<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED JANUARY 31, 1999
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
"... Given the challenges of the market climate, we are
very pleased with the fund's performance ...Our stock
selection was strong, and translated into good gains. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
9
LARGEST HOLDINGS
10
PORTFOLIO OF
INVESTMENTS
13
FINANCIAL STATEMENTS
15
NOTES TO
FINANCIAL STATEMENTS
18
FINANCIAL HIGHLIGHTS
19
SHAREHOLDERS' MEETING
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER RETIREMENT FUND SERIES VII
TOTAL RETURN*
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED JANUARY 31, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
SERIES VII 10.15%
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not guarantee future results.
Investment returns and principal values will fluctuate so that shares, when
redeemed, may be worth 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
1/31/99 7/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
SERIES VII $11.46 $10.62
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER RETIREMENT FUND SERIES VII
RANKINGS AS OF 1/31/99
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER BALANCED TARGET MATURITY CATEGORY**
<TABLE>
<CAPTION>
CLASS A
- --------------------------------------------------------------------------------
<S> <C>
1-YEAR #1 of 13 funds
- --------------------------------------------------------------------------------
</TABLE>
**Lipper analytical services, inc. rankings are based upon changes in net asset
value with all dividends reinvested and do not include the effect of sales
charges and, if they had, results may have been less favorable.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE SIX-MONTH PERIOD ENDED JANUARY 31, 1999, THE FUND PAID THE FOLLOWING
DIVIDENDS PER SHARE:
<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
CONSUMER NONDURABLES STOCKS The stocks from a variety of industries, including
food, restaurants, retail, services and entertainment. Consumer nondurable
companies produce goods or services that tend to be consumed or replaced within
a relatively short period of time. In contrast, consumer durables (such as autos
and furniture) are held for longer periods of time. Due to the steadier demand
for consumer nondurables, stocks in this sector are often considered more
defensive in nature.
GRAY MONDAY On Monday, October 27, 1997, turmoil in Southeast Asian markets
triggered a one-day drop of seven percent in the U.S. equity market.
IMF AND G7 NATIONS Two international groups focusing on international economics
and monetary policy. The International Monetary Fund (IMF) is an agency of the
United Nations. The Group of Seven (G7) is an economic alliance of seven leading
nations, including the United States.
TWO-TIER MARKET Describes a security market in which the majority of gains are
earned by a small group of companies. In 1998, a two-tier market existed in
which only the largest growth-style stocks enjoyed particularly robust gains.
<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.
SILVIA HOLDS A BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND 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 MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
IN THE WORLD, MANAGING MORE THAN $280 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:
If you think the first quarter of 1999 has seemed rather anticlimactic compared
to 1998, you're not alone. The year began with a quiet bang in the U.S. stock
market, with the Dow Jones Industrial Average hitting an all-time high of 9643
points in the first week of January. While stock market volatility has
continued, it seems to be phasing investors less and less. Even global events
are being taken in stride. Europe's Economic and Monetary Union (EMU) was
launched without much notice. And when Brazil's economy recently took a turn for
the worse, Wall Street was only mildly concerned. Also contributing to today's
laid-back attitude -- the impeachment trial of President Clinton has all but
fizzled into obscurity without significantly affecting the U.S. economy or
markets.
Indeed, the U.S. economy looks good. The fundamentals by which we measure the
state of the economy remain strong. We continue to see solid consumer spending
growth, continued investment spending and low inflation. This suggests that
there are no internal problems for continued U.S. economic growth.
Additionally, we can expect the Federal Reserve Board to keep short-term
interest rates steady. On February 3, the Fed left interest rates unchanged. It
is likely that this "hands-off" approach will continue at the Fed's March 30
meeting, particularly if U.S. inflation remains in check and there is a degree
of financial instability in the international arena.
The U.S. budget surplus for 1998 came in at $60 billion, with another budget
surplus of between $80 billion and $100 billion expected for fiscal 1999. Growth
in the nation's gross domestic product (GDP), which represents the total value
of all goods and services produced within the U.S. economy, has remained steady.
GDP, driven by consumer spending, is expected to grow at an annualized rate of
approximately 3 to 3.5 percent in 1999. We also anticipate modest capital
spending growth and inventory growth.
The consumer price index (CPI) remains in the vicinity of 2 percent. However,
energy prices, which were down 6 to 7 percent last year and helped keep the CPI
down, are unlikely to remain so low this year. For 1999, inflation should
register at 2 to 2.5 percent.
Employment growth has slowed to 2 percent, but combined with real wage growth
of between 2 percent and 2.5 percent, produces real income growth between 4
percent and 5 percent. In addition, gains in household net worth, which tends to
fuel consumer spending, are on the rise. Banks appear to be only a little less
willing to lend in 1999, so the threat of a general credit crunch is minimal. As
a result of all these factors, consumer spending should continue to grow this
year.
On a less positive note, corporate profits have slowed in 1999, growing at a
rate of 1 percent to 3 percent on a year-over-year basis. As a result, we may
see a slowdown in capital spending this year. The current U.S. account deficit
is rising, which suggests the U.S. economy is increasingly dependent on foreign
capital inflows to finance its economic activity. This is acceptable as long as
foreign money continues to flow in. But if foreign investors, particularly the
Japanese, no longer wish to invest in the United States, we can expect pressure
on interest rates and the dollar, as well as increased uncertainty and market
volatility.
Given the events of the last two years, investors may be comforted by the fact
that the U.S. markets and economy have withstood the test of tumultuous times.
While certain countries, such as Malaysia, Indonesia, Brazil and Russia, are
still suffering from economic crises, others, including the Philippines, South
Korea, Thailand and China, continue to recover and grow. As long as the Fed and
the Group of Eight leading industrial nations (G8) are committed to avoiding
recession on national and global levels respectively, investors have a good
chance of experiencing a more stable economic environment.
At home, there has been somewhat of a slowdown in manufacturing, as reduced
U.S. exports reflect foreign economic turmoil. But the global impact of the
Asian crisis still has not hit the U.S. as hard as some analysts expected.
Indeed, Asian turmoil has not affected U.S. export
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 (2/28/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 5 5.34 5.57 6.42
Prime rate(2) 7.75 8.5 8.5 8.25
Inflation rate(3) 1.6 1.68 1.63 3.04
The U.S. dollar(4) -1.53 8.17 5.05 7.67
Capital goods orders(5)* 5.53 3.05 12.61 3.93
Industrial production(5)* 1.72 2.71 5.92 6.44
Employment growth(6) 2.23 2.69 2.78 2.47
</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, 1999.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
volumes as much as it has lowered import prices and helped reduce global
interest rates.
Ultimately, Europe's recently inaugurated EMU is likely to bring more
flexibility and growth potential for the region. European equities may be the
beneficiaries of increased spending, as governments seek to ease fiscal and
monetary policy, foster growth and reduce unemployment. It's going to be
interesting to watch as the monetary union continues to evolve. One lesson for
investors -- particularly those with international holdings -- is to diversify.
With the democratization of the world, the globalization of trade and more free
market economies at our fingertips, international markets are becoming more and
more attractive. But if you subscribe to the concept of international
investment, be cautious -- don't put all of your investment eggs in one basket
(i.e. country or region).
Other key elements to watch in 1999: the race for the next presidency and
information technology preparedness for the year 2000. And remember, while it is
nearly impossible to predict the next big crisis, preparedness through
diversification and risk management are key.
Thank you for choosing to invest with Kemper Funds. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/S/ John E. Silvia
John E. Silvia
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 DR. JOHN E. SILVIA AS OF MARCH 8, 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.
4
<PAGE> 5
PERFORMANCE UPDATE
[MCCORMICK PHOTO]
TRACY MCCORMICK JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1994 AND IS A
MANAGING DIRECTOR. SHE IS ALSO A VICE PRESIDENT AND PORTFOLIO MANAGER OF KEMPER
TARGET EQUITY FUND. MCCORMICK 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.
DESPITE A CHALLENGING MARKET CLIMATE DURING THE SEMIANNUAL PERIOD, LEAD
PORTFOLIO MANAGER TRACY MCCORMICK LED KEMPER RETIREMENT FUND SERIES VII TO GOOD
GAINS. BELOW, MCCORMICK PROVIDES AN OVERVIEW OF MARKET CONDITIONS, HER
STOCK-SELECTION DISCIPLINE, AND WHERE SHE'S FINDING THE MOST COMPELLING
OPPORTUNITIES.
Q BEFORE WE DISCUSS KEMPER RETIREMENT FUND SERIES VII, COULD YOU PROVIDE US
WITH AN OVERVIEW OF THE MARKET CONDITIONS?
A Volatility, the flight to perceived quality, the Russian debt default and
a technology stock rally were among the most notable elements influencing the
market. Let's examine these factors in greater detail.
Global economic volatility continued to be par for the course. As we
entered the fiscal year on August 1, 1998, the markets were already grappling
with uncertainty. Investors were concerned about the strength of domestic
corporate earnings and overall economic growth, both domestic and global. From
October 1997 -- when Asian economic turmoil precipitated the Gray Monday
correction (see Terms To Know) -- investors had become preoccupied with the idea
of a "safe haven." They bid the stock prices of a handful of domestic mega-cap
growth stocks up to tremendously high levels, while fleeing from smaller-cap
stocks and stocks with perceived exposure to Asia. This emotional response
resulted in a narrow, "two-tier" market (see Terms To Know) that continued
throughout the semiannual period.
One of the most significant events in recent market history occurred when
the Russian government defaulted on its debt. This triggered a full market
meltdown. While financial services stocks were among the hardest hit, stocks of
all types felt the heat. Plans developed by the G7 nations and the IMF buoyed
the market's optimism, however. Investor confidence was further bolstered when
the Federal Reserve cut interest rates, and the central banks of 30 other
countries followed suit. Nevertheless, uncertainty about Asia, Brazil and Latin
America still cast a shadow across the global economy. As in late 1997 and early
1998, investors flocked back to the mega-cap growth favorites.
After suffering throughout most of 1998, technology stocks came roaring
back in December and January. Propelled by investors' heady enthusiasm about the
Internet, the technology sector drove the market in the final months of the
semiannual period, with both established stocks and more speculative issues
thriving.
In summary, large-cap growth stocks fared much better than the overall
market. The Standard and Poor's 500 Index, a benchmark for large-cap stocks,
gained 15.02 percent, far exceeding the 2.40 percent earned by the Russell 2000,
a small-cap index. We emphasize, however, that an elite group of stocks claims
disproportionate representation for the large-cap growth gains.
Q THE MARKET CERTAINLY HAS EXPERIENCED PLENTY OF UPS AND DOWNS LATELY. HOW
DID THE FUND PERFORM IN THIS CLIMATE?
A Given the challenges of the market climate, we are very pleased with the
fund's performance.
5
<PAGE> 6
PERFORMANCE UPDATE
For the six months ending January 31, 1999, Kemper Retirement Fund Series VII
gained 10.15 percent (unadjusted for any sales charge). Our stock selection was
strong, and translated into good gains.
The fund did trail the S&P 500 index, but we caution investors not to
compare apples to oranges. Only 33 percent of the fund's assets are invested in
stocks. This modest equity allocation is due to the fund's structure as a
guaranteed, target maturity fund. In order to provide the guaranteed return of
principal, we invest a significant portion of the portfolio in zero-coupon U.S.
Treasury bonds. We're therefore limited in our ability to participate in the
equity markets.
The fund's recent performance underscores the essential risk/return
tradeoff of its structure. In exchange for the guaranteed return of principal,
we encourage investors to have realistic expectations about the amount of
growth-stock exposure that the fund offers.
Q COULD YOU EXPLAIN WHAT ZERO-COUPON BONDS ARE, AND WHAT ROLE THEY PLAYED
DURING THE SEMIANNUAL PERIOD?
A Zero-coupon bonds make no periodic payments of interest and are sold at a
deep discount to their face value. At maturity, the buyer receives the face
value of the bond. The fund invests in U.S. Treasury Bonds, so this payment is
guaranteed. However, prior to maturity, the principal value of the zero-coupon
bonds is susceptible to volatility, particularly during periods of shifting
interest rates.
Typically, zero-coupon bonds carry lower price tags when interest rates
are high. That's because accrued interest makes up the difference between the
price at purchase and the face value at maturity. Because interest rates are
low, we must allocate a greater portion of Series VII's assets to bonds to cover
the guarantee.
Following the Russian debt default in August, the zero-coupon bonds
provided a degree of stability during the turmoil that rocked the equity
markets. In the final months of the semiannual period, the zero-coupon exposure
prevented the fund's full participation in the strong equity markets.
Q YOU'VE NOTED THAT MANY INVESTORS FLED TO THE PERCEIVED "SAFE HAVEN" OF
MEGA-CAP GROWTH STOCKS. IN SUCH A VOLATILE CLIMATE, DID YOU MODIFY YOUR
INVESTMENT STRATEGY?
A Rain or shine, we adhere to our growth-at-a-reasonable-price discipline.
To find attractively valued large-cap growth stocks, we follow a
research-intensive, bottom-up stock-picking strategy. We rely on our independent
analysis, not on the quickly changing and often emotional views of Wall Street.
Our approach is rigorous: we tear apart balance sheets and pour over stock-
price and industry trends. But for us, analyzing the numbers is just one part of
the process. Before we buy a stock, we must have a high degree of confidence in
the company's management, their products and their strategy. Our goal is to
uncover stocks with a catalyst for potential growth. These catalysts include
forward-thinking new management, innovative products, restructurings and
strategic repositionings.
To a degree, the market's flight to perceived quality did hurt the fund's
relative performance. Our valuation discipline discouraged us from investing in
the high-priced stocks that were driving the market, and placed many quality
growth stocks outside of our reach.
Q WOULD YOU SHARE SOME EXAMPLES THAT TYPIFY YOUR STOCK-SELECTION STRATEGY?
A Oracle is a leading designer of computer software products. The stock was
battered in late 1997 and through 1998. Conventional wisdom was against the
company: A large percentage of its sales are international, and many investors
were concerned that the growth of database demand was slowing. We, however, saw
Oracle as an attractively valued opportunity, and we purchased it late in the
summer of 1998. We found the requisite catalyst: Under the guidance of new upper
management, Oracle was focusing on exciting software applications. Our analysis
suggested that through their database management programming, Oracle could
benefit greatly from an increase in Web-based computing. So far, our research
and insight have served the fund in good stead.
Our decision to build our stake in Household International also highlights
key elements of our research-intensive approach. Household International's
operations include finance and banking, as well as insurance. In 1998, the firm
acquired Beneficial, another financial services company. We had owned Beneficial
prior to the acquisition, but began to cut back on the fund's exposure to
Household International until we could see a clear post-merger story emerge.
This proved extremely wise, as we sidestepped losses when the stock declined.
Last fall, I visited the company and met with its management. The story was
intact, and the merger was playing out as anticipated. Management's more focused
6
<PAGE> 7
PERFORMANCE UPDATE
approach to credit cards and secured-lending was extremely compelling, and we
left our meeting with a high degree of conviction. This, combined with our
independent analysis of company fundamentals and balance sheets, led us to
bolster the fund's position, and the stock has been an excellent performer
during the semiannual period.
Q HOW DO YOU DECIDE WHEN TO SELL A STOCK?
A We use the same rigorously researched, growth-at-a-reasonable-price
strategy to sell stocks. We monitor and track each stock in the portfolio
extremely carefully, alert to any changes in price and fundamentals. We'll sell
stocks when their prices reach the pre-established targets that we set for them.
This sort of selling, often referred to as "profit taking," requires discipline
and long-term focus. Even if a company offers great potential, we won't want to
remain invested in it if its price exceeds its long-term growth prospects.
We also eliminate stocks from the portfolio when we believe that
fundamentals are deteriorating, or when the catalyst that originally attracted
us to the company shows signs of fading. So, here, too, we're keeping a close
eye about what's going on at the company, including changes in strategic
directions, or departures of key employees.
Q COULD YOU PROVIDE US WITH EXAMPLES OF BOTH THE PROFIT-TAKING AND
CATALYST-FADING SCENARIOS?
A ALZA provides a good example of our profit-taking sell strategy. We
purchased ALZA in 1997. Although the stock didn't enjoy abundant publicity at
that time, ALZA had a sound product pipeline of drug delivery systems. In late
1998, the company began to attract greater attention from Wall Street and its
stock price rose. Additionally, it began to enter a new stage in its operations.
At this juncture, we began to take profits, eventually eliminating it from the
portfolio.
In contrast, we sold Alcatel when we saw signals that the original
catalyst was beginning to fade. Alcatel is a French telecommunications firm that
initially seemed well poised to benefit from the expansion of the European
telecommunications industry. However, our analysis of the firm began to cast
doubt on the company's long-term merits. Alcatel issued disappointing earnings
announcements, and it became apparent to us that the firm's management did not
have a good grasp of the infrastructure needs of European companies.
Q ALTHOUGH THE FUND'S STOCK HOLDINGS TURNED IN COMPELLING GAINS OVERALL,
WERE THERE AREAS THAT DIDN'T WORK OUT AS WELL AS EXPECTED?
A Energy stocks continued to fight against the tide of poor investor
sentiment. An oversupply of cheaply priced crude oil took a toll on oil-service
companies. However, we don't believe that this climate will last forever, so the
fund continues to have modest energy-stock exposure. Within the fund's oil-stock
exposure, we are favoring quality companies with leadership status.
Impeded by regulatory concerns, railroad stocks have also faced an uphill
climb. Nonetheless, we do believe that some railroad stocks, such as Canadian
National Railway and Norfolk Southern, continue to offer attractively priced
earnings-growth potential. We also believe that railroad stocks could benefit
the fund should economic growth accelerate.
Q YOU'VE MENTIONED THAT TOWARD THE END OF THE SEMIANNUAL PERIOD, TECHNOLOGY
STOCKS DROVE THE STOCK MARKET. WHAT SORT OF TECHNOLOGY EXPOSURE DOES THE FUND
HAVE?
A Technology stocks are well represented in the portfolio. We prefer
quality, established companies over less-tested issues. Stocks that we're
backing with special conviction include Cisco Systems, Oracle and Texas
Instruments. Through hardware, software, and component operations, these
companies are fueling the growth of the Internet, while also offering
demonstrated histories of earnings growth -- something that most of the
fledgling ".com" companies just don't offer.
Q GIVEN THE CHALLENGES OF THE PAST SIX MONTHS, HOW HAVE YOU STRUCTURED THE
REMAINDER OF THE EQUITY HOLDINGS?
A In addition to technology stocks, consumer nondurables stocks (see Terms
To Know) are another important theme in the portfolio. We've found appealing
media stocks that satisfy our GARP criteria, including Time Warner and Univision
Communication, both broadcasting/ entertainment stocks, and Young & Rubicam, an
advertising firm.
Relative to the S&P 500 index, the fund is overweighted in food stocks.
We're finding valuations we like, as well as compelling catalysts. For instance,
through its acquisition of American Stores, Albertson's is taking a leading role
in the grocery industry's consolidation. Meanwhile, we feel that H.J. Heinz
Co.'s new, more-aggressive management could
7
<PAGE> 8
PERFORMANCE UPDATE
be a catalyst for improved long-term growth. We've also backed McCormick & Co.
with conviction. Our research indicates that the stock is attractively valued
relative to its long-term growth potential. McCormick & Co. faces a low level of
competition, further bolstering its appeal.
Within the utilities sector, we've gravitated to telecommunications
stocks. These stocks tend to offer better growth than gas or electric utilities.
We like AT&T quite a bit. Under new Chief Executive Officer Michael Armstrong,
the company really seems to be taking off, making strategic acquisitions and
building relationships with cable and wireless companies. Other
telecommunications holdings give the fund exposure to rapidly growing regional
bell operators (Cincinnati Bell) and long-distance providers (MCI WorldCom).
We're finding fewer attractively priced choices within the health care
sector. Nonetheless, some stocks have met our criteria. The fund holds
pharmaceutical powerhouses Pfizer and Eli Lilly & Co. We also believe that
Medtronic, a medical technology firm, offers high upside potential. Medtronic
struggled in the past to meet earnings expectations, but we believe that the
strong new-product cycles and recent acquisitions are good potential catalysts
for rapid earnings growth.
In the financial services group, the fund had been more heavily weighted
to insurance stocks than it is now. Our research suggests that in order to
bolster their earnings-growth numbers, the insurance industry would have to
begin another round of consolidation. The fund is invested more heavily in
money- center banks than it had been at the start of the semiannual period.
After the August market correction, we took advantage of attractive valuations
within the money-center bank group to build positions.
Q AS THE FUND ENTERS THE SECOND HALF OF THE FISCAL YEAR, HOW DO YOU FEEL
ABOUT THE MARKET CLIMATE?
A When it comes to the short-term stock market activity, no one can
guarantee what's coming around the bend. There's every reason to believe that
short-term volatility will continue, however.
That said, I think that there are still ample opportunities for long-term
investors. It's just a question of knowing where to seek those opportunities.
Discipline and thorough research continue to direct our pursuit, and we place
high confidence in these guides.
8
<PAGE> 9
LARGEST HOLDINGS
THE FUND'S 10 LARGEST STOCK HOLDINGS*
REPRESENTING 20.7 PERCENT OF THE FUND'S TOTAL NET ASSETS ON JANUARY 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Holdings Percent
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
1. Motorola Manufactures electronic 2.7%
communications equipment and
components.
- --------------------------------------------------------------------------------------
2. Bell Atlantic Provides local telephone services 2.7%
to various east coast states, as
well as systems integration and
directory publishing services.
- --------------------------------------------------------------------------------------
3. Texas Instruments A high technology company with 2.5%
sales or manufacturing operations
in more than 30 countries.
Products and services include
semiconductors, defense electronic
systems, software productivity
tools, computer peripheral
products and consumer products.
- --------------------------------------------------------------------------------------
4. Cisco Systems Largest, most comprehensive 2.3%
supplier of routing systems that
direct the flow of data between
local area networks.
- --------------------------------------------------------------------------------------
5. Microsoft Develops, markets and supports a 2.0%
variety of microcomputer software,
operating systems, language and
application programs, related
books and peripheral devices.
- --------------------------------------------------------------------------------------
6. Hewlett-Packard Produces computer and electronic 1.9%
equipment, including computer
systems, printers, scanners, and
data-storage devices.
- --------------------------------------------------------------------------------------
7. Eli Lilly & Co. Develops, manufactures and sells 1.7%
pharmaceutical and animal-health
products.
- --------------------------------------------------------------------------------------
8. Medtronic Develops, manufactures, and 1.7%
markets therapeutic medical
devices designed to improve
cardiovascular and neurological
health.
- --------------------------------------------------------------------------------------
9. Raytheon A diversified technology-based 1.6%
company active in electronics,
aircraft products, and energy and
environmental services.
- --------------------------------------------------------------------------------------
10. Bristol-Myers Squibb A diversified global manufacturer 1.6%
of health and personal care
products.
- --------------------------------------------------------------------------------------
</TABLE>
*THE FUND'S HOLDINGS ARE SUBJECT TO CHANGE.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER RETIREMENT FUND -- SERIES VII
PORTFOLIO OF INVESTMENTS AT JANUARY 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT
OBLIGATIONS--65.8%
U.S. Treasury, zero coupon, 2008
(Cost: $25,210) $42,500 $26,991
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NUMBER OF
COMMON STOCKS SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--3.1%
AT&T Corp. 2,350 213
Ameritech Corp. 1,800 117
Bell Atlantic Corp. 6,000 360
Cincinnati Bell, Inc. 6,000 122
Frontier Corp. 4,600 166
(a)MCI WorldCom, Inc. 1,350 108
SBC Communications, Inc. 2,500 135
US West, Inc. 1,000 62
------------------------------------------------------------------------------
1,283
- --------------------------------------------- ------------------------------------------------------------------------------
CONSUMER
DISCRETIONARY--1.9%
Home Depot 3,200 193
May Department Stores Co. 2,700 163
(a)Mirage Resorts, Inc. 4,000 57
Newell Co. 3,600 150
Wal-Mart Stores, Inc. 2,500 215
------------------------------------------------------------------------------
778
- --------------------------------------------- ------------------------------------------------------------------------------
CONSUMER STAPLES--3.1%
Albertson's, Inc. 2,875 175
Coca-Cola Co. 3,000 196
ConAgra, Inc. 3,600 117
Dean Foods Co. 1,300 51
Dial Corp. 3,750 102
H.J. Heinz Co. 2,500 141
McCormick & Co. 5,500 162
PepsiCo 4,000 156
Procter & Gamble Co. 2,000 182
------------------------------------------------------------------------------
1,282
- --------------------------------------------- ------------------------------------------------------------------------------
DURABLES--.4%
Federal-Mogul Corp. 2,500 148
------------------------------------------------------------------------------
- --------------------------------------------- ------------------------------------------------------------------------------
ENERGY--1.1%
Chevron Corp. 1,400 105
(a)Conoco, Inc. "A" 2,800 56
Mobil Corp. 1,200 105
Royal Dutch Petroleum Co. 1,500 60
Texaco 800 38
Unocal Corp. 2,500 71
------------------------------------------------------------------------------
435
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCE--4.8%
American Express Co. 1,600 $ 165
American International Group, Inc. 1,800 185
BancBoston Corp. 2,000 74
BankAmerica Corp. 2,263 151
Chase Manhattan Corp. 2,000 154
CIGNA Corp. 2,500 206
Citigroup Inc. 3,100 174
Compass Bancshares 1,500 53
Federal National Mortgage Association 1,500 109
First Security Corporation of Utah 3,000 61
First Tennessee National Corp. 2,000 73
Household International 4,759 209
Jefferson-Pilot Corp. 2,350 178
MGIC Investment Corp. 2,200 80
UNUM Life Insurance Company of America 1,500 91
------------------------------------------------------------------------------
1,963
- ----------------------------------------------------------------------------------------------------------------------------
HEALTH CARE--5.1%
Abbott Laboratories 3,900 181
American Home Products Corp. 2,700 158
Baxter International, Inc. 3,000 213
Becton Dickinson & Co. 4,000 143
Bristol-Myers Squibb Co. 1,700 218
Eli Lilly & Co. 2,500 234
Glaxo Wellcome PLC (ADR) 1,500 102
Medtronic, Inc. 2,890 230
Pfizer, Inc. 1,500 193
Schering-Plough Corp. 2,600 142
SmithKline Beecham Group PLC (ADR) 3,000 203
Warner-Lambert Co. 1,000 72
------------------------------------------------------------------------------
2,089
- ----------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--1.5%
Emerson Electric Co. 2,900 169
General Electric Co. 1,400 147
Raytheon Co. "A" 3,962 221
Waste Management, Inc. 1,500 75
------------------------------------------------------------------------------
612
- ----------------------------------------------------------------------------------------------------------------------------
MEDIA--3.0%
(a)CBS Corp. 5,400 184
(a)Infinity Broadcasting Corp. 3,700 102
(a)Jacor Communications "A" 1,300 90
R.R. Donnelley & Sons Co. 3,000 113
(a)Tele-Comm Liberty Media Group "A" 3,500 189
Time Warner, Inc. 1,950 122
Tribune Co. 2,000 128
(a)Univision Communication, Inc. 4,000 180
(a)Young & Rubicam 3,100 124
------------------------------------------------------------------------------
1,232
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TECHNOLOGY--8.1%
(a)Applied Materials, Inc. 2,000 $ 127
Automatic Data Processing 3,000 128
Cisco Systems 2,800 313
Compaq Computer 2,500 119
(a)Convergys Corp. 6,000 108
Hewlett-Packard Co. 3,250 255
Intel Corp. 1,000 141
International Business Machines 1,050 192
(a)Intuit 1,800 165
(a)Microsoft Corp. 1,500 263
Motorola 5,000 361
Oracle Corp. 3,700 205
(a)Seagate Technology 4,000 163
(a)Sun Microsystems 1,500 168
Texas Instruments 3,500 346
Xerox Corp. 1,200 149
(a)Xilinx, Inc. 1,700 141
------------------------------------------------------------------------------
3,344
- ----------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--.9%
CSX Corp. 2,000 80
Canadian National Railway Co. 2,000 106
Norfolk Southern Corp. 6,200 171
------------------------------------------------------------------------------
357
------------------------------------------------------------------------------
TOTAL COMMON STOCKS--33.0%
(Cost: $11,005) 13,523
------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET
INSTRUMENTS--1.2%
(b)Repurchase agreement--
Investors Fiduciary Trust Co.,
dated 1/29/99, 4.00%, due 2/1/99
(Cost: $497) $497 497
----------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $36,712) $41,011
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Repurchase agreements are fully collateralized by U.S. Treasury or U.S.
Government agency securities. The collateral is monitored daily by the fund
so that its market value exceeds the carrying value of the repurchase
agreement.
Based on the cost of investments of $36,712,000 for federal income tax purposes
at January 31, 1999, the gross unrealized appreciation was $4,479,000, the gross
unrealized depreciation was $180,000 and the net unrealized appreciation on
investments was $4,299,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
Investments, at value
(Cost: $36,712) $41,011
- -----------------------------------------------------------------------
Cash 49
- -----------------------------------------------------------------------
Receivable for:
Investments sold 233
- -----------------------------------------------------------------------
Fund shares sold 66
- -----------------------------------------------------------------------
Dividends and interest 14
- -----------------------------------------------------------------------
TOTAL ASSETS 41,373
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------
Payable for:
Investments purchased 327
- -----------------------------------------------------------------------
Fund shares redeemed 6
- -----------------------------------------------------------------------
Management fee 16
- -----------------------------------------------------------------------
Administrative services fee 15
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 17
- -----------------------------------------------------------------------
Trustees' fees and other 14
- -----------------------------------------------------------------------
Total liabilities 395
- -----------------------------------------------------------------------
NET ASSETS $40,978
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------
Paid-in capital $36,916
- -----------------------------------------------------------------------
Accumulated net realized loss on investments (341)
- -----------------------------------------------------------------------
Net unrealized appreciation on investments 4,299
- -----------------------------------------------------------------------
Undistributed net investment income 104
- -----------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $40,978
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------
Shares outstanding 3,575
- -----------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
(net assets / shares outstanding) $11.46
- -----------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE
(net asset value, plus 5.26% of net asset value or 5.00% of
offering price) $12.06
- -----------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JANUARY 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------
INVESTMENT INCOME
- ------------------------------------------------------------------------------------------
Interest $ 577
- ------------------------------------------------------------------------------------------
Dividends 68
- ------------------------------------------------------------------------------------------
Total investment income 645
- ------------------------------------------------------------------------------------------
Expenses:
Management fee 81
- ------------------------------------------------------------------------------------------
Administrative services fee 41
- ------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 26
- ------------------------------------------------------------------------------------------
Professional fees 4
- ------------------------------------------------------------------------------------------
Reports to shareholders 15
- ------------------------------------------------------------------------------------------
Trustees' fees and other 7
- ------------------------------------------------------------------------------------------
Total expenses 174
- ------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 471
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------------------
Net realized loss on sales of investments (337)
- ------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 3,243
- ------------------------------------------------------------------------------------------
Net gain on investments 2,906
- ------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,377
- ------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
JANUARY 31, ENDED
1999 JULY 31,
(UNAUDITED) 1998
- ---------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 471 443
- ---------------------------------------------------------------------------------------------
Net realized gain (loss) (337) 65
- ---------------------------------------------------------------------------------------------
Change in net unrealized appreciation 3,243 870
- ---------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,377 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 12,579 19,984
- ---------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 15,191 21,237
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------
Beginning of period 25,787 4,550
- ---------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment income
of $104 and $332, respectively) $40,978 25,787
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
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 SECURITY VALUATION. Investments are stated at
value. Portfolio 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 on
the Nasdaq. If there are no such sales, the value
is the most recent bid quotation. Securities which
are not quoted on the Nasdaq but are traded in
another over-the-counter market are valued at the
most recent sale price on such market. 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
shall be used.
Portfolio debt securities are valued by pricing
agents approved by the officers of the fund, which
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. All other securities are valued at
their fair market value as determined in good faith
by the Valuation Committee of the Board of
Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. 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 close of
the Exchange by dividing the total value of the
fund's
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
investments and other assets, less liabilities, by
the number of shares outstanding.
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.
DIVIDENDS TO SHAREHOLDERS. The fund 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 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 $81,000 for the six months ended
January 31, 1999.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's businesses to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, the fund's
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Trustees of the fund has
approved a new investment management agreement with
Scudder Kemper, which is substantially identical to
the former investment management agreement, except
for the dates of execution and termination.
Shareholders approved the new investment management
agreement through a proxy solicitation that
concluded in mid-December.
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 six months ended January 31,
1999 are $59,000.
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 six
months ended January 31, 1999 are $41,000.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the trust's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent for the fund. Under the agreement,
KSvC received shareholder services fees of $18,000
for the six months ended January 31, 1999.
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
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, 1999, the fund made no payments to its officers
and incurred trustees' fees of $1,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended January 31, 1999,
investment transactions (excluding short-term
instruments) are as follows (in thousands):
Purchases $17,921
Proceeds from sales 5,358
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JANUARY 31, 1999 JULY 31, 1998
---------------- ----------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,265 13,878 2,064 $21,046
---------------------------------------------------------------------------------
Shares issued in reinvestment of dividends 66 737 16 151
---------------------------------------------------------------------------------
Shares redeemed (184) (2,036) (117) (1,213)
---------------------------------------------------------------------------------
NET INCREASE FROM CAPITAL SHARE TRANSACTIONS 12,579 $19,984
---------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS MONTH
ENDED YEAR ENDED ENDED MAY 1(A) TO
JANUARY 31, 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 .10 .21 .01 .02
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain .97 .73 .54 .21
- --------------------------------------------------------------------------------------------
Total from investment operations 1.07 .94 .55 .23
- --------------------------------------------------------------------------------------------
Less dividends
Distribution from net investment income .21 .10 -- --
- --------------------------------------------------------------------------------------------
Distribution from net realized gain .02 -- -- --
- --------------------------------------------------------------------------------------------
Total dividends .23 .10 -- --
- --------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.46 10.62 9.78 9.23
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 10.15% 9.68 5.96 2.56
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------
Expenses 1.06% 1.21 .95 1.17
- --------------------------------------------------------------------------------------------
Net investment income 2.90% 2.79 3.45 3.16
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------
Net assets at end of period (in
thousands) $40,978 25,787 4,550 2,043
- --------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 33% 43 6 12
- --------------------------------------------------------------------------------------------
</TABLE>
NOTES: Total return does not reflect the effect of any sales charges. Data for
the period ended January 31, 1999 is unaudited.
(a) Commencement of operations.
18
<PAGE> 19
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 17, 1998, a special shareholders' meeting was held and adjourned to
January 15, 1999. Kemper Retirement Fund Series VII shareholders were asked to
vote on two separate issues: approval of the new Investment Management Agreement
between the Fund and Scudder Kemper Investments, Inc., and to modify or
eliminate certain policies and to eliminate the shareholder approval
requirements as to certain other matters. The following are the results.
1) Approval of the new Investment Management Agreement between the fund and
Scudder Kemper Investments, Inc. This item was approved.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,543,027 24,900 46,892
</TABLE>
2) To modify or eliminate certain policies and to eliminate the shareholder
approval requirements as to certain other matters. These items were approved.
Investment objectives
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,210,225 119,140 176,581
</TABLE>
Investment policies
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,210,225 119,140 176,581
</TABLE>
Diversification
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,211,547 117,818 176,581
</TABLE>
Borrowing
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,211,167 118,198 176,581
</TABLE>
Senior securities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,210,572 118,793 176,581
</TABLE>
Concentration
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,211,547 117,818 176,581
</TABLE>
Underwriting of securities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,202,930 126,435 176,581
</TABLE>
Investment in real estate
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,201,146 128,219 176,581
</TABLE>
Purchase of commodities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,210,436 118,929 176,581
</TABLE>
Lending
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,209,801 119,563 176,581
</TABLE>
Margin purchases and short sales
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,209,026 120,338 176,581
</TABLE>
Pledging of assets
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,211,547 117,818 176,581
</TABLE>
Purchases of securities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,211,547 117,818 176,581
</TABLE>
19
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY MAUREEN E. KANE
Chairman and Trustee President Assistant Secretary
JAMES E. AKINS PHILIP J. COLLORA CAROLINE PEARSON
Trustee Vice President and Assistant Secretary
Secretary
ARTHUR R. GOTTSCHALK ELIZABETH C. WERTH
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer BRENDA LYONS
FREDERICK T. KELSEY Assistant Treasurer
Trustee TRACY MCCORMICK
Vice President
THOMAS W. LITTAUER
Trustee and ANN M. MCCREARY
Vice President Vice President
FRED B. RENWICK KATHRYN L. QUIRK
Trustee Vice President
JOHN B. TINGLEFF CORNELIA SMALL
Trustee Vice President
JOHN G. WEITHERS LINDA J. WONDRACK
Trustee Vice President
- --------------------------------------------------------------------------------
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 STATE STREET BANK & TRUST
TRANSFER AGENT 225 Franklin Street
Boston, MA 02110
INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
- --------------------------------------------------------------------------------
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 - 3 (3/24/99) 1068910
