793
Mellon Bank Corp. 3,000 213
Charles Schwab Corporation 10,000 320
Signet Banking Corp. 14,000 430
-----------------------------------------------------------------------------
4,342
</TABLE>
12
<PAGE> 13
PORTFOLIOS OF INVESTMENTS
<TABLE>
<CAPTION>
- ----------------------- ------------------------- ------------------------- ----------------------------
SERIES II SERIES III SERIES IV SERIES V
- ----------------------- ------------------------- ------------------------- ----------------------------
- --------------------------------------------------------------------------------------------------------------
NUMBER NUMBER NUMBER NUMBER
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
18,000 $ 495 14,000 $ 385 14,000 $ 385 15,000 $ 413
12,000 285 8,000 190 8,000 190 10,000 238
21,000 869 16,000 662 16,000 662 17,000 703
31,000 934 22,000 663 22,000 663 22,000 663
32,500 1,048 26,250 846 26,250 846 26,250 846
11,500 377 8,200 268 8,200 268 9,200 301
20,000 683 19,000 648 19,000 648 20,000 683
30,000 784 24,000 627 24,000 627 25,000 653
9,000 390 7,000 304 7,000 304 7,000 304
18,000 514 14,000 400 14,000 400 15,000 428
12,000 669 10,000 557 10,000 557 10,000 557
907 17 778 15 778 15 778 15
52,000 1,033 38,000 755 38,000 755 44,000 874
- --------------------------------------------------------------------------------------------------------------
8,098 6,320 6,320 6,678
- --------------------------------------------------------------------------------------------------------------
32,000 768 30,000 720 27,000 648 27,000 648
9,000 462 6,000 308 6,000 308 7,000 360
- --------------------------------------------------------------------------------------------------------------
1,230 1,028 956 1,008
- --------------------------------------------------------------------------------------------------------------
7,500 845 6,400 721 7,200 811 7,200 811
4,000 430 2,500 269 2,500 269 3,500 376
8,000 310 6,000 233 6,000 233 7,000 271
11,200 384 9,300 318 9,300 318 9,300 318
8,000 1,402 5,500 964 5,500 964 5,500 964
- --------------------------------------------------------------------------------------------------------------
3,371 2,505 2,595 2,740
- --------------------------------------------------------------------------------------------------------------
10,000 805 8,000 644 8,000 644 8,000 644
17,000 984 12,000 695 12,000 695 14,000 810
1,237 15 1,050 13 1,050 13 1,050 13
18,900 477 15,000 379 15,000 379 15,000 379
10,300 1,259 7,800 956 8,200 1,002 8,000 980
- --------------------------------------------------------------------------------------------------------------
3,540 2,687 2,733 2,826
- --------------------------------------------------------------------------------------------------------------
8,000 463 7,000 405 7,000 405 7,000 405
16,000 904 12,000 678 12,000 678 12,000 678
6,500 418 7,000 450 7,000 450 7,000 450
2,151 19 1,843 17 1,843 17 1,843 17
3,000 17 2,000 12 2,000 12 2,000 12
1,000 9 1,000 9 1,000 9 1,000 9
1,000 14 1,000 14 1,000 14 1,000 14
8,000 430 6,000 322 6,000 322 7,000 376
12,000 810 9,000 607 9,000 607 9,000 607
565 20 487 18 487 18 487 18
17,000 963 14,000 793 14,000 793 14,000 793
3,000 213 3,000 213 3,000 213 3,000 213
12,000 384 8,000 256 8,000 256 10,000 320
16,000 492 14,000 430 14,000 430 14,000 430
- --------------------------------------------------------------------------------------------------------------
5,156 4,224 4,224 4,342
</TABLE>
13
<PAGE> 14
PORTFOLIOS OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------
SERIES I
---------------------
- ----------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE--9.3%,
7.2%, 7.8%, 7.0%
AND 7.8%
(a)ALZA Corp. 25,200 $ 652
Abbott Laboratories 6,000 304
(a)Amgen, Inc. 10,000 544
Beckman Instruments 17,000 652
(a)British Bio-Technology Group 3,000 11
(a)Fresenius Medical Care A.G. 166 13
(a)HealthCare COMPARE Corp. 10,000 424
Eli Lilly & Co. 7,000 511
McKesson Corp. 15,700 879
Merck & Co., Inc. 7,000 555
(a)Nellcor Puritan Bennett Incorporated 29,000 634
(a)Novartis, ADR 13,000 739
Omnicare Inc. 20,300 652
Perkin-Elmer Corp. 18,600 1,095
Pharmacia & Upjohn, Inc. 7,000 277
Rhone-Poulenc Rorer Inc. 7,000 547
Roche Holding A.G., with warrants expiring 1998 4 16
(a)STERIS Corp. 13,000 566
(a)St. Jude Medical 19,900 848
(a)U.S. Bioscience -- --
(a)Ventritex Inc. 11,800 291
----------------------------------------------------------------------------
10,210
- ---------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--11.4%,
9.2%, 9.7%, 8.8%
AND 9.5%
Adobe Systems 9,000 336
(a)Analog Devices 15,000 508
(a)Applied Materials Inc. 10,000 359
(a)Cabletron Systems 10,000 332
(a)Cadence Design Systems 16,700 664
(a)Ceridian Corp. 10,000 405
(a)Cisco Systems 5,000 318
(a)Electronic Arts 11,000 329
L.M. Ericsson Telephone Co., "B" 408 13
Harris Corp. 14,000 961
Hewlett-Packard Co. 7,000 352
Honeywell 6,000 395
(a)Informix Corp. 35,600 725
Linear Technology Corp. 7,000 307
(a)Microsoft Corp. 4,000 331
National Data Corp. 8,000 348
(a)National Semiconductor Corp. 30,000 731
Nokia Corporation, ADS 13,000 749
Pitney Bowes 15,000 817
Raytheon Co. 3,000 144
(a)Silicon Graphics Inc. 17,000 434
(a)Sterling Commerce 20,000 705
(a)Sun Microsystems 17,000 437
(a)Teradyne 12,400 302
Texas Instruments 13,000 829
(a)3Com Corporation 4,000 294
(a)Xilinx, Inc. 12,000 442
----------------------------------------------------------------------------
12,567
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
PORTFOLIOS OF INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------- ------------------------- ------------------------ ----------------------------
SERIES II SERIES III SERIES IV SERIES V
- ------------------------- ------------------------- ------------------------ ----------------------------
- ---------------------------------------------------------------------------------------------------------------
NUMBER NUMBER NUMBER NUMBER
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
29,200 $ 755 22,400 $ 580 22,400 $ 580 25,200 $ 652
7,000 355 6,000 304 6,000 304 6,000 304
12,000 652 8,000 435 8,000 435 10,000 544
20,000 767 15,000 576 16,000 614 17,000 652
4,000 14 3,000 11 3,000 11 3,000 11
192 15 166 13 166 13 166 13
12,000 509 9,000 381 9,000 381 10,000 424
8,000 584 6,500 474 6,500 474 7,000 511
20,100 1,126 14,000 784 14,000 784 15,700 879
8,000 634 7,000 555 7,000 555 7,000 555
35,000 766 28,000 613 29,000 634 29,000 634
14,000 796 13,000 739 13,000 739 13,000 739
24,800 797 19,200 617 19,200 617 20,200 649
23,600 1,389 17,600 1,036 17,600 1,036 18,600 1,095
8,000 317 6,000 238 6,000 238 7,000 277
8,000 625 6,000 469 6,000 469 7,000 547
4 16 4 16 4 16 4 16
14,000 609 12,000 522 12,000 522 13,000 566
23,700 1,010 19,900 848 19,900 848 19,900 848
1,417 10 -- -- -- -- -- --
14,000 345 11,800 291 11,800 291 11,800 291
- ---------------------------------------------------------------------------------------------------------------
12,091 9,502 9,561 10,207
- ---------------------------------------------------------------------------------------------------------------
13,000 486 9,000 336 9,000 336 9,000 336
19,000 644 15,000 508 15,000 508 15,000 508
12,000 431 10,000 359 10,000 359 10,000 359
10,000 332 10,000 332 10,000 332 10,000 332
20,800 827 15,500 616 15,500 616 16,700 664
13,000 526 10,000 405 10,000 405 10,000 405
6,000 382 5,000 318 5,000 318 5,000 318
13,000 389 10,000 299 10,000 299 11,000 329
476 15 408 13 408 13 408 13
18,000 1,235 14,000 961 14,000 961 14,000 961
9,000 452 7,000 352 7,000 352 7,000 352
7,000 460 5,000 329 5,000 329 6,000 395
43,500 886 24,600 501 24,600 501 35,600 725
9,000 395 7,000 307 7,000 307 6,000 263
4,000 331 3,000 248 4,000 331 4,000 331
9,000 392 7,000 305 7,000 305 8,000 348
37,000 902 27,000 658 27,000 658 30,000 731
16,500 951 12,000 692 12,000 692 12,000 692
20,000 1,090 15,000 817 15,000 817 15,000 817
4,000 193 3,000 144 3,000 144 3,000 144
21,000 536 16,000 408 16,000 408 17,000 434
22,000 775 20,000 705 20,000 705 20,000 705
23,200 596 16,000 411 16,000 411 17,000 437
15,000 366 11,400 278 11,400 278 12,400 302
15,000 956 13,000 829 13,000 829 13,000 829
5,000 367 4,000 294 4,000 294 4,000 294
14,000 515 12,000 442 12,000 442 12,000 442
- ---------------------------------------------------------------------------------------------------------------
15,430 11,867 11,950 12,466
</TABLE>
15
<PAGE> 16
PORTFOLIOS OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------
SERIES I
-----------------------
- ----------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TRANSPORTATION--2.4%,
2.0%, 2.1%, 1.9%
AND 2.1% Burlington Northern 9,000 $ 777
Canadian National Railway Company 13,709 521
Ryder System Inc. 30,300 852
Swire Pacific Limited, "A" 1,000 10
Union Pacific Corp. 8,500 511
-----------------------------------------------------------------------------
2,671
- ----------------------------------------------------------------------------------------------------------------------
UTILITIES--2.1%,
1.4%, 1.7%, 1.5%
AND 1.6% (a)AirTouch Communications 10,000 253
Cincinnati Bell 14,200 875
Iberdrola, S.A. 1,125 16
LCI International 15,000 323
SBC Communications Inc. 10,600 549
Telefonica del Peru, S.A., ADS 500 9
(a)WorldCom, Inc. 8,600 224
-----------------------------------------------------------------------------
2,249
-----------------------------------------------------------------------------
TOTAL COMMON STOCKS--50.3%, 39.6%, 42.8%,
38.5% AND 42.0%
(Cost: $48,836, $59,311, $46,157, $46,307 and $48,777) 55,275
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET
INSTRUMENTS--5.4%,
1.8%, 2.5%, 2.2%
AND 5.4% Yield--5.57% to 6.21%
Due--January 1997
ConAgra Inc. $2,000 1,993
ENSEARCH Corporation -- --
Other 4,000 3,989
----------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--5.4%,
1.8%, 2.5%, 2.2% AND 5.4%
(Cost: $5,983, $2,992, $2,993, $2,993 and $6,991) 5,982
----------------------------------------------------------------------------
TOTAL INVESTMENTS--99.1%, 99.4%, 99.2%, 99.6% AND 99.2%
(Cost: $98,893, $153,775, $110,725, $130,882 and $117,628) 108,934
----------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.9%,
.6%, .8%, .4% AND .8% 998
----------------------------------------------------------------------------
NET ASSETS--100% $109,932
----------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTES TO PORTFOLIOS OF INVESTMENTS
- -------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments for federal income tax purposes at December 31,
1996, the unrealized appreciation and depreciation on investments is as follows
(in thousands):
<TABLE>
<CAPTION>
SERIES I SERIES II SERIES III SERIES IV SERIES V
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cost of investments for federal income tax purposes $98,893 $153,775 $110,725 $130,882 $117,628
- ---------------------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation 10,575 14,347 10,747 6,737 12,965
- ---------------------------------------------------------------------------------------------------------------------------
Gross unrealized depreciation 534 679 500 1,614 548
- ---------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation 10,041 13,668 10,247 5,123 12,417
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE> 17
PORTFOLIOS OF INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------ --------------------- --------------------- -------------------------
SERIES II SERIES III SERIES IV SERIES V
- ------------------------ --------------------- --------------------- -------------------------
- -------------------------------------------------------------------------------------------------
NUMBER NUMBER NUMBER NUMBER
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12,000 $ 1,036 9,000 $ 777 9,000 $ 777 9,000 $ 777
16,827 639 13,709 521 13,709 521 13,709 521
36,500 1,027 26,900 757 27,900 785 31,300 880
1,000 10 1,000 10 1,000 10 1,000 10
10,000 601 8,500 511 8,500 511 8,500 511
- -------------------------------------------------------------------------------------------------
3,313 2,576 2,604 2,699
- -------------------------------------------------------------------------------------------------
11,000 278 8,000 202 8,000 202 8,000 202
15,600 961 13,200 813 13,200 813 14,200 875
1,315 19 1,125 16 1,125 16 1,125 16
16,000 344 13,000 280 13,000 280 15,000 323
12,000 621 10,400 538 10,700 554 10,000 517
500 9 500 9 500 9 500 9
9,400 245 8,600 224 8,600 224 8,600 224
- -------------------------------------------------------------------------------------------------
2,477 2,082 2,098 2,166
- -------------------------------------------------------------------------------------------------
66,735 52,247 52,531 55,094
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$1,000 997 $ -- -- $ -- -- $ -- --
-- -- 1,000 999 1,000 999 1,000 999
2,000 1,995 2,000 1,993 2,000 1,993 6,000 5,992
- -------------------------------------------------------------------------------------------------
2,992 2,992 2,992 6,991
- -------------------------------------------------------------------------------------------------
167,443 120,972 136,005 130,045
- -------------------------------------------------------------------------------------------------
1,043 1,031 515 1,073
- -------------------------------------------------------------------------------------------------
$168,486 $122,003 $136,520 $131,118
- -------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES
------------------------------------------------
I II III IV V
------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $98,893, $153,775, $110,725, $130,882 and
$117,628) $108,934 167,443 120,972 136,005 130,045
- -------------------------------------------------------------------------------------------------------------
Cash 839 -- 1,019 213 708
- -------------------------------------------------------------------------------------------------------------
Receivable for:
Investments sold 1,728 2,671 1,707 1,697 2,382
- -------------------------------------------------------------------------------------------------------------
Dividends and interest 55 69 51 52 53
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 111,556 170,183 123,749 137,967 133,188
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------------
Cash overdraft -- 891 -- -- --
- -------------------------------------------------------------------------------------------------------------
Payable for:
Investments purchased 1,495 635 1,403 1,267 1,495
- -------------------------------------------------------------------------------------------------------------
Fund shares redeemed 13 14 218 55 459
- -------------------------------------------------------------------------------------------------------------
Management fee 46 70 51 57 55
- -------------------------------------------------------------------------------------------------------------
Administrative services fee 24 35 26 29 28
- -------------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 21 26 24 18 20
- -------------------------------------------------------------------------------------------------------------
Trustees' fees and other 25 26 24 21 13
- -------------------------------------------------------------------------------------------------------------
Total liabilities 1,624 1,697 1,746 1,447 2,070
- -------------------------------------------------------------------------------------------------------------
NET ASSETS $109,932 168,486 122,003 136,520 131,118
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------
Paid-in capital $ 97,592 152,099 109,418 129,226 116,196
- -------------------------------------------------------------------------------------------------------------
Undistributed net realized gain on investments 2,202 2,672 2,322 2,127 2,352
- -------------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 10,041 13,668 10,247 5,123 12,417
- -------------------------------------------------------------------------------------------------------------
Undistributed net investment income 97 47 16 44 153
- -------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $109,932 168,486 122,003 136,520 131,118
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------------
Shares outstanding 10,668 14,200 12,203 13,674 13,837
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
(net assets / shares outstanding) $10.30 11.86 10.00 9.98 9.48
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
18
<PAGE> 19
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES
---------------------------------------------
I II III IV V
---------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Interest $2,079 3,773 2,385 2,593 2,634
- ------------------------------------------------------------------------------------------------------------
Dividends 382 452 371 375 382
- ------------------------------------------------------------------------------------------------------------
Total investment income 2,461 4,225 2,756 2,968 3,016
- ------------------------------------------------------------------------------------------------------------
Expenses:
Management fee 270 420 303 343 325
- ------------------------------------------------------------------------------------------------------------
Administrative services fee 113 207 151 172 163
- ------------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 72 98 86 95 94
- ------------------------------------------------------------------------------------------------------------
Professional fees 21 34 25 24 26
- ------------------------------------------------------------------------------------------------------------
Reports to shareholders 6 7 5 6 6
- ------------------------------------------------------------------------------------------------------------
Trustees' fees and other 13 15 15 15 14
- ------------------------------------------------------------------------------------------------------------
Total expenses 495 781 585 655 628
- ------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,966 3,444 2,171 2,313 2,388
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- ------------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments 6,721 8,056 6,751 6,293 6,912
- ------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 165 495 736 2,056 1,453
- ------------------------------------------------------------------------------------------------------------
Net gain on investments 6,886 8,551 7,487 8,349 8,365
- ------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $8,852 11,995 9,658 10,662 10,753
- ------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------- ----------------------------
SERIES I SERIES II
---------------------------- ----------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
1996 1996 1996 1996
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------------------------
Net investment income $ 1,966 3,965 3,444 7,175
- --------------------------------------------------------------------------------------------------------------
Net realized gain 6,721 15,205 8,056 18,830
- --------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 165 (5,077) 495 (8,163)
- --------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 8,852 14,093 11,995 17,842
- --------------------------------------------------------------------------------------------------------------
Distribution from net investment income (3,910) (3,962) (7,156) (7,198)
- --------------------------------------------------------------------------------------------------------------
Distribution from net realized gain (14,932) (6,844) (18,193) (8,965)
- --------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (18,842) (10,806) (25,349) (16,163)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital
share transactions 12,619 (2,466) 13,415 (6,591)
- --------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,629 821 61 (4,912)
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------------------------
Beginning of period 107,303 106,482 168,425 173,337
- --------------------------------------------------------------------------------------------------------------
END OF PERIOD $109,932 107,303 168,486 168,425
- --------------------------------------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME
AT END OF PERIOD $ 97 2,041 47 3,759
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
20
<PAGE> 21
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -------------------------- -------------------------- -------------------------
SERIES III SERIES IV SERIES V
- -------------------------- -------------------------- -------------------------
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
1996 1996 1996 1996 1996 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2,171 4,570 2,313 5,079 2,388 4,885
- -------------------------------------------------------------------------------------
6,751 14,496 6,293 13,801 6,912 13,996
- -------------------------------------------------------------------------------------
736 (5,249) 2,056 (4,109) 1,453 (4,790)
- -------------------------------------------------------------------------------------
9,658 13,817 10,662 14,771 10,753 14,091
- -------------------------------------------------------------------------------------
(4,443) (4,807) (4,508) (5,653) (4,663) (4,780)
- -------------------------------------------------------------------------------------
(14,626) (6,226) (14,118) -- (14,346) --
- -------------------------------------------------------------------------------------
(19,069) (11,033) (18,626) (5,653) (19,009) (4,780)
- -------------------------------------------------------------------------------------
9,926 (5,977) 5,626 (22,439) 9,627 (14,501)
- -------------------------------------------------------------------------------------
515 (3,193) (2,338) (13,321) 1,371 (5,190)
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
121,488 124,681 138,858 152,179 129,747 134,937
- -------------------------------------------------------------------------------------
122,003 121,488 136,520 138,858 131,118 129,747
- -------------------------------------------------------------------------------------
16 2,288 44 2,239 153 2,428
- -------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUNDS Kemper Retirement Fund Series I, II, III, IV and V
(the Funds) are series of Kemper Target Equity Fund
(the Trust), an open-end, management investment
company, organized as a business trust under the
laws of Massachusetts. The objectives of the Funds
are to provide a guaranteed return of investment on
the Maturity Date to investors who reinvest all
dividends and hold their shares to the Maturity
Date, and to provide long-term growth of capital.
The Maturity Date for each Fund is as follows:
<TABLE>
<CAPTION>
FUND MATURITY DATE
---- -------------
<S> <C>
Series I November 15, 1999
Series II August 15, 2000
Series III February 15, 2002
Series IV February 15, 2003
Series V November 15, 2004
</TABLE>
The assurance that investors who reinvest all
dividends and hold their shares until the Maturity
Date will receive at least their original
investment on the Maturity Date is provided by the
principal amount of the zero coupon U.S. Treasury
obligations in the Funds' portfolios, as well as by
a guarantee from Zurich Kemper Investments, Inc.
(ZKI), the Funds' investment manager.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Portfolio securities that are traded on a
domestic securities exchange or securities listed
on the NASDAQ National Market are valued at the
last sale price on the exchange or market where
primarily traded or listed 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 or listed are
valued at the last current bid quotation if market
quotations are available. 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. Options are valued at the last
sale price unless the bid price is higher or the
asked is lower, in which event such bid or asked
price is used. 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. Forward foreign
currency contracts are valued at the forward rates
prevailing on the day of valuation. 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). Dividend income is recorded on the
ex-dividend date, and interest income is recorded
on the accrual basis. Interest income includes
discount amortization on fixed income securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
EXPENSES. Expenses arising in connection with a
series of the Trust are allocated to that series.
Other Trust expenses are allocated among the series
in proportion to their relative net assets.
FUND SHARE VALUATION. Fund shares were sold during
limited offering periods which ended during the
years 1990 through 1995, and are redeemed on a
continuous basis. Fund shares were sold and are
redeemed at net asset value (plus a commission on
most sales). On each day the New York Stock
Exchange is open 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 by
dividing the total value of each Fund's investments
and other assets, less liabilities, by the
respective number of shares outstanding.
FEDERAL INCOME TAXES. Each Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies during the six
months ended December 31, 1996.
DIVIDENDS TO SHAREHOLDERS. The Trust declares and
pays dividends of net investment income and net
realized capital gains annually, which are recorded
on the ex-dividend date. Dividends are determined
in accordance with income tax principles which may
treat certain transactions differently from
generally accepted accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Trust has a management
agreement with ZKI and the Funds pay a management
fee at an annual rate of .50% of average daily net
assets. The Funds incurred a management fee of
$1,661,000 for the six months ended December 31,
1996. Zurich Investment Management Limited, an
affiliate of ZKI, serves as sub-adviser with
respect to foreign securities investments in the
Funds, and is paid by ZKI for its services.
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agreement with Kemper
Distributors, Inc. (KDI). For providing information
and administrative services to shareholders, the
Funds pay KDI a fee at an annual rate of up to .25%
of average daily net assets. KDI in turn has
various agreements with financial services firms
that provide these services and pays these firms
based on assets of Fund accounts the firms service.
Administrative services fees (ASF) paid are as
follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY ----------------------------
THE FUNDS TO KDI TO ALL FIRMS TO AFFILIATES
---------------- ------------ -------------
<S> <C> <C> <C>
Six months ended
December 31, 1996 $806,000 805,000 12,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Trusts' transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent for the Funds. Under the agreement,
KSvC received shareholder services fees of $243,000
for the six months ended December 31, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of ZKI.
During the six months ended December 31,
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
1996, the Trust made no payments to its officers
and the Funds incurred trustees' fees of $48,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended December 31, 1996,
investment transactions (excluding short-term
instruments) are as follows (in thousands):
<TABLE>
<CAPTION>
SERIES I SERIES II SERIES III SERIES IV SERIES V
-------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Purchases $51,568 64,011 48,120 48,327 51,815
Proceeds from sales 56,074 69,720 56,730 60,046 59,737
</TABLE>
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Funds (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 JUNE 30, 1996
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------
SERIES I
----------------------------------------------------------------------------------------
Shares issued in
reinvestment of dividends 1,819 $ 18,597 995 $ 10,634
----------------------------------------------------------------------------------------
Shares redeemed (511) (5,978) (1,153) (13,100)
----------------------------------------------------------------------------------------
Net increase (decrease)
from capital share
transactions 1,308 $ 12,619 (158) $ (2,466)
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
SERIES II
----------------------------------------------------------------------------------------
Shares issued in
reinvestment of dividends 2,125 $ 25,066 1,286 $ 15,951
----------------------------------------------------------------------------------------
Shares redeemed (873) (11,651) (1,732) (22,542)
----------------------------------------------------------------------------------------
Net increase (decrease)
from capital share
transactions 1,252 $ 13,415 (446) $ (6,591)
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
SERIES III
----------------------------------------------------------------------------------------
Shares issued in
reinvestment of dividends 1,932 $ 19,205 1,056 $ 11,016
----------------------------------------------------------------------------------------
Shares redeemed (827) (9,279) (1,557) (16,993)
----------------------------------------------------------------------------------------
Net increase (decrease)
from capital share
transactions 1,105 $ 9,926 (501) $ (5,977)
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
SERIES IV
----------------------------------------------------------------------------------------
Shares issued in
reinvestment of dividends 1,860 $ 18,446 559 $ 5,780
----------------------------------------------------------------------------------------
Shares redeemed (1,162) (12,820) (2,689) (28,219)
----------------------------------------------------------------------------------------
Net increase (decrease)
from capital share
transactions 698 $ 5,626 (2,130) $(22,439)
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
SERIES V
----------------------------------------------------------------------------------------
Shares issued in
reinvestment of dividends 1,999 $ 18,799 478 $ 4,701
----------------------------------------------------------------------------------------
Shares redeemed (881) (9,172) (1,922) (19,202)
----------------------------------------------------------------------------------------
Net increase (decrease)
from capital share
transactions 1,118 $ 9,627 (1,444) $(14,501)
----------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------------------
SERIES I
------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
1996 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 11.46 11.19 10.67 12.57 12.01
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .23 .44 .45 .42 .41
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .73 1.03 1.20 (.78) 1.59
- ----------------------------------------------------------------------------------------------------
Total from investment operations .96 1.47 1.65 (.36) 2.00
- ----------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .44 .44 .41 .40 .42
- ----------------------------------------------------------------------------------------------------
Distribution from net realized gain 1.68 .76 .72 1.14 1.02
- ----------------------------------------------------------------------------------------------------
Total dividends 2.12 1.20 1.13 1.54 1.44
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.30 11.46 11.19 10.67 12.57
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.52% 13.91 17.03 (3.76) 17.47
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses .91% .95 .97 .91 .92
- ----------------------------------------------------------------------------------------------------
Net investment income 3.64% 3.68 3.96 3.32 3.19
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------
Net assets at end of period (in
thousands) $109,932 107,303 106,482 103,764 122,340
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 94% 71 63 59 61
- ----------------------------------------------------------------------------------------------------
Average commission rate paid per share on stock transactions for the six months ended December 31,
1996 and the year ended June 30, 1996 was $.0586 for each period.
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
SERIES II
----------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
1996 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 13.01 12.94 12.30 13.95 12.40
- ----------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .30 .58 .60 .56 .53
- ----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .64 .77 1.25 (1.04) 1.67
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations .94 1.35 1.85 (.48) 2.20
- ----------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .59 .57 .57 .58 .49
- ----------------------------------------------------------------------------------------------------------------
Distribution from net realized gain 1.50 .71 .64 .59 .16
- ----------------------------------------------------------------------------------------------------------------
Total dividends 2.09 1.28 1.21 1.17 .65
- ----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.86 13.01 12.94 12.30 13.95
- ----------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.32% 10.92 16.52 (4.07) 18.18
- ----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------------
Expenses .93% .94 .96 .90 .95
- ----------------------------------------------------------------------------------------------------------------
Net investment income 4.10% 4.16 4.54 3.91 3.83
- ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $168,486 168,425 173,337 173,055 202,794
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 74% 54 47 44 51
- ----------------------------------------------------------------------------------------------------------------
Average commission rate paid per share on stock transactions for the six months ended December 31, 1996 and the
year ended June 30, 1996 was $.0585 for each period.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------------
SERIES III
-------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
1996 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 10.95 10.75 9.87 10.72 9.10
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .23 .43 .44 .40 .29
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .66 .78 1.24 (.88) 1.51
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations .89 1.21 1.68 (.48) 1.80
- --------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .43 .44 .43 .37 .18
- --------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain 1.41 .57 .37 -- --
- --------------------------------------------------------------------------------------------------------------------
Total dividends 1.84 1.01 .80 .37 .18
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.00 10.95 10.75 9.87 10.72
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.26% 11.72 18.37 (4.76) 19.96
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------
Expenses .96% .96 1.00 .95 .95
- --------------------------------------------------------------------------------------------------------------------
Net investment income 3.58% 3.67 4.14 3.59 3.46
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $122,003 121,488 124,681 123,132 143,632
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 75% 59 52 47 59
- --------------------------------------------------------------------------------------------------------------------
Average commission rates paid per share on stock transactions for the six months ended December 31, 1996 and the
year ended June 30, 1996 were $.0586 and $.0585, respectively.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
SERIES IV
-------------------------------------------------------------
SIX MONTHS ENDED JANUARY 15
DECEMBER 31, YEAR ENDED JUNE 30, TO JUNE 30,
1996 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 10.70 10.07 8.83 9.57 9.00
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .21 .40 .39 .26 .06
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .64 .64 1.22 (.85) .51
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations .85 1.04 1.61 (.59) .57
- --------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .38 .41 .37 .15 --
- --------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain 1.19 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Total dividends 1.57 .41 .37 .15 --
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.98 10.70 10.07 8.83 9.57
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.05% 10.47 18.95 (6.31) 6.33
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------
Expenses .95% .95 .97 .97 1.21
- --------------------------------------------------------------------------------------------------------------------
Net investment income 3.37% 3.46 4.01 3.43 2.87
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $136,520 138,858 152,179 146,655 61,882
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 73% 52 45 51 31
- --------------------------------------------------------------------------------------------------------------------
Average commission rates paid per share on stock transactions for the six months ended December 31, 1996 and the
year ended June 30, 1996 were $.0585 and $.0586, respectively.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------------
SERIES V
--------------------------------------------------
SIX MONTHS NOVEMBER 15,
ENDED 1993 TO
DECEMBER 31, YEAR ENDED JUNE 30, JUNE 30,
1996 1996 1995 1994
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 10.20 9.53 8.15 9.00
- --------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .21 .39 .28 .15
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .66 .64 1.31 (1.00)
- --------------------------------------------------------------------------------------------------------
Total from investment operations .87 1.03 1.59 (.85)
- --------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .39 .36 .21 --
- --------------------------------------------------------------------------------------------------------
Distribution from net realized gain 1.20 -- -- --
- --------------------------------------------------------------------------------------------------------
Total dividends 1.59 .36 .21 --
- --------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.48 10.20 9.53 8.15
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.66% 10.95 19.97 (9.44)
- --------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------
Expenses .96% .96 1.07 1.29
- --------------------------------------------------------------------------------------------------------
Net investment income 3.67% 3.64 4.01 3.13
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $131,118 129,747 134,937 64,275
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 78% 58 73 35
- --------------------------------------------------------------------------------------------------------
Average commission rates paid per share on stock transactions for the six months ended December 31, 1996
and the year ended June 30, 1996 were $.0586 and $.0587, respectively.
- --------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR ALL SERIES: Total return does not reflect the effect of any sales
charges.
27
<PAGE> 28
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS TRACY M. CHESTER
President and Trustee Vice President
JAMES E. AKINS CHARLES R. MANZONI, JR.
Trustee Vice President
ARTHUR R. GOTTSCHALK JOHN E. NEAL
Trustee Vice President
FREDERICK T. KELSEY STEVEN H. REYNOLDS
Trustee Vice President
DOMINIQUE P. MORAX PHILIP J. COLLORA
Trustee Vice President and
Secretary
FRED B. RENWICK
Trustee JEROME L. DUFFY
Treasurer
JOHN B. TINGLEFF
Trustee ELIZABETH C. WERTH
Assistant Secretary
JOHN G. WEITHERS
Trustee
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
KRF - 3 (2/97) 1028460
Printed in the U.S.A.
[KEMPER FUNDS LOGO]
<PAGE> 29
KEMPER TARGET EQUITY FUND
KEMPER RETIREMENT FUND SERIES VI
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED DECEMBER 31, 1996
Provides a guaranteed return of investment on the designated maturity date to
investors who reinvest all dividends and hold their shares to the maturity date,
and seeks to provide long-term growth of capital
" . . . This was a market that favored
large company stocks which was an obvious advantage
for the fund due to our equity focus on blue chip companies."
[KEMPER FUNDS LOGO]
<PAGE> 30
CONTENTS
3
Economic Overview
5
Performance Update
8
Largest Stock Holdings
9
Portfolio of Investments
12
Financial Statements
14
Notes to Financial Statements
17
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER RETIREMENT FUND SERIES VI
TOTAL RETURN*
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1996
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
SERIES VI 8.70%
- --------------------------------------------------------------------------------
</TABLE>
Returns are historical and do not represent 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.
*Total return measures net investment income and capital gain or loss from
portfolio investments, assuming reinvestment of all dividends. During the period
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
12/31/96 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
SERIES VI $10.12 $9.83
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE PERIOD ENDED DECEMBER 31, 1996, THE FUND MADE THE FOLLOWING
DISTRIBUTIONS PER SHARE:
<TABLE>
<CAPTION>
INCOME SHORT-TERM
DIVIDEND CAPITAL GAIN
- -----------------------------------------------------
<S> <C> <C>
SERIES VI $0.28 $0.28
- -----------------------------------------------------
</TABLE>
TERMS TO KNOW
BETA A measure of a fund's sensitivity to market movements. A high beta (above
1.0) indicates moderate or high price volatility. A beta of 1.5 forecasts a 1.5
percent change in the return on an asset for every 1 percent change in the
return on the market.
CORRECTION A reverse movement, usually downward, in the price of a group of
stocks or the overall market. Corrections are to be expected over a long term.
PRICE/EARNINGS RATIO (P/E) The price of a stock divided by its earnings per
share. The P/E ratio, also known as the MULTIPLE, is a measure of how much an
investor is paying for a company's earning power.
SECTOR A specific industry group.
SEMICONDUCTOR A material that is neither a good conductor of electricity, nor a
good insulator, and whose conduction properties can therefore be manipulated
easily. Semiconductor devices are the essential parts that make it possible to
build small, inexpensive electronic machines.
VOLATILITY Characteristic of a security, commodity or market to rise or fall
sharply in price within a short period of time. A measure of the relative
volatility of a stock to the overall market is its beta.
ZERO-COUPON BOND A bond that makes no periodic interest payments but instead is
sold at a deep discount from its face value. The buyer of such a bond receives
the rate of return by the gradual appreciation of the security due to the
accrual of interest. The security is redeemed at face value at maturity.
2
<PAGE> 31
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $79 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:
As we progress through the first quarter of 1997, the fundamentals of the
economy are remarkably similar to what they were one year ago. Long-term
interest rates are in the same 6.5% to 7% range they were in during the first
half of 1996. We believe the economy is growing at a rate of approximately 2.5%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and last year is that prices of
the stocks are on average up 20%. While price movements were more volatile in
1996 than in the past few years, the patient investor was amply rewarded. The
prime element sending the stock market higher was strong positive cash flows.
This liquidity in an environment of modestly increasing corporate profits and
relatively stable interest rates pushed stocks higher for most of the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in
recent years but positive nonetheless.
- INTEREST RATES. Rates should remain stable, and short-term interest rates
may even decline.
- LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, will continue to create strong demand
for securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
3
<PAGE> 32
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The
10-year Treasury rate and the prime rate are prevailing interest rates.
The other data report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (1/31/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.58 6.64 5.81 7.47
PRIME RATE(2) 8.25 8.25 8.25 9.00
INFLATION RATE(3)* 3.24 2.95 2.72 2.87
THE U.S. DOLLAR(4) 4.59 4.26 0.82 (5.54)
CAPTIAL GOODS ORDERS(5)* 0.58 15.00 4.72 21.53
INDUSTRIAL PRODUCTION(5)* 4.32 3.38 0.39 5.60
EMPLOYMENT GROWTH(6) 2.50 2.17 1.78 3.49
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. 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 December 31, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
February 5, 1997
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
4
<PAGE> 33
PERFORMANCE UPDATE
[MCCORMICK CHESTER PHOTO]
TRACY MCCORMICK CHESTER JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1994 AND
IS A SENIOR VICE PRESIDENT OF ZKI, VICE PRESIDENT OF KEMPER TARGET EQUITY FUND
AND PORTFOLIO MANAGER OF KEMPER RETIREMENT FUND SERIES VI. MCCORMICK CHESTER
RECEIVED BOTH HER B.A. AND M.B.A. DEGREES FROM MICHIGAN STATE UNIVERSITY.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
KEMPER RETIREMENT FUND SERIES VI HAS A DISCIPLINED APPROACH TO BUYING STOCKS
THAT THE INVESTMENT MANAGER BELIEVES HAVE MORE THAN 20 PERCENT UPSIDE POTENTIAL
AND SELLING HOLDINGS AT OR NEAR EXPECTED VALUATIONS. THIS STRATEGY HELPED
PORTFOLIO MANAGER TRACY MCCORMICK CHESTER GUIDE THE FUND THROUGH A VOLATILE
MARKET IN THE SECOND HALF OF 1996.
Q THE RETURN, UNADJUSTED FOR SALES CHARGE, FOR THE EQUITY-ONLY PORTION OF THE
PORTFOLIO WAS 13.72% FOR THE SIX-MONTH PERIOD. WHAT DID YOU SEE HAPPENING IN THE
MARKET DURING THE SECOND HALF OF 1996 AND HOW DID YOU POSITION THE EQUITY
HOLDINGS IN THE FUND TO ACHIEVE SUCH STRONG RETURNS?
A The past six months required active management because there was a great
deal of rotation and increased volatility in the market. We saw significant
corrections within groups and within individual stocks at different points
during the second half of the year. Retail, a strong performer in the first half
of the year, seemed fully valued by midyear so we reduced our exposure to it.
Exposure to some of the big conglomerates was also reduced because they had
reached expected valuations. Conversely, we had been light in financial stocks
early in the year because we expected them to be hurt by economic concerns. As
we got to the end of the first quarter, financial stocks had indeed
underperformed. The market was reacting to concerns about inflation and the
possibility that the Federal Reserve Board (the Fed) would increase interest
rates. We didn't feel it was likely that the Fed would make such a move because
the economy seemed to be weakening after a growth period, so we added financial
holdings that we felt were fundamentally well positioned.
Throughout the second half of 1996, we were careful about the amount of
exposure we had to technology. Our weightings were somewhat light and focused
mainly on service companies and some with lower price/earnings ratios relative
to the market. As the period progressed, we started raising our exposure to more
aggressive technology names. We added such names as Analog Devices, National
Semiconductor and Texas Instruments, because the companies had gone through a
year-long inventory correction cycle and it seemed likely their performance
would improve. Aerospace was another sector that performed well for us. For
example, Boeing has consistently had solid returns. We also expanded our
exposure in this sector to include some supplier names such as United
Technologies and Sundstrand.
Q BEYOND THE SECTOR PERFORMANCE, WHAT WERE THE EXCEPTIONAL PERFORMERS?
A This was a market that favored large company stocks which was an obvious
advantage for the fund due to our equity focus on blue chip companies. Our
consumer staples, which included Avon and Procter & Gamble, did well as the
market became more defensive midyear. In the gaming industry, we had a
5
<PAGE> 34
PERFORMANCE UPDATE
good run with Circus Circus Enterprises. Acting on news of restructuring in the
Hilton Hotels, we added exposure to this hotel chain and enjoyed some nice gains
there, too. Ryder System is a good example of a stock we have included in the
fund that is not getting a great deal of attention from the market, but has a
lot of upside potential. We started building a position in Ryder over the summer
because of positive restructuring involving the sale of their consumer rental
unit. Based on our research, we feel Ryder is poised for growth if they succeed
in becoming more of a pure logistics management company.
Q WHEN EVALUATING THE EQUITY HOLDINGS IN KEMPER RETIREMENT FUND SERIES VI,
WHAT DO YOU LOOK FOR WHEN MAKING BUYING AND SELLING DECISIONS?
A One of the elements we look for in our larger positions in the fund is a
consistent ability to outperform the fund's overall equity return. We want to
make sure our larger positions are pulling their weight. If we don't see that
kind of performance, we reevaluate the positions and move out those holdings
that appear to be fully valued.
Q WERE THERE ANY OPPORTUNITIES YOU MISSED IN MANAGING THE FUND'S EQUITY
COMPONENT DURING THE PERIOD?
A Well, I do wish we had been a little more aggressive in buying some of the
undervalued technology stocks in early fall when technology prices were way
down. I was somewhat restrained because I was reluctant to go out on a limb and
take on the risk. I am very conscious of managing the risk to the fund. A move
that hurt us slightly was a somewhat premature selling of our consumer staples.
They continued to keep climbing after we sold so we missed part of the run. We
did a good job of buying consumer staple names like Avon and made a fair amount
of money on them but just did not hold them long enough. It was disappointing to
miss a portion of that move but if you are committed to stepping away from a
stock when it reaches the expected targets, you avoid holding it too long and
ending up with something that has already reached its peak. Being overly
optimistic is usually dangerous in the market.
Q ALTHOUGH THEY ARE AN UNMANAGED COMPONENT OF THE PORTFOLIO, CAN YOU DISCUSS
THE PERFORMANCE OF THE ZERO-COUPON BONDS DURING THIS PERIOD AND HOW THEY
AFFECTED THE FUND'S OVERALL RETURN?
A Throughout the year there was a great deal of speculation about interest
rates. After easing rates early in the year, there was a feeling in the second
half that the Fed would tighten rates because the economy was, perhaps, too
healthy and rates had crept up again. Zero coupon bonds are very sensitive to
movements in rates -- when rates go down, the value of the bonds increases.
However, through the third quarter of 1996, the opposite was happening which
hurt bond performance and slightly dragged on the performance of the fund. The
Fed did not move to adjust rates because of a slowdown in growth in the fourth
quarter. This sort of leveling off late in the year provided a slight boost to
bond performance.
Q WHAT IS YOUR MARKET OUTLOOK FOR THE COMING MONTHS AND WHAT ARE YOU DOING
WITH THE FUND TO POSITION IT FOR THE NEW YEAR?
A I am raising my beta a little bit in technology. The sector went through a
pretty significant correction in 1996 and I think 1997 could be a better year --
particularly for semiconductors. Both National Semiconductor and Texas
Instruments are companies in the portfolio that could benefit. The market seems
to reflect a slowdown in the economy and a belief that interest rates are going
to stay at this level or lower. I am reexamining some of the consumer cyclicals,
like Federated Department Stores, that have experienced significant corrections.
I'm also focusing on stocks which have not received a great deal of attention
from Wall Street. This is where our research provides a lot of added value.
Examples include McKesson, a distributor which recently acquired the assets of
Foxmeyer, another distributor, out of bankruptcy. We believe this acquisition
could greatly increase sales and earnings for McKesson. Another example is
Jefferson-Pilot, an insurance company that we believe has significant earnings
leverage as it redeploys excess capital.
The zero-coupon bond performance will depend on the course of interest
rates. There is the possibility that the Fed will tighten rates which would
hurt bond performance but we don't expect them to make any moves until they
have evaluated the
6
<PAGE> 35
PERFORMANCE UPDATE
economic data from the first quarter of 1997.
Q HOW DO YOU EXPECT THE FUND TO RESPOND IF THE MARKET SLIPS IN 1997?
A We believe that our disciplined valuation approach will help us in a down
market. When holdings reach expected targets, we eliminate or reduce our
position in spite of the temptation to raise targets because a stock has been a
good performer. We also try not to buy a stock unless we believe there is 20 to
25 percent upside potential. This has been a market where, at any point, one
sector can look good and then another can spring up with a strong outlook as
well, so we have been moving around. If this pattern continues, we will continue
shifting the portfolio to take advantage of the greatest opportunities.
7
<PAGE> 36
LARGEST STOCK HOLDINGS
THE FUND'S 10 LARGEST STOCK HOLDINGS*
REPRESENTING 20% OF THE FUND'S TOTAL COMMON STOCKS ON DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
HOLDINGS PERCENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 PERKIN-ELMER Develops, manufactures and sells analytical 2.4%
CORP. instrumentation and life science systems.
- -------------------------------------------------------------------------------------------------------
2 GENERAL ELECTRIC CO. Operates in major businesses including power 2.3%
generators, appliances, lighting, plastics, medical
systems, aircraft engines, financial services and
broadcasting.
- -------------------------------------------------------------------------------------------------------
3 B.F. GOODRICH CO. Provides aircraft systems, components and services, 2.2%
and manufactures a wide range of specialty chemicals.
- -------------------------------------------------------------------------------------------------------
4 UNILEVER N.V. Engaged in branded consumer goods, primarily foods, 2.2%
drinks, detergents and personal products.
- -------------------------------------------------------------------------------------------------------
5 MOBIL CORP. Produces, transports, refines and markets petroleum 2.2%
and natural gas and related products.
- -------------------------------------------------------------------------------------------------------
6 HARRIS CORP. Engaged in advanced research, development, design and 1.9%
production of high-technology systems for government
and commercial organizations.
- -------------------------------------------------------------------------------------------------------
7 SUNDSTRAND CORP. Designs, manufactures and sells proprietary systems 1.7%
and components for aerospace and industrial
applications.
- -------------------------------------------------------------------------------------------------------
8 CINCINNATI BELL Provides telecommunications services, information 1.7%
systems and marketing services.
- -------------------------------------------------------------------------------------------------------
9 GM HUGHES ELECTRONICS CORP. Designs, manufactures and markets electronic systems 1.7%
for automotive, telecommunications and defense
applications; a leading manufacturer and private owner
and operator of commercial communications satellites.
- -------------------------------------------------------------------------------------------------------
10 MCKESSON CORP. Involved in three businesses including distribution 1.7%
and marketing of pharmaceuticals; bottling and
distribution of drinking water; and, with a 55% stake
in Armor All, markets automotive appearance products.
- -------------------------------------------------------------------------------------------------------
</TABLE>
*The fund's holdings are subject to change.
8
<PAGE> 37
PORTFOLIO OF INVESTMENTS
KEMPER RETIREMENT FUND--SERIES VI
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT U.S. Treasury, zero coupon, 2006
OBLIGATIONS--58.7% (Cost: $36,060) $65,400 $35,726
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF
COMMON STOCKS SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC INDUSTRIES--3.2% Air Products & Chemicals 2,500 173
Alco Standard Corporation 5,000 258
Betz Laboratories 6,000 351
Cementos Mexicanos, S.A. de C.V., "B," ADR 1,700 7
Crown Cork & Seal Co. 6,400 348
(a)FMC Corp. 3,250 228
W.R. Grace & Co. 6,000 310
Pall Corp. 10,000 255
Randstad Holding N.V. 47 3
Rentokil Group PLC 940 7
Technip S.A. 58 5
Toray Industries 1,000 6
-----------------------------------------------------------------------------
1,951
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--5.3% Boeing Co. 3,300 351
Emerson Electric Co. 4,000 387
GM Hughes Electronics Corp. 7,000 394
General Electric Co. 5,500 544
B.F. Goodrich Co. 13,000 526
Honda Motor Co., Ltd. 200 6
Matsushita Electric Industrial Co., Ltd. 400 7
Mitsubishi Heavy Industries 1,000 8
Murata Manufacturing 200 7
Sundstrand Corp. 9,600 408
(a)Tubos de Acero de Mexico, S.A., ADR 400 6
(a)U.S. Filter Corp. 6,500 206
(a)USA Waste Services 4,000 127
United Technologies Corp. 3,400 224
-----------------------------------------------------------------------------
3,201
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--3.9% CVS Corporation 7,000 290
Circuit City Stores 10,000 301
(a)Consolidated Stores Corporation 11,875 383
Deluxe Corporation 3,900 128
(a)Federated Department Stores 7,000 239
Hilton Hotels 11,000 287
(a)ITT Corporation 4,000 173
(a)Liberty Media Group, "A" 9,000 257
Reed International PLC 389 7
Westinghouse Electric Corp. 15,000 298
-----------------------------------------------------------------------------
2,363
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 38
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER DURABLES--.7% Brunswick Corp. 10,000 $ 240
Goodyear Tire & Rubber Company 3,000 154
-----------------------------------------------------------------------------
394
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--1.8% Philip Morris Companies 2,800 315
Seagram Company Ltd. 7,000 271
Unilever N.V., ADR 3,000 526
-----------------------------------------------------------------------------
1,112
- ----------------------------------------------------------------------------------------------------------------------
ENERGY--1.9% AMOCO Corp. 3,000 241
Amerada Hess Corp. 5,000 289
British Petroleum 300 4
Enron Oil & Gas Co. 3,800 96
Mobil Corp. 4,200 513
-----------------------------------------------------------------------------
1,143
- ----------------------------------------------------------------------------------------------------------------------
FINANCE--3.2% Allstate Corp. 3,500 203
American Express Company 5,500 311
Bank of Boston 3,000 193
Bank of Ireland 921 8
CITIC Pacific Ltd. 1,000 6
Cheung Kong Holdings Ltd. 1,000 9
Development Bank of Singapore 500 7
First Chicago NBD Corp. 3,000 161
ITT Hartford Group 3,500 236
Internationale Nederlanden Groep N.V. 240 9
Jefferson-Pilot Corp. 6,000 340
Mellon Bank Corp. 1,500 107
Charles Schwab Corporation 3,000 96
Signet Banking Corp. 9,000 277
-----------------------------------------------------------------------------
1,963
- ----------------------------------------------------------------------------------------------------------------------
HEALTH CARE--7.0% (a)ALZA Corp. 5,900 153
(a)Amgen, Inc. 2,500 136
Beckman Instruments 7,000 269
(a)British Bio-Technology Group 1,500 5
(a)Fresenius Medical Care A.G. 84 7
(a)HealthCare COMPARE Corp. 4,000 170
Eli Lilly & Co. 3,000 219
McKesson Corp. 7,000 392
Merck & Co., Inc. 3,000 238
(a)Nellcor Puritan Bennett Incorporated 11,000 241
(a)Novartis, ADR 6,000 341
Omnicare Inc. 9,000 289
Perkin-Elmer Corp. 9,500 559
Pharmacia & Upjohn, Inc. 3,000 119
Rhone-Poulenc Rorer Inc. 5,000 391
Roche Holding A.G., with warrants expiring 1998 2 8
(a)STERIS Corp. 6,000 261
(a)St. Jude Medical 8,600 367
(a)Ventritex Inc. 5,300 131
-----------------------------------------------------------------------------
4,296
- ----------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--8.6% Adobe Systems 4,500 168
(a)Analog Devices 5,000 169
(a)Applied Materials Inc. 4,000 144
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 39
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a)Cadence Design Systems 8,500 $ 338
(a)Ceridian Corp. 4,000 162
(a)Electronic Arts 10,000 299
L.M. Ericsson Telephone Co., "B" 204 6
Harris Corp. 6,500 446
Hewlett-Packard Co. 3,000 151
Honeywell 3,500 230
(a)Informix Corp. 8,000 163
Linear Technology Corp. 3,000 132
National Data Corp. 3,000 131
(a)National Semiconductor Corp. 12,000 292
Nokia Corporation, ADS 6,000 346
Pitney Bowes 7,000 381
(a)Silicon Graphics Inc. 8,000 204
(a)Sterling Commerce 10,000 352
(a)Sun Microsystems 8,000 205
(a)Teradyne 6,200 151
Texas Instruments 6,000 383
(a)3Com Corporation 2,200 161
(a)Xilinx, Inc. 6,000 221
-----------------------------------------------------------------------------
5,235
- ----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--2.0% Burlington Northern 4,000 346
Canadian National Railway Company 7,355 279
Ryder System Inc. 13,200 371
Swire Pacific Limited, "A" 500 5
Union Pacific Corp. 4,000 241
-----------------------------------------------------------------------------
1,242
- ----------------------------------------------------------------------------------------------------------------------
UTILITIES--1.1% Cincinnati Bell 6,500 401
Iberdrola, S.A. 563 8
SBC Communications Inc. 2,100 109
Telefonica del Peru, S.A., ADS 350 7
(a)WorldCom, Inc. 6,000 156
-----------------------------------------------------------------------------
681
-----------------------------------------------------------------------------
TOTAL COMMON STOCKS--38.7%
(Cost: $21,449) 23,581
-----------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET Yield--5.57%
INSTRUMENTS--1.7% Due--January 1997
(Cost: $1,016) $ 1,020 1,016
-----------------------------------------------------------------------------
TOTAL INVESTMENTS--99.1%
(Cost: $58,525) 60,323
-----------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES--.9% 542
-----------------------------------------------------------------------------
NET ASSETS--100% $60,865
-----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments of $58,525,000 for federal income tax purposes
at December 31, 1996, the gross unrealized appreciation was $2,316,000, the
gross unrealized depreciation was $518,000 and the net unrealized appreciation
on investments was $1,798,000.
See accompanying Notes to Financial Statements.
11
<PAGE> 40
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
Investments, at value
(Cost: $58,525) $60,323
- -----------------------------------------------------------------------
Receivable for:
Investments sold 2,366
- -----------------------------------------------------------------------
Fund shares sold 84
- -----------------------------------------------------------------------
Dividends and interest 29
- -----------------------------------------------------------------------
TOTAL ASSETS 62,802
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------
Cash overdraft 666
- -----------------------------------------------------------------------
Payable for:
Investments purchased 1,162
- -----------------------------------------------------------------------
Fund shares redeemed 5
- -----------------------------------------------------------------------
Management fee 21
- -----------------------------------------------------------------------
Administrative services fee 10
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 54
- -----------------------------------------------------------------------
Trustees' fees and other 19
- -----------------------------------------------------------------------
Total liabilities 1,937
- -----------------------------------------------------------------------
NET ASSETS $60,865
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------
Paid-in capital $58,156
- -----------------------------------------------------------------------
Undistributed net realized gain on investments 884
- -----------------------------------------------------------------------
Net unrealized appreciation on investments 1,798
- -----------------------------------------------------------------------
Undistributed net investment income 27
- -----------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $60,865
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($60,865,000 / 6,013,000 shares outstanding) $10.12
- -----------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE
(net asset value, plus 5.26% of
net asset value or 5.00% of offering price) $10.65
- -----------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 41
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------
Interest $1,050
- ----------------------------------------------------------------------
Dividends 164
- ----------------------------------------------------------------------
Total investment income 1,214
- ----------------------------------------------------------------------
Expenses:
Management fee 134
- ----------------------------------------------------------------------
Administrative services fee 64
- ----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 86
- ----------------------------------------------------------------------
Professional fees 4
- ----------------------------------------------------------------------
Reports to shareholders 2
- ----------------------------------------------------------------------
Trustees' fees and other 5
- ----------------------------------------------------------------------
Total expenses 295
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 919
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- ----------------------------------------------------------------------
Net realized gain on sales of investments 1,841
- ----------------------------------------------------------------------
Change in net unrealized appreciation on investments 1,915
- ----------------------------------------------------------------------
Net gain on investments 3,756
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,675
- ----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1996 1996
- --------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 919 1,051
- --------------------------------------------------------------------------------------------------
Net realized gain 1,841 978
- --------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 1,915 (160)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,675 1,869
- --------------------------------------------------------------------------------------------------
Distribution from net investment income (1,588) (382)
- --------------------------------------------------------------------------------------------------
Distribution from net realized gain (1,590) (324)
- --------------------------------------------------------------------------------------------------
Total dividends to shareholders (3,178) (706)
- --------------------------------------------------------------------------------------------------
Net increase from capital share transactions 9,679 41,337
- --------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 11,176 42,500
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------------
Beginning of period 49,689 7,189
- --------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment
income of $27,000 and $696,000, respectively) $60,865 49,689
- --------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUND Kemper Retirement Fund Series VI (the Fund) is a
series of Kemper Target Equity Fund (the Trust), an
open-end, management investment company, organized
as a business trust under the laws of
Massachusetts. The objectives of the Fund are to
provide a guaranteed return of investment on the
Maturity Date (May 15, 2006) to investors who
reinvest all dividends and hold their shares to the
Maturity Date, and to provide long-term growth of
capital. The assurance that investors who reinvest
all dividends and hold their shares until the
Maturity Date will receive at least their original
investment on the Maturity Date is provided by the
principal amount of the zero coupon U.S. Treasury
obligations in the Fund's portfolio, as well as by
a guarantee from Zurich Kemper Investments, Inc.
(ZKI), the Fund's investment manager.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Portfolio securities that are traded on a
domestic securities exchange or securities listed
on the NASDAQ National Market are valued at the
last sale price on the exchange or market where
primarily traded or listed 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 or listed are
valued at the last current bid quotation if market
quotations are available. 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. Options are valued at the last
sale price unless the bid price is higher or the
asked is lower, in which event such bid or asked
price is used. 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. Forward foreign
currency contracts are valued at the forward rates
prevailing on the day of valuation. 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). Dividend income is recorded on the
ex-dividend date, and interest income is recorded
on the accrual basis. Interest income includes
discount amortization on fixed income securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
EXPENSES. Expenses arising in connection with a
series of the Trust are allocated to that series.
Other Trust expenses are allocated among the series
in proportion to their relative net assets.
FUND SHARE VALUATION. Fund shares are sold to the
public during a limited offering period, which may
be extended or shortened at the option of the Fund.
Fund shares are redeemed on a continuous basis and
are sold and redeemed at net asset value (plus a
commission on most sales). On each
14
<PAGE> 43
NOTES TO FINANCIAL STATEMENTS
day the New York Stock Exchange is open 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 by dividing the
total value of the Fund's investments and other
assets, less liabilities, by the number of shares
outstanding.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies during the six
months ended December 31, 1996.
DIVIDENDS TO SHAREHOLDERS. The Trust declares and
pays dividends of net investment income and net
realized capital gains annually, which are recorded
on the ex-dividend date. Dividends are determined
in accordance with income tax principles which may
treat certain transactions differently from
generally accepted accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Trust has a management
agreement with ZKI and the Fund pays a management
fee at an annual rate of .50% of average daily net
assets. The Fund incurred a management fee of
$134,000 for the six months ended December 31,
1996. Zurich Investment Management Limited, an
affiliate of ZKI, serves as sub-adviser with
respect to foreign securities investments in the
Fund, and is paid by ZKI for its services.
UNDERWRITING AGREEMENT. The Trust has an
underwriting agreement with Kemper Distributors,
Inc. (KDI). Underwriting commissions paid in
connection with the distribution of the Fund's
shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS ----------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Six months ended
December 31, 1996 $51,000 416,000 1,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, the Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets. KDI in turn has various agreements with
financial services firms that provide these
services and pays these firms based on assets of
Fund accounts the firms service. Administrative
services fees (ASF) paid are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY ----------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Six months ended
December 31, 1996 $64,000 66,000 --
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Trust's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent for the Fund. Under the agreement,
KSvC received shareholder services fees of $35,000
for the six months ended December 31, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of ZKI.
During the six months ended December 31,
15
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS
1996, the Trust made no payments to its officers
and the Fund incurred trustees' fees of $3,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended December 31, 1996,
investment transactions (excluding short-term
instruments) are as follows (in thousands):
Purchases $29,257
Proceeds from sales 22,286
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1996 1996
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,040 $10,552 4,459 $43,103
----------------------------------------------------------------------------
Share issued in
reinvestment of
dividends 312 3,133 71 688
----------------------------------------------------------------------------
1,352 13,685 4,530 43,791
Shares redeemed (393) (4,006) (252) (2,454)
----------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE
TRANSACTIONS 959 $ 9,679 4,278 $41,337
----------------------------------------------------------------------------
</TABLE>
16
<PAGE> 45
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
DECEMBER 31, JUNE 30, MAY 1 TO
1996 1996 JUNE 30, 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.83 9.26 9.00
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .15 .24 .06
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain .70 .57 .20
- --------------------------------------------------------------------------------------------------
Total from investment operations .85 .81 .26
- --------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .28 .13 --
- --------------------------------------------------------------------------------------------------
Distribution from net realized gain .28 .11 --
- --------------------------------------------------------------------------------------------------
Total dividends .56 .24 --
- --------------------------------------------------------------------------------------------------
Net asset value, end of period $10.12 9.83 9.26
- --------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.70% 8.79 2.89
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------
Expenses 1.06% 1.27 1.09
- --------------------------------------------------------------------------------------------------
Net investment income 3.32% 3.47 3.91
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $60,865 49,689 7,189
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 74% 34 --
- --------------------------------------------------------------------------------------------------
</TABLE>
Average commission rates paid per share on stock transactions for the six
months ended December 31, 1996 and the year ended June 30, 1996 were $.0578
and $.0582, respectively.
NOTE: Total return does not reflect the effect of any sales charges.
17
<PAGE> 46
NOTES
18
<PAGE> 47
NOTES
19
<PAGE> 48
TRUSTEES&OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS TRACY M. CHESTER
President and Trustee Vice President
JAMES E. AKINS CHARLES R. MANZONI, JR.
Trustee Vice President
ARTHUR R. GOTTSCHALK JOHN E. NEAL
Trustee Vice President
FREDERICK T. KELSEY STEVEN H. REYNOLDS
Trustee Vice President
DOMINIQUE P. MORAX PHILIP J. COLLORA
Trustee Vice President and
Secretary
FRED B. RENWICK
Trustee JEROME L. DUFFY
Treasurer
JOHN B. TINGLEFF
Trustee ELIZABETH C. WERTH
Assistant Secretary
JOHN G. WEITHERS
Trustee
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Retirement Fund Series VI prospectus.
KRF6 - 3 (2/97) 1028470
Printed in the U.S.A. [KEMPER FUNDS LOGO]
<PAGE> 49
KEMPER TARGET EQUITY FUND
KEMPER WORLDWIDE 2004 FUND
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED DECEMBER 31, 1996
Provides a guaranteed return of investment on the designated maturity date to
investors who reinvest all dividends and hold their shares to the maturity date,
and seeks to provide a total return, a combination of capital growth and income
" . . . The markets overseas . . . have
benefited from declining interest rates, positively
sloped yield curves, and very
low levels of inflation."
[KEMPER FUNDS LOGO]
<PAGE> 50
CONTENTS
3
Economic Overview
5
Performance Update
8
Country Concentrations
8
Largest Holdings
9
Portfolio of Investments
14
Financial Statements
16
Notes to Financial Statements
19
Financial Highlights
AT A GLANCE
- ------------------------------------------------------------------------------
KEMPER WORLDWIDE 2004
FUND TOTAL RETURN*
- ------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1996
(UNADJUSTED FOR ANY SALES CHARGE)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------
KEMPER WORLDWIDE 2004 FUND 5.19%
- ------------------------------------------------------------------------------
</TABLE>
Returns are historical and do not represent 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.
* Total return measures net investment income and capital gain or loss from
portfolio investments, assuming reinvestment of all dividends. During the
period 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
12/31/96 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER WORLDWIDE 2004 FUND $10.54 $10.60
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE PERIOD ENDED DECEMBER 31, 1996, THE FUND MADE THE FOLLOWING
DISTRIBUTIONS PER SHARE:
<TABLE>
<CAPTION>
INCOME LONG-TERM
DIVIDEND CAPITAL GAIN
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER WORLDWIDE 2004 FUND $0.44 $0.16
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
CONGLOMERATE A corporation composed of companies in a variety of businesses.
EMERGING MARKETS A developing or emerging country in the initial stages of its
industrial cycle. Developing or emerging markets involve exposure to economic
structures and political systems that are generally less diverse, mature and
stable than in the United States.
INDEX An unmanaged group of securities that is considered representative of the
stock or bond markets. An index does not take into account any fees or expenses
related to the individual securities that it tracks. However, for performance
comparisons, the index is adjusted to reflect reinvestment of the securities'
dividends.
MARKET CAPITALIZATION (CAP) A measure of the size of a publicly traded company,
as determined by multiplying the current price per share by the number of shares
outstanding. The market capitalization of a company has bearing on its perceived
earnings potential and risk. Small cap companies (less than $1 billion) may
present the potential for greater growth than larger, more established
companies. On the other hand, the stock of small cap companies may be expected
to be more volatile and, therefore, a greater risk to capital.
YIELD CURVE A graph showing the term structure of interest rates by plotting the
yields of all bonds of the same quality with maturities ranging from shortest to
longest available. The resulting curve shows if short-term interest rates are
higher or lower than long-term rates.
ZERO-COUPON BOND A bond that makes no periodic interest payments but instead is
sold at a deep discount from its face value. The buyer of such a bond receives
the rate of return by the gradual appreciation of the security due to the
accrual of interest. The security is redeemed at face value at maturity.
2
<PAGE> 51
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $79 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:
As we progress through the first quarter of 1997, the fundamentals of the
economy are remarkably similar to what they were one year ago. Long-term
interest rates are in the same 6.5% to 7% range they were in during the first
half of 1996. We believe the economy is growing at a rate of approximately 2.5%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and last year is that prices of
the stocks are on average up 20%. While price movements were more volatile in
1996 than in the past few years, the patient investor was amply rewarded. The
prime element sending the stock market higher was strong positive cash flows.
This liquidity in an environment of modestly increasing corporate profits and
relatively stable interest rates pushed stocks higher for most of the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in
recent years but positive nonetheless.
- INTEREST RATES. Rates should remain stable, and short-term interest rates
may even decline.
- LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, will continue to create strong demand
for securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
3
<PAGE> 52
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The
10-year Treasury rate and the prime rate are prevailing interest rates.
The other data report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (1/31/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.58 6.64 5.81 7.47
PRIME RATE(2) 8.25 8.25 8.25 9.00
INFLATION RATE(3)* 3.24 2.95 2.72 2.87
THE U.S. DOLLAR(4) 4.59 4.26 0.82 (5.54)
CAPTIAL GOODS ORDERS(5)* 0.58 15.00 4.72 21.53
INDUSTRIAL PRODUCTION(5)* 4.32 3.38 0.39 5.60
EMPLOYMENT GROWTH(6) 2.50 2.17 1.78 3.49
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. 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 December 31, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
February 5, 1997
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
4
<PAGE> 53
PERFORMANCE UPDATE
[FERRO PHOTO]
DENNIS FERRO JOINED ZURICH INVESTMENT MANAGEMENT LIMITED (ZIML), A LONDON-BASED
AFFILIATE OF ZURICH KEMPER INVESTMENTS, INC., IN 1994 AND IS A MANAGING DIRECTOR
OF ZIML AND PORTFOLIO MANAGER OF KEMPER WORLDWIDE 2004 FUND. FERRO HOLDS AN
M.B.A. IN FINANCE FROM ST. JOHN'S UNIVERSITY IN NEW YORK AND A BACHELOR'S DEGREE
FROM VILLANOVA UNIVERSITY IN PENNSYLVANIA. 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.
OPTIMUM WEIGHTINGS IN THE TOP-PERFORMING INTERNATIONAL MARKETS HELPED KEMPER
WORLDWIDE 2004 FUND OUTPERFORM A PURE EQUITY BENCHMARK DESPITE THE DECLINE IN
ZERO-COUPON BOND VALUES.
Q FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, THE MORGAN STANLEY
CAPITAL INTERNATIONAL EUROPE AUSTRALASIA, FAR EAST INDEX (EAFE)* RETURNED 1.62%,
WHILE ON AN EQUITY-ONLY BASIS, KEMPER WORLDWIDE 2004 FUND HAD A 6.18% RETURN,
UNADJUSTED FOR SALES CHARGE (TOTAL RETURN FOR THE FUND, UNADJUSTED FOR SALES
CHARGE, WAS 5.19%). WHAT DID YOU SEE HAPPENING IN INTERNATIONAL MARKETS AND HOW
DID YOU POSITION THE EQUITY PORTION OF THE FUND TO ACHIEVE THIS OUTPERFORMANCE
COMPARED TO AN INTERNATIONAL EQUITY BENCHMARK?
A The markets overseas, especially in Europe, have benefited from declining
interest rates, positively sloped yield curves, and very low levels of
inflation. These factors have combined to create a positive monetary environment
for financial assets. We have seen strength in many international bond markets
that has spilled over and caused a general improvement in economic activity.
International markets had strong returns within a long-term context.
However, Japan has such a heavy weighting in the EAFE Index, the index return
somewhat masks the strong returns in other markets. European markets in general
provided attractive returns as did markets in Canada, Southeast Asia and certain
countries in Latin America. Our broadly based portfolio with exposure in these
markets and an underweighted position in Japan, proved an effective approach
and helped us achieve fairly strong returns.
* The EAFE Index is an unmanaged index that is a generally accepted benchmark
for major overseas markets.
Q YOU MENTIONED THE FUND BEING UNDERWEIGHTED IN JAPAN. HOW WAS THE FUND
WEIGHTED IN THE OTHER REGIONS?
A The fund had strong exposure in Europe with an emphasis on the Netherlands,
Ireland, France, Switzerland and Spain. We benefited from the growth of the
United Kingdom by having exposure in both England and Ireland. We reduced our
position a bit in Southeast Asia while maintaining a focus in Hong Kong and
Malaysia.
We increased exposure in Canada because we were able to find companies that
combined attractive growth characteristics at reasonable valuations. We
maintained a strong focus throughout the six-month period in Australia.
In midsummer we added some exposure to Latin America. We saw improved
economic performance in this market and a confirmation by the equity markets
that they were ready to move upward. Our primary emphasis in this region was on
Mexico where the economy seems to have made a strong recovery after its fiscal
and currency problems. Inexpensive companies are benefiting from the economic
improvements in this market which may help increase the performance of those
companies in the long term.
5
<PAGE> 54
PERFORMANCE UPDATE
Q AND WITHIN THESE REGIONS, WHICH INDUSTRIES OFFERED THE GREATEST
OPPORTUNITIES?
A In Europe, we focused on pharmaceutical and retail stocks. While our
pharmaceuticals weren't dominant performers during the period, the
restructuring in this sector seems to indicate they are poised for growth. Our
European pharmaceutical holdings include Novartis and Roche Holding A.G. in
Switzerland. Retail stocks, such as Dixons Group PLC in the United Kingdom,
performed extremely well as the improved economic environment in Europe resulted
in an improvement in consumer spending, especially in the UK.
In Southeast Asia we focused on broad-based conglomerates and banks, such
as HSBC Holdings and CITIC Pacific in Hong Kong, that are in a position to take
advantage of growth across the region. In Japan our focus was on a few specific
sectors of the Japanese economy that are growing at an above-average rate. These
industries included autos, electronics and selected retailers. Honda and Seven
Eleven Japan were among the companies we owned.
In Canada our investments cut across a broad spectrum of industries and
included Canadian National Railway. In Latin America we focused our investments
on selected niche companies such as Tubos de Acero de Mexico, a Mexican pipe
manufacturing company.
Q ALTHOUGH THEY ARE AN UNMANAGED COMPONENT OF THE PORTFOLIO, CAN YOU DISCUSS
THE PERFORMANCE OF THE ZERO-COUPON BONDS DURING THIS PERIOD AND HOW THEY
AFFECTED THE FUND'S OVERALL RETURN?
A Throughout the year there was a great deal of speculation about interest
rates. After easing rates early in the year, there was a feeling in the second
half that the Federal Reserve Board (the Fed) would tighten rates because the
economy was, perhaps, too healthy and rates had crept up again. Zero-coupon
bonds are very sensitive to movements in rates -- when rates go down, the value
of the bonds increases. However, through the third quarter of 1996, the opposite
was happening which hurt bond performance and slightly dragged on the
performance of the fund. The Fed did not move to adjust rates because of a
slowdown in growth in the fourth quarter. This leveling off late in the year
provided a slight boost to bond performance.
Q IT HAS BEEN SUGGESTED THAT OVERSEAS MARKETS ARE TRAILING U.S. MARKET
PERFORMANCE AND THAT THESE MARKETS MAY BE EXPECTED TO PERFORM IN MUCH THE SAME
WAY THE U.S. MARKET DID AS THE U.S. ECONOMY EVOLVED. WHAT INDICATORS ARE YOU
SEEING TO SUPPORT OR DISCREDIT THIS THEORY?
A We do believe the international markets are mimicking in many ways the
activity of the U.S. market -- although with a lag. Europe and Japan appear to
be at the same place the U.S. was in 1980, which, if you recall, was the
beginning of the longest-running U.S. bull market in history. Latin America and
the Asian markets seem to parallel the U.S. from the 1950s to the 1970s when new
home starts were at a record high and consumer spending increased dramatically.
Emerging markets are at nearly the same point the U.S. was at the turn of the
century -- the beginning of the U.S. industrial revolution. Noting these
similarities, we believe there are opportunities that lie ahead in these
markets.
The current corporate restructuring overseas is being driven by several
different factors. One is globalization. Products move between markets faster
and more efficiently than ever before because trade-friendly agreements (such as
GATT and NAFTA) have been enacted over the last six or seven years. Competitive
products are finding new markets in this world marketplace that have fewer trade
barriers.
Another factor promoting international growth is the reduction in
government subsidies to support businesses. Governments have recognized that
they alone cannot be the solution to unemployment problems. Fostering a business
environment that encourages innovation and growth will lead to higher private
sector employment. So, in trying to solve unemployment problems overseas,
governments are trying to encourage companies to be more efficient and
competitive. One way they are doing this is by reducing government rules and
regulations designed to discourage mergers and acquisitions. This relaxing of
government control has led to significant new merger and acquisition activity
overseas, both in Europe and Japan.
6
<PAGE> 55
PERFORMANCE UPDATE
Companies are recognizing that to continue to grow, they need to attract
capital. Since capital tends to seek the highest returns, companies need to show
they can be highly competitive and financially productive. This has made
overseas companies more conscious of their need to restructure and their need to
have returns on capital that attract investor interest. A global marketplace for
capital is consistent with a global marketplace for goods and services.
Q WERE THERE ANY OPPORTUNITIES YOU MISSED?
A Well, we really were expecting things to turn around for Japan, but we
didn't get the type of growth we expected there. While we had a lesser exposure
to this market than the benchmark, looking back we would have benefited from
having an even smaller position there.
Another slight miss was in our hesitation to jump into Latin American
markets. We exercised a lot of patience before going in because we wanted to see
confirmation that the economy had a firm footing. Being a little more aggressive
there probably would have resulted in some incremental return. Overall, we feel
pretty comfortable with the results relative to the opportunity in the
international marketplace and the amount of risk that we took in the portfolio.
We feel good about the quality of our holdings and the consistency of our
results.
Q WHAT IS YOUR OUTLOOK FOR THE COMING MONTHS?
A We continue to be very optimistic. We are seeing continued support on the
monetary side in most economies, especially in the major economies in Europe and
in Japan. Both have low interest rates, positive yield curves and very low
inflation levels. There seems to be a pickup in economic activity as measured by
improvements in industrial production, and we do see earnings at attractive
levels for focused growth companies. Our belief that the overseas markets are
trailing the U.S. in their economic recovery leads us to expect attractive
growth from nearly all of the international markets.
The zero-coupon bond performance will depend on the course of interest
rates. There is the possibility that the Fed will tighten rates which would hurt
bond performance but we don't expect them to make any moves until they have
evaluated the economic data from the first quarter of 1997. However, investors
should remember that the zero-coupon bonds have an imbedded capital gain that
will grow as we move closer to maturity.
7
<PAGE> 56
- --------------------------------------------------------------------------------
COUNTRY CONCENTRATIONS
- --------------------------------------------------------------------------------
THE FUND'S COMMON STOCK GEOGRAPHIC DISTRIBUTION
[BAR GRAPH]
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Japan 18.0%
United Kingdom 15.3%
Netherlands 14.6%
Spain 7.6%
Ireland 7.1%
Switzerland 7.1%
France 6.4%
Hong Kong 5.2%
Germany 3.6%
Mexico 3.1%
Other 12.0%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
*Please see pages 9 through 13 for a complete listing.
LARGEST HOLDINGS
YOUR FUND'S FIVE LARGEST STOCK HOLDINGS*
REPRESENTING 16.8% OF THE FUND'S TOTAL COMMON STOCKS ON DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PERCENT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 NOVARTIS Created by the merger of Ciba and Sandoz, Novartis is a 4.5%
SWITZERLAND leader in life sciences with core businesses in
pharmaceuticals, agribusiness and nutrition.
2 AEGON N.V. Offers a full range of life, accident, health and 3.8%
NETHERLANDS general insurance products and associated financial
services.
3 IBERDROLA, S.A. An electric utility based in Spain formed from the 3.1%
SPAIN merger of Iberduero and Hidroelectrica Espanola.
4 RENTOKIL GROUP PLC Provides a broad range of services including health 2.7%
UNITED KINGDOM care, pest control, security services, contract
cleaning, tropical plants (for company reception areas
and offices), air conditioning systems and office
machine maintenance.
5 BRITISH BIO- Develops innovative patented drugs, with a focus on 2.7%
TECHNOLOGY GROUP cancer, inflammatory diseases and AIDS.
UNITED KINGDOM
</TABLE>
*The fund's holdings are subject to change.
8
<PAGE> 57
PORTFOLIO OF INVESTMENTS
KEMPER WORLDWIDE 2004 FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT U.S. Treasury, zero coupon, 2004
OBLIGATIONS--61.6% (Cost: $20,967) $37,100 $22,466
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EUROPE
- ----------------------------------------------------------------------------------------------------------------------
United Kingdom--5.8% BBA Group PLC
DIVERSIFIED ENGINEERING COMPANY 30,574 185
Barclays PLC
BANKING 20,000 342
(a)British Bio-Technology Group
PHARMACEUTICAL COMPANY 106,250 373
Dixons Group PLC
ELECTRONICS RETAILER 29,294 273
Glaxo Wellcome
PHARMACEUTICAL COMPANY 7,635 124
Laura Ashley Holdings PLC
RETAILER 43,000 125
Next PLC
RETAILER 10,000 97
Pearson PLC
MEDIA AND ENTERTAINMENT COMPANY 4,700 60
Reed International PLC
PUBLISHER 7,874 148
Rentokil Group PLC
SERVICES COMPANY 50,000 377
---------------------------------------------------------------------------
2,104
- ----------------------------------------------------------------------------------------------------------------------
Netherlands--5.5% ABN AMRO Bank
BANKING 3,100 202
Aegon N.V.
INSURANCE COMPANY 8,267 526
GTI Holding
ENGINEERING SERVICES 820 104
Goudsmit N.V.
TEMPORARY EMPLOYMENT AGENCY 1,160 103
Gucci Group N.V.
LUXURY GOODS MANUFACTURER 3,450 231
Koninklijke Ahold N.V.
FOOD RETAILER 2,936 183
Randstad Holding N.V.
BUSINESS SERVICES 3,000 217
Royal Dutch Petroleum
PETROLEUM PRODUCER 970 170
Wolters Kluwer
PUBLISHER 2,000 265
---------------------------------------------------------------------------
2,001
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 58
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Spain--2.9% Banco Bilbao Vizcaya
BANKING 3,948 $ 213
Empresa Nacional de Electricidad S.A.
ELECTRIC UTILITY 2,700 192
Iberdrola, S.A.
ELECTRIC UTILITY 30,000 424
PRYCA Centros, S.A.
FOOD RETAILER 10,000 211
-----------------------------------------------------------------------------
1,040
- ----------------------------------------------------------------------------------------------------------------------
Ireland--2.7% Bank of Ireland
BANKING 20,831 189
Greencore Group PLC
FOOD PRODUCER 40,408 256
Independent Newspapers PLC
PUBLISHER 60,436 307
Kerry Group PLC
FOOD PROCESSING 8,370 85
Waterford Wedgewood PLC
FINE CHINA AND CRYSTAL MANUFACTURER 112,865 145
-----------------------------------------------------------------------------
982
- ----------------------------------------------------------------------------------------------------------------------
Switzerland--2.7% (a)Novartis
PHARMACEUTICAL COMPANY 544 621
Roche Holding A.G., with warrants expiring 1998
PHARMACEUTICAL COMPANY 45 351
-----------------------------------------------------------------------------
972
- ----------------------------------------------------------------------------------------------------------------------
France--2.4% Carrefour S.A.
FOOD RETAILER 450 292
Christian Dior S.A.
LUXURY GOODS MANUFACTURER 660 106
Elf Aquitaine
OIL AND GAS PRODUCER 3,000 273
Grand Optical Photoservice
PHOTO DEVELOPING AND PRESCRIPTION OPTICAL
MANUFACTURING 315 51
Technip S.A.
ENGINEERING COMPANY 1,741 163
-----------------------------------------------------------------------------
885
- ----------------------------------------------------------------------------------------------------------------------
Germany--1.3% Bayer A.G.
CHEMICAL COMPANY 7,000 285
Mannesmann A.G.
CAPITAL GOODS PRODUCER 170 74
Veba, A.G.
ELECTRIC UTILITY 2,250 130
-----------------------------------------------------------------------------
489
- ----------------------------------------------------------------------------------------------------------------------
Italy--1.0% Bulgari SpA
LUXURY GOODS MANUFACTURER 7,000 142
Telecom Italia Mobile
MOBILE TELECOMMUNICATIONS PROVIDER 90,000 227
-----------------------------------------------------------------------------
369
</TABLE>
10
<PAGE> 59
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sweden--1.0% L.M. Ericsson Telephone Co., "B"
TELECOMMUNICATIONS EQUIPMENT MANUFACTURER 6,452 $ 199
Getinge Industrier A.B.
MEDICAL SUPPLY COMPANY 3,225 64
Hoganas A.B.
ENGINEERING COMPANY 2,890 101
-----------------------------------------------------------------------------
364
- ----------------------------------------------------------------------------------------------------------------------
Denmark--.3% Copenhagen Airports
AIRPORT OPERATOR 1,200 122
- ----------------------------------------------------------------------------------------------------------------------
Norway--.2% Schibsted A/S
PUBLISHER 3,700 68
-----------------------------------------------------------------------------
TOTAL EUROPEAN COUNTRIES--25.8% 9,396
- ----------------------------------------------------------------------------------------------------------------------
PACIFIC REGION
- ----------------------------------------------------------------------------------------------------------------------
Japan--6.8% Bank of Tokyo-Mitsubishi Ltd.
BANKING 7,000 130
Canon Inc.
PRECISION INSTRUMENTS MANUFACTURER 9,000 199
Circle K Japan
CONVENIENCE RETAILER 2,000 86
Daifuku Co., Ltd
DIVERSIFIED MACHINERY MANUFACTURER 15,000 189
Eisai Co., Ltd.
PHARMACEUTICAL COMPANY 8,000 157
Honda Motor Co., Ltd.
AUTOMOBILE MANUFACTURER 6,000 171
Ishikawajima-Harima Heavy Industries
HEAVY MACHINERY MANUFACTURER 30,000 133
Mabuchi Motor Co., Ltd.
ENGINE MANUFACTURER 3,100 156
Mitsui & Co. Ltd.
CONGLOMERATE 25,000 202
Murata Manufacturing
ELECTRONIC COMPONENTS MANUFACTURER 2,000 66
Olympus Optical Co., Ltd.
CAMERA AND OPTICAL EQUIPMENT MANUFACTURER 14,000 133
Ricoh Company, Ltd.
OFFICE AUTOMATION EQUIPMENT MANUFACTURER 11,000 126
Seven Eleven Japan Co., Ltd.
CONVENIENCE RETAILER 2,000 117
Sumitomo Metal Industries
STEEL MANUFACTURER 50,000 123
Toray Industries
TEXTILE MANUFACTURER 27,000 166
Toyota Motor Corp.
AUTOMOBILE MANUFACTURER 2,000 57
Tsubakimoto Chain Co.
CHAIN AND CONVEYOR MANUFACTURER 50,000 267
-----------------------------------------------------------------------------
2,478
</TABLE>
11
<PAGE> 60
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hong Kong--2.0% CITIC Pacific Ltd.
CONGLOMERATE 31,000 $ 180
Cheung Kong Holdings Ltd.
REAL ESTATE 15,000 133
HSBC Holdings PLC
BANKING 5,257 113
Hysan Development Co., Ltd.
PROPERTY DEVELOPER 35,000 139
Regal Hotels International Holdings
HOTEL OPERATOR 200,000 70
Swire Pacific Ltd., "A"
CONGLOMERATE 8,000 76
-----------------------------------------------------------------------------
711
- ----------------------------------------------------------------------------------------------------------------------
Malaysia--.9% DCB Holdings Bhd
BANKING 30,000 103
Edaran Otomobil Nasional Berhad
AUTOMOBILE DISTRIBUTOR 4,000 40
Hume Industries Bhd
CONSTRUCTION MATERIAL MANUFACTURER 10,000 63
Magnum Corporation Berhad
ENTERTAINMENT AND GAMING 51,000 99
Sungei Way Holdings Berhad
BUILDING MATERIALS COMPANY 10,000 29
-----------------------------------------------------------------------------
334
- ----------------------------------------------------------------------------------------------------------------------
Singapore--.3% Development Bank of Singapore
BANKING 5,000 68
Fraser & Neave Ltd.
BEER AND SOFT DRINK MANUFACTURER 3,800 39
-----------------------------------------------------------------------------
107
-----------------------------------------------------------------------------
TOTAL PACIFIC REGION--10.0% 3,630
- ----------------------------------------------------------------------------------------------------------------------
COMMONWEALTH COUNTRIES
- ----------------------------------------------------------------------------------------------------------------------
Australia--.6% Tabcorp Holdings Ltd.
ENTERTAINMENT AND GAMING 46,300 221
- ----------------------------------------------------------------------------------------------------------------------
Canada--.2% Canadian National Railway Company
RAILWAY COMPANY 1,888 72
-----------------------------------------------------------------------------
TOTAL COMMONWEALTH COUNTRIES--.8% 293
</TABLE>
12
<PAGE> 61
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
LATIN AMERICA
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mexico--1.1% Cementos Mexicanos, S.A. de C.V., "B," ADR
CEMENT PRODUCER 44,500 $ 175
(a)Tubos de Acero de Mexico, S.A., ADR
STEEL MANUFACTURER 16,200 257
------------------------------------------------------------------------------
TOTAL LATIN AMERICAN COUNTRIES--1.1% 432
------------------------------------------------------------------------------
TOTAL COMMON STOCKS--37.7%
(Cost: $10,945) 13,751
------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.3%
(Cost: $31,912) 36,217
------------------------------------------------------------------------------
CASH AND OTHER ASSETS,
LESS LIABILITIES--.7% 247
------------------------------------------------------------------------------
NET ASSETS--100% $36,464
------------------------------------------------------------------------------
At December 31, 1996, the Fund's portfolio of investments had the following
industry diversification (dollars in thousands):
VALUE %
------------------------------------------------------------------------------
Finance $ 2,833 7.8
------------------------------------------------------------------------------
Consumer Cyclicals 2,546 7.0
------------------------------------------------------------------------------
Capital Goods 1,760 4.8
------------------------------------------------------------------------------
Health Care 1,741 4.8
------------------------------------------------------------------------------
Basic Industries 1,199 3.3
------------------------------------------------------------------------------
Consumer Staples 1,183 3.2
------------------------------------------------------------------------------
Utilities 973 2.7
------------------------------------------------------------------------------
Technology 879 2.4
------------------------------------------------------------------------------
Energy 443 1.2
------------------------------------------------------------------------------
Transportation 194 .5
------------------------------------------------------------------------------
TOTAL COMMON STOCKS 13,751 37.7
------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS 22,466 61.6
------------------------------------------------------------------------------
OTHER NET ASSETS 247 .7
------------------------------------------------------------------------------
NET ASSETS $36,464 100.0
------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- -----------------------------------------------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments of $31,912,000 for federal income tax purposes
at December 31, 1996, the gross unrealized appreciation was $4,525,000, the
gross unrealized depreciation was $220,000 and the net unrealized appreciation
on investments was $4,305,000.
See accompanying Notes to Financial Statements.
</TABLE>
13
<PAGE> 62
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
Investments, at value
(Cost: $31,912) $36,217
- -----------------------------------------------------------------------
Cash 258
- -----------------------------------------------------------------------
Receivable for:
Investments sold 72
- -----------------------------------------------------------------------
Dividends and interest 22
- -----------------------------------------------------------------------
TOTAL ASSETS 36,569
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------
Payable for:
Fund shares redeemed 53
- -----------------------------------------------------------------------
Management fee 18
- -----------------------------------------------------------------------
Administrative services fee 7
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 14
- -----------------------------------------------------------------------
Trustees' fees 13
- -----------------------------------------------------------------------
Total liabilities 105
- -----------------------------------------------------------------------
NET ASSETS $36,464
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------
Paid-in capital $31,977
- -----------------------------------------------------------------------
Undistributed net realized gain on investments and foreign
currency transactions 148
- -----------------------------------------------------------------------
Net unrealized appreciation on investments and assets and
liabilities in foreign currencies 4,317
- -----------------------------------------------------------------------
Undistributed net investment income 22
- -----------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $36,464
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($36,464,000 / 3,458,000 shares outstanding) $10.54
- -----------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 63
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------
Interest $ 795
- ----------------------------------------------------------------------
Dividends (less foreign taxes withheld) 65
- ----------------------------------------------------------------------
Total investment income 860
- ----------------------------------------------------------------------
Expenses:
Management fee 111
- ----------------------------------------------------------------------
Administrative services fee 46
- ----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 39
- ----------------------------------------------------------------------
Professional fees 8
- ----------------------------------------------------------------------
Reports to shareholders 3
- ----------------------------------------------------------------------
Trustees' fees and other 7
- ----------------------------------------------------------------------
Total expenses 214
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 646
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- ----------------------------------------------------------------------
Net realized gain on sales of investments and foreign
currency transactions 291
- ----------------------------------------------------------------------
Change in net unrealized appreciation on investments and
assets and liabilities in foreign currencies 919
- ----------------------------------------------------------------------
Net gain on investments 1,210
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,856
- ----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1996 1996
- --------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 646 1,282
- --------------------------------------------------------------------------------------------------
Net realized gain 291 1,486
- --------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 919 507
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,856 3,275
- --------------------------------------------------------------------------------------------------
Distribution from net investment income (1,451) (1,157)
- --------------------------------------------------------------------------------------------------
Distribution from net realized gain (528) --
- --------------------------------------------------------------------------------------------------
Total dividends to shareholders (1,979) (1,157)
- --------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions (1,231) 5,001
- --------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,354) 7,119
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------------
Beginning of period 37,818 30,699
- --------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment
income of $22,000 and $827,000, respectively) $36,464 37,818
- --------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 64
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUND Kemper Worldwide 2004 Fund (the Fund) is a series
of Kemper Target Equity Fund (the Trust), an
open-end management investment company organized as
a business trust under the laws of Massachusetts.
The objectives of the Fund are to provide a
guaranteed return of investment on the Maturity
Date (November 15, 2004) to investors who reinvest
all dividends and hold their shares to the Maturity
Date, and to provide total return, a combination of
capital growth and income. The Fund pursues its
objectives by investing a portion of its assets in
zero coupon U.S. Treasury obligations and the
balance of its assets primarily in an
internationally diversified portfolio of foreign
securities. The assurance that investors who
reinvest all dividends and hold their shares until
the Maturity Date will receive at least their
original investment on the Maturity Date is
provided by the principal amount of the zero coupon
U.S. Treasury obligations in the Fund's portfolio,
as well as by a guarantee from Zurich Kemper
Investments, Inc. (ZKI), the Fund's investment
manager.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Any portfolio securities that are primarily
traded on a domestic securities exchange are valued
at the last sale price on that exchange or, if
there is no recent sale price available, 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. A
security that is listed or traded on more than one
exchange is valued at the quotation on the exchange
determined to be the primary market for such
security by the Board of Trustees or its delegates.
Securities not so traded or listed are valued at
the last current bid quotation if market quotations
are available. 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. Options are valued at the
last sale price unless the bid price is higher or
the asked price is lower, in which event such bid
or asked price is used. 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. Forward foreign
currency contracts and foreign currencies are
valued at the forward and current exchange rates,
respectively, prevailing on the day of valuation.
Other securities and assets are valued at fair
value as determined in good faith by the Board of
Trustees.
CURRENCY TRANSLATION. The books and records of the
Fund are maintained in U.S. dollars. All assets and
liabilities initially expressed in foreign currency
values are converted into U.S. dollar values at the
mean between the bid and offered quotations of such
currencies against U.S. dollars as last quoted by a
recognized dealer. If such quotations are not
readily available, the rates of exchange are
determined in good faith by the Board of Trustees.
Income and expenses and purchases and sales of
investments are translated into U.S. dollars at the
rates of exchange prevailing on the respective
dates of such transactions. The Fund includes that
portion of the
16
<PAGE> 65
NOTES TO FINANCIAL STATEMENTS
results of operations resulting from changes in
foreign exchange rates with the net realized and
unrealized gain (loss) on investments.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Dividend income is recorded on the
ex-dividend date, except that certain dividends
from foreign securities are recorded as soon as the
information is available to the Fund. Interest
income is recorded on the accrual basis and
includes discount amortization on fixed income
securities. Realized gains and losses from
investment transactions are reported on an
identified cost basis.
EXPENSES. Expenses arising in connection with a
series of the Trust are allocated to that series.
Other Trust expenses are allocated among the series
in proportion to their relative net assets.
FUND SHARE VALUATION. Fund shares were sold during
a limited offering period which ended in 1996, and
are redeemed on a continuous basis. Fund shares
were sold and are redeemed at net asset value (plus
a commission on most sales). On each day the New
York Stock Exchange is open 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 by dividing the total value of the
Fund's investments and other assets, less
liabilities, by the number of shares outstanding.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies during the six
months ended December 31, 1996.
DIVIDENDS TO SHAREHOLDERS. The Trust declares and
pays dividends of net investment income and net
realized capital gains annually, which are recorded
on the ex-dividend date. Dividends are determined
in accordance with income tax principles which may
treat certain transactions differently from
generally accepted accounting principles. These
differences are primarily due to differing
treatments for certain transactions such as foreign
currency transactions.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with ZKI and pays a management fee at an
annual rate of .60% of average daily net assets.
The Fund incurred a management fee of $111,000 for
the six months ended December 31, 1996. Zurich
Investment Management Limited, an affiliate of ZKI,
serves as a sub-adviser with respect to foreign
securities investments in the Fund, and is paid by
ZKI for its services.
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, the Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets. 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. During the six
months ended December 31, 1996, the Fund paid
administrative
17
<PAGE> 66
NOTES TO FINANCIAL STATEMENTS
services fees of $46,000, all of which KDI remitted
to financial services firms.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Trust's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent for the Fund. Under the agreement,
KSvC received shareholder services fees of $17,000
for the six months ended December 31, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of ZKI.
During the six months ended December 31, 1996, the
Trust made no payments to its officers and the Fund
incurred trustees' fees of $6,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended December 31, 1996,
investment transactions (excluding short-term
instruments) are as follows (in thousands):
Purchases $4,827
Proceeds from sales 7,402
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1996 1996
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold -- $ -- 958 $ 9,921
---------------------------------------------------------------------------
Shares issued in
reinvestment of
dividends 188 1,950 108 1,110
---------------------------------------------------------------------------
188 1,950 1,066 11,031
Shares redeemed (297) (3,181) (581) (6,030)
---------------------------------------------------------------------------
NET INCREASE (DECREASE)
FROM CAPITAL SHARE
TRANSACTIONS (109) $(1,231) 485 $ 5,001
---------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FORWARD FOREIGN
CURRENCY CONTRACTS In order to protect itself against a decline in the
value of a particular foreign currency against the
U.S. Dollar, the Fund has entered into a forward
contract to deliver foreign currency in exchange
for U.S. Dollars as described below. The Fund bears
the market risk that arises from changes in foreign
exchange rates, and accordingly, the net unrealized
gain on this contract is reflected in the
accompanying financial statements. The Fund also
bears the credit risk if the counterparty fails to
perform under the contract. At December 31, 1996,
the Fund had the following forward foreign currency
contract outstanding with a settlement date in
January, 1997:
<TABLE>
<CAPTION>
UNREALIZED
FOREIGN CURRENCY CONTRACT AMOUNT GAIN
TO BE DELIVERED IN U.S. DOLLARS AT 12/31/96
-----------------------------------------------------------------
<S> <C> <C>
45,320,000 Japanese Yen $405,000 $12,000
-----------------------------------------------------------------
</TABLE>
18
<PAGE> 67
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED JUNE 30, MAY 3 TO
DECEMBER 31, 1996 1996 1995 JUNE 30, 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 10.60 9.96 9.02 9.00
- ---------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .21 .36 .27 .02
- ---------------------------------------------------------------------------------------------------------
Net realized and unrealized gain .33 .63 .79 --
- ---------------------------------------------------------------------------------------------------------
Total from investment operations .54 .99 1.06 .02
- ---------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .44 .35 .12 --
- ---------------------------------------------------------------------------------------------------------
Distribution from net realized gain .16 -- -- --
- ---------------------------------------------------------------------------------------------------------
Total dividends .60 .35 .12 --
- ---------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.54 10.60 9.96 9.02
- ---------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.19% 10.05 11.91 .22
- ---------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------
Expenses 1.16% 1.32 1.29 1.32
- ---------------------------------------------------------------------------------------------------------
Net investment income 3.50% 3.60 3.77 2.59
- ---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $36,464 37,818 30,699 5,900
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 23% 50 75 --
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Average commission rates paid per share on stock transactions for the six
months ended December 31, 1996 and the year ended June 30, 1996 were $.0168 and
$.0253, respectively. Foreign commissions usually are lower than U.S.
commissions when expressed as cents per share due to the lower per share price
of many non-U.S. securities.
NOTE: Total return does not reflect the effect of any sales charges.
19
<PAGE> 68
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS TRACY M. CHESTER
President and Trustee Vice President
JAMES E. AKINS CHARLES R. MANZONI, JR.
Trustee Vice President
ARTHUR R. GOTTSCHALK JOHN E. NEAL
Trustee Vice President
FREDERICK T. KELSEY STEVEN H. REYNOLDS
Trustee Vice President
DOMINIQUE P. MORAX PHILIP J. COLLORA
Trustee Vice President and
Secretary
FRED B. RENWICK
Trustee JEROME L. DUFFY
Treasurer
JOHN B. TINGLEFF
Trustee ELIZABETH C. WERTH
Assistant Secretary
JOHN G. WEITHERS
Trustee
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT
INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
FOREIGN CUSTODIAN
THE CHASE MANHATTAN BANK
Chase Metro Tech Center
Brooklyn, NY 11245
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
KWF-2 (2/97) 1028480
Printed in the U.S.A. [KEMPER FUNDS LOGO]
