<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED JANUARY 31, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
PROVIDES LONG-TERM CAPITAL GROWTH WITH GUARANTEED RETURN OF INVESTMENT
ON THE MATURITY DATE TO INVESTORS WHO REINVEST ALL DIVIDENDS AND HOLD THEIR
SHARES TO THE MATURITY DATE.
KEMPER TARGET EQUITY FUND
KEMPER RETIREMENT FUND
SERIES VII
"...The last six months showed investors the
wisdom of maintaining a long-term perspective...."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
LARGEST HOLDINGS
8
PORTFOLIO OF
INVESTMENTS
11
FINANCIAL STATEMENTS
13
NOTES TO
FINANCIAL STATEMENTS
16
FINANCIAL HIGHLIGHTS
17
SHAREHOLDERS' MEETING
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER RETIREMENT FUND SERIES VII
TOTAL RETURN*
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED JANUARY 31, 1998 (UNADJUSTED FOR ANY SALES
CHARGE)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
SERIES VII 4.83%
- --------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
1/31/98 7/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
SERIES VII $10.15 $9.78
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE SIX MONTH PERIOD ENDED JANUARY 31, 1998, THE FUND MADE THE FOLLOWING
DISTRIBUTION PER SHARE:
<TABLE>
<CAPTION>
INCOME
DIVIDEND
- --------------------------------------------------------------------------------
<S> <C>
SERIES VII $.10
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
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.
P/E RATIO 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.
VOLATILITY Characteristic of a security, commodity or market to rise or fall
sharply in price within a short period of time.
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 accrual of
interest. The security is redeemed at face value at maturity.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS. HE IS ALSO A MEMBER OF THE INVESTMENT POLICY AND STRATEGY COMMITTEE
FOR KEMPER FUNDS.
SILVIA HOLDS A BACHELOR OF ARTS AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND HAS A MASTER'S DEGREE IN ECONOMICS FROM BROWN
UNIVERSITY IN PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS
WITH THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT ADVISOR FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $200 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS. IT IS ONE OF
THE 10 LARGEST MUTUAL FUND COMPLEXES IN THE UNITED STATES.
DEAR SHAREHOLDERS,
Despite ongoing stock market volatility, the economic climate for mutual fund
investors has been fairly positive in the first quarter of 1998. Steady U.S.
economic growth bolstered by stable interest rates has created a positive
environment for both equity and fixed-income investing -- and we expect this to
continue.
The U.S. economy, as measured by the gross domestic product (GDP) growth
rate, in the fourth quarter of 1997 grew 3.9 percent. With 3.8 percent GDP
growth for all of 1997, the economy produced $7.19 trillion of output. For the
first quarter of 1998, we estimate the economy to grow at a 3.4 percent rate,
representing a modest slowdown. Momentum for the year, in fact, should slip to a
rate of 2.5 percent.
Although the economy will continue to slow in the months ahead, the outlook
is still positive. Employment growth is expected to remain steady. Both bonds
and equities have continued to perform well, thereby boosting consumer
confidence and spending. The housing market has been noteworthy, with new home
sales reaching an all-time high for this point in the economic cycle and housing
starts remain high relative to demographic trends.
Output prices, as measured by the Consumer Price Index (CPI), remain stable
at 1.5 to 2 percent year over year. When the rate of inflation remains stable
and as low as it has, the risk of higher interest rates is reduced and the real
return on financial assets grows. It is unlikely that the Fed will raise
interest rates in the second quarter.
Seemingly in defiance of our diplomatic struggles with Iraq, political
scandal at home and a few major earnings disappointments particularly in the
technology sector, the market managed to hit several new heights in the first
quarter. U.S. corporate profit growth and earnings continued to boost stock
prices, making the market all the more attractive to investors.
Much of the market activity in the first quarter can be attributed to
today's service-based economy. With the arrival of annual and holiday bonuses
at the end of the fourth quarter -- compensation for a good year's work -- the
first quarter has established itself as a time for American employees to either
spend or stash away these lump sum earnings in Individual Retirement Accounts
(IRAs) and other investments.
One factor that affected the U.S. market in 1997 appears to be having a
diminished influence in the new year. The East Asian market crisis now appears
for most Asian countries to be subsiding. East Asia's economic difficulties did
not affect global production or employment nearly as much as the markets had
anticipated. Consequently, most investors did not feel the serious repercussions
that had been feared. Obviously, investors with heavy concentrations in the
region suffered the largest losses. But the markets were anticipating a greater
global impact -- and this has not yet come to pass. Further impacts may occur or
orders on shipments already made may find no ultimate buyer. Then again, as we
move into the second quarter of 1998, many East Asian countries appear to have
already recovered from the crisis. Some Asian currencies have stabilized and
several Asian stock markets have rebounded. Korea and Malaysia are two countries
where this has happened. The perception of an Asian "contagion" or flu
throughout the region is fading fast -- and investors in general seem to be
staying in the game.
At the end of February, the U.S. federal budget deficit essentially
vanished. Recent efforts to reduce the deficit, combined with higher federal
revenues due to the robust economy, have left us with a budget surplus for
fiscal 1998. This stable fiscal environment is characterized by a reduction
in Treasury financing, which tends to have a downward effect on interest rates.
Lower interest rates fuel consumer spending, which clearly benefits the
marketplace in the form of higher corporate revenues and earnings. One result
of higher earnings is higher stock prices, which can ultimately benefit
investors.
The last time the U.S. enjoyed a budget surplus was 1969. After nearly 30
years of being in the red, we very well may notice a new shift in psychology
about the Treasury market and the issuance of Treasury securities. In the past,
investors worried about deficits that were out of control and expected higher
interest rates on Treasuries. High interest rates are the bane of fixed-income
investing, so a balanced budget can be expected to have a positive effect.
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 (2/28/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.57 6.21 6.69 6.27
PRIME RATE(2) 8.5 8.5 8.3 8.25
INFLATION RATE(3)* 1.57 2.72 3.03 2.72
THE U.S. DOLLAR(4)* 9.32 10.1 7.67 0.82
CAPITAL GOODS ORDERS(5)* 13.77 11.53 5.8 11.19
INDUSTRIAL PRODUCTION(5)* 5.47 5.03 4.57 2.93
EMPLOYMENT GROWTH(6) 2.6 2.31 2.14 1.83
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
* Data as of January 31, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
On the global front, current economic fundamentals tend to favor the U.S.,
with the dollar continuing to be a safe haven for investors. International
investors want to participate in U.S. economic growth, which, at 3.8 percent for
1997, was better than the economic growth in both Europe and Japan. Europe's
1997 growth rate remained fairly steady at 2 to 3 percent. Japan experienced a
growth rate last year of 1 percent. U.S. real interest rates have also been more
attractive than those of most other countries, enticing foreign investors to buy
U.S. Treasuries.
We anticipate the positive economic environment to continue into the second
quarter of 1998. The budget surplus should hold for at least the near term.
President Clinton's initiatives for increased spending and more tax credits
haven't come to fruition. In fact, proponents of spending control have continued
to squelch spending programs on Capitol Hill. All the while, fiscal policy has
remained steady.
With solid economic growth, lower interest rates, low inflation and a
record-setting stock market, it is no wonder that investor expectations are
high. But, are investors expecting too much?
It is important to recognize that although from a macroeconomic perspective
the economy is strong, there are some microeconomic challenges that could
threaten in the months to come. These include health care reform and shifts in
the political landscape at home and continuing conflicts or new developments
abroad. For example, the European Monetary Union (EMU) appears to be proceeding
as we would expect. But within six months to a year after the EMU is
established, tensions may indeed mount as countries try to adapt to the new
structure. Each of these issues could affect our strong, yet reactive
marketplace. Be sure to stay tuned.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
JOHN E. SILVIA
March 12, 1998
4
<PAGE> 5
PERFORMANCE UPDATE
[CHESTER PHOTO]
TRACY MCCORMICK CHESTER JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1994 AND IS A
MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS AND VICE PRESIDENT AND PORTFOLIO
MANAGER OF KEMPER RETIREMENT FUND SERIES. 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.
THE FIRST HALF OF THE FISCAL YEAR WAS ONE OF THE STOCK MARKET'S MORE
VOLATILE PERIODS IN RECENT MEMORY. YET, PORTFOLIO MANAGER TRACY CHESTER
REGISTERED A SOLID RETURN BY FOCUSING ON SOLID GROWTH COMPANIES SELLING AT
ATTRACTIVE PRICES.
Q HOW WOULD YOU DESCRIBE THE PERFORMANCE OF THE STOCK MARKET OVER THE LAST
SIX MONTHS?
A There's really only one word that describes it: volatile. Over
the last 36 months or so, the market has advanced so routinely that
people may have forgotten that it isn't always smooth sailing. They were
reminded of the market's capricious nature over the last six months. The final
quarter of 1997 saw global stock markets gyrate widely, including a 6.87
percent decline for the S&P 500 Index on October 27.
For the most part, this volatility was prompted by the free-fall of
currencies in nearly all Southeast Asian countries. The troubles in Asian
economies cast doubt on whether the strong earnings of American companies would
continue at the strong pace that had underpinned the bull market of the last
couple of years. As the currencies of Thailand, Singapore, Malaysia and other
countries came under fire, the U.S. stock market felt the impact. However,
during the ensuing months, investors had a chance to digest the news. As a
result of the bailout plans proposed by the International Monetary Fund, and
the fact that many American companies posted solid earnings, concerns over the
effects of the Asian crisis began to fade. In fact, as January 1998 drew to a
close, the U.S. stock market was again chugging ahead toward new record highs.
In short, the last six months showed investors the wisdom of
maintaining a long-term perspective.
Q HOW DID THE FUND PERFORM IN COMPARISON?
A Overall, the Fund performed extremely well. In fact, its 4.83 percent
return (unadjusted for any sales charge) for the period was actually better than
the Russell 1000 Growth Index's 3.28 percent gain, which you wouldn't expect
from a fund invested substantially in zero coupon bonds. Usually, the bond
portion of the portfolio will impede the return of the stock portion. But over
this time period, the fund's bonds were helped by a flight to stable assets
during the Asian turbulence. As investors rushed for the relative safety of U.S.
government securities, prices rose and the fund benefited.
Q WAS THE TURMOIL IN ASIA THE PRIMARY IMPETUS BEHIND YOUR TRADING FOR THE
PERIOD?
A We have relatively little international exposure, but Asia did prompt us
to adopt a slightly more defensive position -- right now, no one knows just how
big an impact it will have on the earnings of American companies. Most of our
Asia-influenced moves were made in two sectors: technology and finance.
We maintained an overweighted position in finance, but avoided big
money-center banks that have greater exposure to Asian currency problems.
Instead, we concentrated on strong regional banks with good franchises that are
good candidates for a takeover. By the late fourth quarter, many of these stocks
had run up strongly and we began to trim positions.
5
<PAGE> 6
PERFORMANCE UPDATE
We continue to have a healthy representation in the insurance sector, where
valuations are more reasonable and we are intrigued by some of the consolidation
potential. If money center banks really come under pressure, we might look at
them again, but right now it seems a little premature.
Before the Asian problems surfaced, we'd already begun to adopt a somewhat
defensive position in technology stocks due to their strong summer rally. This
helped us avoid some of the more spectacular flame-outs when the Asian
difficulties put the sector under extreme pressure. After such substantial price
declines, we felt most of the danger was out of the better technology stocks, so
we began buying again in November. We concentrated on our favorite stocks such
as Hewlett-Packard, Sun Microsystems, Teradyne and Gartner Group.
Overall, we treated the widespread price decline in the last quarter of 1997
as an opportunity to reduce positions in more vulnerable companies and boost
positions in our higher confidence stocks. For the most part, that strategy has
been vindicated as the market has rebounded and was moving toward new highs at
the end of January.
Q HAVE ANY OTHER FACTORS INFLUENCED YOUR POSITIONING OF THE FUND?
A Asia was the main thing. Otherwise, we've been applying our normal
philosophy of "bottom up" stock selection. Rather than focus on economic
conditions or entire sectors, we tend to choose stocks based on their individual
merits, and seek those that offer above-average growth prospects, but are
selling at what we believe to be attractive prices. To do that, we set upper and
lower price targets on stocks. If a stock falls below a certain price level, we
buy. If it rallies above a certain price level, we sell. In this way, we hope to
benefit from most of the ride up, but avoid most of the ride down.
When the market is volatile, that usually gives us opportunities to buy
good stocks on a dip. Unfortunately, that disciplined approach to valuations
worked against us occasionally during the last few months. The expensive
stocks just got more expensive, and the less expensive stocks got less
expensive.
Q WHY WAS THAT?
A The problems experienced by Pacific Rim economies made many investors
nervous. The response was a flight to big, brand-name stocks that people
believed were safer, and they would pay any price to do so. The lofty valuations
that resulted made us hesitant to buy companies like Coke or Merck or Pfizer. We
believe that there's not a lot of upside in stocks priced that highly, and they
are susceptible to a big plunge on any bad news. Regardless, the market
continued to bid them up, and we didn't participate as fully as we would have
liked.
Q WHAT AREAS DO YOU THINK CURRENTLY OFFER THE MOST ATTRACTIVELY PRICED
STOCKS?
A The areas we're looking at are retail stocks and hotel/gaming stocks. They
are attractively valued right now and may benefit from improved business as
mortgage refinancing gives consumers more money to spend. Our major holdings
include Stanley Works (strong franchise and excellent management), R.R.
Donnelley & Sons (a dominant player in printing and another talented management
team) and Harcourt General (a major force in specialty retailing through its
majority ownership of The Neiman Marcus Group). Also, we've recently added the
Mirage and MGM Grand.
Q THE MARKET POSTED 20 PERCENT PLUS GAINS FOR THE THIRD YEAR IN A ROW IN
1997. DO YOU THINK THIS PERFORMANCE WILL CONTINUE?
A I'm not much of a prognosticator when it comes to the market. But the
economy's growth, coupled with an environment of low inflation and low interest
rates, offers many individual companies the potential to experience such gains.
We intend to maintain strict attention to valuations and try to find these kinds
of companies when they are priced attractively.
There are still many stocks that are not among the darlings of the S&P 500
that offer solid growth potential at attractive prices. At some point, the
market is going to recognize these bargains, and that's when this fund will
benefit the most.
6
<PAGE> 7
LARGEST HOLDINGS
THE FUND'S 10 LARGEST STOCK HOLDINGS*
Representing 21.6 percent of the fund's total common stocks on January 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
HOLDINGS PERCENT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. INTERNATIONAL BUSINESS Manufactures data processing equipment and systems. 2.6%
MACHINES
2. SUN MICROSYSTEMS Provides high performance workstations. 2.5%
3. AMERICAN GENERAL A leading provider of annuities, consumer loans and 2.5%
life insurance.
4. AMERICAN HOME PRODUCTS Manufactures and markets health care products. 2.3%
5. HEWLETT-PACKARD Manufactures computers and computer-related products. 2.2%
6. CSX A transportation company involved in rails, shipping 2.1%
and trucking worldwide.
7. J.C. PENNEY Department store chain. 2.0%
8. COMPUTER SCIENCES CORP. Computer services. 1.9%
9. JEFFERSON-PILOT Writes life, health and accident insurance and 1.8%
annuities.
10. ABBOTT LABORATORIES Engaged in the discovery, development, manufacture and 1.7%
sale of a broad and diversified line of health care
products and services.
</TABLE>
*The fund's holdings are subject to change.
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS
KEMPER RETIREMENT FUND -- SERIES VII
Portfolio of Investments at January 31, 1998 (unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U. S. GOVERNMENT U.S. Treasury, zero coupon, 2008
OBLIGATIONS--58.4%
(Cost: $8,178) $15,500 $ 8,645
-----------------------------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
NUMBER OF
COMMON STOCKS SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC INDUSTRIES--1.3% Betz Dearborn, Inc. 900 52
Imperial Chemical Industries, PLC 1,000 61
PPG Industries 1,100 63
Temple-Inland, Inc. 200 11
------------------------------------------------------------------------
187
-----------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--3.1% Boeing 500 24
Emerson Electric Co. 1,100 67
Federal-Mogul Corp. 1,500 67
General Electric Co. 400 31
Lockheed Martin 500 52
Raytheon Co. 1,862 96
Sundstrand Corp. 1,500 82
U.S. Industries 1,700 48
------------------------------------------------------------------------
467
-----------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--4.4% CBS Corp. 1,900 57
Dillard Department Stores 1,200 42
Harcourt General 1,200 64
J.C. Penney Co. 1,700 115
May Department Stores Co. 1,700 89
(a)MGM Grand 2,000 72
(a)Midas, Inc. 250 4
(a)Mirage Resorts 1,000 23
R.R. Donnelley & Sons 2,500 93
Stanley Works 2,200 97
------------------------------------------------------------------------
656
-----------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--4.3% General Mills 700 52
Gillette Co. 500 49
H.J. Heinz Co. 1,200 67
International Flavors & Fragrances 2,200 93
Kimberly-Clark Corp. 700 37
McCormick & Co. 2,000 58
Newell Co. 500 21
PepsiCo 1,400 50
Procter & Gamble Co. 500 39
Seagram Co., Ltd. 1,000 34
Service Corp. International 1,500 59
Unilever, N.V., ADR 800 46
Whitman Corp. 1,500 25
------------------------------------------------------------------------
630
-----------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ENERGY--1.6% AMOCO Corp. 300 $ 24
Baker Hughes, Inc. 800 31
Chevron Corp. 700 52
Enron Corp. 1,000 41
Hussman International 750 10
Mobil Corp. 800 55
Pennzoil Co. 100 6
Unocal Corp. 600 21
------------------------------------------------------------------------
240
-----------------------------------------------------------------------------------------------------------------
FINANCE--5.4% American Express Co. 600 50
American General Corp. 2,500 141
Beneficial Corp. 500 39
Compass Bancshares 1,000 43
Federal National Mortgage Association 500 31
First Chicago NBD Corp. 1,000 75
First Union Corp. 650 31
Fleet Financial Group, Inc. 970 69
Jefferson-Pilot Corp. 1,300 106
Mellon Bank Corp. 500 30
Morgan Stanley, Dean Witter Discover & Co. 650 38
NationsBank 1,000 60
PNC Bank Corp., N.A. 1,000 52
Safeco Corp. 800 40
------------------------------------------------------------------------
805
-----------------------------------------------------------------------------------------------------------------
HEALTH CARE--4.9% Abbott Laboratories 1,400 99
ALZA Corp. 1,500 53
American Home Products Corp. 1,400 134
Baxter International 1,500 84
Bristol-Myers Squibb Co. 700 70
(a)Crescendo Pharmaceuticals Corp. 50 1
Glaxo Wellcome, PLC, ADR 1,000 54
(a)HEALTHSOUTH Corp. 1,300 29
McKesson Corp. 1,000 48
Merck & Co. 400 47
(a)Tenet Healthcare Corp. 2,100 72
United Healthcare Corp. 700 36
------------------------------------------------------------------------
727
-----------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(Dollars in Thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TECHNOLOGY--10.3% AMP, Inc. 1,800 $ 72
(a)Analog Devices 3,000 88
(a)Cadence Design Systems 2,200 62
(a)Cisco Systems 1,200 76
Computer Associates International 1,250 66
(a)Computer Sciences Corp. 1,300 110
Diebold 900 45
(a)Gartner Group 1,500 56
GM-Hughes Electronics Corp. 2,000 69
Harris Corp. 1,800 86
Hewlett-Packard Co. 2,100 126
Intel Corp. 200 16
International Business Machines 1,500 148
(a)National Semiconductor Corp. 2,500 70
(a)Parametric Technology Corp. 1,900 96
Pitney Bowes, Inc. 600 28
(a)Sterling Commerce, Inc. 1,500 54
(a)Sun Microsystems 3,000 144
(a)Teradyne, Inc. 1,000 40
(a)Xilinx, Inc. 1,800 68
------------------------------------------------------------------------
1,520
-----------------------------------------------------------------------------------------------------------------
TRANSPORTATION--2.0% Canadian Pacific, Ltd. 2,000 54
CSX Corp. 2,300 122
(a)Federal Express Corp. 1,000 65
Norfolk Southern Corp. 1,500 47
------------------------------------------------------------------------
288
-----------------------------------------------------------------------------------------------------------------
UTILITIES--1.6% (a)AirTouch Communications 300 13
Ameritech Corp. 600 26
AT&T 600 38
Cincinnati Bell, Inc. 1,500 54
SBC Communications, Inc. 1,000 78
Sprint Corp. 500 30
------------------------------------------------------------------------
239
------------------------------------------------------------------------
TOTAL COMMON STOCKS--38.9%
(Cost: $5,490) 5,759
------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.37% to 5.40%
INSTRUMENTS--4.7% Due--February 1998
(Cost: $698) $ 700 698
------------------------------------------------------------------------
TOTAL INVESTMENTS--102.0%
(Cost: $14,366) 15,102
------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(2.0%) (302)
------------------------------------------------------------------------
NET ASSETS--100% $14,800
------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Non-income producing security.
Based on the cost of investments of $14,366,000 for federal income tax purposes
at January 31, 1998, the gross unrealized appreciation was $866,000, the gross
unrealized depreciation was $130,000 and the net unrealized appreciation on
investments was $736,000.
See accompanying Notes to Financial Statements.
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1998 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
<S> <C>
Investments, at value
(Cost: $14,366) $15,102
- -----------------------------------------------------------------------
Cash 257
- -----------------------------------------------------------------------
Receivable for:
Investments sold 104
- -----------------------------------------------------------------------
Fund shares sold 97
- -----------------------------------------------------------------------
Interest and dividends 4
- -----------------------------------------------------------------------
TOTAL ASSETS 15,564
- -----------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------
Payable for:
Investments purchased 738
- -----------------------------------------------------------------------
Management fee and other 26
- -----------------------------------------------------------------------
Total liabilities 764
- -----------------------------------------------------------------------
NET ASSETS $14,800
- -----------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------
Paid-in capital $14,099
- -----------------------------------------------------------------------
Accumulated net realized loss on investments (70)
- -----------------------------------------------------------------------
Net unrealized appreciation on investments 736
- -----------------------------------------------------------------------
Undistributed net investment income 35
- -----------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $14,800
- -----------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------
Shares outstanding 1,458
- -----------------------------------------------------------------------
Net asset value and redemption price per share $ 10.15
- -----------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE
- -----------------------------------------------------------------------
(net asset value, plus 5.26% of
net asset value or 5.00% of offering price) $ 10.68
- -----------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
Statement of Operations
Six months ended January 31, 1998 (unaudited)
(in thousands)
<TABLE>
<S> <C>
- --------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 25
- --------------------------------------------------------------------
Interest 180
- --------------------------------------------------------------------
Total investment income 205
- --------------------------------------------------------------------
Expenses:
Management fee 24
- --------------------------------------------------------------------
Administrative services fee 12
- --------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 17
- --------------------------------------------------------------------
Professional fees 3
- --------------------------------------------------------------------
Trustees' fees and other 3
- --------------------------------------------------------------------
Total expenses 59
- --------------------------------------------------------------------
NET INVESTMENT INCOME 146
- --------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------------------------
Net realized loss on sales of investments (67)
- --------------------------------------------------------------------
Change in net unrealized appreciation on investments 550
- --------------------------------------------------------------------
Net gain on investments 483
- --------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $629
- --------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED ONE MONTH
JANUARY 31, ENDED MAY 1(A) TO
1998 JULY 31, JUNE 30,
(UNAUDITED) 1997 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------------------
Net investment income $ 146 9 5
- ----------------------------------------------------------------------------------------------------------
Net realized loss (67) (1) (2)
- ----------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 550 162 24
- ----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 629 170 27
- ----------------------------------------------------------------------------------------------------------
Distribution from net investment income (125) -- --
- ----------------------------------------------------------------------------------------------------------
Net increase from capital share transactions 9,746 2,337 1,916
- ----------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 10,250 2,507 1,943
- ----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period 4,550 2,043 100
- ----------------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed
net investment income of
$35, $14 and $5, respectively) $14,800 4,550 2,043
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Commencement of operations.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Retirement Fund Series VII (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, 2008) 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 Scudder Kemper Investments, Inc.,
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. Equity 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 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 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.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended January 31, 1998. The accumulated net
realized loss on sales of investments for federal
income tax purposes at January 31, 1998, amounting
to approximately $70,000, is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 2004 through
2006.
DIVIDENDS TO SHAREHOLDERS. The Trust declares and
pays dividends of any 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 INVESTMENT MANAGER COMBINATION. Effective December
31, 1997, Zurich Insurance Company, the parent of
Zurich Kemper Investments, Inc. (ZKI), acquired a
majority interest in Scudder, Stevens & Clark, Inc.
(Scudder), another major investment manager. As a
result of this transaction, the operations of ZKI
were combined with Scudder to form a new global
investment organization named Scudder Kemper
Investments, Inc. (Scudder Kemper). The transaction
resulted in the termination of the Fund's
investment management agreement with ZKI, however,
a new investment management agreement between the
Fund and Scudder Kemper was approved by the Fund's
Board of Trustees and by the Fund's Shareholders.
The new management agreement, which was effective
December 31, 1997, is the same in all material
respects as the previous management agreement,
except that Scudder Kemper is the new investment
adviser to the Fund. In addition, the names of the
Fund's principal underwriter and shareholder
service agent were changed to Kemper Distributors,
Inc. (KDI) and Kemper Service Company (KSvC),
respectively.
MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper and pays a management
fee at an annual rate of .50% of average daily net
assets. The Fund incurred a management fee of
$24,000 for the six months ended January 31, 1998.
UNDERWRITING AGREEMENT. The Trust has an
underwriting agreement with KDI. Underwriting
commissions paid in connection with the
distribution of the Fund's shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY KDI BY KDI TO FIRMS
--------------- -------------------
<S> <C> <C>
Six months ended January 31, 1998 $47,000 $332,000
</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 ASF PAID BY
THE FUND TO KDI KDI TO FIRMS
--------------- ------------
<S> <C> <C>
Six months ended January 31, 1998 $12,000 $13,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Trust's transfer agent,
KSvC is the shareholder service agent for the Fund.
Under
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
the agreement, KSvC received shareholder service
fees of $7,000 for the six months ended January 31,
1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of
Scudder Kemper. For the six months ended January
31, 1998, the Fund made no payments to its officers
or trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended January 31, 1998,
investment transactions (excluding short-term
instruments) are as follows (in thousands):
<TABLE>
<S> <C>
Purchases $11,924
Proceeds from sales 1,848
</TABLE>
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED ONE MONTH ENDED MAY 1 TO
JANUARY 31,1998 JULY 31, 1997 JUNE 30, 1997
---------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,023 $10,043 253 $2,422 212 $1,930
-----------------------------------------------------------------------
Shares issued in
reinvestment of
dividends 15 151 -- -- -- --
-----------------------------------------------------------------------
Shares redeemed (45) (448) (9) (85) (2) (14)
-----------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE
TRANSACTIONS 993 $9,746 244 $2,337 210 $1,916
-----------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED ONE MONTH
JANUARY 31, ENDED MAY 1(A) TO
1998 JULY 31, JUNE 30,
(UNAUDITED) 1997 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.78 9.23 9.00
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .09 .01 .02
- --------------------------------------------------------------------------------
Net realized and unrealized gain .38 .54 .21
- --------------------------------------------------------------------------------
Total from investment operations .47 .55 .23
- --------------------------------------------------------------------------------
Less distribution from net investment
income .10 -- --
- --------------------------------------------------------------------------------
Net asset value, end of period $10.15 9.78 9.23
- --------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.83% 5.96 2.56
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------
Expenses 1.20% .95 1.17
- --------------------------------------------------------------------------------
Net investment income 1.53% 3.45 3.16
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Net assets at end of period (in
thousands) $14,800 4,550 2,043
- --------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 32% 6 12
- --------------------------------------------------------------------------------
Average commission rate paid per share on
stock transactions $.0595 .0602 .0597
- --------------------------------------------------------------------------------
</TABLE>
NOTES: Total return does not reflect the effect of any sales charges.
(a) Commencement of operations.
16
<PAGE> 17
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 3, 1997, a special shareholders' meeting was held. Kemper Target
Equity Fund-Kemper Retirement Fund Series VII shareholders were asked to vote on
three separate issues: election of the eight members to the Board of Trustees,
ratification of Ernst & Young LLP as independent auditors and approval of a new
investment management agreement.
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
James E. Atkins 39,454,675 591,508
Arthur R. Gottschalk 39,451,750 594,433
Frederick T. Kelsey 39,456,557 589,626
Daniel Pierce 39,458,148 588,035
Fred B. Renwick 39,480,893 565,290
John B. Tingleff 39,483,670 562,512
Edmond D. Villani 39,454,386 591,796
John B. Weithers 39,475,301 570,882
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
38,794,530 359,686 891,966
</TABLE>
3) Approval of a new investment management agreement with Scudder Kemper
Investments, Inc.
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
<S> <C> <C> <C>
403,584 2,823 8,054 652
</TABLE>
17
<PAGE> 18
NOTES
18
<PAGE> 19
19
NOTES
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY
Chairman and Trustee President
JAMES E. AKINS PHILIP J. COLLORA
Trustee Vice President,
Secretary and Treasurer
ARTHUR R. GOTTSCHALK
Trustee TRACY MCCORMICK CHESTER
Vice President
FREDERICK T. KELSEY
Trustee JERARD K. HARTMAN
Vice President
FRED B. RENWICK
Trustee THOMAS W. LITTAUER
Vice President
JOHN B. TINGLEFF
Trustee ANN M. MCCREARY
Vice President
EDMOND D. VILLANI
Trustee ROBERT C. PECK, JR.
Vice President
JOHN G. WEITHERS
Trustee KATHRYN L. QUIRK
Vice President
LINDA J. WONDRACK
Vice President
JOHN R. HEBBLE
Assistant Treasurer
MAUREEN E. KANE
Assistant Secretary
CAROLINE PEARSON
Assistant Secretary
ELIZABETH C. WERTH
Assistant Secretary
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- ----------------------------------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- ----------------------------------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania
Kansas City, MO 64105
- ----------------------------------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Target Equity Fund VII prospectus.
KRF7 - 3 (3/98) 1044940
