<PAGE> 1
Kemper-Dreman High Return Equity Fund Class I Shares
AVERAGE ANNUAL TOTAL RETURNS*
For periods ended December 31, 1996
1-year Life of Class
------ ---------------
Kemper-Dreman High Return Equity Fund Class I Shares 29.36% 35.68%
(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 High Return Equity
Fund Class I Shares from 11/1/95 through 12/31/96
<TABLE>
<CAPTION>
November 1, June 30, December 31,
1995 1996 1996
----------- -------- ------------
<S> <C> <C> <C>
Kemper Dreman High Return Equity Fund* 10,000 12,288 14,290
Standard & Poor's 600 Stock Index** 10,000 11,727 13,093
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 Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market. Source is Towers Data Systems.
*** 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 High Return Equity Fund Class I shares
made the following distributions per share:
Income Dividend $0.5326
Short-term Capital Gain $0.45
Long-term Capital Gain $0.28
Investment Manager
Dreman Value Advisor, 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
High Return Equity Fund.
(1028520)
<PAGE> 3
KEMPER-DREMAN
HIGH RETURN EQUITY FUND
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996
Seeks to achieve a high rate of total return
". . . Last year was a pleasant surprise for
most equity investors. Few of us expected such a
good year after the strong performance of 1995."
[KEMPER FUNDS LOGO]
<PAGE> 4
CONTENTS
3
Economic Overview
5
Performance Update
9
Industry Sectors
10
Individual Holdings
11
Portfolio of Investments
13
Report of Independent Auditors
14
Financial Statements
16
Notes to Financial Statements
20
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER-DREMAN HIGH RETURN EQUITY
FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 28.79%
CLASS B 27.63%
CLASS C 27.66%
LIPPER EQUITY
INCOME FUNDS CATEGORY
AVERAGE* 18.85%
- --------------------------------------------------------------------------------
</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. The fund's strategy of sector
concentration presents special risk considerations.
* 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
12/31/96 12/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER-DREMAN HIGH RETURN
EQUITY FUND CLASS A $26.52 $21.49
- --------------------------------------------------------------------------------
KEMPER-DREMAN HIGH RETURN
EQUITY FUND CLASS B $26.44 $21.47
- --------------------------------------------------------------------------------
KEMPER-DREMAN HIGH RETURN
EQUITY FUND CLASS C $26.45 $21.48
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER-DREMAN HIGH RETURN EQUITY
FUND LIPPER RANKINGS
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER EQUITY INCOME FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #2 OF 160 FUNDS #8 OF 160 FUNDS #7 OF 160 FUNDS
- --------------------------------------------------------------------------------
3-YEAR #1 OF 85 FUNDS N/A N/A
- --------------------------------------------------------------------------------
5-YEAR #1 OF 56 FUNDS N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE FISCAL YEAR, KEMPER-DREMAN HIGH RETURN EQUITY FUND MADE THE FOLLOWING
DISTRIBUTIONS PER SHARE:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME DIVIDEND $0.38 $0.2083 $0.2163
- --------------------------------------------------------------------------------
SHORT-TERM CAPITAL GAIN $0.45 $0.45 $0.45
- --------------------------------------------------------------------------------
LONG-TERM CAPITAL GAIN $0.28 $0.28 $0.28
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
PRICE/EARNINGS MULTIPLE A company's stock price divided by its earnings for the
past four quarters.
VALUE (CONTRARIAN) STYLE OF INVESTING Investors following this investment style
seek to find value among promising stocks that are currently out of favor or, in
other words, trading below market multiples. Stocks may become undervalued as a
result of overreaction by investors to unfavorable news about a company,
industry or the stock markets 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. David Dreman,
portfolio manager of Kemper Dreman High Return Equity Fund, is a pioneer of this
investment philosophy.
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.
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
[DREMAN PHOTO]
DAVID N. DREMAN IS PORTFOLIO MANAGER OF KEMPER-DREMAN HIGH RETURN EQUITY FUND.
HE HAS MORE THAN 30 YEARS OF EXPERIENCE AS AN INVESTMENT ANALYST, ADVISOR AND
MANAGER. DREMAN HOLDS A BACHELOR OF COMMERCE DEGREE FROM THE UNIVERSITY OF
MANITOBA, WINNIPEG, MANITOBA, CANADA. DAVID DREMAN IS CONSIDERED TO BE A PIONEER
OF THE VALUE STYLE OF INVESTING AND IS A REGULAR COLUMNIST IN FORBES AND THE
AUTHOR OF SEVERAL BOOKS ON CONTRARIAN INVESTING.
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.
CONTINUED CONCENTRATION IN FINANCIAL STOCKS, COMBINED WITH SELECTED
OIL, NATURAL GAS AND TECHNOLOGY POSITIONS, HELPED KEMPER-DREMAN HIGH
RETURN EQUITY FUND PRODUCE ANOTHER EXCEPTIONAL YEAR AS A PERFORMANCE LEADER OF
EQUITY INCOME MUTUAL FUNDS.
Q IN ANOTHER EXCELLENT YEAR FOR THE STOCK MARKET, KEMPER-DREMAN HIGH RETURN
EQUITY FUND'S 28.79 PERCENT RETURN (CLASS A SHARES, UNADJUSTED FOR ANY SALES
CHARGE) SURPASSED THE 22.95 PERCENT RETURN OF THE STANDARD & POOR'S 500 STOCK
INDEX* (S&P 500). HOW WOULD YOU CHARACTERIZE THE MARKET IN GENERAL IN 1996 --
AND HOW DID THE FUND MAXIMIZE ITS OPPORTUNITIES?
A Last year was a pleasant surprise for most equity investors. Few of us
expected such a good year after the strong performance of 1995. In fact, in our
last annual report to shareholders we said that we'd be doing well if the market
rose 5 to 10 percent in 1996.
Of course, the market was much more turbulent in 1996 and we saw more
speculation, particularly in the market for initial public offerings. We also
saw an unexpected confluence of strong economic factors including continued low
inflation, greater-than-anticipated economic expansion and strong productivity
growth in the manufacturing sector. Yet, this fund's performance was led by many
of the stocks we established positions in years ago -- the Federal National
Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie
Mac) and financial services companies including BankAmerica, NationsBank and
Barnett Banks. Many of these were the same companies that drove our 1995
performance.
Technology stocks that we purchased when the market rotated away from the
sector during the winter of 1995-1996 also contributed. Compaq, Intel and Texas
Instruments almost doubled in price while we owned them.
In addition, we found value in individual stocks in a variety of other
industries. For example, the TJX Companies, a woman's apparel company, rose
significantly in 1996. Philip Morris, Columbia Gas System, General Electric,
Toys R Us and Liz Claiborne all had strong years.
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
Q THE GRAPHS ON PAGE 9 ILLUSTRATE THE DIFFERENCES BETWEEN THE PORTFOLIO ON
DECEMBER 31, 1995, AND 1996. WHAT STANDS OUT THE MOST ARE THE CHANGES IN
FINANCIAL STOCKS FROM APPROXIMATELY 46% TO 38% OF THE COMMON STOCKS IN THE
PORTFOLIO, ENERGY FROM 9% TO 19% AND HEALTH CARE STOCKS FROM 17% TO 9%. HOW DID
YOU ADJUST THE FUND DURING THE YEAR?
A One of the major adjustments was to expose the fund to more oil and energy
stocks. Our decision to build up to a 19% position (of the fund's common stock
holdings) by the end of the year was based on
5
<PAGE> 8
PERFORMANCE UPDATE
three primary observations: the stocks' underperformance for the past five or
six years, a dissipation in what had been enormous oil surpluses and political
instability in Saudi Arabia. Taken together, these factors offered us an
opportunity to buy attractively priced stocks in companies whose large domestic
reserves are likely to be in demand in the next year or so. What you can't see
from the graph on page 9 (because it compares the fund's composition from the
end of 1996 to the end of 1995) is our temporary heightened exposure to
technology stocks. At its highest in 1996, technology represented 12% of the
common stocks in the portfolio. When we closed the year, Texas Instruments was
our only pure technology holding.
Q OF COURSE, ONE OF THE CHANGES FOR THE FUND IN 1996 WAS ITS GROWTH TO SEVEN
TIMES ITS SIZE -- TO $738 MILLION FROM $98 MILLION AT YEAR-END 1995. HOW HAS
SUCH GROWTH AFFECTED YOUR MANAGEMENT?
A The fund's extraordinary growth has not affected my style or the way I
manage. Today, we own 55 companies and at the end of 1995 we held 50. As you can
see the fund has grown by $640 million and I have only added five stocks. As the
fund has grown, I have been able to add to existing positions, which enables me
to maintain a stock's weighting in the portfolio. Owning a $25 to $30 million
position in companies the size of NationsBank, Philip Morris and Federal
National Mortgage Association is relatively insignificant considering they have
at least $25 billion worth of stock outstanding.
Q IN ADDITION TO BEATING ITS BROAD MARKET INDEX, THE FUND'S RELATIVE
PERFORMANCE WAS OUTSTANDING IN 1996, AS IT CONTINUED TO RANK AMONG THE TOP
PERFORMING EQUITY INCOME FUNDS FOR ALL FUNDS TRACKED IN THE CATEGORY BY LIPPER
ANALYTICAL SERVICES, INC.* (SEE PAGE 2). HOW IS THE FUND DIFFERENT FROM ITS
PEERS?
A What makes this fund unique is that we tend to be very opportunistic. We
seek to take advantage of sectors that have experienced a crisis and present
opportunities to buy fundamentally sound companies at deep value. By that I mean
companies that have P/E ratios or price-to-book values at as much as a 50%
discount to their historic values and that are well below the market as a whole.
We're not afraid to take a concentrated position in a sector that has been
beaten down. Of course, we do extensive research before we buy particular stocks
so that we are confident there is greater intrinsic value than the market is
giving them.
Q WE'VE DISCUSSED EVERYTHING THAT WENT RIGHT -- BUT SURELY THERE WERE SOME
DISAPPOINTMENTS?
A Fortunately, there weren't many. We were a little early to pull the plug on
technology stocks. However, we bought them at below market prices and we sold
them when they climbed to market price/earnings multiples. (FOR AN EXPLANATION
OF HOW INVESTORS MEASURE STOCK PRICE RELATIVE TO A COMPANY'S EARNINGS, PLEASE
SEE PRICE/EARNINGS MULTIPLE IN TERMS TO KNOW.) That's our signal to sell. Being
a value investor requires us to maintain a sell discipline, even if it means
that we miss an additional climb in price. We'd rather miss some of the
additional gain than be left holding a stock as it starts to fall.
Q FINANCIAL STOCKS HAVE BEEN STALWARTS OF THE FUND FOR THE LAST FEW YEARS. AS
WE BEGIN A NEW YEAR, IS THERE STILL VALUE IN THIS SECTOR?
A Yes. Overall, I feel that the sector can still be strong. Many of the
stocks offer dividend yields that are higher than the market and yet their
price/earnings multiples are below the market. The price-to-book ratio for the
sector is about 2.6% versus 4.25% for the S&P 500 index. Rising interest rates
or surprising negative news about the economy would be expected to hurt their
performance. But, given their attractive fundamentals, we'd be likely to see a
downturn as an opportunity to expand our exposure. That's how much we favor
financial stocks.
Q YOU TURNED TO TECHNOLOGY STOCKS FOR A WHILE IN 1996. DO YOU SEE RETURNING
TO THAT SECTOR IN 1997?
A I would like to re-establish positions in some of the good technology
stocks but, as of the close of 1996, they're too expensive. Just about anything
- --an economic slowdown or a disappointing earnings announcement from a pivotal
company --
6
<PAGE> 9
PERFORMANCE UPDATE
could set the industry back and create a buying opportunity for the fund.
Q WHERE ELSE WILL YOU BE LOOKING FOR OPPORTUNITIES?
A I am still very positive on oil stocks. And, of course, we will also be
looking at individual issues that might have fallen out of favor in other
sectors.
Q SHORTLY AFTER THE CLOSE OF THE YEAR, A BARRON'S ARTICLE REVIEWED THE
KEMPER-DREMAN HIGH RETURN EQUITY FUND'S STRENGTH IN 1996 YET DESCRIBED THE FUND
AS ONE THAT "IS DESIGNED TO DO BEST IN BEDRAGGLED MARKETS." HAVING JUST
COMPLETED TWO EXCELLENT YEARS, ARE THE MARKETS BECOMING BEDRAGGLED?
A With the market up almost 70% since the beginning of 1995, I think one
needs to be a bit cautious. I expect 1997 to be rough and we've positioned the
fund to be more defensive now than it was at the start of 1996.
BARRON'S point is that we're a value fund whose strategy is to make the
most of opportunities. We do expect the market to correct -- there hasn't been
a correction of 10 percent in seven years. But we believe the impact of a
correction on our existing portfolio should be relatively low, given our low
price/ earnings holdings and their above-average dividend yields. Corrections,
remember, are what enable us to establish positions in out-of-favor companies
that we consider attractive on a long-term basis.
An up-and-down year should present buying opportunities. We'll be
patient, of course. I won't look for value in a market where there is none. But
price weakness is what a value investor seeks. The financial stocks in the
portfolio right now are a perfect example of how our strategy develops. Six
years ago, financial services was a beaten-up sector that included many stocks
with sound fundamentals. These are the stocks that have steadily contributed to
our performance, and they're typical of the kinds of opportunities that are
available when a sector or market corrects. This is what we'll be waiting for
in 1997.
7
<PAGE> 10
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
KEMPER-DREMAN HIGH RETURN EQUITY FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED DECEMBER 31, 1996 (ADJUSTED FOR THE APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR CLASS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER-DREMAN HIGH RETURN EQUITY FUND CLASS A 21.39% 18.23% 17.64% (since 3/18/88)
- --------------------------------------------------------------------------------------------------
KEMPER-DREMAN HIGH RETURN EQUITY FUND CLASS B 24.63 N/A 30.04 (since 9/11/95)
- --------------------------------------------------------------------------------------------------
KEMPER-DREMAN HIGH RETURN EQUITY FUND CLASS C 27.66 N/A 32.23 (since 9/11/95)
- --------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper-Dreman High Return Equity Fund Class A FROM 3/18/88 THROUGH 12/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3/18/88 12/31/90 12/31/92 12/31/94 12/31/96
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper-Dreman High Return Equity Fund Class A(1) 10000 11531 20386 22046 41698
Standard & Poor's 500 Stock Index+ 10000 14175 19880 22172 37453
Consumer Price Index++ 10000 11485 12180 12850 13614
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper-Dreman High Return Equity 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 High Return Equity Fund Class B(1) 10000 11288 14107
Standard & Poor's 500 Stock Index+ 10000 11091 13681
Consumer Price Index++ 10000 10039 10373
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper-Dreman High Return Equity 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 High Return Equity Fund Class C(1) 10000 11294 14419
Standard & Poor's 500 Stock Index+ 10000 11091 13631
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 High Return Equity Fund to the Standard & Poor's 500 Stock
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 Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market. Source is Towers Data Systems.
++ 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.
8
<PAGE> 11
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 HIGH KEMPER-DREMAN HIGH
RETURN EQUITY FUND RETURN EQUITY FUND
ON 12/31/96 ON 12/31/95
<S> <C> <C>
FINANCE 38.3% 45.5%
CONSUMER NONDURABLES 19.7% 19.6%
ENERGY 19.0% 8.5%
HEALTH CARE 8.7% 16.7%
BASIC INDUSTRIES 5.7% 2.9%
CAPITAL GOODS 5.3% 0.0%
TECHNOLOGY 2.7% 0.0%
CONSUMER DURABLES 0.6% 3.3%
OTHER 0.0% 3.5%
</TABLE>
A COMPARISON WITH THE STANDARD & POOR'S 500 STOCK INDEX*
Data show the percentage of the common stocks in the portfolio that each sector
of the Kemper-Dreman High Return Equity Fund represented on December 31, 1996,
compared to the industry sectors that make up the fund's benchmark, the Standard
& Poor's 500 Stock Index.
[STANDARD & POOR'S 500 STOCK INDEX COMPARISON BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER-DREMAN HIGH STANDARD & POOR'S
RETURN EQUITY FUND 500 INDEX
ON 12/31/96 ON 12/31/96
<S> <C> <C>
FINANCE 38.3% 14.8%
CONSUMER NONDURABLES 19.7% 21.5%
ENERGY 19.0% 10.1%
HEALTH CARE 8.7% 10.6%
BASIC INDUSTRIES 5.7% 5.9%
CAPITAL GOODS 5.3% 10.1%
TECHNOLOGY 2.7% 13.2%
CONSUMER DURABLES 0.6% 2.9%
UTILITIES 0.0% 9.5%
TRANSPORTATION 0.0% 1.4%
</TABLE>
*The Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market.
9
<PAGE> 12
INDIVIDUAL HOLDINGS
THE FUND'S 10 LARGEST COMMON STOCK HOLDINGS*
REPRESENTING 31.0% OF THE FUND'S TOTAL NET ASSETS ON DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
HOLDINGS PERCENT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. ATLANTIC RICHFIELD Engaged in exploring, developing and producing 5.0%
petroleum which includes petroleum liquids and natural
gas.
2. AMOCO CORP. Engaged in exploration, development and production of 4.3%
crude oil and natural gas, refining and marketing of
petroleum products and petrochemicals.
3. FEDERAL HOME LOAN MORTGAGE Provides for the transfer of capital between mortgage 3.4%
CORP. (FREDDIE MAC) lenders and mortgage security investors.
4. UST, INC. Manufactures and sells moist snuff, wine and other 3.2%
products.
5. PHILIP MORRIS COMPANIES The nation's largest cigarette manufacturer and second 3.0%
largest brewer (Miller Brewing). Also a major branded
food producer through Kraft and General Foods.
6. FEDERAL NATIONAL MORTGAGE Provides financial products and services that increase 2.9%
ASSOCIATION (FANNIE MAE) the availability and affordability of housing for low,
moderate and middle income Americans.
7. HUMANA INC. Provides managed care through health maintenance 2.8%
organizations and preferred provider organizations.
8. COLUMBIA GAS SYSTEM Engaged in transmitting, distributing, producing, 2.3%
purchasing and storing natural gas and producing oil.
9. HANSON PLC An industrial management company with operating 2.2%
subsidiaries in the U.K. and the U.S.
10. NATIONSBANK Provides financial services such as checking and 1.9%
savings accounts, loans, investment management,
trading, corporate finance and insurance services.
</TABLE>
*The fund's holdings are subject to change.
10
<PAGE> 13
PORTFOLIO OF INVESTMENTS
KEMPER-DREMAN HIGH RETURN EQUITY FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BANKS--10.4% Banc One Corporation 163,300 $ 7,022
Bank of New York Co. 189,200 6,386
BankAmerica Corp. 86,132 8,592
Bankers Trust New York Corp. 39,800 3,433
Barnett Banks 206,500 8,492
First Chicago NBD Corp. 235,732 12,671
First Union Corp. 109,955 8,137
NationsBank 145,640 14,236
PNC Bank Corp., N.A. 200,935 7,560
----------------------------------------------------------------------------
76,529
- ---------------------------------------------------------------------------------------------------------------------
BASIC INDUSTRIES--3.5% Eastman Chemical Co. 1,000 55
Hanson PLC, ADR 2,428,500 16,392
Louisiana-Pacific Corp. 321,400 6,790
(a)Millennium Chemicals Inc. 152,513 2,707
----------------------------------------------------------------------------
25,944
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--3.2% General Electric Co. 125,900 12,448
Xerox Corporation 215,000 11,314
----------------------------------------------------------------------------
23,762
- ---------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--4.2% (a)Burlington Coat Factory 63,000 819
Liz Claiborne 47,400 1,831
Dayton Hudson Corp. 66,900 2,626
Dillard Department Stores 49,100 1,516
(a)Fruit of the Loom 94,300 3,572
Philips N.V., ADR 248,800 9,952
TJX Companies, Inc. 90,000 4,264
(a)Toys R Us 57,000 1,710
V.F. Corp. 37,000 2,497
Wal-Mart Stores 95,000 2,173
----------------------------------------------------------------------------
30,960
- ---------------------------------------------------------------------------------------------------------------------
CONSUMER DURABLES--.4% Ford Motor Co. 88,000 2,805
- ---------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--7.9% (a)Imperial Tobacco Group, ADR 629,250 7,944
Philip Morris Companies 198,000 22,300
Quaker Oats Co. 111,000 4,232
UST, Inc. 727,300 23,546
----------------------------------------------------------------------------
58,022
- ---------------------------------------------------------------------------------------------------------------------
ENERGY--11.6% AMOCO Corp. 393,300 31,661
Atlantic Richfield Co. 276,100 36,583
Columbia Gas System 270,900 17,236
----------------------------------------------------------------------------
85,480
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--13.0% H.F. Ahmanson & Co. 33,200 1,079
American General Corp. 45,100 1,843
American International Group, Inc. 58,300 6,311
Crestar Financial Corp. 132,800 9,877
Federal Home Loan Mortgage Corp. 229,900 25,318
Federal National Mortgage Association 580,600 21,627
Fleet Financial Group, Inc. 49,400 2,464
Great Western Financial Corp. 48,900 1,418
KeyCorp 149,700 7,560
J.P. Morgan & Company 95,000 9,274
Norwest Corp. 54,600 2,375
</TABLE>
11
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Signet Banking Corp. 190,100 $ 5,846
Wells Fargo & Co. 3,800 1,025
----------------------------------------------------------------------------
96,017
- ---------------------------------------------------------------------------------------------------------------------
HEALTH CARE--5.3% Glaxo Wellcome PLC, ADR 21,700 689
(a)Humana, Inc. 1,069,200 20,448
Eli Lilly & Co 34,000 2,482
Merck & Co., Inc. 16,100 1,276
Pharmacia & Upjohn, Inc. 36,960 1,464
(a)Tenet Healthcare Corporation 580,600 12,701
----------------------------------------------------------------------------
39,060
- ---------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--1.6% AT&T 80,000 3,480
Lucent Technologies Inc. 25,926 1,199
Texas Instruments 116,200 7,408
----------------------------------------------------------------------------
12,087
----------------------------------------------------------------------------
TOTAL COMMON STOCKS--61.1%
(Cost: $368,853) 450,666
----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(B)MONEY MARKET Yield--4.95% to 6.20%
INSTRUMENTS--38.0% Due--January through March 1997
Baxter International $15,000 14,970
CS First Boston, Inc. 18,000 17,917
Ciesco, L.P. 20,000 19,890
ConAgra Inc. 23,000 22,877
Dynamic Funding Corporation 24,000 23,940
Enserch Corporation 14,000 13,985
General Electric Capital Corp. 14,900 14,833
IBM Credit Corp. 12,000 11,990
Madison Funding Corp. 22,000 21,962
Renaissance Energy Co. 29,000 28,849
SRD Finance Inc. 29,000 28,939
Sanwa Business Credit Corp. 12,000 11,976
U.S. Treasury Bills 11,500 11,407
Whirlpool Financial Corporation 10,000 9,989
Other 27,189 27,143
----------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--38.0%
(Cost: $280,693) 280,667
----------------------------------------------------------------------------
TOTAL INVESTMENTS--99.1%
(Cost: $649,546) 731,333
----------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES--.9% 6,501
----------------------------------------------------------------------------
NET ASSETS--100% $737,834
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
(b) The Fund has entered into exchange traded S&P 500 Index futures contracts in
order to take advantage of anticipated market conditions and effectively
invest in equities approximately $252,000,000 of money market instruments.
As a result, approximately 95% of the Fund's net assets are effectively
invested in equities. (See Note 6 of the Notes to Financial Statements.)
Based on the cost of investments of $649,546,000 for federal income tax purposes
at December 31, 1996, the gross unrealized appreciation was $84,628,000, the
gross unrealized depreciation was $2,841,000 and the net unrealized appreciation
on investments was $81,787,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
KEMPER-DREMAN HIGH RETURN EQUITY FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper-Dreman High Return Equity Fund
(formerly known as Kemper-Dreman High Return Fund) as of December 31, 1996, 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Kemper-Dreman High Return Equity 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: $649,546) $731,333
- ------------------------------------------------------------------------
Receivable for:
Fund shares sold 15,413
- ------------------------------------------------------------------------
Dividends 1,057
- ------------------------------------------------------------------------
TOTAL ASSETS 747,803
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Cash overdraft 3,074
- ------------------------------------------------------------------------
Payable for:
Fund shares redeemed 426
- ------------------------------------------------------------------------
Investments purchased 4,928
- ------------------------------------------------------------------------
Management fee 407
- ------------------------------------------------------------------------
Distribution services fee 196
- ------------------------------------------------------------------------
Administrative services fee 136
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 649
- ------------------------------------------------------------------------
Directors' fees and other 153
- ------------------------------------------------------------------------
Total liabilities 9,969
- ------------------------------------------------------------------------
NET ASSETS $737,834
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $652,710
- ------------------------------------------------------------------------
Undistributed net realized gain on investments 2,964
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 81,787
- ------------------------------------------------------------------------
Undistributed net investment income 373
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $737,834
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($385,895,000 / 14,549,000 shares outstanding) $26.52
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $28.14
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($295,432,000 / 11,172,000 shares outstanding) $26.44
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($44,477,000 / 1,682,000 shares outstanding) $26.45
- ------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($12,030,000 / 454,000 shares outstanding) $26.49
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended December 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Dividends $ 6,262
- -----------------------------------------------------------------------
Interest 4,613
- -----------------------------------------------------------------------
Total investment income 10,875
- -----------------------------------------------------------------------
Expenses:
Management fee 2,430
- -----------------------------------------------------------------------
Distribution services fee 994
- -----------------------------------------------------------------------
Administrative services fee 635
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,028
- -----------------------------------------------------------------------
Professional fees 55
- -----------------------------------------------------------------------
Reports to shareholders 71
- -----------------------------------------------------------------------
Registration fees 143
- -----------------------------------------------------------------------
Directors' fees 16
- -----------------------------------------------------------------------
Total expenses before expense waiver 5,372
- -----------------------------------------------------------------------
Less expenses waived by investment manager 148
- -----------------------------------------------------------------------
Total expenses after expense waiver 5,224
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 5,651
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized gain on sales of investments 9,589
- -----------------------------------------------------------------------
Net realized gain from futures transactions 11,891
- -----------------------------------------------------------------------
Net realized gain 21,480
- -----------------------------------------------------------------------
Change in net unrealized appreciation on investments 61,834
- -----------------------------------------------------------------------
Net gain on investments 83,314
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $88,965
- -----------------------------------------------------------------------
</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 $ 5,651 730
- ------------------------------------------------------------------------------------------
Net realized gain 21,480 1,939
- ------------------------------------------------------------------------------------------
Change in net unrealized appreciation 61,834 16,825
- ------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 88,965 19,494
- ------------------------------------------------------------------------------------------
Distribution from net investment income (5,373) (643)
- ------------------------------------------------------------------------------------------
Distribution from net realized gain (18,442) (1,637)
- ------------------------------------------------------------------------------------------
Total dividends to shareholders (23,815) (2,280)
- ------------------------------------------------------------------------------------------
Net increase from capital share transactions 574,488 45,977
- ------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 639,638 63,191
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------
Beginning of year 98,196 35,005
- ------------------------------------------------------------------------------------------
END OF YEAR (including undistributed net investment
income of $373,000 and $94,000, respectively) $737,834 98,196
- ------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF Kemper-Dreman High Return Equity Fund (the Fund) is
THE FUND 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 INVESTMENT VALUATION. Investments are stated at
ACCOUNTING POLICIES 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
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
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.
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 declares and
pays dividends of net investment income quarterly
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 MANAGEMENT AGREEMENT. KDF has a management
AFFILIATES 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
$2,430,000 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 $148,000 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 $601,000 4,531,000 356,000
</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
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
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
$976,000 7,496,000 126,000
</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 accounts the firms
service. Administrative services fees (ASF) paid by
the Fund are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY ----------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Year ended December 31, 1996 $635,000 941,000 19,000
</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
this agreement, KSvC received shareholder services
fees of $951,000 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 $16,000 to
independent directors.
- --------------------------------------------------------------------------------
4 INVESTMENT For the year ended December 31, 1996, investment
TRANSACTIONS transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $346,728
Proceeds from sales 43,705
18
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE The following table summarizes the activity in
TRANSACTIONS 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 11,969 $294,186 1,797 $35,340
------------------------------------------------------------------------------
Class B 10,792 264,773 772 15,914
------------------------------------------------------------------------------
Class C 1,617 40,240 93 1,919
------------------------------------------------------------------------------
Class I 612 14,409 161 3,376
------------------------------------------------------------------------------
SHARE ISSUED IN REINVESTMENT OF DIVIDENDS
------------------------------------------------------------------------------
Class A 483 12,533 89 1,788
------------------------------------------------------------------------------
Class B 322 8,424 12 246
------------------------------------------------------------------------------
Class C 51 1,337 1 25
------------------------------------------------------------------------------
Class I 21 512 3 64
------------------------------------------------------------------------------
SHARES REDEEMED
------------------------------------------------------------------------------
Class A (1,483) (35,513) (659) (12,361)
------------------------------------------------------------------------------
Class B (682) (16,613) (7) (167)
------------------------------------------------------------------------------
Class C (77) (1,854) (3) (64)
------------------------------------------------------------------------------
Class I (338) (7,946) (5) (103)
------------------------------------------------------------------------------
CONVERSION OF SHARES
------------------------------------------------------------------------------
Class A 37 907 -- --
------------------------------------------------------------------------------
Class B (37) (907) -- --
------------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $574,488 $45,977
------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES The Fund has entered into exchange traded financial
CONTRACTS futures contracts in order to take advantage of
anticipated market conditions and, as such, bears
the risk that arises from owning these contracts.
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and the broker as the market value
of the futures contract changes. At December 31,
1996, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $9,927,000 for the following
financial futures contracts owned by the Fund.
<TABLE>
<CAPTION>
CONTRACT EXPIRATION LOSS AT
TYPE AMOUNT POSITION MONTH 12/31/96
--------------------- -------- -------- ---------- --------
<S> <C> <C> <C> <C>
S&P 500 Index $251,269,000 Long Mar. '97 $2,455,000
</TABLE>
19
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------
CLASS A
-------------------------------------------
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------
Net asset value, beginning of year $21.49 15.11 15.50 14.62 12.53
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .39 .26 .25 .21 .24
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 5.75 6.76 (.39) 1.13 2.21
- --------------------------------------------------------------------------------------------------
Total from investment operations 6.14 7.02 (.14) 1.34 2.45
- --------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .38 .24 .25 .21 .24
- --------------------------------------------------------------------------------------------------
Distribution from net realized gain .73 .40 -- .25 .12
- --------------------------------------------------------------------------------------------------
Total dividends 1.11 .64 .25 .46 .36
- --------------------------------------------------------------------------------------------------
Net asset value, end of year $26.52 21.49 15.11 15.50 14.62
- --------------------------------------------------------------------------------------------------
TOTAL RETURN 28.79% 46.86 (.99) 9.22 19.80
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.21% 1.25 1.25 1.25 1.25
- --------------------------------------------------------------------------------------------------
Net investment income 2.12% 1.55 1.58 1.47 1.88
- --------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses 1.21% 1.57 1.39 1.56 1.70
- --------------------------------------------------------------------------------------------------
Net investment income 2.12% 1.23 1.44 1.16 1.43
- --------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
FINANCIAL HIGHLIGHTS
[CAPTION]
<TABLE>
<CAPTION>
------------------------------ ---------------------------- ----------------------------
CLASS B CLASS C CLASS I
------------------------------ ---------------------------- ----------------------------
YEAR ENDED SEPT. 11 TO YEAR ENDED SEPT. 11 TO YEAR ENDED NOV. 1 TO
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1996 1995 1996 1995 1996 1995
- --------------------------------------------------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------- ---------------------------- ----------------------------
Net asset value, beginning of period $21.47 19.45 21.48 19.45 21.51 19.90
- --------------------------------------------------------------------- ---------------------------- ----------------------------
Income from investment operations:
Net investment income .19 .07 .20 .09 .54 .04
- --------------------------------------------------------------------- ---------------------------- ----------------------------
Net realized and unrealized gain 5.72 2.41 5.72 2.41 5.70 2.03
- --------------------------------------------------------------------- ---------------------------- ----------------------------
Total from investment operations 5.91 2.48 5.92 2.50 6.24 2.07
- --------------------------------------------------------------------- ---------------------------- ----------------------------
Less dividends:
Distribution from net investment
income .21 .06 .22 .07 .53 .06
- --------------------------------------------------------------------- ---------------------------- ----------------------------
Distribution from net realized gain .73 .40 .73 .40 .73 .40
- --------------------------------------------------------------------- ---------------------------- ----------------------------
Total dividends .94 .46 .95 .47 1.26 .46
- --------------------------------------------------------------------- ---------------------------- ----------------------------
Net asset value, end of period $26.44 21.47 26.45 21.48 26.49 21.51
- -------------------------------------------------------------------- --------------------------- ---------------------------
TOTAL RETURN (NOT ANNUALIZED) 27.63% 12.88 27.66 12.94 29.36 10.47
- --------------------------------------------------------------------- ---------------------------- ----------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------- ---------------------------- ----------------------------
Expenses absorbed by the Fund 2.20% 2.00 2.22 1.95 .88 .47
- --------------------------------------------------------------------- ---------------------------- ----------------------------
Net investment income 1.13% .61 1.11 .66 2.45 1.99
- --------------------------------------------------------------------- ---------------------------- ----------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------- ---------------------------- ----------------------------
Expenses 2.31% 2.35 2.33 2.30 .88 .85
- --------------------------------------------------------------------- ---------------------------- ----------------------------
Net investment income 1.02% .26 1.00 .31 2.45 1.61
- --------------------------------------------------------------------- ---------------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $737,834 98,196 35,005 28,413 14,425
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate 10% 18 12 14 13
- ------------------------------------------------------------------------------------------------------
Average commission rate paid per share on stock transactions for the year ended December 31, 1996 was
$.0513.
- ------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: 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.
21
<PAGE> 24
NOTES
22
<PAGE> 25
NOTES
23
<PAGE> 26
DIRECTORS & OFFICERS
DIRECTORS OFFICERS
STEPHEN B. TIMBERS CHRISTIAN C. BERTELSEN JEROME L. DUFFY
President and Director Vice President Treasurer
JAMES E. AKINS CHARLES R. MANZONI, JR. ELIZABETH C. WERTH
Director Vice President Assistant Secretary
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
JOHN G. WEITHERS
Director
- --------------------------------------------------------------------------------
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.
KDHRF-2 (2/97) 1028520
Printed in the U.S.A. [KEMPER FUNDS LOGO]
