<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED JULY 31, 1999
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
"... when it comes to the stock market, you need to keep a long-term focus ...
as we saw during the annual period, long-term opportunities can often emerge out
of short-term volatility. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
Contents
3
Economic Overview
5
Performance Update
10
Largest Holdings
11
Portfolio of Investments
15
Report of Independent Auditors
16
Financial Statements
18
Notes to Financial Statements
21
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER RETIREMENT FUND SERIES VII
TOTAL RETURN*
- --------------------------------------------------------------------------------
(UNADJUSTED FOR ANY SALES CHARGE) FOR THE YEAR ENDED JULY 31, 1999
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
SERIES VII 5.25%
- --------------------------------------------------------------------------------
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE PERFORMANCE. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, 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
7/31/99 7/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
SERIES VII $10.95 $10.62
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME SHORT-TERM LONG-TERM
DIVIDEND CAPITAL GAIN CAPITAL GAIN
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SERIES
VII $0.21 $0.01 $0.01
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
BALANCE SHEET A listing of assets and liabilities and net worth showing the
position of a company at a certain time.
CYCLICAL STOCKS Cyclical stocks carry a higher degree of economic sensitivity.
In accelerating economies, cyclical stocks tend to rise quickly. In decelerating
economies, cyclicals tend to decline quickly. Cyclical stocks include industrial
machinery, paper and forestry, automobiles and construction.
GROWTH STOCKS Growth stocks are shares in companies that are expected to
experience rapid growth resulting from strong sales, talented management and
dominant market position. Because these stocks are typically in demand, they
tend to carry relatively high price tags and can also be volatile, based on
changing perceptions of the companies' growth.
NARROW MARKET Describes a stock market environment where only a few stocks
perform strongly, while the majority struggle. In contrast, in a broad market,
overall market gains are driven by a larger group of stocks.
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
In a widely anticipated move, the Federal Reserve Board raised its key
interest rate -- the overnight bank lending rate -- by one quarter of a point
(0.25%) in August in an effort to slow the U.S. economy and keep inflation under
control. The rate hike frustrates many investors, who do not understand why the
Fed is tightening when there are no signs of inflation.
Talk of rising interest rates began last spring, and on June 30 the Fed
boosted the overnight bank lending rate one quarter of a point (0.25%). With
this move the Fed said it was not inclined to increase rates again anytime
soon -- although it noted that it was alert to the potential emergence of
inflationary pressures that could undermine economic growth. Talk of a second
rate hike began in July after Fed Chairman Alan Greenspan's commentary to the
House Banking Committee, which was part of the Fed's twice-yearly outlook report
required by the Humphrey-Hawkins Full Employment and Balanced Growth Act of
1978. While Greenspan didn't say that the Fed definitely would raise the
overnight bank loan rate at its next meeting, the tone of his report included
more warnings than expected about the need to follow the June rate increase with
another, and speculation about another hike became reality at the August 24 Fed
meeting.
Many investors are frustrated by a rate hike when there are no signs of
inflation, but Fed policymakers look at the rate hike another way: If the June
30 increase was not enough to bring inflation risks into balance, a "euphoric"
rise in stocks may fuel increased consumer spending, which could necessitate a
more disruptive adjustment later. In its August 24 rate hike, the Fed was acting
promptly to prevent such an adjustment. In other words, the Fed strongly
believes that "a stitch in time saves nine" -- it wants to be preemptive by
raising interest rates and slowing the economy before an inflation problem
arises.
What data may confirm the Fed's theory? To start, the Fed forecasts that the
consumer price index (CPI), the average value of an imaginary "basket" of goods
and services in the economy, could rise as much as 2.5 percent this year, up
from 1.6 percent in 1998. The CPI is the standard measure of inflation in the
United States, so a marked increase would suggest rising inflation.
Employment growth also suggests inflation. Job creation has exceeded the
growth of the working-age population by almost one-half a percentage point
(0.50%) in the past year. The Fed believes that if the pool of job seekers
shrinks sufficiently, upward pressures on wage costs are likely. Such cost
increases have invariably presaged rising inflation in that past, and presumably
would in the future.
The Fed also believes that gross domestic product (GDP), the value of all
goods and services produced in the United States, is growing faster than it
would grow without inflation. The Fed believes that GDP can grow 3.0 percent to
3.5 percent per year without generating inflation. Actual 1998 GDP growth was
4.3 percent, and 1999 GDP growth is projected to be 3.8 percent.
Productivity growth is another indicator of inflation pressure. After
languishing at about 1 percent in the 1970s and 1980s, productivity growth has
been above 2 percent in each of the past three years. Over the past four
quarters it has increased 2.8 percent, and could reach 3.5 percent if
second-quarter productivity growth comes in close to 4 percent. According to the
Fed, this has enabled output to grow beyond what normally would have been
expected -- and has held down inflationary pressures. But productivity must
continue to grow at an ever faster pace to keep inflation from accelerating. The
Fed is concerned that the gains in technology that have fostered the
productivity growth will slow, and any inflationary pressures in the labor
market could ultimately show in product prices.
The improving global economy could also contribute to inflation. Improving
economic conditions around the world mean that the U.S. economy will no longer
experience declines in basic commodity and import prices that curtailed
inflation in recent years. A rise in the price of imported crude oil -- which is
used to make everything from gasoline to plastic bags -- is already up 57
percent this year. To the Fed, which cut interest rates by 75 basis points last
year because of a slowdown in the global economy, raising interest rates in June
and again in August was only "taking back" some of what it gave last year.
Clearly, then, Fed raised interest rates to slow the economy. As a result,
consumer spending will likely decrease, leading to a decline in corporate
profits. That will have negative effects on capital spending. The end result
could be a decline in the value of equities in general.
Although many economic analysts have moved past the August 24 rate hike and
are now speculating about what the Fed will do at its October 5 meeting, the
August rate hike will likely be the end of the Fed's interest in interest rates
for the next six months. The Fed is unlikely to raise rates between November and
February because of the Y2K issue: It doesn't want to encourage Y2K fears or
appear responsible for Y2K-related volatility in the financial markets.
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 (8/31/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate 1 5.94 5.00 5.34 6.30
Prime rate 2 8.06 7.75 8.50 8.50
Inflation rate 3* 2.00 1.60 1.68 2.16
The U.S. dollar 4 -6.36 -1.53 8.17 10.10
Capital goods orders 5* 11.84 5.11 3.05 10.30
Industrial production 5* 3.58 1.55 2.71 5.59
Employment growth 6* 2.17 2.37 2.67 2.39
</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 7/31/99.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
The long-term possibility of interest rate hikes is likely to be affected by
political considerations. Election primaries begin in February 2000. Will
candidates be talking about tax cuts? Medicare reform? Social Security reform?
These will be the issues to consider when we look at the economy in early- to
mid-2000.
Hopefully it will be as easy for investors to obtain information about Fed
policies at that time as it is today. The Humphrey-Hawkins hearings were created
to give Congress and the public some idea of economic growth and inflation. But
this round of Humphrey-Hawkins hearings could be the last, because the
Humphrey-Hawkins law expires this year. Although Greenspan has said he thinks it
is important for the Fed to report to Congress, and House Banking Committee
Chairman Jim Leach intends to press for a new law, there has been no move to
enact a new reporting requirement. Although the Fed could still provide
hearings, without a law forcing it to do so within a certain framework, we would
likely have no consistent basis for analyzing monetary policy.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF SCUDDER KEMPER INVESTMENTS ECONOMICS GROUP
AS OF AUGUST 27, 1999, AND MAY NOT ACTUALLY COME TO PASS. THIS INFORMATION IS
SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS AN INVESTMENT
RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[McCORMICK PHOTO]
TRACY MCCORMICK IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC. SHE
IS ALSO A VICE PRESIDENT AND PORTFOLIO MANAGER OF KEMPER RETIREMENT FUND SERIES
VII. TRACY MCCORMICK RECEIVED BOTH HER BA AND M.B.A. DEGREES FROM MICHIGAN STATE
UNIVERSITY. SHE BRINGS MORE THAN 15 YEARS OF INVESTMENT INDUSTRY EXPERIENCE.
[LANGBAUM PHOTO]
[DOLAN PHOTO]
PORTFOLIO MANAGER GARY LANGBAUM, CFA, AND SCOTT DOLAN ALSO CONTRIBUTE TO THE
MANAGEMENT OF THE FUND. THE TEAM IS SUPPORTED BY SCUDDER KEMPER INVESTMENTS,
INC.'S LARGE STAFF OF ANALYSTS, RESEARCHERS AND TRADERS.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE REPORT PERIOD, AS STATED ON THE COVER. THE MANAGERS'
VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON THE MARKET AND OTHER
CONDITIONS.
INTEREST-RATE SHIFTS, INVESTOR ANXIETY AND GLOBAL UNCERTAINTY WERE JUST A FEW OF
THE FACTORS THAT CONTRIBUTED TO A TURBULENT MARKET CLIMATE DURING THE FUND'S
FISCAL YEAR. DESPITE THIS VOLATILITY, LEAD PORTFOLIO MANAGER TRACY MCCORMICK LED
KEMPER RETIREMENT FUND SERIES VII TO A RESPECTABLE GAIN. BELOW, MCCORMICK
PROVIDES AN OVERVIEW OF THE MARKET, THE FUND'S PERFORMANCE AND HER INVESTMENT
STRATEGY.
Q BEFORE YOU DISCUSS THE FUND, COULD YOU PROVIDE AN OVERVIEW OF SOME OF THE
IMPORTANT EVENTS AND THEMES THAT DROVE THE MARKET?
A The fund began its fiscal year in August 1998, one of the most turbulent
months for the stock market. In late August, Russia defaulted on its debt,
sending shock waves across the global economy. Investors were already jittery
about the economic strength of Asia, Brazil and Latin America; news of Russia's
default unleashed a steep global market correction.
The Federal Reserve Bank stepped in quickly, cutting interest rates to
stimulate economic growth. Other countries followed suit. Leading nations came
together and developed plans to shore up the sagging economies.
These quick and cohesive actions were well received by investors, and the
domestic stock market rallied briskly in the fourth quarter of 1998. Strong
consumer confidence, low unemployment, low inflation, and steady, modest
corporate growth also contributed to an optimistic environment.
Yet, not all types of domestic stocks fared equally well. Because
investors remained nervous about market volatility, they tended to gravitate
toward stocks that offered the perception of stability. These were typically
large-cap, household-name companies. The domestic market was unusually narrow
(see Terms To Know on page 2), and only a handful of these large growth
companies propelled the performance of the stock market.
In a climate of high consumer confidence, retail and media stocks were
among those posting brisk gains. But technology stocks stole the show in the
fourth quarter. After struggling mightily since the Asian economic crisis of
1997, technology stocks saw the tides turn in their favor. Low valuations, an
improving supply/demand environment and the explosive growth of the Internet
propelled an enthusiastic rally.
In April, however, the markets changed direction, rotating from growth
stocks into more-cyclical issues, and broadening out to include more small- and
mid-cap stocks. Cyclical stocks (see Terms To Know on page 2) typically thrive
during times of accelerating economic growth, and many investors believed that
the economy was indeed positioned to grow more rapidly. The Federal Reserve's
move in June to tighten interest rates reinforced this view. Oil, chemical, and
industrial stocks benefited from the change of market direction, while
growth-oriented health-care and consumer-nondurable stocks faltered. Concerns
about trendy, high-priced technology stocks came home to roost, and many
Internet stocks dropped precipitously.
By June, however, this cyclical rotation slowed. At the close of the
fund's fiscal year, the domestic-
5
<PAGE> 6
PERFORMANCE UPDATE
stock market isn't moving with uniform momentum towards either cyclical or
growth-style stocks. Investors are paying more attention to company
fundamentals, but the possibility of additional interest-rate hikes continues to
leave many individuals ill at ease.
Q HOW DID THE FUND PERFORM?
A For the one-year period ending July 31, 1999, Kemper Retirement Fund
Series VII gained 5.25 percent (unadjusted for any sales charges).
While this return may seem modest compared to the fund returns that you
may see in newspaper headlines and investment magazines, keep in mind that this
fund typically invests less than half of its assets in stocks, and the remainder
in zero-coupon U.S. Treasury bonds. The bonds anchor the fund's guaranteed
return of original investment, but they also limit the fund's ability to
participate fully in the equity market. (The guaranteed return of original
investment applies only to shareholders who hold their investment to the fund's
maturity date of May 15, 2008, and who reinvest all dividends. Please see the
prospectus for more details.)
Q TELL US MORE ABOUT ZERO-COUPON U.S. TREASURY BONDS.
A Zero-coupon U.S. Treasury bonds are sold at considerable discount to their
face value. "Zero-coupon" means that the bondholder receives no periodic
interest payments. When the bonds mature, the bondholder receives the face value
of the bond. Because the U.S. government backs the bonds, the payment is
guaranteed.
Prior to maturity, the principal value of a zero-coupon bond is subject to
volatility, especially when interest rates are shifting. Generally, zero-coupon
bonds have higher prices when interest rates are low.
Q HOW DO YOU SELECT STOCKS?
A We follow a disciplined, research-intensive process. We invest primarily
in the stocks of established, large-cap, domestic companies. Before we buy a
stock, we require:
- Excellent company fundamentals
- Strong earnings-growth prospects
- Catalysts for potential growth, such as new management, products,
services or business strategies
- Attractive stock prices
In order to determine which stocks to buy, we rely on rigorous,
independent analysis. We need to understand a company inside and out. To do
this, we'll meet with a company's management, visit facilities, dig into balance
sheets (see Terms To Know on page 2), and apply thorough quantitative screens.
We don't let the conventional Wall Street buzz sway our judgement.
Another important element of our strategy involves analyzing secular or
industry trends, and targeting companies that are well-positioned to benefit
from those trends.
Q HOW DO YOU DECIDE WHAT STOCKS TO SELL?
A We'll begin to sell stocks when their prices reach the pre-established
targets we set for them. This sort of selling is often referred to as "profit
taking." Profit taking requires strict discipline, but we believe that this
discipline can keep us from getting caught up in emotion. We also eliminate
stocks when we see signs that company fundamentals could be weakening or
indications that growth potential could be deteriorating.
Q PLEASE HIGHLIGHT SOME EXAMPLES OF WHERE YOUR STOCK-SELECTION PROCESS
ENHANCED PERFORMANCE.
A Media and technology stocks were two groups that contributed especially
good gains.
MEDIA: Because they derive significant revenues from advertising, media
stocks have profited from high consumer confidence. As lengthening commute times
keep people in cars for longer periods, radio and outdoor advertising have
become increasing lucrative. Companies like Clear Channel Communications, a
leading provider of outdoor advertising and radio broadcasting, have taken
advantage of these trends. Certain media companies, such as AT&T -- Liberty
Media Group, also offer exposure to the growth of the Internet. In addition to
providing television programming, AT&T -- Liberty Media Group also has a corner
on some highly valued band-width. We believe that many of the largest Internet
players would be willing to pay a premium price for this bandwidth.
Tribune Company, Time Warner, and Univision Communications also earned
solid gains. Tribune and Time Warner are well-known companies, operating a
variety of diversified media services. Both have demonstrated the ability to
address -- and profit from -- the evolving needs of the marketplace. Univision
Communications is a leading player in a rapidly growing market segment --
Spanish-language radio and television. Univision may not be a household name
today, but
6
<PAGE> 7
PERFORMANCE UPDATE
it's a good example of an excellently managed company that is well positioned to
dominate its niche.
TECHNOLOGY: Our analysis had also led us to profitable technology stocks,
notably semiconductor and computer hardware stocks, including Motorola and
Hewlett-Packard. These, and other technology stocks, have provided the fund with
robust gains.
Motorola and Hewlett-Packard both demonstrate the benefits of our
independent research. We invested in Motorola in 1997, at a time when many Wall
Street analysts did not have a favorable view of the stock. We tuned out the
buzz and relied on our own research. In our analysis, Motorola offered several
catalysts for growth: The firm had clarified its focus, redefined its business
groups, and initiated cost-control measures. Our decision paid off: Motorola has
since posted very attractive earnings, and we've reaped an excellent return from
the stock.
Hewlett-Packard is also a good example of our stock-selection process in
action. Throughout the fall and summer of 1997, when many investors felt that
Hewlett-Packard wasn't a worthwhile proposition, we built exposure to the stock.
The company had been frank about recent problems with top-line growth and also
had significant exposure to troubled Asian markets. We considered these factors
carefully, but also looked deeper. Hewlett-Packard was battening down the
hatches on expenses, offered a healthy product cycle and had developed plans to
spin-off a portion of its operations. The firm had also brought in well-
regarded senior management from outside the firm. In short, we were seeing the
catalysts that we like to see. Our judgement proved on-track, Hewlett Packard
has made considerable progress in getting its house in order, and its stock
price has risen accordingly.
Q WHAT FACTORS HINDERED PERFORMANCE?
A In more general terms, the fund's hefty exposure in zero-coupon bonds
limited our ability to fully participate in the stock market's rebound. When the
market rotated toward value-oriented cyclicals in the spring, our more growth-
oriented style faced added challenges as well.
Waste Management Services proved to be a poor investment. We bought the
stock at an attractive valuation -- and saw its price rise dramatically through
the first portion of 1999. We were aware that Waste Management was grappling
with some accounting issues, but felt that its acquisition by USA Waste could
address these situations. Regrettably, our conviction in Waste Management was
not merited. In July, the firm fell short of earnings expectations. We saw that
the management did not have a firm hold on the company and had not appropriately
addressed the accounting issues. Thanks to our prompt liquidation, we were able
to sidestep much of the price decline that was to follow. Overall, we ended up
just a moderate degree behind where we started.
Some of our health-care stocks also fell short of expectations. Many
pharmaceutical stocks became richly valued, despite slowing product pipelines.
Although we had been paring back the fund's exposure, in retrospect we would
have been better served by a more-aggressive reduction. When the market took on
a more cyclical tilt in the spring, our pharmaceutical exposure clipped overall
gains, as stocks such as Abbott Laboratories and Pfizer stumbled. American Home
Products has faced uphill ground in the wake of legislation surrounding its diet
drug "fen-phen." Our analysis indicates that the market has over-discounted the
impact of possible judgements against the company, so we continue to hold the
stock.
Q TECHNOLOGY STOCKS ARE WELL REPRESENTED IN THE PORTFOLIO. COULD YOU TELL US
MORE ABOUT THE FUND'S TECHNOLOGY EXPOSURE?
A We've found many attractively valued technology stocks. Throughout the
annual period, we've favored component, networking and hardware companies. We're
particularly interested in companies that have embraced the electronic-commerce
revolution with compelling business models and product plans. Companies that fit
this criteria include Intuit, Novell and Oracle Systems.
We're also interested in technology companies that are leveraging the
potential of contract manufacturing, or outsourcing. A contract-manufacturing
arrangement allows a company to focus and build on its core competencies, such
as product development, while outsourcing the manufacturing to another company.
Typically, the contract manufacturer can produce the goods at a reduced cost.
We've been particularly impressed with the ways that companies such as Cisco
Systems have used outsourcing to enhance growth. We also hold a position in
Solectron, a leading contract manufacturer.
Meanwhile, we're steering clear of the trendy, untested ".com" stocks.
Simply put, we need quality fundamentals, not hype. We're also being very
vigilant about companies that
7
<PAGE> 8
PERFORMANCE UPDATE
could be most susceptible to Year 2000 spending slowdowns.
Q WHERE ELSE ARE YOU FINDING OPPORTUNITIES?
A Within the financial-services industry, we've built exposure to property
and casualty insurance companies, such as St. Paul Companies. Many insurers have
endured a long down-cycle, characterized by weak cash flow and overcapacity.
More recently, however, pricing has improved and there are signs of improved
retention.
We've also added stocks that provide cyclical exposure without sacrificing
growth. Stocks that have met these dual criteria include industrial-machinery
producer Parker-Hannifin, and chemical manufacturer Air Products & Chemicals.
Air Products hasn't yet performed as briskly as we had anticipated, but our
analysis suggests that the stock still offers good longer-term potential.
We've also done some repositioning of our health-care stocks. The
valuations of many pharmaceutical companies are stretched. Also, many of the
pharmaceutical giants have experienced slowdowns in their product pipelines. In
contrast, many biotech and medical supply companies offer more attractive
valuations and opportunities for growth. So, our analysis has encouraged us to
pare back exposure to pharmaceuticals in favor of these other segments of the
health-care sector.
Apart from media stocks, the portfolio does include some other
consumer-staple stocks, but we've been particularly selective here. Recently, we
haven't found many consumer-staple stocks that offer the attractively valued
growth potential that we seek. Many have experienced difficulties generating
top-line growth. PepsiCo is one stock that makes the grade, however. Here, we're
seeing improved cost-controls, and reinvigorated management. PepsiCo has
sharpened its focus, spinning off its restaurant and bottling divisions to focus
on the more lucrative potential of its core beverage market and the Frito-Lay
brand. In fact, PepsiCo is one of the fund's largest holdings, and we also have
exposure to its spin-off, Pepsi Bottling Group.
Q TRACY, GIVEN THE VOLATILITY OF THIS PAST YEAR, DO YOU HAVE ANY CLOSING
THOUGHTS FOR SHAREHOLDERS?
A The past year reminds us that stock investing brings both ups and downs.
The events of the past year also emphasize that, when it comes to the stock
market, you need to keep a long-term focus. Short-term market volatility can be
uncomfortable, but we encourage shareholders to look to the benefits of the
investment program they have established with Kemper Retirement Fund. Through
its zero-coupon bonds, Kemper Retirement Fund provides shareholders with a
guaranteed return of initial investment and a more secure way to participate in
the stock market. The target-maturity structure supports a long-term investment
discipline. (Please see the prospectus for important details and conditions
about the guarantee.)
Lastly, as we saw during the annual period, long-term opportunities can
often emerge out of short-term volatility. We are committed to using Scudder
Kemper Investments' disciplined, independent research to pursue these
opportunities on behalf of the shareholders.
IMPORTANT NOTICE FOR SHAREHOLDERS OF KEMPER RETIREMENT FUND -- SERIES VII
On November 15, 1999, Kemper Retirement Fund Series VII will reach the end of
its limited offering period, as outlined in the prospectus. Existing
shareholders may add to investments in Series VII until November 30, 1999. For
more information, please refer to the information that you have recently
received in the mail. If you would like more information, please contact your
financial representative or call Kemper Shareholder Services at (800) 621-1048.
8
<PAGE> 9
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED JULY 31, 1999 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR LIFE OF FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER RETIREMENT FUND SERIES VII -0.03% 8.12% (since 5/1/97)
- ---------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER RETIREMENT FUND SERIES VIII
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Series VIII shares from
5/1/97 to 7/31/99
<TABLE>
<CAPTION>
LEHMAN BROTHERS
KEMPER RETIREMENT RUSSELL 1000 GROWTH GOVERNMENT/CORPORATE S&P 500 STOCK
FUND SERIES VIII(1) INDEX+ BOND++ INDEX+++
------------------ ------------------- -------------------- -------------
<S> <C> <C> <C> <C>
5/1/97 10000 10000 10000 10000
12/31/97 10645 11352 10812 11553
12/31/98 12237 15745 11837 14854
7/31/99 11922 16838 11536 16175
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE PERFORMANCE. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST.
* AVERAGE ANNUAL TOTAL RETURN AND TOTAL RETURN MEASURE NET INVESTMENT INCOME
AND CAPITAL GAIN OR LOSS FROM PORTFOLIO INVESTMENTS, ASSUMING REINVESTMENT
OF ALL DIVIDENDS. AVERAGE ANNUAL TOTAL RETURN REFLECTS ANNUALIZED CHANGE
WHILE TOTAL RETURN MEASURES AGGREGATE CHANGE. DURING THE PERIODS NOTED,
SECURITIES PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION, SEE THE PROSPECTUS
AND STATEMENT OF ADDITIONAL INFORMATION AND THE FINANCIAL HIGHLIGHTS AT THE
END OF THIS REPORT.
(1) PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE OF 5.0%. WHEN COMPARING KEMPER RETIREMENT FUND SERIES
VII TO THE INDICES YOU SHOULD NOTE THAT THE FUND'S PERFORMANCE REFLECTS THE
MAXIMUM SALES CHARGE, WHILE NO SUCH CHARGES ARE REFLECTED IN THE PERFORMANCE
OF THE INDICES.
+ THE RUSSELL 1000(R) GROWTH INDEX IS AN UNMANAGED INDEX COMPRISED OF COMMON
STOCKS OF LARGER U.S. COMPANIES WITH GREATER THAN AVERAGE GROWTH ORIENTATION
AND REPRESENTS THE UNIVERSE OF STOCKS FROM WHICH "EARNINGS/GROWTH" MONEY
MANAGERS TYPICALLY SELECT. ASSUMES REINVESTMENT OF DIVIDENDS. SOURCE IS CDA
WIESENBERGER.
++ THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX IS AN UNMANAGED INDEX
COMPRISED OF INTERMEDIATE AND LONG-TERM GOVERNMENT AND INVESTMENT GRADE
CORPORATE DEBT SECURITIES. SOURCE IS CDA WIESENBERGER.
+++ THE S&P 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE OF
THE U.S. STOCK MARKET. CDA WIESENBERGER.
9
<PAGE> 10
LARGEST HOLDINGS
THE FUND'S 10 LARGEST STOCK HOLDINGS*
Representing 22.5 percent of the fund's total common stocks on July 31, 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
HOLDINGS PERCENT
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
1. MICROSOFT Develops, markets and supports a 3.2%
variety of microcomputer
software, operating systems,
language and application
programs, related books and
peripheral devices.
- ----------------------------------------------------------------------------------------
2. MOTOROLA Manufactures components, notably 2.8%
semiconductors, and electronic
communications equipment.
- ----------------------------------------------------------------------------------------
3. HEWLETT-PACKARD Large supplier of enterprise 2.4%
computer systems. Products
include low-cost printers and
personal computers.
- ----------------------------------------------------------------------------------------
4. CISCO SYSTEMS Large, comprehensive supplier of 2.3%
routing software and related
systems that direct the flow of
data between local networks.
- ----------------------------------------------------------------------------------------
5. INTEL Engaged in the design, 2.3%
development, manufacture and
sale of advanced microcomputer
components, such as integrated
circuits and other related
products.
- ----------------------------------------------------------------------------------------
6. PEPSICO Leading global provider of 2.0%
beverages and snack foods.
Brands include 7-UP, Pepsi, Diet
Pepsi, Tropicana Products and
Frito-Lay.
- ----------------------------------------------------------------------------------------
7. BELL ATLANTIC Provider of information and 2.0%
telecommunications services.
Subsidiaries provide telephone
services to mid-Atlantic region,
cellular telecommunications,
software, network support and
computer maintenance.
- ----------------------------------------------------------------------------------------
8. CITIGROUP Leading global financial-service 1.9%
provider. Operations include a
wide variety of insurance
products and banking services,
managed health-care programs,
asset management, investment
services and credit-card
services.
- ----------------------------------------------------------------------------------------
9. EMERSON ELECTRIC Engaged in the design, 1.8%
manufacture and sale of
electrical, electromechanical
and electronic products and
systems.
- ----------------------------------------------------------------------------------------
10. GENERAL ELECTRIC A broadly diversified company 1.8%
with major businesses in power
generators, appliances,
lighting, plastics, medical
systems, aircraft engines,
financial services and
broadcasting.
- ----------------------------------------------------------------------------------------
</TABLE>
* The fund's holdings are subject to change.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER RETIREMENT FUND--SERIES VII
Portfolio of Investments at July 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS--62.8%
U.S. Treasury, Strip, zero coupon, 2008
(Cost: $31,576) $51,700 $29,967
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NUMBER OF
COMMON STOCKS SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--2.2% Ameritech Corp. 1,800 132
TELEPHONE/ AT&T Corp. 3,025 157
COMMUNICATIONS Bell Atlanta Corp. 5,000 319
BellSouth Corp. 2,500 120
Frontier Corp. 1,100 61
(a)MCI WorldCom, Inc. 1,350 111
SBC Communication, Inc. 3,000 172
-------------------------------------------------------------------------------
1,072
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER CVS Corp. 2,000 100
DISCRETIONARY--2.6% Dayton Hudson Corp. 3,000 194
DEPARTMENT STORE Dollar General Corp. 5,000 132
CHAINS--1.9% Home Depot, Inc. 3,200 204
Wal-Mart Stores, Inc. 6,500 275
-------------------------------------------------------------------------------
905
HOTELS & CASINOS--0.2%
(a) Mirage Resorts, Inc. 5,300 75
-------------------------------------------------------------------------------
RESTAURANTS--0.5%
McDonald's Corp. 5,300 221
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--2.3% Albertson's Inc. 2,675 133
FOOD & BEVERAGE--1.8% Dean Foods Inc. 2,000 87
H.J. Heinz Co. 3,300 156
Pepsi Bottling Group, Inc. 7,000 165
PepsiCo, Inc. 8,300 325
-------------------------------------------------------------------------------
866
PACKAGE GOODS/
COSMETICS--0.5% Procter & Gamble Co. 2,750 249
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
DURABLES--0.1%
TELECOMMUNICATIONS
EQUIPMENT Lucent Technologies, Inc. 1,000 65
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
ENERGY--1.9% Conoco Inc. "A" 2,800 73
OIL & GAS Royal Dutch Petroleum Co. 3,500 214
COMPANIES--0.6% -------------------------------------------------------------------------------
287
OIL COMPANIES--1.0% Chevron Corp. 1,400 128
Mobil Corp. 1,200 123
Texaco, Inc. 1,800 112
Unocal Corp. 2,000 79
-------------------------------------------------------------------------------
442
OILFIELD SERVICES/
EQUIPMENT--0.3% Schlumberger Ltd. 2200 133
-------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL--5.5%
BANKS--1.5%
BankAmerica Corp. 3,263 $ 216
Chase Manhattan Corp. 2,000 154
Compass Bancshares 3,750 108
First Tennessee National Corp. 3,000 110
J.P. Morgan & Co., Inc. 1,000 128
-------------------------------------------------------------------------------
716
CONSUMER FINANCE--1.4%
American Express Credit Corp. 1,900 250
Capital One Finance Corp. 2,000 93
Citigroup, Inc. 6,850 305
-------------------------------------------------------------------------------
648
INSURANCE--2.0%
American International Group, Inc. 2,000 232
CIGNA Corp. 3,000 264
Jefferson-Pilot Corp. 2,850 208
St. Paul Companies, Inc. 5,000 156
UnumProvident Corp. 1,500 78
-------------------------------------------------------------------------------
938
OTHER FINANCIAL
COMPANIES--0.6% (a) Goldman Sachs Group, Inc. 800 51
Household International, Inc. 5,759 247
-------------------------------------------------------------------------------
298
- ---------------------------------------------------------------------------------------------------------------------------
HEALTH--3.9%
BIOTECHNOLOGY--0.1%
(a) Biogen, Inc. 900 62
-------------------------------------------------------------------------------
HEALTH INDUSTRY SERVICES--0.3%
(a) Wellpoint Health Networks, Inc. 2,000 164
-------------------------------------------------------------------------------
MEDICAL SUPPLY & SPECIALTY--1.0%
Baxter International, Inc. 4,000 275
Medtronic Inc. 2,890 208
-------------------------------------------------------------------------------
483
PHARMACEUTICALS--2.5%
Abbott Laboratories 3,900 167
Allergan, Inc. 300 28
American Home Products Corp. 4,200 214
Bristol-Meyers Squibb Co. 3,850 256
Pfizer, Inc. 5,000 170
Schering-Plough Corp. 3,100 152
Warner-Lambert Co. 3,500 231
-------------------------------------------------------------------------------
1,218
- ---------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--2.8%
DIVERSIFIED MANUFACTURING--1.0%
General Electric Co. 2,600 283
Tyco International Ltd. 1,500 147
-------------------------------------------------------------------------------
430
ELECTRICAL PRODUCTS--0.6%
Emerson Electric Co. 4,900 292
-------------------------------------------------------------------------------
MACHINERY/COMPONENTS/
CONTROLS--0.7%
Federal-Mogul Corp. 2,600 126
Parker-Hannifin Corp. 4,100 193
-------------------------------------------------------------------------------
319
OFFICE EQUIPMENT/
SUPPLIES--0.2%
Xerox Corp. 2,000 98
-------------------------------------------------------------------------------
SPECIALTY CHEMICALS--0.3%
Air Products & Chemicals, Inc. 4,500 150
-------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MEDIA--3.2%
ADVERTISING--0.3%
Young & Rubicam 3,100 $ 140
-------------------------------------------------------------------------------
BROADCASTING & ENTERTAINMENT--1.5%
(a) CBS Corp. 4,400 193
(a) Clear Channel Communications, Inc. 1,504 105
(a) Infinity Broadcasting Corp. 3,700 102
Time Warner, Inc. 1,950 140
(a) Univision Communication, Inc. 2,500 173
-------------------------------------------------------------------------------
713
CABLE TELEVISION--1.0%
(a) AT&T Corp.--Liberty Media Group 6,000 222
(a) Media One Group, Inc. 3,000 217
-------------------------------------------------------------------------------
439
PRINT MEDIA--0.4%
Tribune Co. 2,000 176
-------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--0.8%
EDP SERVICES
Automatic Data Processing, Inc. 3,600 144
Electronic Data Systems Corp. 3,800 230
-------------------------------------------------------------------------------
374
- ---------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--7.8%
COMPUTER SOFTWARE--1.8%
(a) Intuit, Inc. 2,500 205
(a) Microsoft Corp. 6,000 515
(a) Oracle Systems Corp. 4,300 164
-------------------------------------------------------------------------------
884
DIVERSE ELECTRONIC
PRODUCTS--1.5%
(a) Applied Materials, Inc. 2,000 144
Motorola, Inc. 5,000 456
(a) Solectron Corp. 2,000 129
-------------------------------------------------------------------------------
729
ELECTRONIC COMPONENTS/
DISTRIBUTORS--0.8%
(a) Cisco Systems, Inc. 6,100 379
-------------------------------------------------------------------------------
ELECTRONIC DATA
PROCESSING--1.6%
Hewlett-Packard Co. 3,750 393
International Business Machines Corp. 1,800 226
(a) Sun Microsystems, Inc. 2,600 176
-------------------------------------------------------------------------------
795
MILITARY ELECTRONICS--0.4%
Raytheon Co. "A" 2,962 206
-------------------------------------------------------------------------------
OFFICE/PLANT
AUTOMATION--0.3%
(a) Novell, Inc. 6,300 162
-------------------------------------------------------------------------------
SEMICONDUCTORS--1.4%
Intel Corp. 5,400 373
Texas Instruments, Inc. 1,275 184
(a) Xilinx, Inc. 2,100 131
-------------------------------------------------------------------------------
688
- ---------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--0.7%
RAILROADS
Canadian National Railway Co. 2,700 182
Norfolk Southern Corp. 5,200 152
-------------------------------------------------------------------------------
334
-------------------------------------------------------------------------------
TOTAL COMMON STOCKS--33.8%
(Cost: $13,214) 16,150
-------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET
INSTRUMENTS--3.4
(b) Repurchase agreements
State Street Bank and Trust Company
dated 7/30/99, 5.04%, due 8/02/99 $ 302 $ 302
Commercial Paper
Yield--5.06%
Due--August 1999 1,300 1,299
-------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--3.4%
(Cost: $1,601) 1,601
-------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $46,391) $47,718
-------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Repurchase agreements are fully collaterized by the U.S. Treasury or U.S.
Government agency securities.
Based on the cost of investments of $46,392,000 for federal income tax purposes
at July 31, 1999, the gross unrealized appreciation was $3,104,000, the gross
unrealized depreciation was $1,778,000 and the net unrealized appreciation on
investments was $1,326,000.
See accompanying Notes to Financial Statements.
14
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER TARGET EQUITY FUND--
KEMPER RETIREMENT FUND SERIES VII
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Target Equity Fund--Kemper
Retirement Fund Series VII as of July 31, 1999, the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended and the financial highlights for each of the
fiscal periods since 1997. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of July
31, 1999, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Target Equity Fund--Kemper Retirement Fund Series VII at July 31, 1999, the
results of its operations, the changes in its net assets and the financial
highlights for the periods referred to above in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 16, 1999
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
Investments, at value
(Cost: $46,391) $47,718
- -----------------------------------------------------------------------
Cash 1
- -----------------------------------------------------------------------
Foreign taxes recoverable 1
- -----------------------------------------------------------------------
Receivable for:
Investments sold 134
- -----------------------------------------------------------------------
Fund shares sold 73
- -----------------------------------------------------------------------
Dividends and interest 10
- -----------------------------------------------------------------------
TOTAL ASSETS 47,937
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
LIABILITIES
- -----------------------------------------------------------------------
Payable for:
Investments purchased 155
- -----------------------------------------------------------------------
Fund shares redeemed 107
- -----------------------------------------------------------------------
Management fee 19
- -----------------------------------------------------------------------
Administrative services fee 18
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 33
- -----------------------------------------------------------------------
Trustees' fees and other 14
- -----------------------------------------------------------------------
Total liabilities 346
- -----------------------------------------------------------------------
NET ASSETS, AT MARKET VALUE $47,591
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income $ 739
- -----------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments 1,327
- -----------------------------------------------------------------------
Accumulated net realized loss on investments (9)
- -----------------------------------------------------------------------
Paid-in capital 45,534
- -----------------------------------------------------------------------
NET ASSETS, AT MARKET VALUE $47,591
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($47,591 /4,347 shares outstanding) $10.95
- -----------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE
(net asset value, plus 5.26% of
net asset value or 5.00% of offering price) $11.53
- -----------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended July 31, 1999
(in thousands)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------
Interest income $1,415
- ----------------------------------------------------------------------
Dividends (net of foreign taxes withheld of $1) 146
- ----------------------------------------------------------------------
Total investment income 1,561
- ----------------------------------------------------------------------
Expenses:
Management fee 193
- ----------------------------------------------------------------------
Administrative services fee 96
- ----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 103
- ----------------------------------------------------------------------
Trustees' fees 5
- ----------------------------------------------------------------------
Reports to shareholders 35
- ----------------------------------------------------------------------
Audit 8
- ----------------------------------------------------------------------
Legal 3
- ----------------------------------------------------------------------
Registration fee 7
- ----------------------------------------------------------------------
Other 5
- ----------------------------------------------------------------------
Total expenses 455
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 1,106
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ----------------------------------------------------------------------
Net realized gain (loss) on investments (5)
- ----------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) on
investments 271
- ----------------------------------------------------------------------
Net gain on investments 266
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,372
- ----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------
1999 1998
- -----------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 1,106 443
- -----------------------------------------------------------------------------------------
Net realized income (loss) (5) 65
- -----------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) 271 870
- -----------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,372 1,378
- -----------------------------------------------------------------------------------------
Distribution from net investment income (699) (125)
- -----------------------------------------------------------------------------------------
Distribution from net realized gain (66) --
- -----------------------------------------------------------------------------------------
Total dividends to shareholders (765) (125)
- -----------------------------------------------------------------------------------------
Net increase from capital share transactions 21,197 19,984
- -----------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 21,804 21,237
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------
Beginning of period 25,787 4,550
- -----------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment income
of $739 and $332, respectively) $47,591 25,787
- -----------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUND Kemper Retirement Fund Series VII (the "fund") is a
diversified/non-diversified series of Kemper Target
Equity Fund (the "Trust") which is registered under
the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end management investment
company organized as a Massachusetts business
trust. Fund shares are sold to the public during a
limited offering period, which is expected to end
November 30, 1999.
The fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the fund in the
preparation of its financial statements. 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 SECURITY VALUATION. Investments are stated at value
determined as of the close of regular trading on
the New York Stock Exchange. Securities which are
traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on
the exchange on which the security is traded most
extensively. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation is used. Securities quoted on the Nasdaq
Stock Market ("Nasdaq"), for which there have been
sales, are valued at the most recent sale price
reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are
not quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the
calculated mean between the most recent bid and
asked quotations on such market. If there are no
such bid and asked quotations, the most recent bid
quotation shall be used.
Portfolio debt securities purchased with an
original maturity greater than sixty days are
valued by pricing agents approved by the officers
of the Trust, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the most
recent bid quotation supplied by a bona fide market
maker shall be used. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
REPURCHASE AGREEMENTS. The fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
be maintained at such a level that the market value
is equal to at least the principal amount of the
repurchase price plus accrued interest.
FEDERAL INCOME TAXES. The fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the fund paid no federal income taxes
and no federal income tax provision was required.
At July 31, 1999, the fund had a net tax basis
capital loss carryforward of approximately $4,000
which may be applied against any realized net
taxable capital gains of each succeeding year until
fully utilized or until July 31, 2007, the
expiration date.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made annually.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. These differences primarily relate to
securities sold at a loss. As a result, net
investment income (loss) and net realized gain
(loss) on investment transactions for a reporting
period may differ significantly from distributions
during such period. Accordingly, the fund may
periodically make reclassifications among certain
of its capital accounts without impacting the net
asset value of the fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Realized gains and losses
from investment transactions are recorded on an
identified cost basis. All discounts are accreted
for both tax and financial reporting purposes.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the annual rate of .50%
of average daily net assets. The fund incurred a
management fee of $193,000 for the year ended July
31, 1999.
UNDERWRITING AGREEMENT. The Trust has an
underwriting agreement with Kemper Distributors,
Inc. (KDI). Underwriting commissions retained by
KDI in connection with the distribution of the
fund's shares for the year ended July 31, 1999 are
$52,000.
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 paid by the fund to KDI for the year
ended July 31, 1999 are $96,000.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Trust's transfer agent,
Kemper Service Company (KSvC) is the shareholder
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
service agent for the fund. Under the agreement,
KSvC received shareholder services fees of $61,000
for the year ended July 31, 1999.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the trust are also officers or directors of
Scudder Kemper. For the year ended July 31, 1999,
the fund made no payments to its officers and
incurred trustees' fees of $5,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended July 31, 1999, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $29,288
Proceeds from sales 9,854
- --------------------------------------------------------------------------------
5
CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JULY 31
1999 1998
----------------- -----------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,310 $25,523 2,064 $21,046
------------------------------------------------------------------------------
Shares issued in reinvestment of
dividends 66 737 16 151
------------------------------------------------------------------------------
Shares redeemed (457) (5,063) (117) (1,213)
------------------------------------------------------------------------------
NET INCREASE FROM CAPITAL SHARE
TRANSACTIONS $21,197 $19,984
------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MONTH
ENDED MAY 1(A) TO
YEARS ENDED JULY 31 JULY 31, JUNE 30,
1999 1998 1997 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------
Net asset value, beginning of period $ 10.62 9.78 9.23 9.00
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .32 .21 .01 .02
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .24 .73 .54 .21
- ----------------------------------------------------------------------------------------
Total from investment operations .56 .94 .55 .23
- ----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .21 .10 -- --
- ----------------------------------------------------------------------------------------
Distributions from net realized gain .02 -- -- --
- ----------------------------------------------------------------------------------------
Total dividends .23 .10 -- --
- ----------------------------------------------------------------------------------------
Net asset value, end of period $ 10.95 10.62 9.78 9.23
- ----------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.25% 9.68 5.96 2.56
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------
Expenses 1.18% 1.21 .95 1.17
- ----------------------------------------------------------------------------------------
Net investment income 2.86% 2.79 3.45 3.16
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------
Net assets at end of period (in
thousands) $47,591 25,787 4,550 2,043
- ----------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 26% 43 6 12
- ----------------------------------------------------------------------------------------
</TABLE>
NOTES: Total return does not reflect the effect of any sales charges. Per share
data for the year ended July 31, 1999 was determined based on average shares
outstanding.
(a) Commencement of operations.
TAX INFORMATION
The Fund paid distributions of $.01 per share from net long-term capital gains
during its year ended July 31, 1999 of which 100% represents 20% rate gains.
For corporate shareholders, 20% of the income dividends paid during the Fund's
fiscal year ended July 31, 1999 qualified for the dividends received deduction.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your account, please call 1-800-621-1048.
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
JAMES E. AKINS MARK S. CASADY
Trustee President
JAMES R. EDGAR PHILIP J. COLLORA
Trustee Vice President and
Secretary
ARTHUR R. GOTTSCHALK
Trustee JOHN R. HEBBLE
Treasurer
FREDERICK T. KELSEY
Trustee TRACY MCCORMICK
Vice President
THOMAS W. LITTAUER
Trustee and Vice President ANN M. MCCREARY
Vice President
FRED B. RENWICK
Trustee KATHRYN L. QUIRK
Vice President
JOHN G. WEITHERS
Trustee
CORNELIA SMALL
Vice President
LINDA J. WONDRACK
Vice President
MAUREEN E. KANE
Assistant Secretary
CAROLINE PEARSON
Assistant Secretary
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
- --------------------------------------------------------------------------------
CUSTODIAN STATE STREET BANK AND TRUST
225 Franklin Street
Boston, MA 02110
- --------------------------------------------------------------------------------
INDEPENDENT ERNST & YOUNG LLP
AUDITORS 233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Target Equity Fund VII prospectus.
KRF7 - 2 (9/28/99) 1086190
