<PAGE> 1
Kemper-Dreman Small Cap Value Fund Class I Shares
Average Annual Total Returns*
For periods ended December 31, 1996
1-year Life of Class
------ -------------
Kemper-Dreman Small Cap Value Fund Class I Shares 30.28% 33.92%
(since 11/1/95)
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
Growth of an assumed $10,000 investment in Kemper-Dreman Small Cap Value Fund
Class I Shares from 11/1/95 through 12/31/96
<TABLE>
<CAPTION>
November 1, June 30, December 31,
1996 1996 1996
----------- -------- ------------
<S> <C> <C> <C>
Kemper-Dreman Small Cap Value Fund * 10,000 12,961 14,074
Russell 2000 index ** 10,000 11,803 12,461
Consumer Price index *** 10,000 10,195 10,319
</TABLE>
* Average annual total return measures net investment income and capital gain or
loss from portfolio investments, assuming reinvestment of all dividends. The
performance in the graph above also includes reinvestment of dividends. During
the periods noted, securities prices fluctuated. For additional information, see
the Prospectus and Statement of Additional Information and the Financial
Highlights in the annual report.
** The Russell 2000 Index is a capitalization weighted price only index which
is comprised of 2000 of the smallest stocks (on the basis of capitalization) in
the Russell 3000 Index. The largest company in the index has an approximate
market cap of $591 million.
++ The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. Source is Towers Data Systems.
(over)
<PAGE> 2
Dividend Review
During the fiscal year, Kemper-Dreman Small Cap Value Fund Class I shares made
the following distributions per share:
Income Dividend $0.0688
Short-term Capital Gain $0.3925
Long-term Capital Gain $0.04
Investment Manager
Dreman Value Advisors, Inc.
Principal Underwriter
Kemper Distributors, Inc.
This report is not to be distributed unless preceded or accompanied by a
Kemper-Dreman Funds prospectus and the 1996 Annual Report for Kemper-Dreman
Small Cap Value Fund.
<PAGE> 3
KEMPER-DREMAN
SMALL CAP VALUE FUND
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996
Seeking Long-Term Capital Appreciation
" . . . the fund owned sizable positions
in several stocks that strongly outperformed the
market. Successes of that nature really boosted the
fund's return ."
[KEMPER FUNDS LOGO]
<PAGE> 4
CONTENTS
3
Economic Overview
5
Performance Update
8
Industry Sectors
9
Largest Holdings
10
Portfolio of Investments
13
Report of Independent Auditors
14
Financial Statements
16
Notes to Financial Statements
19
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER-DREMAN SMALL CAP VALUE FUND
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Class A 29.60%
Class B 28.54%
Class C 28.77%
LIPPER SMALL
COMPANY GROWTH
FUNDS
CATEGORY AVERAGE* 20.20%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
12/31/96 12/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER-DREMAN SMALL CAP
VALUE FUND CLASS A $18.28 $14.50
- --------------------------------------------------------------------------------
KEMPER-DREMAN SMALL CAP
VALUE FUND CLASS B $18.14 $14.48
- --------------------------------------------------------------------------------
KEMPER-DREMAN SMALL CAP
VALUE FUND CLASS C $18.17 $14.48
- --------------------------------------------------------------------------------
</TABLE>
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
* Lipper Analytical Services, Inc. returns and rankings are based upon
changes in net asset value with all dividends reinvested and do not include
the effect of sales charges. If they had, results may have been less
favorable. Returns and rankings are historical and do not reflect future
performance.
- --------------------------------------------------------------------------------
KEMPER-DREMAN SMALL CAP VALUE
FUND LIPPER RANKINGS
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER SMALL COMPANY GROWTH FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #54 OF #62 OF #59 OF
388 FUNDS 388 FUNDS 388 FUNDS
- --------------------------------------------------------------------------------
3-YEAR #15 OF N/A N/A
218 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE FISCAL YEAR, KEMPER-DREMAN SMALL CAP VALUE FUND MADE THE FOLLOWING
DISTRIBUTIONS PER SHARE:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME DIVIDEND: $0.065 $0.0269 $0.0297
- --------------------------------------------------------------------------------
SHORT-TERM
CAPITAL GAIN: $0.3925 $0.3925 $0.3925
- --------------------------------------------------------------------------------
LONG-TERM
CAPITAL GAIN: $0.04 $0.04 $0.04
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
CONTRARIAN An investor who decides which securities to buy and sell by going
against the crowd. Contrarians operate on the premise that when stocks are
popular they are overbought and when stocks are unpopular they are oversold.
Dreman's contrarian philosophy stresses buying out-of-favor stocks believed to
present good value.
INDEX An unmanaged group of stocks that is considered representative of the
stock or bond markets. An index does not take into account any fees or expenses
related to the individual securities that it tracks. However, for performance
comparisons, the index is adjusted to reflect dividend reinvestment of the
securities in the index.
MARKET CAPITALIZATION Capitalization is a measure of the size of a publicly
traded company, determined by multiplying the current share price by the number
of shares outstanding. The market capitalization of a company has bearing on its
perceived earnings potential and risk. Small capitalization companies (less than
$1 billion) may present the potential for greater growth than larger, more
established companies. On the other hand, the stock of small cap companies may
be more volatile and therefore a greater risk to capital.
PRICE/EARNINGS MULTIPLE A company's stock price divided by its earnings for the
past four quarters, also referred to as its P/E.
SECTOR A specific industry group.
VALUE STOCK The stock of a company that is out of favor with investors because
the market underestimates its value or overlooks its potential. Stocks can
become undervalued as a result of overreaction by investors to unfavorable news
about a company, industry or the stock market in general. They can also become
undervalued as a result of a market decline, poor economic conditions, tax-loss
selling or actual or anticipated unfavorable developments affecting the company.
2
<PAGE> 5
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $79 BILLION IN ASSETS, INCLUDING $44 BILLION IN RETAIL MUTUAL
FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD
UNIVERSITY.
DEAR SHAREHOLDER:
As we progress through the first quarter of 1997, the fundamentals of the
economy are remarkably similar to what they were one year ago. Long-term
interest rates are in the same 6.5% to 7% range they were in during the first
half of 1996. We believe the economy is growing at a rate of approximately 2.5%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and last year is that prices of
the stocks are on average up 20%. While price movements were more volatile in
1996 than in the past few years, the patient investor was amply rewarded. The
prime element sending the stock market higher was strong positive cash flows.
This liquidity in an environment of modestly increasing corporate profits and
relatively stable interest rates pushed stocks higher for most of the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in
recent years but positive nonetheless.
- INTEREST RATES. Rates should remain stable, and short-term interest rates
may even decline.
- LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, will continue to create strong demand
for securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
3
<PAGE> 6
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The
10-year Treasury rate and the prime rate are prevailing interest rates.
The other data report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (1/31/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.58 6.64 5.81 7.47
PRIME RATE(2) 8.25 8.25 8.25 9.00
INFLATION RATE(3)* 3.24 2.95 2.72 2.87
THE U.S. DOLLAR(4) 4.59 4.26 0.82 (5.54)
CAPTIAL GOODS ORDERS(5)* 0.58 15.00 4.72 21.53
INDUSTRIAL PRODUCTION(5)* 4.32 3.38 0.39 5.60
EMPLOYMENT GROWTH(6) 2.50 2.17 1.78 3.49
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. The low, moderate inflation of the last
few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of December 31, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
February 5, 1997
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
4
<PAGE> 7
PERFORMANCE UPDATE
[BERTELSEN PHOTO]
CHRISTIAN BERTELSEN IS CHIEF INVESTMENT OFFICER FOR DREMAN VALUE ADVISORS, INC.
(DVA) THE INVESTMENT ADVISOR TO THE KEMPER-DREMAN FUNDS. HE IS PORTFOLIO
CO-MANAGER OF KEMPER-DREMAN SMALL CAP VALUE FUND AND HOLDS AN M.B.A. IN FINANCE
AND MARKETING AND A B.A. IN HISTORY AND ECONOMICS FROM BOSTON UNIVERSITY.
[STOKES PHOTO]
STEVEN STOKES IS THE PORTFOLIO CO-MANAGER OF KEMPER-DREMAN SMALL CAP VALUE
FUND. STOKES RECEIVED HIS BACHELOR OF SCIENCE DEGREE IN FINANCE IN 1985 FROM
STATE UNIVERSITY OF NEW YORK AT NEW PALTZ. HE IS A CHARTERED FINANCIAL ANALYST
AND A MEMBER OF THE ASSOCIATION OF INVESTMENT MANAGEMENT AND RESEARCH, FINANCIAL
ANALYST FEDERATION AND NYSSA.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
IN A YEAR WHEN LARGE CAPITALIZATION STOCKS DOMINATED THE MARKET, KEMPER-DREMAN
SMALL CAP VALUE FUND OUTPACED BOTH THE STANDARD AND POOR'S 500 STOCK INDEX* AND
ITS BENCHMARK, THE RUSSELL 2000 INDEX**. PORTFOLIO CO-MANAGERS STEVE STOKES AND
CHRIS BERTELSEN DISCUSS THE STRATEGY THAT LED TO THE FUND'S STRONG PERFORMANCE.
Q KEMPER-DREMAN SMALL CAP VALUE FUND POSTED AN OUTSTANDING 29.60% RETURN
(CLASS A SHARES, UNADJUSTED FOR ANY SALES CHARGE) FOR THE YEAR ENDED DECEMBER
31, 1996, COMPARED WITH THE STANDARD AND POOR'S 500 STOCK INDEX, WHICH ROSE
22.95% AND THE FUND'S BENCHMARK -- THE RUSSELL 2000 INDEX -- WHICH ROSE 16.50%.
WHAT SET THE FUND APART?
A Stock picking was certainly a key factor. The fund owned sizable positions
in several stocks that strongly outperformed the market. Successes of that
nature really boosted the fund's return. Among our top performers were Bally
Entertainment, the hotel and gaming company; Duracraft, maker of consumer
household products; and Blount Inc., maker of outdoor products including
forestry harvesting and sporting equipment.
The other big factor was staying true to our value-style philosophy --
owning only stocks with low price/earnings (P/E) multiples relative to the broad
market. Coupled with that, of course, is buying only those stocks in which we
have conviction. We want to be comfortable holding a stock even if it suffers a
temporary setback. Equally important is being disciplined when it comes to
selling a stock. When the market recognizes a stock's value and the P/E ratio
rises to market levels, it's imperative that we let it go instead of hanging on
in the hope of additional appreciation. We've avoided several disasters by
knowing when to sell.
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET. SOURCE IS TOWERS DATA SYSTEMS.
**THE RUSSELL 2000 INDEX IS AN UNMANAGED CAPITALIZATION WEIGHTED PRICE ONLY
INDEX WHICH IS COMPRISED OF 2000 OF THE SMALLEST STOCKS (ON THE BASIS OF
CAPITALIZATION) IN THE RUSSELL 3000 INDEX. SOURCE IS LIPPER ANALYTICAL SERVICES,
INC.
Q WHAT STOCKS PERFORMED THE BEST (AND WORST) DURING THE PERIOD?
A Financial stocks, which represent the fund's largest sector exposure,
contributed some solid gains throughout the year. We like this area because the
stocks tend to trade at relatively low P/E ratios and offer some yield, which
provides a cushion on the downside. In addition, this sector has benefited from
consolidation among the thrifts and regional banks, a trend we believe will
continue. One example is PHH Corporation, a financial holding company, which
rose significantly on an acquisition by HFS Corp. While they aren't trading at
historic lows, we believe they still offer good relative value.
Energy stocks have been good performers as well. This is another area where
we are somewhat overweighted relative to the benchmark. (See page 8 for a
comparison of the portfolio's
5
<PAGE> 8
PERFORMANCE UPDATE
industry sector allocations and those of the Russell 2000 Index.) In this area
we like natural gas suppliers like Tesoro Petroleum and KCS Energy, one of the
fund's top holdings. More recently, we've added selected exploration companies.
One example is Seitel, a company that provides 3-D seismic data for the oil and
gas industries, and is developing a new gas exploration business.
Among the laggards, certain consumer stocks were less than spectacular, as
were a few of our cable-related stocks. In each of these cases, however, we're
comfortable with their individual stories, their management and their prospects.
As contrarian investors, we believe that there are going to be times when we
have to wait for the market to recognize a stock's intrinsic value. There's a
difference between being early and being wrong.
Q WHAT KIND OF CHANGES HAVE OCCURRED IN THE PORTFOLIO DURING THE PAST YEAR?
A The most significant change has been the increase in assets under
management. Since joining the Kemper Funds family in late 1995, we've seen the
portfolio's assets increase from less than $18 million to approximately $273
million as of December 31, 1996. That's a 15-fold increase in assets in as many
months.
Q WHAT INFLUENCE DOES THAT KIND OF GROWTH HAVE ON THE FUND?
A On one hand, it has contributed to better economies of scale in terms of
fund expenses. On the other, it's forced us to increase the number of companies
in the portfolio. For example, a year ago -- or even six months ago -- it wasn't
uncommon for the fund to have 4.5% or 5% of its assets invested in a company
that we really believed in. Now, a 5% position in one stock can represent close
to $15 million, which is more than we would want to have invested in any one
company. Consequently, there were 75 stocks in the portfolio as of December 31,
1996, compared with 42 a year earlier. Overall, of course, we feel that this is
a great position to be in -- we have more cash available to invest in compelling
stories as they arise.
Q WHAT KIND OF COMPANIES HAVE YOU BEEN BUYING FOR THE FUND?
A We've been looking at more economically-sensitive stocks. Within this area
we target companies that have more going for them than just the economic cycle.
Specifically, we look for strong product lines and sales growth that we believe
can sustain a company in an economic downturn. One example is Carpenter
Technology, a stainless steel manufacturer with exposure to the aerospace
industry.
Q TECHNOLOGY STOCKS CONTINUE TO GET A LOT OF ATTENTION. GIVEN THE REMARKABLE
CLIMB THAT SECTOR HAS HAD, AND THE RELATIVELY HIGH VALUATIONS THEY CARRY, DO
THESE STOCKS HAVE A PLACE IN A VALUE FUND?
A To a limited degree, yes. Obviously, we aren't going to buy stocks that are
trading at high price/earnings multiples, since that would contradict our
value-style orientation. But, thanks in part to the correction that occurred
among technology stocks last summer, we've been able to identify several
worthwhile investments. As with any stock we invest in, we emphasize quality
companies with strong balance sheets, solid management and a strong product with
a significant market. Again, we want to be comfortable that the company can
sustain its earnings growth even in the event of a short-term downturn.
Q WHAT'S YOUR OUTLOOK FOR SMALL CAPITALIZATION STOCKS IN 1997?
A We believe small cap stocks should do well relative to large caps by virtue
of their attractive valuations and growth potential.
The flow of money into the stock markets and stock mutual funds --
particularly money ear-marked for retirement -- is still quite strong. Until
that changes, we don't forsee a serious downturn in the broad market. That being
said, there are bound to be some periodic shocks to the market, probably sparked
by fears of rising inflation or recession. Clearly this "Goldilocks" economy --
and by that we mean not too hot and not too cold -- with low inflation, benign
interest rates and steady corporate earnings growth can't last forever. We just
don't know WHEN it will end. It wouldn't be prudent to manage the fund with an
assumption of either indefinite growth or an impending downturn. We don't
attempt to time the market. In managing the fund, we're aiming for solid
appreciation on the upside, price protection on the downside and, in either
scenario, outperformance of our benchmark.
6
<PAGE> 9
PERFORMANCE UPDATE
- ------------------------------------------------------------------------------
KEMPER-DREMAN SMALL CAP VALUE FUND
- ------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- ------------------------------------------------------------------------------
FOR PERIODS ENDED DECEMBER 31, 1996 (ADJUSTED FOR THE APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR CLASS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER-DREMAN SMALL CAP VALUE FUND CLASS A 22.19% 18.12% (since 5/22/92)
- -------------------------------------------------------------------------------------------------
KEMPER-DREMAN SMALL CAP VALUE FUND CLASS B 25.54 16.62 (since 9/11/95)
- -------------------------------------------------------------------------------------------------
KEMPER-DREMAN SMALL CAP VALUE FUND CLASS C 28.77 18.96 (since 9/11/95)
- -------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper-Dreman Small Cap Value Fund Class A FROM 5/22/92 THROUGH 12/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/22/92 12/31/93 12/31/94 12/21/95 12/31/96
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper-Dreman Small Cap Value Fund Class A(1) 10000 11584 11601 16623 21544
Russell 2000 Index+ 10000 13391 13147 16889 19677
Consumer Price Index++ 10000 10437 10716 10988 11369
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper-Dreman Small Cap Value Fund Class B FROM 9/11/95 THROUGH 12/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9/11/95 12/31/95 12/31/96
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kemper-Dreman Small Cap Value Fund Class B(1) 10000 9748 12230
Russell 2000 Index+ 10000 10400 12117
Consumer Price Index++ 10000 10039 10373
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper-Dreman Small Cap Value Fund Class C FROM 9/11/95 THROUGH 12/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9/11/95 12/31/95 12/31/96
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kemper-Dreman Small Cap Value Fund Class C(1) 10000 9749 12554
Russell 2000 Index+ 10000 10400 12117
Consumer Price Index++ 10000 10039 10373
</TABLE>
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
* Average annual total return measures net investment income and capital gain
or loss from portfolio investments, assuming reinvestment of all dividends
and for Class A shares adjustment for the maximum sales charge of 5.75%,
for Class B shares adjustment for the applicable contingent deferred sales
charge (CDSC) of 3% and for Class C shares no adjustment for sales charge.
The maximum B share CDSC is 4%. For C shares purchased on or after April 1,
1996, there is a 1% CDSC on certain redemptions within the first year of
purchase. 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 for Class A shares and the contingent deferred sales
charge in effect at the end of the period for B shares. In comparing
Kemper-Dreman Small Cap Value Fund to the Russell 2000 Index+ and the
Consumer Price Index++, you should note that the fund's performance
reflects the maximum sales charge, while no such charges are reflected in
the performance of the indexes.
+ The Russell 2000 Index is an unmanaged capitalization weighted price only
index which is comprised of 2000 of the smallest stocks (on the basis of
capitalization) in the Russell 3000 Index. Source is Lipper Analytical
Services, Inc.
++ The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. Source is Towers Data Systems.
7
<PAGE> 10
INDUSTRY SECTORS
A YEAR-TO-YEAR COMPARISON
Data show the percentage of the common stocks in the portfolio that each sector
represented on December 31, 1996 and on December 31, 1995.
[YEAR-TO-YEAR COMPARISON BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER-DREMAN SMALL CAP KEMPER-DREMAN SMALL CAP
VALUE FUND ON 12/31/96 VALUE FUND ON 12/31/95
<S> <C> <C>
CAPITAL GOODS 28.8% 23.7%
FINANCE 21.9% 32.6%
CONSUMER NONDURABLES 13.9% 25.1%
ENERGY 11.3% 10.4%
TECHNOLOGY 9.5% 2.7%
TRANSPORTATION 8.4% 2.5%
UTILITIES 2.8% 0.0%
BASIC INDUSTRIES 1.9% 3.0%
OTHER 0.9% 0.0%
HEALTH CARE 0.6% 0.0%
</TABLE>
A COMPARISON WITH THE RUSSELL 2000 INDEX*
Data show the percentage of the common stocks in the portfolio that each sector
of Kemper-Dreman Small Cap Value Fund represented on December 31, 1996, compared
to the industry sectors that make up the fund's benchmark, the Russell 2000
Index.
[RUSSELL COMPARISON BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER-DREMAN SMALL CAP RUSSELL 2000 INDEX
VALUE FUND ON 12/31/96 ON 12/31/96
<S> <C> <C>
CAPITAL GOODS 28.8% 9.7%
FINANCE 21.9% 23.6%
CONSUMER NONDURABLES 13.9% 19.3%
ENERGY 11.3% 6.0%
TECHNOLOGY 9.5% 15.4%
TRANSPORTATION 8.4% 1.7%
UTILITIES 2.8% 3.6%
BASIC INDUSTRIES 1.9% 6.5%
OTHER 0.9% 0.4%
HEALTH CARE 0.6% 10.3%
CONSUMER DURABLES 0.0% 3.5%
</TABLE>
*The Russell 2000 Index is an unmanaged capitalization weighted price only index
which is comprised of 2000 of the smallest stocks (on the basis of
capitalization) in the Russell 3000 Index.
8
<PAGE> 11
LARGEST HOLDINGS
THE FUND'S 10 LARGEST COMMON STOCK HOLDINGS
REPRESENTING 21% OF THE FUND'S TOTAL NET ASSETS ON DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
HOLDINGS PERCENTAGE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. KCS ENERGY Engaged in the exploration, transport, production and 2.5%
marketing of natural gas, oil and gas.
2. BLOUNT INC. Manufactures outdoor products, forestry harvest and 2.3%
sporting equipment; products include saw chains,
sprockets, timber harvest and log loading equipment,
industrial tractors and sporting ammunition.
3. IMPERIAL CREDIT A specialty lender with thrift and loan subsidiaries. 2.2%
INDUSTRIES
4. PHH CORPORATION A business services company specializing in vehicle 2.2%
fleet and fuel management services, corporate
relocation, corporate real estate management services
and mortgage banking services.
5. HILTON HOTELS Owns and manages hotels, casino-hotels and inns. 2.2%
6. STEWART & STEVENSON Designs, fabricates, assembles and markets diesel and 2.0%
SERVICES gas turbine engine-driven power systems; provides
related parts and services; manufactures and assembles
military trucks.
7. GLOBAL INDUSTRIAL Manufactures refactory products, recycling and 1.9%
TECHNOLOGIES processing equipment, mining equipment, flanges and
specialized industrial tools used by a wide range of
industries.
8. CARPENTER TECHNOLOGY Manufactures, fabricates and markets specialty metals. 1.9%
9. SCIENTIFIC ATLANTA Leading supplier of broad band communication systems, 1.9%
satellite-based video voice and data communication
networks.
10. INTERMET Manufactures a wide variety of ductile and gray iron 1.9%
casting for automotive and industrial customers.
</TABLE>
* The fund's holdings are subject to change.
9
<PAGE> 12
PORTFOLIO OF INVESTMENTS
KEMPER-DREMAN SMALL CAP VALUE FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUTOS AND
TRANSPORTATION--7.4%
Airborne Freight Corporation 191,400 $ 4,474
Fleetwood Enterprises 92,200 2,536
Intermet Corp. 317,000 5,112
Myers Industries 233,300 3,937
Simpson Industries 79,100 861
Walbro Corp. 175,000 3,194
-----------------------------------------------------------------------------
20,114
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER
DISCRETIONARY--11.4%
(a)AMC Entertainment 160,000 2,300
J. Baker, Inc. 188,500 1,001
Bush Industries 46,500 895
Cato Corp. 191,000 955
Fedders Corporation 324,500 2,028
Haggar Apparel Co. 204,500 3,246
Heilig - Meyers 271,000 4,404
Hilton Hotels Corp. 226,700 5,923
(a)Insurance Auto Auctions 210,500 2,000
(a)Jean Philippe Fragrances 244,500 1,589
(a)Sports & Recreation 293,000 2,271
Del Webb Corp. 277,500 4,544
-----------------------------------------------------------------------------
31,156
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--.7% (a)Performance Food Group 130,200 2,018
- ----------------------------------------------------------------------------------------------------------------------
ENERGY--9.9%
(a)Belden & Blake Corporation 68,400 1,744
(a)Chieftain International Inc. 182,600 4,748
Enron Global Power & Pipelines L.L.C. 106,000 2,862
Giant Industries 182,500 2,555
KCS Energy 193,900 6,932
(a)Nuevo Energy Co. 69,600 3,619
(a)Seitel, Inc. 116,500 4,660
-----------------------------------------------------------------------------
27,120
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--19.2%
(a)Arbatax International, Inc. 95,000 618
Compass Bancshares 83,500 3,319
Cullen Frost Bankers 142,700 4,745
First Commerce Corp. 72,500 2,818
First Financial Caribbean Corp. 168,000 4,662
First Financial Corp. 186,875 4,578
Guaranty National Insurance 27,284 457
Imperial Credit Industries 283,720 5,958
Integon Corp. 240,800 4,274
Lawyers Title Insurance Corp. 95,000 1,864
Liberty Bancorp 39,700 1,975
Long Island Bancorp 101,500 3,553
North Fork Bancorp 88,692 3,160
PHH Corporation 138,000 5,934
Roosevelt Financial Group 105,500 2,216
T.R. Financial Corporation 67,300 2,389
-----------------------------------------------------------------------------
52,520
- ----------------------------------------------------------------------------------------------------------------------
HEALTH CARE--.6%
(a)Sofamor-Danek Group 51,000 1,556
</TABLE>
10
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEGRATED OILS--1.7% (a)Tesoro Petroleum Corp. 328,100 $ 4,593
- -----------------------------------------------------------------------------------------------------------------------
MATERIALS PROCESSING--16.3% AK Steel Holding Corp. 127,500 5,052
AMCOL International 225,000 3,544
Ball Corp. 119,500 3,107
Blount, Inc. 163,050 6,257
Carpenter Technology Corp. 143,000 5,237
Elcor Corp. 160,700 3,435
(a)Global Industrial Technologies, Inc. 240,000 5,310
(a)Lydall, Inc. 135,000 3,038
(a)Mueller Industries, Inc. 84,000 3,234
Quanex Corp. 137,000 3,750
Rexene Corp. 179,000 2,439
-----------------------------------------------------------------------------
44,403
- -----------------------------------------------------------------------------------------------------------------------
PRODUCER DURABLES--8.9% (a)Asyst Technologies 71,000 1,216
BWIP, Inc. 57,900 955
(a)Electroglas 206,000 3,322
Pacific Scientific Co. 207,000 2,329
Scientific-Atlanta 345,000 5,175
Stewart & Stevenson Services 187,000 5,446
(a)Teltrend 85,000 2,359
Watts Industries, Inc. 151,600 3,619
-----------------------------------------------------------------------------
24,421
- -----------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--8.3% (a)Benchmark Electronics 115,700 3,485
(a)Burr Brown Corp. 77,500 2,015
(a)Diamond Multimedia Systems, Inc. 58,000 689
(a)EXAR Corporation 146,500 2,271
(a)Jones Intercable Inc. 422,400 4,382
(a)Photronics, Inc. 34,900 951
(a)Proxima Corp. 163,500 2,105
(a)Read-Rite Corp. 117,500 2,967
(a)Tech-Sym Corporation 128,400 3,820
-----------------------------------------------------------------------------
22,685
- -----------------------------------------------------------------------------------------------------------------------
UTILITIES--2.4% (a)Atlantic Tele-Network 209,800 3,199
United Cities Gas Co. 152,500 3,431
-----------------------------------------------------------------------------
6,630
- -----------------------------------------------------------------------------------------------------------------------
OTHER--.8% Mercer International, Inc. 207,000 2,122
-----------------------------------------------------------------------------
TOTAL COMMON STOCKS--87.6%
(Cost: $217,513) 239,338
-----------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET Yield--5.30% to 6.05%
INSTRUMENTS--15.3%
Due--January and February 1997
Baxter International $ 5,000 $ 4,982
Ciesco, L.P. 8,000 7,956
ConAgra Inc 6,000 5,980
Dynamic Funding Corporation 6,000 5,991
Renaissance Energy Co. 6,000 5,966
Other 11,000 10,987
------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--15.3%
(Cost: $41,865) 41,862
------------------------------------------------------------------------------
TOTAL INVESTMENTS--102.9%
(Cost: $259,378) 281,200
------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND
OTHER ASSETS--(2.9)% (7,978)
------------------------------------------------------------------------------
NET ASSETS--100% $273,222
------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments of $259,378,000 for federal income tax purposes
at December 31, 1996, the gross unrealized appreciation was $30,434,000, the
gross unrealized depreciation was $8,612,000 and the net unrealized appreciation
on investments was $21,822,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
KEMPER-DREMAN SMALL CAP VALUE FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper-Dreman Small Cap Value Fund as
of December 31, 1996, and the related statement of operations for the year then
ended and the statement of changes in net assets and the financial highlights
for each of the two years in the period then ended. 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. The financial highlights for each of
the three years in the period ended December 31, 1994 were audited by other
auditors whose report dated January 19, 1995 expressed an unqualified opinion on
those financial highlights.
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
December 31, 1996, 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 audit provides 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-Dreman Small Cap Value Fund at December 31, 1996, the results of its
operations for the year then ended and the changes in its net assets and the
financial highlights for the two years then ended, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 18, 1997
13
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $259,378) $281,200
- ------------------------------------------------------------------------
Cash 84
- ------------------------------------------------------------------------
Receivable for:
Investments sold 1,551
- ------------------------------------------------------------------------
Fund shares sold 5,177
- ------------------------------------------------------------------------
Dividends 121
- ------------------------------------------------------------------------
TOTAL ASSETS 288,133
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Investments purchased 14,174
- ------------------------------------------------------------------------
Fund shares redeemed 237
- ------------------------------------------------------------------------
Management fee 154
- ------------------------------------------------------------------------
Distribution services fee 26
- ------------------------------------------------------------------------
Administrative services fee 53
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 244
- ------------------------------------------------------------------------
Directors' fees and other 23
- ------------------------------------------------------------------------
Total liabilities 14,911
- ------------------------------------------------------------------------
NET ASSETS $273,222
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $253,026
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (1,695)
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 21,822
- ------------------------------------------------------------------------
Undistributed net investment income 69
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $273,222
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($144,812,000 / 7,922,000 shares outstanding) $18.28
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $19.40
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($99,355,000 / 5,477,000 shares outstanding) $18.14
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($20,054,000 / 1,104,000 shares outstanding) $18.17
- ------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($9,001,000 / 489,000 shares outstanding) $18.40
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME
- ---------------------------------------------------------------------------------
Dividends $ 1,750
- ---------------------------------------------------------------------------------
Interest 1,009
- ---------------------------------------------------------------------------------
Total investment income 2,759
- ---------------------------------------------------------------------------------
Expenses:
Management fee 943
- ---------------------------------------------------------------------------------
Distribution services fee 387
- ---------------------------------------------------------------------------------
Administrative services fee 263
- ---------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 637
- ---------------------------------------------------------------------------------
Professional fees 10
- ---------------------------------------------------------------------------------
Reports to shareholders 15
- ---------------------------------------------------------------------------------
Registration fees 42
- ---------------------------------------------------------------------------------
Directors' fees and other 19
- ---------------------------------------------------------------------------------
Total expenses before expense waiver 2,316
- ---------------------------------------------------------------------------------
Less expenses waived by investment manager 283
- ---------------------------------------------------------------------------------
Total expenses after expense waiver 2,033
- ---------------------------------------------------------------------------------
NET INVESTMENT INCOME 726
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- ---------------------------------------------------------------------------------
Net realized gain on sales of investments 3,470
- ---------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 20,292
- ---------------------------------------------------------------------------------
Net gain on investments 23,762
- ---------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $24,488
- ---------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
- ------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income (loss) $ 726 (40)
- ------------------------------------------------------------------------------------------
Net realized gain 3,470 1,914
- ------------------------------------------------------------------------------------------
Change in net unrealized appreciation 20,292 2,016
- ------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 24,488 3,890
- ------------------------------------------------------------------------------------------
Distribution from net investment income (658) --
- ------------------------------------------------------------------------------------------
Distribution from net realized gain (5,471) (1,603)
- ------------------------------------------------------------------------------------------
Total dividends to shareholders (6,129) (1,603)
- ------------------------------------------------------------------------------------------
Net increase from capital share transactions 223,257 22,388
- ------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 241,616 24,675
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------
Beginning of year 31,606 6,931
- ------------------------------------------------------------------------------------------
END OF YEAR
(including undistributed net investment income of
$69,000 in 1996) $273,222 31,606
- ------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUND Kemper-Dreman Small Cap Value Fund (the Fund) is a
separate series of Kemper-Dreman Fund, Inc. (KDF),
an open-end management investment company organized
as a corporation in the state of Maryland. KDF is
authorized to issue 500,000,000 shares of $.01 par
value common stock.
The Fund currently offers four classes of shares.
Class A shares are sold to investors subject to an
initial sales charge. Class B shares are sold
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and, for shares sold on or
after April 1, 1996, a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are sold to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Portfolio securities that are traded on a
domestic securities exchange or securities listed
on the NASDAQ National Market are valued at the
last sale price on the exchange or market where
primarily traded or listed or, if there is no
recent sale, at the last current bid quotation.
Fixed income securities are valued by using market
quotations, or independent pricing services that
use prices provided by market makers or estimates
of market values obtained from yield data relating
to instruments or securities with similar
characteristics. Equity options are valued at the
last sale price unless the bid price is higher or
the asked price is lower, in which event such bid
or asked price is used. Financial futures and
options thereon are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Other securities
and assets are valued at fair value as determined
in good faith by the Board of Directors.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Dividend income is recorded on the
ex-dividend date, and interest income is recorded
on the accrual basis and includes discount
amortization on money market instruments. Realized
gains and losses from investment transactions are
reported on an identified cost basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies and therefore no
federal income tax provision is required.
DIVIDENDS TO SHAREHOLDERS. The Fund generally
declares and pays dividends of net investment
income and net realized capital gains annually,
which are recorded on the ex-dividend date.
Dividends are determined in accordance with income
tax principles which may treat certain transactions
differently from generally accepted accounting
principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. KDF has a management
agreement with Dreman Value Advisors, Inc. (DVA), a
wholly owned subsidiary of Zurich Kemper
Investments, Inc. The Fund pays a management fee at
an annual rate of .75% of the first $250 million of
average daily net assets declining to .62% of
average daily net assets in excess of $12.5
billion. The Fund incurred a management fee of
$943,000 for the year ended December 31, 1996.
DVA agreed to waive certain operating expenses
through November 11, 1996 to the extent necessary
to limit the Fund's operating expenses to the
following annualized percentages of average daily
net assets: Class A, 1.25%, Class B, 2.00% and
Class C, 1.95%. Under this arrangement, DVA waived
expenses of $283,000 during the year ended December
31, 1996.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
KDF has an underwriting and distribution services
agreement with Kemper Distributors, Inc. (KDI), an
affiliate of DVA. Underwriting commissions paid in
connection with the distribution of Class A shares
are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS ------------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ --------------
<S> <C> <C> <C>
Year ended December 31, 1996 $231,000 1,734,000 114,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B and Class C shares and the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES DISTRIBUTION FEES
(AFTER EXPENSE WAIVER) PAID BY KDI
AND CDSC ------------------------------
RECEIVED BY KDI TO ALL FIRMS TO AFFILIATES
---------------------- ------------ --------------
<S> <C> <C> <C>
Year ended December 31, 1996 $292,000 2,429,000 47,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. KDF has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
accounts the firms service. Administrative services
fees (ASF) paid by the Fund are as follows:
<TABLE>
<CAPTION>
ASF PAID BY ASF PAID BY KDI
THE FUND TO KDI ------------------------------
(AFTER EXPENSE WAIVER) TO ALL FIRMS TO AFFILIATES
---------------------- ------------- --------------
<S> <C> <C> <C>
Year ended December 31,
1996 $170,000 351,000 6,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with KDF's transfer agent, Kemper
Service Company (KSvC), an affiliate of DVA, is the
shareholder service agent of the Fund. Under the
agreement, KSvC received shareholder services fees of
$541,000 for the year ended December 31, 1996.
OFFICERS AND DIRECTORS. Certain officers or directors
of the Fund are also officers or directors of DVA.
During the year ended December 31, 1996, the Fund
made no payments to its officers and incurred
directors' fees of $12,000 to independent directors.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended December 31, 1996, investment
transactions
(excluding short-term instruments) are as follows
(in thousands):
Purchases $215,905
Proceeds from sales 29,212
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
-------------------------------------------------------------------------------
Class A 8,060 $140,448 1,364 $19,337
-------------------------------------------------------------------------------
Class B 6,110 105,279 544 7,969
-------------------------------------------------------------------------------
Class C 1,077 18,688 91 1,360
-------------------------------------------------------------------------------
Class I 1,043 17,495 141 2,045
-------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-------------------------------------------------------------------------------
Class A 182 3,250 77 1,060
-------------------------------------------------------------------------------
Class B 115 2,031 23 333
-------------------------------------------------------------------------------
Class C 25 434 3 44
-------------------------------------------------------------------------------
Class I 13 229 6 92
-------------------------------------------------------------------------------
SHARES REDEEMED
-------------------------------------------------------------------------------
Class A (1,764) (29,756) (653) (9,016)
-------------------------------------------------------------------------------
Class B (1,288) (21,940) (10) (155)
-------------------------------------------------------------------------------
Class C (66) (1,102) (26) (400)
-------------------------------------------------------------------------------
Class I (695) (11,799) (19) (281)
-------------------------------------------------------------------------------
CONVERSION OF SHARES
-------------------------------------------------------------------------------
Class A 17 308 -- --
-------------------------------------------------------------------------------
Class B (17) (308) -- --
-------------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $223,257 $22,388
-------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------------
CLASS A
-----------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 22
1996 1995 1994 1993 TO DEC. 31, 1992
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $14.50 10.85 11.23 11.52 10.00
- --------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .14 (.02) -- .06 .03
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain 4.14 4.64 .02 .23 1.95
- --------------------------------------------------------------------------------------------------------------
Total from investment operations 4.28 4.62 .02 .29 1.98
- --------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .07 -- -- .06 .03
- --------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .43 .97 .40 .52 .43
- --------------------------------------------------------------------------------------------------------------
Total dividends .50 .97 .40 .58 .46
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of period $18.28 14.50 10.85 11.23 11.52
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 29.60% 43.29 .15 2.54 32.51
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.31% 1.25 1.25 1.25 1.25
- --------------------------------------------------------------------------------------------------------------
Net investment income (loss) .87% (.16) (.03) .53 .81
- --------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------
Expenses 1.47% 1.83 1.82 2.09 4.29
- --------------------------------------------------------------------------------------------------------------
Net investment income (loss) .71% (.74) (.61) (.32) (2.24)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------- ------------------- ----------------------
CLASS B CLASS C CLASS I
------------------- ------------------- ----------------------
NOV. 1
YEAR SEPT. 11 YEAR SEPT. 11 YEAR TO
ENDED TO ENDED TO ENDED DEC.
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, 31,
1996 1995 1996 1995 1996 1995
- ----------------------------------------------------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------- ------------------- ---------------------
Net asset value, beginning of period $14.48 15.75 14.48 15.75 14.52 14.25
- ----------------------------------------------------------------- ------------------- ---------------------
Income from investment operations:
Net investment income (loss) .01 (.02) .01 (.02) .25 --
- ----------------------------------------------------------------- ------------------- ---------------------
Net realized and unrealized gain (loss) 4.11 (.41) 4.14 (.41) 4.13 1.11
- ----------------------------------------------------------------- ------------------- ---------------------
Total from investment operations 4.12 (.43) 4.15 (.43) 4.38 1.11
- ----------------------------------------------------------------- ------------------- ---------------------
Less dividends:
Distribution from net investment income .03 -- .03 -- .07 --
- ----------------------------------------------------------------- ------------------- ---------------------
Distribution from net realized gain .43 .84 .43 .84 .43 .84
- ----------------------------------------------------------------- ------------------- ---------------------
Total dividends .46 .84 .46 .84 .50 .84
- ----------------------------------------------------------------- ------------------- ---------------------
Net asset value, end of period $18.14 14.48 18.17 14.48 18.40 14.52
- ----------------------------------------------------------------- ------------------- ---------------------
TOTAL RETURN (NOT ANNUALIZED) 28.54% (2.52) 28.77 (2.51) 30.28 8.03
- ----------------------------------------------------------------- ------------------- ---------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------- ------------------- ---------------------
Expenses absorbed by the Fund 2.12% 2.00 2.06 1.95 .84 .47
- ----------------------------------------------------------------- ------------------- ---------------------
Net investment income (loss) .06% (.99) .12 (.94) 1.34 .28
- ----------------------------------------------------------------- ------------------- ---------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------- ------------------- ---------------------
Expenses 2.49% 2.39 2.19 2.35 .84 .90
- ----------------------------------------------------------------- ------------------- ---------------------
Net investment income (loss) (.31)% (1.38) (.01) (1.34) 1.34 (.15)
- ----------------------------------------------------------------- ------------------- ---------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 22
1996 1995 1994 1993 TO DEC. 31, 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $273,222 31,606 6,931 4,875 2,385
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 23% 86 140 79 37
- ---------------------------------------------------------------------------------------------------------
Average commission rate paid per share on stock transactions for the year ended December 31, 1996 was
$.0426.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOTES: Per share data for 1996 were determined based on average shares
outstanding. Total return does not reflect the effect of any sales charges.
The investment manager agreed to waive a portion of its management fee and
absorb certain operating expenses of the Fund. The Other Ratios to Average Net
Assets are computed without this expense waiver or absorption.
19
<PAGE> 22
DIRECTORS & OFFICERS
DIRECTORS OFFICERS
STEPHEN B. TIMBERS CHRISTIAN C. BERTELSEN
President and Director Vice President
JAMES E. AKINS CHARLES R. MANZONI, JR.
Director Vice President
ARTHUR R. GOTTSCHALK JOHN E. NEAL
Director Vice President
FREDERICK T. KELSEY JAMES R. NEEL
Director Vice President
DOMINIQUE P. MORAX STEVEN T. STOKES
Director Vice President
FRED B. RENWICK PHILIP J. COLLORA
Director Vice President and
Secretary
JOHN B. TINGLEFF
Director JEROME L. DUFFY
Treasurer
JOHN G. WEITHERS
Director ELIZABETH C. WERTH
Assistant Secretary
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER DREMAN VALUE ADVISORS, INC.
280 Park Avenue
New York, New York 10017
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
This report is not to be distributed unless preceded
or accompanied by a Kemper-Dreman
Fund, Inc. prospectus.
KDSCF - 2 (2/97) 1028530
Printed in the U.S.A. [KEMPER FUNDS LOGO]
