<PAGE> 1
1997 ANNUAL
REPORT
----------
KEMPER
ADVANTAGE
Individual Variable Annuity Contracts
------
Kemper Investors Life Insurance Company
------
Variable Annuity Account C
PERIOD ENDED DECEMBER 31, 1997 [ZURICH KEMPER LOGO]
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS OF
KEMPER INVESTORS LIFE INSURANCE COMPANY AND CONTRACT OWNERS
OF VARIABLE ANNUITY ACCOUNT C
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, 1997, and the related combined statement of
operations and statement of changes in contract owners' equity for the year then
ended. 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 audit. The combined statement of changes in contract
owners' equity for the year ended December 31, 1996 was audited by other
auditors, whose report, dated February 21, 1997, expressed an unqualified
opinion on that statement.
We conducted our audit 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. Our procedures included
confirmation of portfolio shares owned at December 31, 1997 by correspondence
with the custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the December 31, 1997 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, 1997, and the combined results of its operations and changes
in its contract owners' equity for the year then ended in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 20, 1998
1
<PAGE> 3
COMBINED FINANCIAL STATEMENTS
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
COMBINED STATEMENT OF ASSETS AND LIABILITIES
AND CONTRACT OWNERS' EQUITY
December 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER
TOTAL RETURN
COMBINED FUND DIVISION
<S> <C> <C>
- -----------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------
Investments, at current value $23,023 8,015
Dividend and other receivables 16 2
- -----------------------------------------------------------------------------------------
TOTAL ASSETS 23,039 8,017
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
LIABILITIES AND CONTRACT OWNERS' EQUITY
- -----------------------------------------------------------------------------------------
Liabilities:
Mortality and expense risk charges 19 7
Other 39 3
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES 58 10
- -----------------------------------------------------------------------------------------
Contract owners' equity $22,981 8,007
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
ANALYSIS OF CONTRACT OWNERS' EQUITY
- -----------------------------------------------------------------------------------------
Excess of payments for units redeemed over proceeds from
units sold $(67,624) (10,148)
Accumulated net investment income 86,393 15,366
Accumulated net realized gain (loss) on sales of investments 3,156 1,876
Unrealized appreciation (depreciation) of investments 1,056 913
- -----------------------------------------------------------------------------------------
Contract owners' equity $22,981 8,007
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
2
<PAGE> 4
COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
KEMPER
INCOME AND KEMPER KEMPER U.S.
KEMPER CAPITAL ZURICH KEMPER DIVERSIFIED GOVERNMENT
GROWTH PRESERVATION MONEY MARKET HIGH YIELD INCOME SECURITIES
FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
5,622 882 5,240 1,977 221 1,066
-- -- 14 -- -- --
- ---------------------------------------------------------------------------------------------
5,622 882 5,254 1,977 221 1,066
- ---------------------------------------------------------------------------------------------
4 1 4 2 -- 1
1 -- 29 -- -- 6
- ---------------------------------------------------------------------------------------------
5 1 33 2 -- 7
- ---------------------------------------------------------------------------------------------
5,617 881 5,221 1,975 221 1,059
- ---------------------------------------------------------------------------------------------
(6,853) (2,728) (38,530) (3,862) (437) (5,066)
10,818 3,460 43,751 5,674 1,419 5,905
1,666 118 -- 27 (743) 212
(14) 31 -- 136 (18) 8
- ---------------------------------------------------------------------------------------------
5,617 881 5,221 1,975 221 1,059
- ---------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 5
COMBINED FINANCIAL STATEMENTS
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER
TOTAL RETURN
COMBINED FUND DIVISION
<S> <C> <C>
- ----------------------------------------------------------------------------------------
Dividend and capital gain distributions $2,703 1,295
- ----------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charges 254 78
Maintenance fee 12 4
- ----------------------------------------------------------------------------------------
Total expenses 266 82
- ----------------------------------------------------------------------------------------
Net investment income 2,437 1,213
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) on sales of investments 937 499
Change in unrealized appreciation (depreciation) of
investments (548) (332)
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 389 167
- ----------------------------------------------------------------------------------------
NET INCREASE IN CONTRACT OWNERS' EQUITY RESULTING FROM
OPERATIONS $2,826 1,380
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
4
<PAGE> 6
COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
KEMPER
INCOME AND KEMPER KEMPER U.S.
KEMPER CAPITAL ZURICH KEMPER DIVERSIFIED GOVERNMENT
GROWTH PRESERVATION MONEY MARKET HIGH YIELD INCOME SECURITIES
FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION FUND DIVISION
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
771 67 291 172 16 91
- --------------------------------------------------------------------------------------------
54 10 70 20 2 20
2 -- 5 1 -- --
- --------------------------------------------------------------------------------------------
56 10 75 21 2 20
- --------------------------------------------------------------------------------------------
715 57 216 151 14 71
- --------------------------------------------------------------------------------------------
406 13 -- 28 (2) (7)
(259) 2 -- 16 3 22
- --------------------------------------------------------------------------------------------
147 15 -- 44 1 15
- --------------------------------------------------------------------------------------------
862 72 216 195 15 86
- --------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
COMBINED FINANCIAL STATEMENTS
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
COMBINED STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
For the years ended December 31, 1997 and 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
------------------------------
1997 1996
<S> <C> <C>
- --------------------------------------------------------------------------------------------
OPERATIONS
- --------------------------------------------------------------------------------------------
Net investment income $ 2,437 3,246
Net realized gain (loss) on sales of investments 937 1,361
Change in unrealized appreciation (depreciation) of
investments (548) (1,943)
- --------------------------------------------------------------------------------------------
Net increase in contract owners' equity resulting from
operations 2,826 2,664
- --------------------------------------------------------------------------------------------
ACCOUNT UNIT TRANSACTIONS
- --------------------------------------------------------------------------------------------
Proceeds from units sold 282 419
Net transfers (to) from affiliate or divisions 89 (181)
Payments for units redeemed (5,179) (6,079)
- --------------------------------------------------------------------------------------------
Net decrease in contract owners' equity from account
unit transactions (4,808) (5,841)
- --------------------------------------------------------------------------------------------
Total increase (decrease) in contract owners' equity (1,982) (3,177)
- --------------------------------------------------------------------------------------------
CONTRACT OWNERS' EQUITY
- --------------------------------------------------------------------------------------------
Beginning of period 24,963 28,140
- --------------------------------------------------------------------------------------------
End of period $22,981 24,963
- --------------------------------------------------------------------------------------------
</TABLE>
COMBINED STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
(CONTINUED)
<TABLE>
<CAPTION>
ZURICH MONEY MARKET
FUND DIVISION
-----------------------------
1997 1996
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
OPERATIONS
- ---------------------------------------------------------------------------------------------
Net investment income $ 216 253
Net realized gain (loss) on sales of investments -- --
Change in unrealized appreciation (depreciation) of
investments -- --
- ---------------------------------------------------------------------------------------------
Net increase in contract owners' equity resulting from
operations 216 253
- ---------------------------------------------------------------------------------------------
ACCOUNT UNIT TRANSACTIONS
- ---------------------------------------------------------------------------------------------
Proceeds from units sold 130 74
Net transfers (to) from affiliate or divisions (70) 4
Payments for units redeemed (877) (806)
- ---------------------------------------------------------------------------------------------
Net decrease in contract owners' equity from account
unit transactions (817) (728)
- ---------------------------------------------------------------------------------------------
Total increase (decrease) in contract owners' equity (601) (475)
- ---------------------------------------------------------------------------------------------
CONTRACT OWNERS' EQUITY
- ---------------------------------------------------------------------------------------------
Beginning of period 5,822 6,297
- ---------------------------------------------------------------------------------------------
End of period $5,221 5,822
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
6
<PAGE> 8
COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN KEMPER GROWTH KEMPER INCOME AND CAPITAL
FUND DIVISION FUND DIVISION PRESERVATION FUND DIVISION
- ------------------- --------------- --------------------------
1997 1996 1997 1996 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1,213 1,204 715 1,406 57 70
499 549 406 734 13 23
(332) (549) (259) (1,218) 2 (92)
- ---------------------------------------------------------------
1,380 1,204 862 922 72 1
- ---------------------------------------------------------------
63 88 59 127 2 13
(105) 1 452 (95) (103) (29)
(1,650) (2,003) (1,646) (1,647) (205) (377)
- ---------------------------------------------------------------
(1,692) (1,914) (1,135) (1,615) (306) (393)
- ---------------------------------------------------------------
(312) (710) (273) (693) (234) (392)
- ---------------------------------------------------------------
8,319 9,029 5,890 6,583 1,115 1,507
- ---------------------------------------------------------------
8,007 8,319 5,617 5,890 881 1,115
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD KEMPER DIVERSIFIED INCOME KEMPER U.S. GOVERNMENT
FUND DIVISION FUND DIVISION SECURITIES FUND DIVISION
- ----------------- ------------------------- -------------------------
1997 1996 1997 1996 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
151 183 14 16 71 114
28 61 (2) (5) (7) (1)
16 3 3 5 22 (92)
- ----------------------------------------------------------------------
195 247 15 16 86 21
- ----------------------------------------------------------------------
14 36 7 5 7 76
16 83 -- (6) (101) (139)
(211) (682) (18) (32) (572) (532)
- ----------------------------------------------------------------------
(181) (563) (11) (33) (666) (595)
- ----------------------------------------------------------------------
14 (316) 4 (17) (580) (574)
- ----------------------------------------------------------------------
1,961 2,277 217 234 1,639 2,213
- ----------------------------------------------------------------------
1,975 1,961 221 217 1,059 1,639
- ----------------------------------------------------------------------
</TABLE>
7
<PAGE> 9
NOTES TO COMBINED FINANCIAL STATEMENTS
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
- --------------------------------------------------------------------------------
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"). KILICO is a
wholly-owned subsidiary of Kemper Corporation which
was acquired by an investor group led by Zurich
Insurance Company ("Zurich") on January 4, 1996.
The Separate Account is divided into seven
subaccounts and each subaccount invests exclusively
in a corresponding Kemper or Zurich Fund ("Fund").
Each Fund is an open-end diversified management
investment company.
ESTIMATES. The preparation of financial statements
in conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that could affect the reported
amounts of assets and liabilities as well as the
disclosure of contingent amounts at the date of the
financial statements. As a result, actual results
reported as income and expenses could differ from
the estimates reported in the accompanying
financial statements.
SECURITY VALUATION. The investments are stated at
current value which is based on the closing bid
price, net asset value, at December 31, 1997.
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 a first in,
first out ("FIFO") 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 Fund's investments and other assets,
less liabilities, by the number of accumulation
units outstanding in the respective Fund.
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 26, 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.
In early 1998, the Clinton Administration's Fiscal
Year 1999 Budget was released and contained certain
proposals to change the taxation of non-qualified
fixed and variable annuities. It is currently
unknown whether such proposals will be adopted,
amended or omitted in the final 1999 budget
approved by Congress.
8
<PAGE> 10
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2 SUMMARY
OF INVESTMENTS Investments, at cost, at December 31, 1997, are as
follows (in thousands):
<TABLE>
<CAPTION>
SHARES
OWNED COST
-----------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS
-----------------------------------------------------------------------
Kemper Total Return Fund 794 $ 7,102
Kemper Growth Fund 430 5,636
Kemper Income and Capital Preservation Fund 103 851
Zurich Money Market Fund 5,240 5,240
Kemper High Yield Fund 234 1,841
Kemper Diversified Income Fund 37 239
Kemper U.S. Government Securities Fund 122 1,058
-----------------------------------------------------------------------
TOTAL INVESTMENTS $21,967
-----------------------------------------------------------------------
</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.
ZURICH 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.
CONTINUED
9
<PAGE> 11
NOTES TO COMBINED FINANCIAL STATEMENTS
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.
- --------------------------------------------------------------------------------
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.
Scudder Kemper Investments, Inc. ("SKI"), formerly
Zurich Kemper Investments, Inc., an affiliated
company, is the investment manager of the Funds
which serve as the underlying investments of the
Separate Account.
Investors Brokerage Services, Inc. ("IBS"), a
wholly-owned subsidiary of KILICO, is the principal
underwriter for 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 Fund 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.
10
<PAGE> 12
NOTES TO COMBINED FINANCIAL STATEMENTS
Contract owners' equity at December 31, 1997, is as
follows (in thousands, except unit value;
differences are due to rounding):
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
SEPARATE ACCOUNT FUND DIVISION OF UNITS VALUE EQUITY
-----------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------
KEMPER TOTAL RETURN FUND
-----------------------------------------------------------------------------
Qualified 1,205 $6.589 $ 7,941
Nonqualified 10 6.594 66
-----------------------------------------------------------------------------
8,007
-----------------------------------------------------------------------------
KEMPER GROWTH FUND
-----------------------------------------------------------------------------
Qualified 711 7.761 5,516
Nonqualified 13 7.740 101
-----------------------------------------------------------------------------
5,617
-----------------------------------------------------------------------------
KEMPER INCOME AND CAPITAL PRESERVATION FUND
-----------------------------------------------------------------------------
Qualified 182 4.851 881
-----------------------------------------------------------------------------
ZURICH MONEY MARKET FUND
-----------------------------------------------------------------------------
Qualified 1,637 3.011 4,929
Nonqualified 97 3.011 292
-----------------------------------------------------------------------------
5,221
-----------------------------------------------------------------------------
KEMPER HIGH YIELD FUND
-----------------------------------------------------------------------------
Qualified 297 6.200 1,841
Nonqualified 21 6.362 134
-----------------------------------------------------------------------------
1,975
-----------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME FUND
-----------------------------------------------------------------------------
Qualified 66 3.376 221
-----------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------------------
Qualified 226 4.311 974
Nonqualified 19 4.480 85
-----------------------------------------------------------------------------
1,059
-----------------------------------------------------------------------------
TOTAL CONTRACT OWNERS' EQUITY $22,981
-----------------------------------------------------------------------------
</TABLE>
11
<PAGE> 13
NOTES
12
<PAGE> 14
NOTES
13
<PAGE> 15
[RECYCLED LOGO]
Printed on recycled paper.
Distributed by
Investors Brokerage Services, Inc.
[ZURICH KEMPER LOGO]
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, IL 60049
Policy Form Series L-5672, L-5454 & L-5797
L-5759 (2/97)1042
