<PAGE> 1
DEAR KILICO POLICY OWNER:
- - ---------------------------------------
GENERAL ECONOMIC OVERVIEW
The momentum of the 1994 economic expansion produced some of the most positive
economic reports we've seen in years. Income, consumer spending, construction
spending and hiring all were at high levels as we closed the pages on the year.
Such growth, however, continues to concern both investors and the government as
we know from experience that rapid growth can lead to inflation. It was almost a
year ago that the Federal Reserve Board initiated its series of rate hikes
intended to cool down the economy. To date, only a few sectors, such as housing
and automobile sales, have slowed in response to the higher rates. We believe
additional rate increases are inevitable.
Several measures indicate the strength and stability of today's economy compared
to the early 1990s: consumers are not in as much debt as they were just three or
four years ago, nonfinancial corporations have a much lower level of debt
relative to their cash flow, and the federal budget deficit relative to the
gross domestic product (GDP) is lower than it was earlier in the decade.
As we begin a new year, a slowdown in housing and auto sales may be offset
somewhat by accelerated activity in other sectors of the economy. For example,
while it's true that manufacturers today do not have the same incentive they
once had to accumulate inventories, we expect inventories to continue to build.
Products are needed both in this country and overseas, where many economies are
just now emerging from recession. Nonresidential construction may also start to
pick up.
OUR ECONOMIC OUTLOOK
While we believe that higher interest rates will help economic growth decline to
closer to 3 percent, this will probably still be too much growth for the Federal
Reserve. As a consequence, we expect the Fed to continue to raise rates until
growth slows to 2.5 percent to 2.75 percent. Alan Greenspan, chairman of the
Federal Reserve, has made it quite clear that this is the level of growth the
Fed associates with moderate inflation. Long-term rates may rise but not to the
same extent as short-term rates.
Inflation will likely increase but it should range between 3.5 percent and 4.0
percent in the next six months. This is based on our belief that the Federal
Reserve's aggressiveness in raising rates stopped inflation before it could get
out of control. The Federal Reserve's commitment to fighting inflation should be
a long-term positive for financial assets.
We would now like to direct your attention to the performance of the separate
accounts, which are the investment options available through your annuity
product. Please take a moment to review the market and performance summaries
prepared by the portfolio managers.
<TABLE>
<CAPTION>
KEMPER HIGH YIELD FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- - ---------------------------------------------------------
<S> <C>
12 Months Ended 12/31/94 (2.93)%
- - ---------------------------------------------------------
</TABLE>
In what has been a difficult year for all segments of the fixed income market,
high yield bonds outperformed intermediate Treasuries. The Salomon Brothers High
Yield Market Index* dropped 1.24%, while the Salomon Brothers Intermediate
Treasury Index** fell 5.74% for the same twelve-month period. This
outperformance is attributable to the higher level of income offered on high
yield bonds and by the perception that an improving economy decreases the credit
risk of high yield bonds. The high yield market outperformed the stock market,
which rose 1.20% during 1994, as measured by the S&P 500***.
For most of the year, about two-thirds of the Fund's corporate bond holdings
were in cyclical companies. These are companies whose revenues are closely tied
to the economy and because the economy continued to show strength, these
holdings performed well. Recently, we began to position the High Yield Fund for
an eventual economic slowdown. For instance, we shifted some of the Fund's
holdings toward consumer nondurables and services, which tend to outperform in
the latter stages of economic recovery.
In 1995, we look for the high yield market to perform reasonably well, with most
of the return from income rather than price appreciation. The Fed's tightening
during 1994 should slow the economy in
1
<PAGE> 2
1995. This poses a less favorable scenario for high yield issuers than in recent
years and limits the upside for prices of high yield bonds. On the other hand,
the Fed's actions should be successful in restraining inflation--a positive
environment for fixed-income securities such as high yield bonds.
Michael A. McNamara
Harry E. Resis, Jr.
Co-Portfolio Managers January 25, 1995
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- - ---------------------------------------------------------
<S> <C>
12 Months Ended 12/31/94 (10.07)%
- - ---------------------------------------------------------
</TABLE>
The 12 months ended December 1994 were characterized by rapid economic growth,
with expansion occurring faster than the Fed's perceived optimal long-term
growth rate of 2.5% to 2.75%. In response, the Fed repeatedly tightened monetary
policy in an attempt to cool the economy down. In addition, global industrial
commodities experienced sharp inflation while oil prices moderated. U.S.
capacity utilization and employment increased, and worldwide recovery
accelerated.
Rising interest rates usually result in a poor market for both stocks and bonds
which, in fact, occurred in 1994. Bond prices started their decline in October
1993 and stock prices followed, with a lag, after the Federal Reserve raised
short-term interest rates in early February 1994. Stocks came back somewhat
after second- and third-quarter earnings met and, in some cases, exceeded
expectations. However, although we avoided Treasuries during their price
decline, the Total Return Fund was hurt by the volatility of certain stocks.
To help reduce volatility, increased investments were made in defensive growth
stocks, such as food, drugs, household products and beverages, as well as
engineering and construction, banks and electrical equipment. As 1994 ended, we
reduced the total equity holdings in favor of a greater investment in U.S.
Treasuries, a market expected to perform better in 1995. On the other hand, in
December we began to reduce the Fund's holdings of high-yield bonds as rising
interest rates raised the specter of credit risk. Finally, the Fund closed the
year with more than 10% in cash and cash equivalents.
We expect the stock market to be especially vulnerable in the first few months
of 1995. As interest rates continue to rise, corporations can be expected to
have more difficulty meeting their earnings estimates. However, this is the
environment in which growth stocks (which are characterized by their ability to
consistently increase earnings) tend to outperform the market. Stock selection
for the Fund in the near-term will center on defensive growth stocks such as
those in the consumer nondurable industries. Cash also is expected to remain at
a relatively high level.
J. Patrick Beimford, Jr., Robert S. Cessine, Dennis H. Ferro, Gordon K. Johns,
Gary A. Langbaum, Michael A. McNamara and Harry E. Resis, Jr.
Portfolio Management Team January 27, 1995
<TABLE>
<CAPTION>
KEMPER GROWTH FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- - ---------------------------------------------------------
<S> <C>
12 Months Ended 12/31/94 (6.84)%
- - ---------------------------------------------------------
</TABLE>
Economic growth continued to outpace projections during 1994, prompting a series
of interest rate hikes by the Federal Reserve Board. These increases raised
concerns regarding earnings momentum, particularly for companies in interest
rate sensitive industries such as housing and automobile manufacturing. In
addition, investors worried that higher interest rates signaled higher
inflation. This environment resulted in a difficult year in both the stock and
bond markets.
The Kemper Growth Fund's technology, telecommunications and healthcare stocks
enjoyed generally strong performance throughout the year. Consumer-oriented
product companies such as Proctor & Gamble and Coca-Cola experienced
accelerating growth in both the U.S. and international markets. Gains in these
sectors were offset, however, by declines in a number of more
economically-sensitive holdings. Gaming stocks declined in response to a
proposed 4% federal gaming tax and the failure of legislated gaming in Missouri.
This position was reduced substantially early in the year. Semiconductors
declined late in the year after several months of strong performance, and retail
stocks stumbled as holiday sales generally failed to meet optimistic
projections.
With economic growth continuing to exceed the Federal Reserve's target range of
2.5% to 2.75%, we anticipate additional interest rate hikes during the first
half of 1995. Until economic growth slows to a
2
<PAGE> 3
more moderate rate and interest rates stabilize, we will continue to manage the
Fund defensively while identifying opportunities in undervalued domestic stocks
and companies that stand to benefit from strong international exposure.
C. Beth Cotner
Portfolio Manager January 17, 1995
<TABLE>
<CAPTION>
KEMPER INCOME AND
CAPITAL PRESERVATION FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- - ---------------------------------------------------------
<S> <C>
12 Months Ended 12/31/94 (4.33)%
- - ---------------------------------------------------------
</TABLE>
A strengthening economy and the Federal Reserve Board's monetary policy
tightening of 2.50% since early February 1994 pushed both short and long-term
interest rates significantly higher in 1994. This resulted in a very difficult
year for the U.S. bond market.
Our actions during the year were based on our outlook for interest rates to move
higher throughout the year, and for yield spreads between corporate bonds and
Treasuries to widen in the latter part of the year, so that corporates would
underperform Treasuries. In February 1994, we began a gradual process of selling
long corporate bonds and reinvesting the proceeds into a combination of
five-year corporates and cash. This positioned the Fund more defensively than
both the Fund's peers and the high-grade bond marketplace. Since shorter
maturity bonds generally outperformed longer maturity bonds in 1994, this helped
the Fund's performance.
We believe that long bond interest rates have not yet peaked, and that
maintaining a slightly defensive exposure to interest rates continues to be the
best strategy. We intend to keep the average maturity of the corporate bonds in
the portfolio in a relatively short range. Finally, relatively tight spreads
coupled with rising event risk in the corporate sector suggest that issue
selection will be very important in 1995.
Robert S. Cessine
Portfolio Manager January 24, 1995
<TABLE>
<CAPTION>
KEMPER MONEY MARKET FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- - ---------------------------------------------------------
<S> <C>
12 Months Ended 12/31/94 3.30%
- - ---------------------------------------------------------
</TABLE>
After six interest rate increases by the Federal Reserve Board in 1994, the
economy has yet to show significant signs of slowing. It appears the Fed will
continue to raise interest rates until the economic growth rate falls in their
target range of 2.5% to 2.75%. This rising rate environment has caused serious
volatility in the long-term fixed income and equity markets. However, the
short-term money markets have been positively impacted with higher yields.
The Money Market Fund invests in high-quality short-term investments which
allows it to take advantage of the current interest rate environment. When
interest rates are rising, the Fund's yield should quickly increase due to
reinvestment of its short maturity investments at current higher rate levels.
Going forward, we anticipate rates will remain in an upward trend. This will
reward patient investors with higher income. As always, we remain committed to
demanding standards of credit quality and to preserving the integrity of your
investment.
Frank J. Rachwalski, Jr.
Portfolio Manager January 17, 1995
<TABLE>
<CAPTION>
KEMPER DIVERSIFIED INCOME FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- - ---------------------------------------------------------
<S> <C>
12 Months Ended 12/31/94 (4.82)%
- - ---------------------------------------------------------
</TABLE>
A strengthening economy and the Federal Reserve Board's 2.50% tightening since
early February 1994, pushed both short and long-term interest rates
significantly higher in 1994. This resulted in a very difficult year for the
bond market.
In July, we began to reallocate some of the Diversified Income Fund's high yield
bonds towards mortgage-backed securities, foreign bonds and emerging market
securities. In the past six months, foreign currency bonds provided the highest
returns, followed by high yield bonds and mortgages. Most of the Fund losses
were due to its emerging markets component.
In October and November, we reduced our exposure to Argentina given the
uncertainty in emerging markets. In December, following the devaluations of the
Mexican peso, we made further reductions to both Argentina and Mexico. In
January 1995, we eliminated all of our Mexican holdings.
Although we believe interest rates could trend higher in the coming months, we
believe the movement will
3
<PAGE> 4
be much less dramatic than in 1994. This should reduce the risk of total return
losses. In the meantime, investors can benefit from the higher yields available
in the marketplace.
Michael A. McNamara
Harry E. Resis, Jr.
Co-Portfolio Managers January 25, 1995
<TABLE>
<CAPTION>
KEMPER U.S. GOVERNMENT
SECURITIES FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- - ---------------------------------------------------------
<S> <C>
12 Months Ended 12/31/94 (4.02)%
- - ---------------------------------------------------------
</TABLE>
A strengthening economy and the Federal Reserve Board's monetary policy
tightening of 2.50% since early February of 1994 caused both short-term and
long-term interest rates to rise dramatically during 1994. This resulted in a
very difficult year for the U.S. fixed income market. Interest rates declined
from their highs during the last quarter as market participants took solace in
the Fed's continued aggressive stance toward inflation. The Fed tightened
interest rates an additional 75 basis points in November.
The U.S. Government Securities Fund's defensive positioning, by means of
maintaining a short average portfolio life, limited the Fund's ability to
benefit from the decline in rates late in the year.
Our bias for interest rates is for them to continue to rise slightly further,
particularly in the short end of the Treasury yield curve. However, our outlook
for this Fund is positive. Mortgages should continue to perform well in a rising
rate environment. Also, our outlook is constructive because of what has
transpired this year. The Fund is generating more income because we have
reinvested at higher rates than those that prevailed eight months ago. Because
of this additional income, we were able to raise the Fund's dividend in
September. Further, the technicals of the mortgage market remain extremely
positive--continued demand against a background of less supply.
J. Patrick Beimford, Jr.
Portfolio Manager January 24, 1995
We appreciate your support as a Kemper policy owner and look forward to
continuing to serve your insurance needs.
Sincerely,
/S/ John B. Scott
John B. Scott
Chairman, President and
Chief Executive Officer
Kemper Investors Life
Insurance Company
February 10, 1995
- - ----------------
[PHOTO]
- - ----------------
+ The percent change in accumulation unit value is net of mortality and
expense risk charges. No adjustment has been made for the annual $25 records
maintenance charge or surrender charges. No withdrawals are assumed. The
returns are based upon historical results and are not representative of
future results. For the Money Market Fund, there can be no assurance that
the Fund will be able to maintain a stable net asset value of $1.00 per
share and the Fund is not insured or guaranteed by the U.S. Government. For
the High Yield Fund, investment in lower-rated and non-rated securities
present greater risk of loss to principal and interest than higher-rated
securities.
* Salomon Brothers High Yield Market Index includes cash-pay and
deferred-interest bonds with remaining maturities of at least one year.
Source is Salomon Brothers Inc.
** Salomon Brothers Intermediate Treasury Bond Index is based on Treasury Bonds
with an average life of 7-10 years. Source is Salomon Brothers Inc.
*** Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market.
4
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying combined statement of assets and liabilities
and contract owners' equity of Kemper Investors Life Insurance Company Variable
Annuity Account C as of December 31, 1994, and the related combined statement of
operations for the year then ended, and the combined statements of changes in
contract owners' equity for the years ended December 31, 1994 and 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Kemper
Investors Life Insurance Company Variable Annuity Account C as of December 31,
1994, and the combined results of its operations for the year then ended, and
the combined changes in its contract owners' equity for the years ended December
31, 1994 and 1993, in conformity with generally accepted accounting principles.
[SIG]
Chicago, Illinois
February 13, 1995
5
<PAGE> 6
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
COMBINED STATEMENT OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1994 (IN THOUSANDS)
<TABLE>
<CAPTION>
Kemper
Kemper Income Kemper Kemper
Total Kemper and Capital Money High
Return Growth Preservation Market Yield
Fund Fund Fund Fund Fund
Combined Division Division Division Division Division
-------- -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at current value......... $ 29,685 9,345 6,328 1,606 7,945 2,193
Dividends and other receivables....... 20 -- -- -- 4 --
------- ----- ----- ----- ----- -----
Total assets.................... 29,705 9,345 6,328 1,606 7,949 2,193
------- ----- ----- ----- ----- -----
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk.......... 27 8 6 1 7 2
Other............................... 14 4 2 -- 7 1
------- ----- ----- ----- ----- -----
Total liabilities............... 41 12 8 1 14 3
------- ----- ----- ----- ----- -----
Contract owners' equity............... $ 29,664 9,333 6,320 1,605 7,935 2,190
======== ===== ===== ===== ===== =====
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess of payments for units redeemed
over proceeds from units sold....... $(50,385) (4,224) (2,647) (1,653) (35,022) (2,859)
Accumulated net investment income..... 78,700 12,344 8,087 3,238 42,957 5,123
Accumulated net realized gain (loss)
on sales of investments............. 237 579 149 91 -- (77)
Unrealized appreciation (depreciation)
of investments...................... 1,112 634 731 (71) -- 3
------- ----- ----- ----- ----- -----
Contract owners' equity............... $ 29,664 9,333 6,320 1,605 7,935 2,190
======== ===== ===== ===== ===== =====
<CAPTION>
Kemper Kemper U.S.
Diversified Government
Income Securities
Fund Fund
Division Division
----------- -----------
<S> <C> <C>
ASSETS
Investments, at current value......... 230 2,038
Dividends and other receivables....... 2 14
----- -----
Total assets.................... 232 2,052
----- -----
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk.......... 1 2
Other............................... -- --
----- -----
Total liabilities............... 1 2
----- -----
Contract owners' equity............... 231 2,050
===== =====
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess of payments for units redeemed
over proceeds from units sold....... (354) (3,626)
Accumulated net investment income..... 1,368 5,583
Accumulated net realized gain (loss)
on sales of investments............. (727) 222
Unrealized appreciation (depreciation)
of investments...................... (56) (129)
----- -----
Contract owners' equity............... 231 2,050
===== =====
</TABLE>
See accompanying notes to combined financial statements.
6
<PAGE> 7
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS)
<TABLE>
<CAPTION>
Kemper
Kemper Income Kemper Kemper
Total Kemper and Capital Money High
Return Growth Preservation Market Yield
Fund Fund Fund Fund Fund
Combined Division Division Division Division Division
-------- -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions......................... $ 1,294 261 89 135 323 262
------- ----- --- --- --- ---
Expenses:
Mortality and expense risk charges.... 318 103 67 18 58 44
Maintenance fees...................... 13 4 2 1 4 1
------- ----- --- --- --- ---
Total expenses.................. 331 107 69 19 62 45
------- ----- --- --- --- ---
Net investment income................... 963 154 20 116 261 217
------- ----- --- --- --- ---
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on sales of
investments......................... 68 20 156 (11) -- (62)
Change in unrealized depreciation of
investments......................... (2,773) (1,418) (628) (191) -- (250)
------- ----- --- --- --- ---
Net realized and unrealized loss on
investments........................... (2,705) (1,398) (472) (202) -- (312)
------- ----- --- --- --- ---
Net increase (decrease) in contract
owners' equity resulting from
operations............................ $(1,742) (1,244) (452) (86) 261 (95)
======== ====== ==== ==== === ====
<CAPTION>
Kemper Kemper U.S.
Diversified Government
Income Securities
Fund Fund
Division Division
----------- -------------
<S> <C> <C>
Dividends and capital gains
distributions......................... 22 202
-- ---
Expenses:
Mortality and expense risk charges.... 3 25
Maintenance fees...................... -- 1
-- ---
Total expenses.................. 3 26
-- ---
Net investment income................... 19 176
-- ---
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on sales of
investments......................... (17) (18)
Change in unrealized depreciation of
investments......................... (17) (269)
-- ---
Net realized and unrealized loss on
investments........................... (34) (287)
-- ---
Net increase (decrease) in contract
owners' equity resulting from
operations............................ (15) (111)
==== ===
</TABLE>
See accompanying notes to combined financial statements.
7
<PAGE> 8
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
COMBINED STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 (IN THOUSANDS)
<TABLE>
<CAPTION>
Kemper Total Return Kemper Growth
Combined Fund Division Fund Division
--------------------- ------------------- -------------------
1994 1993 1994 1993 1994 1993
-------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income.............................. $ 963 2,653 154 1,398 20 445
Net realized gain (loss) on sales of investments... 68 697 20 514 156 91
Change in unrealized appreciation (depreciation) of
investments...................................... (2,773) (896) (1,418) (677) (628) (489)
-------- ------ ------ ------ ------ ------
Net increase (decrease) in contract owners'
equity resulting from operations............... (1,742) 2,454 (1,244) 1,235 (452) 47
-------- ------ ------ ------ ------ ------
Account unit transactions:
Proceeds from units sold........................... 559 782 184 194 169 169
Net transfers (to) from affiliate or divisions..... (451) 380 (885) 547 451 (308)
Payments for units redeemed........................ (6,902) (6,230) (1,710) (1,979) (1,631) (1,090)
-------- ------ ------ ------ ------ ------
Net increase (decrease) in contract owners'
equity from account unit transactions.......... (6,794) (5,068) (2,411) (1,238) (1,011) (1,229)
-------- ------ ------ ------ ------ ------
Total increase (decrease) in contract owners'
equity............................................. (8,536) (2,614) (3,655) (3) (1,463) (1,182)
Contract owners' equity:
Beginning of year.................................. 38,200 40,814 12,988 12,991 7,783 8,965
-------- ------ ------ ------ ------ ------
End of year........................................ $ 29,664 38,200 9,333 12,988 6,320 7,783
======= ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to combined financial statements.
8
<PAGE> 9
<TABLE>
<CAPTION>
Kemper
Kemper Income Diversified Kemper U.S.
and Capital Kemper Kemper Income Government
Preservation Money Market High Yield Fund Securities
Fund Division Fund Division Fund Division Division Fund Division
--------------- ----------------- ---------------- ---------- ---------------
1994 1993 1994 1993 1994 1993 1994 1993 1994 1993
----- ----- ------ ------ ------ ----- --- --- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
116 121 261 173 217 291 19 22 176 203
(11) 32 -- -- (62) 40 (17) 1 (18) 19
(191) 42 -- -- (250) 256 (17) 21 (269) (49)
----- ----- ------ ------ ------ ----- --- --- ----- -----
(86) 195 261 173 (95) 587 (15) 44 (111) 173
----- ----- ------ ------ ------ ----- --- --- ----- -----
18 56 116 246 42 65 7 6 23 46
(222) 169 1,049 (128) (568) 559 33 44 (309) (503)
(174) (346) (2,186) (1,866) (667) (556) (54) (40) (480) (353)
----- ----- ------ ------ ------ ----- --- --- ----- -----
(378) (121) (1,021) (1,748) (1,193) 68 (14) 10 (766) (810)
----- ----- ------ ------ ------ ----- --- --- ----- -----
(464) 74 (760) (1,575) (1,288) 655 (29) 54 (877) (637)
2,069 1,995 8,695 10,270 3,478 2,823 260 206 2,927 3,564
----- ----- ------ ------ ------ ----- --- --- ----- -----
1,605 2,069 7,935 8,695 2,190 3,478 231 260 2,050 2,927
===== ===== ====== ====== ====== ===== === === ===== =====
</TABLE>
9
<PAGE> 10
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION.
Kemper Investors Life Insurance Company Variable Annuity Account C (the
"Separate Account") is a unit investment trust registered under the Investment
Company Act of 1940, as amended, established by Kemper Investors Life Insurance
Company ("KILICO"). The Separate Account is divided into seven subaccounts and
each subaccount invests exclusively in a corresponding Kemper Fund. Each fund is
an open-end diversified management investment company.
SECURITY VALUATION.
The investments are stated at current value which is based on the closing bid
price, net asset value, at December 31, 1994.
SECURITY TRANSACTIONS AND INVESTMENT INCOME.
Security transactions are accounted for on the trade date (the date the order to
buy or sell is executed). Dividends and capital gains distributions are recorded
as income on the ex-dividend date. Realized gains and losses from security
transactions are reported on an identified cost basis.
ACCUMULATION UNIT VALUATION.
On each day the New York Stock Exchange (the "Exchange") is open for trading,
the accumulation unit value is determined as of the earlier of 3:00 p.m.
(Chicago time) or the close of the Exchange by dividing the total value of each
Division's investments and other assets, less liabilities, by the number of
accumulation units outstanding in the respective Division.
FEDERAL INCOME TAXES.
Under Revenue Ruling 81-225, the contract owner is treated as the owner of the
underlying fund shares with respect to purchase payments made after December 31,
1980, except in the case of Individual Retirement Annuities, tax sheltered
403(b) annuities and annuities under a qualified 403(a) retirement plan issued
before September 22, 1981 ("Qualified Contracts").
With respect to purchase payments made before January 1, 1981, and Qualified
Contracts, KILICO is treated as the owner of the underlying fund shares and the
contract owner is treated as the owner of an annuity contract for all Federal
income tax purposes. Under current law, dividends and realized gains
attributable to fund shares considered owned by KILICO are not currently taxed
to the extent they are applied to liabilities under the contract.
The Tax Reform Act of 1984 authorized the Secretary of the Treasury to prescribe
diversification requirements for the investments underlying a variable annuity
contract. The final regulation issued March 1, 1989, provided that such
diversification requirements do not apply to Qualified Contracts or purchase
payments before January 1, 1981.
10
<PAGE> 11
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1994, are as follows (in thousands):
<TABLE>
<CAPTION>
Shares
Owned Cost
----- --------
<S> <C> <C>
INVESTMENTS
Kemper Total Return Fund......................................................................... 1,059 $ 8,711
Kemper Growth Fund............................................................................... 499 5,597
Kemper Income and Capital Preservation Fund...................................................... 204 1,677
Kemper Money Market Fund......................................................................... 7,945 7,945
Kemper High Yield Fund........................................................................... 290 2,190
Kemper Diversified Income Fund................................................................... 42 286
Kemper U.S. Government Securities Fund........................................................... 248 2,167
--------
TOTAL INVESTMENTS.......................................................................... $ 28,573
=======
</TABLE>
The underlying investments of the Funds are summarized below.
KEMPER TOTAL RETURN FUND: This Fund invests in fixed-income securities (bonds
and other debt securities) and equity securities (stocks). The Fund also may
invest a small portion of its assets in put and call options, purchase and sell
financial futures contracts and options thereon, invest in foreign securities,
engage in related foreign currency transactions and lend its securities.
KEMPER GROWTH FUND: This Fund invests primarily in common stocks but can invest
in any security with potential for capital growth. The Fund may also invest a
small portion of its assets in put and call options, purchase and sell financial
futures contracts and options thereon, invest in foreign securities, engage in
foreign currency transactions and lend its securities.
KEMPER INCOME AND CAPITAL PRESERVATION FUND: This Fund invests primarily in
investment grade debt securities including corporate bonds, United States or
Canadian Government securities, commercial paper and money market instruments.
The Fund may also purchase and sell put and call options and financial futures
and options thereon, invest in foreign securities and engage in related foreign
currency transactions.
KEMPER MONEY MARKET FUND: This Fund invests primarily in short-term obligations
of major banks and corporations.
KEMPER HIGH YIELD FUND: This Fund invests in fixed-income securities. The Fund
may also sell put and call options and financial futures contracts and options
thereon, invest in foreign securities and engage in related foreign currency
transactions. The Fund invests a substantial portion of its net assets in high
yielding fixed-income securities. These securities will ordinarily be in the
lower rating categories of recognized rating agencies or will be non-rated, and
generally will involve more risk than securities in the higher rating
categories.
KEMPER DIVERSIFIED INCOME FUND: This Fund invests primarily in fixed-income
securities and dividend paying common stocks and by writing options. The Fund
invests a substantial portion of its assets in high yield bonds. These bonds
ordinarily are in the lower rating categories of recognized rating agencies or
are non-rated, and thus involve more risk than higher rated bonds. The Fund may
also invest a small portion of its assets in put and call options, purchase and
sell financial futures contracts and options thereon, invest in foreign
securities, engage in foreign currency and delayed delivery transactions and
lend its securities.
KEMPER U.S. GOVERNMENT SECURITIES FUND: This Fund invests in obligations issued
or guaranteed by the U.S. Government or its agencies.
11
<PAGE> 12
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(3) TRANSACTIONS WITH AFFILIATES
KILICO assumes the mortality risks associated with the annuity contracts and
incurs all expenses involved in administering the contracts. In return, KILICO
assesses a daily charge based on assets for mortality and expense risk which
amounts to an aggregate of one percent (1.00%) per annum. Additionally, KILICO
assesses against each contract participating in the Separate Account a records
maintenance charge of $25 on December 31st of each calendar year whether or not
any purchase payments have been made during the year.
Proceeds payable on the redemption of units are reduced by the amount of any
applicable contingent deferred sales charge. During the year ended December 31,
1994, KILICO received contingent deferred sales charges of approximately $9,400.
Kemper Financial Services, Inc., an affiliated company, is the investment
manager and principal underwriter of the funds which serve as the underlying
investments of the Separate Account.
(4) NET TRANSFERS (TO) FROM AFFILIATE OR DIVISIONS
Net transfers (to) from affiliate or divisions include transfers of all or part
of the contract owner's interest to or from another Division or to the general
account of KILICO.
(5) CONTRACT OWNERS' EQUITY
The contract owners' equity is affected by the investment results of each fund
and contract charges. The accompanying combined financial statements include
only contract owners' payments pertaining to the variable portions of their
contracts and exclude any payments for the fixed portion, the latter being
included in the general account of KILICO. Contract owners may elect to
annuitize the contract under one of several annuity options, as specified in the
prospectus.
12
<PAGE> 13
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Contract owners' equity at December 31, 1994, is as follows (in thousands,
except unit value; differences are due to rounding):
<TABLE>
<CAPTION>
Contract
Number Unit Owners'
of Units Value Equity
---------------- ------ --------------
<S> <C> <C> <C> <C>
SEPARATE ACCOUNT DIVISION
Kemper Total Return Fund............ Qualified 2,381 $ 3.897 $ 9,280
Nonqualified 14 3.899 53
-------
9,333
-------
Kemper Growth Fund.................. Qualified 1,405 4.461 6,265
Nonqualified 12 4.449 55
-------
6,320
-------
Kemper Income and Capital
Preservation Fund................. Qualified 429 3.717 1,596
Nonqualified 2 3.853 9
-------
1,605
-------
Kemper Money Market Fund............ Qualified 2,850 2.647 7,543
Nonqualified 148 2.647 392
-------
7,935
-------
Kemper High Yield Fund.............. Qualified 480 4.298 2,061
Nonqualified 29 4.410 129
-------
2,190
-------
Kemper Diversified Income Fund...... Qualified 94 2.467 231
-------
231
-------
Kemper U.S. Government Securities
Fund.............................. Qualified 582 3.372 1,962
Nonqualified 25 3.504 88
-------
2,050
-------
TOTAL CONTRACT OWNERS' EQUITY...................................................................... $ 29,664
=======
</TABLE>
13
<PAGE> 14
ANNUAL
REPORT
KEMPER
ADVANTAGE
Individual Variable Annuity Contracts
Kemper Investors Life Insurance Company
Variable Annuity Account C
Period ended
December 31, 1994
[KEMPER LIFE INSURANCE COMPANIES LOGO]
Distributed by
Investors Brokerage Services, Inc.
Kemper Investors Life Insurance Company
[KEMPER LIFE INSURANCE COMPANIES LOGO] 1 Kemper Drive
Long Grove, IL 60049
PRINTED ON RECYCLED PAPER
L-5759 (2/95) Policy form series L-5672, L-5454 & L-5797 230701
