<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 2000
COMMISSION FILE NOS. 2-72671
811-3199
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. _ [ ]
Post-Effective Amendment No. 29 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [ ]
Amendment No. 53 [X]
</TABLE>
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
(EXACT NAME OF REGISTRANT)
KEMPER INVESTORS LIFE INSURANCE
COMPANY
(NAME OF INSURANCE COMPANY)
<TABLE>
<S> <C>
1 Kemper Drive, Long Grove, Illinois 60049
(Address of Insurance Company's Principal Executive Offices) (Zip Code)
Insurance Company's Telephone Number, including Area Code: (847) 550-5500
</TABLE>
Debra P. Rezabek, Esq.
1 Kemper Drive
Long Grove, Illinois 60049
(Name and Address of Agent for Service)
COPIES TO:
<TABLE>
<S> <C>
FRANK J. JULIAN, ESQ. JOAN E. BOROS, ESQ.
KEMPER INVESTORS LIFE INSURANCE COMPANY JORDEN BURT BOROS
1 KEMPER DRIVE CICCHETTI BERENSON & JOHNSON
LONG GROVE, ILLINOIS 60049 1025 THOMAS JEFFERSON STREET, N.W.
SUITE 400E
WASHINGTON, D.C. 20007
</TABLE>
Approximate Date of Proposed Public Offering: Continuous
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 2000 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(i) of Rule 485
[ ] on (date) pursuant to paragraph (a)(i) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities being Registered:
Units of interest in Separate Account under the Contracts
No filing fee is due because an indefinite number of shares is deemed to
have been registered in reliance on Section 24(f) of the Investment Company Act
of 1940.
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<PAGE> 2
PROSPECTUS FOR
KEMPER INVESTORS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
PERIODIC PAYMENT
VARIABLE ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
KEMPER ADVANTAGE III
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
OF
KEMPER INVESTORS LIFE INSURANCE COMPANY
This Prospectus describes Periodic Payment Deferred Variable Annuity Contracts
(the "Contract") offered by Kemper Investors Life Insurance Company ("we" or
"KILICO"). These Contracts are designed to provide annuity benefits for
retirement which qualify for certain federal tax advantages. Depending on
particular state requirements, the Contracts may be issued on a group or
individual basis. Contracts issued on a group basis are represented by a
certificate. Contracts issued on an individual basis are represented by an
individual annuity contract. For purposes of this Prospectus, the term
"Contract" refers both to certificates and to individual annuity contracts.
You may allocate purchase payments to the General Account or to one or more of
the variable options. The Contract currently offers thirty-four investment
options, each being a Subaccount of the KILICO Variable Annuity Separate
Account. Currently, you may choose among the following Portfolios:
KEMPER VARIABLE SERIES
<TABLE>
<S> <C>
- - Kemper Money Market - Kemper Investment Grade Bond
- - Kemper Total Return - Kemper Contrarian Value
- - Kemper High Yield - Kemper Small Cap Value
- - Kemper Growth - Kemper Value + Growth
- - Kemper Government Securities - Kemper Horizon 20+
- - Kemper International - Kemper Horizon 10+
- - Kemper Small Cap Growth - Kemper Horizon 5
</TABLE>
JANUS ASPEN SERIES
<TABLE>
<S> <C>
- - Janus Aspen Growth - Janus Aspen Worldwide Growth
- - Janus Aspen Aggressive Growth - Janus Aspen Balanced
</TABLE>
LEXINGTON NATURAL RESOURCES TRUST
LEXINGTON EMERGING MARKETS FUND, INC.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND ("VIP") (INITIAL CLASS SHARES)
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II ("VIP II") (INITIAL CLASS SHARES)
<TABLE>
<S> <C>
- - Fidelity VIP Equity-Income - Fidelity VIP II Asset Manager
- - Fidelity VIP Growth - Fidelity VIP II Index 500
- Fidelity VIP II Contrafund(R)
</TABLE>
SCUDDER VARIABLE LIFE INVESTMENT FUND ("SCUDDER VLIF") (CLASS A SHARES)
<TABLE>
<S> <C>
- - Scudder VLIF Bond - Scudder VLIF International
- - Scudder VLIF Capital Growth
</TABLE>
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
J.P. MORGAN SERIES TRUST II
- J.P. Morgan Small Company
THE ALGER AMERICAN FUND
<TABLE>
<S> <C>
- - Alger American Growth - Alger American Small Capitalization
</TABLE>
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. ("VP")
<TABLE>
<S> <C>
- - American Century VP Income & Growth - American Century VP Value
</TABLE>
THE CONTRACTS ARE NOT INSURED BY THE FDIC. THEY ARE OBLIGATIONS OF THE ISSUING
INSURANCE COMPANY AND NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR SAVINGS
INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE CONTRACTS THAT YOU
SHOULD KNOW BEFORE INVESTING. YOU SHOULD READ IT BEFORE INVESTING AND KEEP IT
FOR REFERENCE. WE HAVE FILED A STATEMENT OF ADDITIONAL INFORMATION ("SAI") WITH
THE SECURITIES AND EXCHANGE COMMISSION. THE CURRENT SAI HAS THE SAME DATE AS
THIS PROSPECTUS AND IS INCORPORATED BY REFERENCE. YOU MAY OBTAIN A FREE COPY BY
WRITING US OR CALLING (888) 477-9700. A TABLE OF CONTENTS FOR THE SAI APPEARS ON
PAGE 36. YOU MAY ALSO FIND THIS PROSPECTUS AND OTHER REQUIRED INFORMATION ABOUT
THE SEPARATE ACCOUNT AT THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 2000
<PAGE> 3
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 2
SUMMARY OF EXPENSES......................................... 4
CONDENSED FINANCIAL INFORMATION............................. 7
KILICO, THE SEPARATE ACCOUNT AND THE FUNDS.................. 13
FIXED ACCOUNT OPTION........................................ 18
THE CONTRACTS............................................... 18
CONTRACT CHARGES AND EXPENSES............................... 23
THE ANNUITY PERIOD.......................................... 25
FEDERAL TAX MATTERS......................................... 28
DISTRIBUTION OF CONTRACTS................................... 34
VOTING RIGHTS............................................... 34
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 34
DOLLAR COST AVERAGING....................................... 35
SYSTEMATIC WITHDRAWAL PLAN.................................. 35
PROVISIONS OF PRIOR CONTRACTS............................... 35
LEGAL PROCEEDINGS........................................... 36
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 36
APPENDIX.................................................... 37
</TABLE>
<PAGE> 4
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATION PERIOD--The period between the Date of Issue of a Contract and
the Annuity Date.
ACCUMULATION UNIT--A unit of measurement used to determine the value of
each Subaccount during the Accumulation Period.
ANNUITANT--The person designated to receive or who is receiving annuity
payments.
ANNUITY DATE--The date on which annuity payments are to commence.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person designated to receive any benefits under a Contract
upon your death or upon the Annuitant's death prior to the Annuity Period.
COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance
Company. Our home office is at 1 Kemper Drive, Long Grove, Illinois 60049.
CONTRACT--A Variable Annuity Contract offered by this Prospectus on an
individual or group basis. Contracts issued on a group basis are
represented by a certificate. Contracts issued on an individual basis are
represented by an individual annuity contract.
CONTRACT VALUE--The sum of the values of your interest in the Subaccount(s)
of the Separate Account and the General Account.
CONTRACT YEAR--The period between anniversaries of the Date of Issue of a
Contract.
CONTRACT QUARTER--The periods between quarterly anniversaries of the Date
of Issue of a Contract.
CONTRIBUTION YEAR--Each Contract Year in which a Purchase Payment is made
and each later year measured from the end of the Contract Year when the
Purchase Payment was made. For example, if you make an initial payment of
$15,000 and then make a later payment of $10,000 during the fourth Contract
Year, the fifth Contract Year will be the fifth Contribution Year for the
purpose of Accumulation Units attributable to the initial payment and the
second Contribution Year with respect to Accumulation Units attributable to
the later $10,000 payment.
DATE OF ISSUE--The date on which the first Contract Year commences.
DEBT--The principal of any outstanding loan from the General Account
Contract Value, plus any accrued interest. Requests for loans must be made
to us in writing.
FIXED ANNUITY--An annuity under which we guarantee the amount of each
annuity payment; it does not vary with the investment experience of a
Subaccount.
FUND OR FUNDS--Kemper Variable Series, Janus Aspen Series, Lexington
Natural Resources Trust, Lexington Emerging Markets Fund, Inc., Fidelity
Variable Insurance Products Fund, Fidelity Variable Insurance Products Fund
II, Scudder Variable Life Investment Fund, The Dreyfus Socially Responsible
Growth Fund, Inc., J.P. Morgan Series Trust II, The Alger American Fund and
American Century Variable Portfolios, Inc., including any Portfolios
thereunder.
GENERAL ACCOUNT--All our assets other than those allocated to any legally
segregated separate account. We guarantee a minimum rate of interest on
Purchase Payments allocated to the General Account under the Fixed Account
Option.
GENERAL ACCOUNT CONTRACT VALUE--The value of your interest in the General
Account.
NON-QUALIFIED CONTRACT--A Contract issued in connection with a retirement
plan which does not receive favorable tax treatment under Section 401, 403,
408, 408A or 457 of the Internal Revenue Code.
OWNER ("YOU", "YOUR", "YOURS")--The person designated in the Contract as
having the privileges of ownership.
PORTFOLIO--A series of a Fund with its own objective and policies, which
represents shares of beneficial interest in a separate portfolio of
securities and other assets. Portfolio is sometimes referred to as a Fund.
1
<PAGE> 5
PURCHASE PAYMENTS--Amounts paid to us by you or on your behalf.
QUALIFIED CONTRACT--A Contract issued in connection with a retirement plan
which receives favorable tax treatment under Section 401, 403, 408, 408A or
457 of the Internal Revenue Code.
SEPARATE ACCOUNT--The KILICO Variable Annuity Separate Account.
SEPARATE ACCOUNT CONTRACT VALUE--The sum of your interests in the
Subaccount(s).
SUBACCOUNTS--The thirty-four subdivisions of the Separate Account, the
assets of which consist solely of shares of the corresponding Fund or
Portfolio of a Fund.
SUBACCOUNT VALUE--The value of your interest in each Subaccount.
UNITHOLDER--The person holding the voting rights with respect to an
Accumulation or Annuity Unit.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required.
VALUATION PERIOD--The interval of time between two consecutive Valuation
Dates.
VARIABLE ANNUITY--An annuity with payments varying in amount in accordance
with the investment experience of the Subaccount(s) in which you have an
interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Accumulation Units in their first six Contribution
Years or against certain annuitizations of Accumulation Units in their
first six Contribution Years.
WITHDRAWAL VALUE--Contract Value less Debt and any premium tax payable if
the Contract is being annuitized, minus any Withdrawal Charge.
SUMMARY
The summary does not contain all information that may be important. Read the
entire Prospectus before deciding to invest.
The Contracts provide for tax-deferred investments and annuity benefits. Both
Qualified Contracts and Non-Qualified Contracts are described in this
Prospectus.
The minimum initial Purchase Payment for a Non-Qualified Contract is $2,500 and
the minimum subsequent payment is $500. The minimum Purchase Payment for a
Qualified Contract is $50. However, if annualized contribution amounts from a
payroll or salary deduction are equal to or greater than $600, we accept a
periodic payment for a Qualified Contract under $50. For a Non-Qualified
Contract, a minimum of $100 in Contract Value must be allocated to an investment
option before another investment option can be selected. For a Qualified
Contract, as long as contribution amounts to a new investment option from a
payroll or salary reduction plan are equal to or greater than $50 per month, you
may select another such investment option. The maximum Purchase Payment for a
Qualified Contract is the maximum permitted under the qualified plan's terms.
You may make Purchase Payments to Non-Qualified Contracts and Contracts issued
as Individual Retirement Annuities ("IRAs") by authorizing us to draw on your
account via check or electronic debit ("Pre-Authorized Checking [PAC]
Agreement"). (See "The Contracts," page 18.)
We provide for variable accumulations and benefits by crediting Purchase
Payments to one or more Subaccounts of the Separate Account selected by you.
Each Subaccount invests in a corresponding Fund or Portfolio of one of the
Funds. (See "The Funds" page 13.) The Contract Values allocated to the Separate
Account will vary with the investment performance of the Portfolios and Funds
you select.
We also provide for fixed accumulations and benefits in the Fixed Account Option
of the General Account. Any portion of the Purchase Payment allocated to the
Fixed Account Option is credited with interest daily at a rate periodically
declared by us at our discretion, but not less than 3%. (See "Fixed Account
Option," page 18.)
The investment risk under the Contract is borne by you, except to the extent
that Contract Values are allocated to the Fixed Account Option and are
guaranteed to earn at least 3% interest.
Transfers between Subaccounts are permitted before and after annuitization, if
allowed by the qualified plan and subject to limitations. Restrictions apply to
transfers out of the Fixed Account Option. (See "Transfer During Accumulation
Period" and "Transfer During Annuity Period," pages 20 and 27, respectively.)
2
<PAGE> 6
No sales charge is deducted from any Purchase Payment. You may withdraw up to
10% of the Contract Value less Debt in any Contract Year without assessment of
any charge. If you withdraw an amount in excess of 10% of the Contract Value
less Debt in any Contract Year, the amount withdrawn in excess of 10% is subject
to a contingent deferred sales charge ("Withdrawal Charge"). The Withdrawal
Charge starts at 6% in the first Contribution Year and reduces by 1% each
Contribution Year so that there is no charge in the seventh and later
Contribution Years. (See "Withdrawal Charge," page 24.) The Withdrawal Charge
also applies at the annuitization of Accumulation Units in their sixth
Contribution Year or earlier, except as set forth under "Withdrawal Charge."
However, the aggregate Withdrawal Charges assessed against a Contract will never
exceed 7.25% of the aggregate Purchase Payments made under the Contract.
Withdrawals will have tax consequences, which may include the amount of the
withdrawal being subject to income tax and in some circumstances an additional
10% penalty tax. Withdrawals are permitted from Contracts issued in connection
with Section 403(b) Qualified Plans only under limited circumstances. (See
"Federal Tax Matters", page 28.)
We charge for mortality and expense risk and administrative expenses, for
records maintenance, and for any applicable premium taxes. (See "Asset-Based
Charges Against the Separate Account," page 23.) The Funds will incur certain
management fees and other expenses. (See "Summary of Expenses", "Investment
Management Fees and Other Expenses" and the Funds' prospectuses.)
The Contracts may be purchased in connection with retirement plans qualifying
either under Section 401 or 403(b) of the Internal Revenue Code (the "Code") or
as individual retirement annuities including Roth IRAs. The Contracts are also
available in connection with state and municipal deferred compensation plans and
non-qualified deferred compensation plans. (See "Taxation of Annuities in
General," page 28 and "Qualified Plans," page 31.)
You have the right within the "free look" period (generally ten days, subject to
state variation) after receiving the Contract to cancel the Contract by
delivering or mailing it to us. If you decide to return your Contact for a
refund during the "free look" period, please also include a letter of
instruction. Upon receipt by us, the Contract will be cancelled and amounts
refunded. The amount of the refund depends on the state where issued; however,
generally the refund is at least the Contract Value. (See "The Contracts," page
18.) In addition, a special "free look" period applies in some circumstances to
Contracts issued as individual retirement annuities or as Roth IRAs.
3
<PAGE> 7
SUMMARY OF EXPENSES
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase
payments)................................................. None
Contingent Deferred Sales Load (as a percentage of amount
surrendered)(1)
Year of
Withdrawal
After Purchase
First year.... 6%
Second year... 5%
Third year.... 4%
Fourth year... 3%
Fifth year.... 2%
Sixth year.... 1%
Seventh year
and
following..... 0%
Surrender Fees.............................................. None
Exchange Fee................................................ None
MAXIMUM ANNUAL CONTRACT FEE (Records Maintenance
Charge)(2)................................................ $30
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense Risk... 1.00%
Administration............... .30%
Account Fees and Expenses.... 0%
Total Separate Account Annual
Expenses................... 1.30%
</TABLE>
FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets, in some cases after
expense waiver or reimbursement, for the period ended
December 31, 1999. Future Portfolio expenses may be
greater or less than those shown.)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER
MONEY TOTAL KEMPER KEMPER GOVERNMENT KEMPER SMALL CAP
MARKET RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
------ ------ ---------- ------ ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Management
Fees......... 50% .55% .60% .60% .55% .75% .65%
Other
Expenses..... .04 .06 .07 .06 .08 .19 .06
--- --- --- --- --- --- ---
Total
Portfolio
Annual
Expenses..... .54% .61% .67% .66% .63% .94% .71%
=== === === === === === ===
<CAPTION>
KEMPER KEMPER
INVESTMENT KEMPER SMALL KEMPER KEMPER KEMPER KEMPER
GRADE CONTRARIAN CAP VALUE+ HORIZON HORIZON HORIZON
BOND(7) VALUE(7) VALUE(7) GROWTH(7) 20+(7) 10+(7) 5(7)
---------- ---------- -------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management
Fees......... .60% .75% .75% .75% .60% .60% .60%
Other
Expenses..... .05 .05 .09 .08 .18 .12 .16
--- --- --- --- --- --- ---
Total
Portfolio
Annual
Expenses..... .65% .80% .84% .83% .78% .72% .76%
=== === === === === === ===
</TABLE>
<TABLE>
<CAPTION>
JANUS JANUS FIDELITY
JANUS ASPEN ASPEN JANUS LEXINGTON LEXINGTON VIP
ASPEN AGGRESSIVE WORLDWIDE ASPEN NATURAL EMERGING EQUITY-
GROWTH(8) GROWTH(8) GROWTH(8) BALANCED(8) RESOURCES MARKETS INCOME(3)
--------- ---------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Management
Fees......... .65% .65% .65% .65% 1.00% .85% .48%
Other
Expenses..... .02 .02 .05 .02 .33 .85 .08
--- --- --- --- ---- ---- ---
Total
Portfolio
Annual
Expenses..... .67% .67% .70% .67% 1.33% 1.70% .56%
=== === === === ==== ==== ===
<CAPTION>
FIDELITY FIDELITY FIDELITY
FIDELITY VIP II VIP II VIP II
VIP ASSET INDEX CONTRA-
GROWTH(3) MANAGER(3) 500(4) FUND(3)
--------- ---------- -------- --------
<S> <C> <C> <C> <C>
Management
Fees......... .58% .53% .24% .58%
Other
Expenses..... .07 .09 .04 .07
--- --- --- ---
Total
Portfolio
Annual
Expenses..... .65% .62% .28% .65%
=== === === ===
</TABLE>
<TABLE>
<CAPTION>
SCUDDER DREYFUS
SCUDDER VLIF SCUDDER SOCIALLY J.P. MORGAN ALGER
VLIF CAPITAL VLIF RESPONSIBLE SMALL AMERICAN
BOND GROWTH INTERNATIONAL GROWTH COMPANY(5) GROWTH
------- ------- ------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Management
Fees......... .48% .46% .85% .75% .60% .75%
Other
Expenses..... .09 .03 .18 .04 .55 .04
--- --- ---- --- ---- ----
Total
Portfolio
Annual
Expenses..... .57% .49% 1.03% .79% 1.15% .79%
=== === ==== === ==== ====
<CAPTION>
AMERICAN
ALGER CENTURY
AMERICAN VP AMERICAN
SMALL INCOME & CENTURY VP
CAPITALIZATION GROWTH VALUE(6)
-------------- -------- ----------
<S> <C> <C> <C>
Management
Fees......... .85% .70% 1.00%
Other
Expenses..... .05 .00 .00
--- --- ----
Total
Portfolio
Annual
Expenses..... .90% .70% 1.00%
=== === ====
</TABLE>
(1) An Owner may withdraw up to 10% of the Contract Value less Debt in any
Contract Year without assessment of any charge. Under certain circumstances the
contingent deferred sales charge may be reduced or waived, including when
certain annuity options are selected.
(2) The Records Maintenance Charge will be reduced or waived for Contracts in
the situations detailed in the Prospectus. For Contracts with Contract Value of
between $25,000 and $50,000, the charge is $15.00. There is no charge for
Contract Value over $50,000.
(3) A portion of the brokerage commissions that certain Portfolios pay was used
to reduce expenses. In addition, certain Portfolios have entered into
arrangements with their custodian whereby credits realized as a result of
uninvested cash balances were used to reduce a portion of Portfolio expenses.
Without these reductions, Management Fees, Other Expenses and Total Portfolio
Annual Expenses would have been .48%, .09% and .57%, respectively, for the
Fidelity VIP Equity-Income Portfolio; .58%, .08% and .66%, respectively, for the
Fidelity VIP Growth Portfolio; .53%, .10% and .63%, respectively, for the
Fidelity VIP II Asset Manager Portfolio; and .58%, .09% and .67%, respectively,
for the Fidelity VIP II Contrafund Portfolio.
(4) FMR agreed to reimburse a portion of the Fidelity VIP II Index 500
Portfolio's expenses during this period. Without this reimbursement, Management
Fees, Other Expenses and Total Portfolio Annual Expenses would have been .24%,
.10% and .34%, respectively.
(5) Reflects an agreement by Morgan Guaranty Trust Company of New York to
reimburse the Portfolio to the extent expenses exceed 1.15%. Absent fee waiver
and expense reimbursement, total operating expenses would have been 2.57%.
(6) The American Century VP Value Portfolio has a stepped fee schedule. The fees
are 1.00% for the first $500 million of average net assets, 0.95% for the next
$500 million of average net assets and 0.90% thereafter.
(7) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year period
commencing on May 1, 2000, to limit their respective fees and to reimburse other
expenses, to the extent
4
<PAGE> 8
necessary to limit total operating expenses of the following described
Portfolios to the amounts set forth after the Portfolio names: Kemper Value+
Growth Portfolio (.84%), Kemper Contrarian Value Portfolio (.80%), Kemper Small
Cap Value Portfolio (.84%), Kemper Horizon 5 Portfolio (.97%), Kemper Horizon
10+ Portfolio (.83%), Kemper Horizon 20+ Portfolio (.93%), and Kemper Investment
Grade Bond Portfolio (.80%). The amounts set forth in the table above reflect
actual expenses for the past fiscal year, which were at or lower than these
expense limits, except for Kemper Contrarian Value Portfolio, which reflects the
benefit of custodial credits. Without these credits, Management Fees, Other
Expenses and Total Portfolio Annual Expenses for Kemper Contrarian Value
Portfolio would have been .75%, .06% and .81%, respectively.
(8) Expenses are based upon expenses for the fiscal year ended December 31,
1999, restated to reflect a reduction in the management fee for Janus Aspen
Growth, Janus Aspen Aggressive Growth, Janus Aspen Worldwide Growth and Janus
Aspen Balanced Portfolios. All expenses are shown without the effect of any
expenses offset arrangements.
5
<PAGE> 9
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your Contract at the end of the
periods shown, you would pay the following
expenses on a $1,000 investment, assuming 5%
annual return on assets:
Kemper Money Market #1 81 104 127 223
Kemper Total Return 82 106 130 231
Kemper High Yield 83 108 133 237
Kemper Growth 82 107 133 236
Kemper Government Securities 82 107 131 233
Kemper International 85 116 147 265
Kemper Small Cap Growth 83 109 135 241
Kemper Investment Grade Bond 82 107 132 235
Kemper Contrarian Value 84 112 140 251
Kemper Small Cap Value 84 113 142 255
Kemper Value+Growth 84 112 141 254
Kemper Horizon 20+ 84 111 139 249
Kemper Horizon 10+ 83 109 136 242
Kemper Horizon 5 83 110 138 247
Janus Aspen Growth 83 108 133 237
Janus Aspen Aggressive Growth 83 108 133 237
Janus Aspen Worldwide Growth 83 109 135 240
Janus Aspen Balanced 83 108 133 237
Lexington Natural Resources 89 127 166 305
Lexington Emerging Markets 92 138 185 341
Fidelity VIP Equity--Income 81 104 128 225
Fidelity VIP Growth 82 107 132 235
Fidelity VIP II Asset Manager 82 106 131 232
Fidelity VIP II Index 500 79 96 113 195
Fidelity VIP II Contrafund 82 107 132 235
Scudder VLIF Bond 82 105 -- --
Scudder VLIF Capital Growth 81 102 -- --
Scudder VLIF International 86 118 -- --
Dreyfus Socially Responsible Growth 84 111 -- --
J.P. Morgan Small Company 87 122 -- --
Alger American Growth 84 111 -- --
Alger American Small Capitalization 85 115 -- --
American Century VP Income & Growth 83 109 -- --
American Century VP Value 86 118 -- --
If you do not surrender your Contract, you would
pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:
Kemper Money Market #1 19 60 103 223
Kemper Total Return 20 62 107 231
Kemper High Yield 21 64 110 237
Kemper Growth 21 64 110 236
Kemper Government Securities 20 63 108 233
Kemper International 24 72 124 265
Kemper Small Cap Growth 21 65 112 241
Kemper Investment Grade Bond 21 64 109 235
Kemper Contrarian Value 22 68 117 251
Kemper Small Cap Value 23 69 119 255
Kemper Value+Growth 22 69 118 254
Kemper Horizon 20+ 22 68 116 249
Kemper Horizon 10+ 21 66 113 242
Kemper Horizon 5 22 67 115 247
Janus Aspen Growth 21 64 110 237
Janus Aspen Aggressive Growth 21 64 110 237
Janus Aspen Worldwide Growth 21 65 112 240
Janus Aspen Balanced 21 64 110 237
Lexington Natural Resources 28 84 144 305
Lexington Emerging Markets 31 96 163 341
Fidelity VIP Equity--Income 20 61 104 225
Fidelity VIP Growth 21 64 109 235
Fidelity VIP II Asset Manager 20 63 107 232
Fidelity VIP II Index 500 17 52 90 195
Fidelity VIP II Contrafund 21 64 109 235
Scudder VLIF Bond 20 61 -- --
Scudder VLIF Capital Growth 19 59 -- --
Scudder VLIF International 24 75 -- --
Dreyfus Socially Responsible Growth 22 68 -- --
J.P. Morgan Small Company 26 79 -- --
Alger American Growth 22 68 -- --
Alger American Small Capitalization 23 71 -- --
American Century VP Income & Growth 21 65 -- --
American Century VP Value 24 74 -- --
</TABLE>
The purpose of the preceding table, which includes the "SUMMARY OF EXPENSES" on
the prior page, is to assist you in understanding the various costs and expenses
that an Owner in a Subaccount will bear directly or indirectly. The table
reflects expenses of both the Separate Account and the Funds. THE EXAMPLE SHOULD
NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE EXPENSES AND DOES NOT
INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH MAY BE ASSESSED BEFORE OR
UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
"Management Fees" and "Other Expenses" in the "SUMMARY OF EXPENSES" for the
Funds have been provided by the Funds' investment manager's or advisers and have
not been independently verified. The Example assumes a 5% annual rate of return
pursuant to requirements of the Securities and Exchange Commission. This
hypothetical rate of return is not intended to be representative of past or
future performance of any Subaccount. The Records Maintenance Charge is a single
charge; it is not a separate charge for each Subaccount. In addition, the effect
of the Records Maintenance Charge has been reflected in the Example by applying
the percentage derived by dividing the total amounts of annual Records
Maintenance Charge collected by the total net assets of all the Subaccounts in
the Separate Account. See "Contract Charges and Expenses" for more information
regarding the various costs and expenses.
6
<PAGE> 10
CONDENSED FINANCIAL INFORMATION
The following condensed financial information is derived from the financial
statements of the Separate Account. The data should be read in conjunction with
the financial statements, related notes and other financial information included
in the Statement of Additional Information.
Selected data for the last ten years for accumulation units outstanding as of
the year ended December 31st for each period:
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
--------------------------------------------------------
1999+++ 1998 1997 1996++ 1995+ 1994***
------- ---- ---- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
TAX QUALIFIED
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD
Kemper Money Market Subaccount.................... $ 2.493 2.394 2.297 2.208 2.111 2.051
Kemper Total Return
Subaccount....................................... 7.411 6.501 5.473 4.735 3.796 4.236
Kemper High Yield Subaccount...................... 6.369 6.341 5.738 5.082 4.372 4.517
Kemper Growth Subaccount.......................... 7.261 6.371 5.303 4.404 3.345 3.520
Kemper Government Securities Subaccount*.......... 1.828 1.725 1.599 1.575 1.337 1.388
Kemper International Subaccount**................. 1.877 1.723 1.590 1.379 1.234 1.293
Kemper Small Cap Growth Subaccount***............. 2.625 2.240 1.686 1.330 1.033
Kemper Investment Grade Bond Subaccount++......... 1.187 1.111 1.029
Kemper Contrarian Value Subaccount++.............. 1.777 1.505 1.166
Kemper Small Cap Value Subaccount++............... 1.072 1.220 1.012
Kemper Value+Growth Subaccount++.................. 1.683 1.414 1.138
Kemper Horizon 20+ Subaccount++................... 1.530 1.367 1.146
Kemper Horizon 10+ Subaccount++................... 1.410 1.279 1.106
Kemper Horizon 5
Subaccount++..................................... 1.320 1.215 1.089
Janus Aspen Growth
Subaccount+...................................... 26.152 19.471 16.021 13.662
Janus Aspen Aggressive Growth
Subaccount+...................................... 27.149 20.423 18.309 17.132
Janus Aspen Worldwide Growth Subaccount+.......... 30.205 23.663 19.565 15.315
Janus Aspen Balanced
Subaccount+...................................... 24.205 18.205 15.059 13.092
Lexington Natural Resources Subaccount+........... 12.008 15.089 14.211 11.315
Lexington Emerging Markets Subaccount+............ 6.255 8.799 10.048 9.445
Fidelity VIP Equity -- Income Subaccount++........ 29.285 26.497 20.891
Fidelity VIP Growth
Subaccount++..................................... 52.235 37.821 30.933
Fidelity VIP II Asset Manager Subaccount++........ 22.885 20.090 16.818
Fidelity VIP II Index 500 Subaccount.............. 147.801 116.327 88.539
Fidelity VIP II Contrafund Subaccount++........... 26.021 20.220 16.450
Scudder VLIF Bond Subaccount+++................... 6.570
Scudder VLIF Capital Growth Subaccount+++......... 22.910
Scudder VLIF International Subaccount+++.......... 14.280
Dreyfus Socially Responsible Growth
Subaccount+++.................................... 33.680
J.P. Morgan Small Company Subaccount+++........... 11.930
Alger American Growth Subaccount+++............... 59.320
Alger American Small Capitalization
Subaccount+++.................................... 45.520
American Century VP Income & Growth
Subaccount+++.................................... 7.260
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS PERIODIC PAYMENT CONTRACT
--------------------------------- ----------------------------
1993 1992** 1991 1990 1999+++ 1998 1997
---- ------ ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
TAX QUALIFIED
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD
Kemper Money Market Subaccount.................... 2.014 1.966 1.875 1.751 $ 2.372 2.285 2.199
Kemper Total Return
Subaccount....................................... 3.816 3.790 2.776 2.669 7.052 6.205 5.239
Kemper High Yield Subaccount...................... 3.802 3.261 2.169 2.591 6.061 6.052 5.493
Kemper Growth Subaccount.......................... 3.102 3.025 1.916 1.923 6.945 6.112 5.102
Kemper Government Securities Subaccount*.......... 1.317 1.256 1.101 1.013 1.779 1.684 1.566
Kemper International Subaccount**................. .983 1.000 1.839 1.693 1.567
Kemper Small Cap Growth Subaccount***............. 2.589 2.216 1.673
Kemper Investment Grade Bond Subaccount++......... 1.178 1.105 1.027
Kemper Contrarian Value Subaccount++.............. 1.763 1.498 1.164
Kemper Small Cap Value Subaccount++............... 1.063 1.214 1.010
Kemper Value+Growth Subaccount++.................. 1.669 1.407 1.136
Kemper Horizon 20+ Subaccount++................... 1.518 1.360 1.144
Kemper Horizon 10+ Subaccount++................... 1.399 1.273 1.104
Kemper Horizon 5
Subaccount++..................................... 1.310 1.209 1.086
Janus Aspen Growth
Subaccount+...................................... 25.897 19.338 15.960
Janus Aspen Aggressive Growth
Subaccount+...................................... 26.884 20.284 18.238
Janus Aspen Worldwide Growth Subaccount+.......... 29.911 23.502 19.490
Janus Aspen Balanced
Subaccount+...................................... 23.969 18.081 15.001
Lexington Natural Resources Subaccount+........... 11.879 14.971 14.154
Lexington Emerging Markets Subaccount+............ 6.194 8.739 10.009
Fidelity VIP Equity -- Income Subaccount++........ 29.054 26.366 20.849
Fidelity VIP Growth
Subaccount++..................................... 51.818 37.631 30.872
Fidelity VIP II Asset Manager Subaccount++........ 22.705 19.991 16.784
Fidelity VIP II Index 500 Subaccount.............. 146.637 115.754 88.364
Fidelity VIP II Contrafund Subaccount++........... 25.816 20.120 16.418
Scudder VLIF Bond Subaccount+++................... 6.570
Scudder VLIF Capital Growth Subaccount+++......... 22.910
Scudder VLIF International Subaccount+++.......... 14.280
Dreyfus Socially Responsible Growth
Subaccount+++.................................... 33.680
J.P. Morgan Small Company Subaccount+++........... 11.930
Alger American Growth Subaccount+++............... 59.320
Alger American Small Capitalization
Subaccount+++.................................... 45.520
American Century VP Income & Growth
Subaccount+++.................................... 7.260
<CAPTION>
PERIODIC PAYMENT CONTRACT
-----------------------------------------------------------------
1996++ 1995+ 1994*** 1993 1992** 1991 1990
------ ----- ------- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
TAX QUALIFIED
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD
Kemper Money Market Subaccount.................... 2.120 2.033 1.981 1.950 1.910 1.827 1.712
Kemper Total Return
Subaccount....................................... 4.546 3.656 4.092 3.696 3.682 2.705 2.609
Kemper High Yield Subaccount...................... 4.879 4.210 4.363 3.683 3.168 2.114 2.533
Kemper Growth Subaccount.......................... 4.250 3.238 3.417 3.020 2.954 1.876 1.889
Kemper Government Securities Subaccount*.......... 1.547 1.317 1.371 1.305 1.248 1.097 1.012
Kemper International Subaccount**................. 1.363 1.223 1.285 .980 1.000
Kemper Small Cap Growth Subaccount***............. 1.323 1.031
Kemper Investment Grade Bond Subaccount++.........
Kemper Contrarian Value Subaccount++..............
Kemper Small Cap Value Subaccount++...............
Kemper Value+Growth Subaccount++..................
Kemper Horizon 20+ Subaccount++...................
Kemper Horizon 10+ Subaccount++...................
Kemper Horizon 5
Subaccount++.....................................
Janus Aspen Growth
Subaccount+...................................... 13.650
Janus Aspen Aggressive Growth
Subaccount+...................................... 17.117
Janus Aspen Worldwide Growth Subaccount+.......... 15.302
Janus Aspen Balanced
Subaccount+...................................... 13.081
Lexington Natural Resources Subaccount+........... 11.305
Lexington Emerging Markets Subaccount+............ 9.436
Fidelity VIP Equity -- Income Subaccount++........
Fidelity VIP Growth
Subaccount++.....................................
Fidelity VIP II Asset Manager Subaccount++........
Fidelity VIP II Index 500 Subaccount..............
Fidelity VIP II Contrafund Subaccount++...........
Scudder VLIF Bond Subaccount+++...................
Scudder VLIF Capital Growth Subaccount+++.........
Scudder VLIF International Subaccount+++..........
Dreyfus Socially Responsible Growth
Subaccount+++....................................
J.P. Morgan Small Company Subaccount+++...........
Alger American Growth Subaccount+++...............
Alger American Small Capitalization
Subaccount+++....................................
American Century VP Income & Growth
Subaccount+++....................................
</TABLE>
(CONTINUED ON NEXT PAGE)
7
<PAGE> 11
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
--------------------------------------------------------
1999+++ 1998 1997 1996++ 1995+ 1994***
------- ---- ---- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
American Century VP Value Subaccount+++........... $ 6.700 --
ACCUMULATION UNIT VALUE AT END OF PERIOD
Kemper Money Market Subaccount.................... $ 2.588 2.493 2.394 2.297 2.208 2.111
Kemper Total Return
Subaccount....................................... 8.425 7.411 6.501 5.473 4.735 3.796
Kemper High Yield Subaccount...................... 6.442 6.369 6.341 5.738 5.082 4.372
Kemper Growth Subaccount.......................... 9.858 7.261 6.371 5.303 4.404 3.345
Kemper Government Securities Subaccount*.......... 1.823 1.828 1.725 1.599 1.575 1.337
Kemper International Subaccount**................. 2.708 1.877 1.723 1.590 1.379 1.234
Kemper Small Cap Growth Subaccount***............. 3.498 2.625 2.240 1.686 1.330 1.033
Kemper Investment Grade Bond Subaccount++......... 1.151 1.187 1.111 1.029
Kemper Contrarian Value Subaccount++.............. 1.580 1.777 1.505 1.166
Kemper Small Cap Value Subaccount++............... 1.091 1.072 1.220 1.012
Kemper Value+Growth Subaccount++.................. 1.941 1.683 1.414 1.138
Kemper Horizon 20+ Subaccount++................... 1.655 1.530 1.367 1.146
Kemper Horizon 10+ Subaccount++................... 1.513 1.410 1.279 1.106
Kemper Horizon 5
Subaccount++...................................... 1.362 1.320 1.215 1.089
Janus Aspen Growth
Subaccount+...................................... 37.283 26.152 19.471 16.021 13.662
Janus Aspen Aggressive Growth Subaccount+......... 60.590 27.149 20.423 18.309 17.132
Janus Aspen Worldwide Growth Subaccount+.......... 49.181 30.205 23.663 19.565 15.315
Janus Aspen Balanced
Subaccount+...................................... 30.378 24.205 18.205 15.059 13.092
Lexington Natural Resources Subaccount+........... 13.565 12.008 15.089 14.211 11.315
Lexington Emerging Markets Subaccount+............ 14.118 6.255 8.799 10.048 9.445
Fidelity VIP Equity - Income Subaccount++......... 30.830 29.285 26.497 20.891
Fidelity VIP Growth
Subaccount++..................................... 71.079 52.235 37.821 30.933
Fidelity VIP II Asset Manager Subaccount++........ 25.172 22.885 20.090 16.818
Fidelity VIP II Index 500 Subaccount++............ 176.352 147.801 116.327 88.539
Fidelity VIP II Contrafund Subaccount++........... 32.012 26.021 20.220 16.450
Scudder VLIF Bond Subaccount+++................... 6.394
Scudder VLIF Capital Growth Subaccount+++......... 28.914
Scudder VLIF International Subaccount+++.......... 20.207
Dreyfus Socially Responsible Growth
Subaccount+++.................................... 39.967
J.P. Morgan Small Company Subaccount+++........... 16.998
Alger American Growth Subaccount+++............... 71.618
Alger American Small Capitalization
Subaccount+++.................................... 64.873
American Century VP Income & Growth
Subaccount+++.................................... 7.834
American Century VP Value Subaccount+++........... 5.898
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS PERIODIC PAYMENT CONTRACT
--------------------------------- ----------------------------
1993 1992** 1991 1990 1999+++ 1998 1997
---- ------ ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
American Century VP Value Subaccount+++........... $ 6.700
ACCUMULATION UNIT VALUE AT END OF PERIOD
Kemper Money Market Subaccount.................... 2.051 2.014 1.966 1.875 $ 2.455 2.372 2.285
Kemper Total Return
Subaccount....................................... 4.236 3.816 3.790 2.776 7.993 7.052 6.205
Kemper High Yield Subaccount...................... 4.517 3.802 3.261 2.169 6.112 6.061 6.052
Kemper Growth Subaccount.......................... 3.520 3.102 3.025 1.916 9.401 6.945 6.112
Kemper Government Securities Subaccount*.......... 1.388 1.317 1.256 1.101 1.769 1.779 1.684
Kemper International Subaccount**................. 1.293 .983 2.645 1.839 1.693
Kemper Small Cap Growth Subaccount***............. 3.440 2.589 2.216
Kemper Investment Grade Bond Subaccount++......... 1.139 1.178 1.105
Kemper Contrarian Value Subaccount++.............. 1.563 1.763 1.498
Kemper Small Cap Value Subaccount++............... 1.079 1.063 1.214
Kemper Value+Growth Subaccount++.................. 1.920 1.669 1.407
Kemper Horizon 20+ Subaccount++................... 1.637 1.518 1.360
Kemper Horizon 10+ Subaccount++................... 1.497 1.399 1.273
Kemper Horizon 5
Subaccount++...................................... 1.356 1.310 1.209
Janus Aspen Growth
Subaccount+...................................... 36.810 25.897 19.338
Janus Aspen Aggressive Growth Subaccount+......... 59.822 26.884 20.284
Janus Aspen Worldwide Growth Subaccount+.......... 48.558 29.911 23.502
Janus Aspen Balanced
Subaccount+...................................... 29.993 23.969 18.081
Lexington Natural Resources Subaccount+........... 13.379 11.879 14.971
Lexington Emerging Markets Subaccount+............ 13.939 6.194 8.739
Fidelity VIP Equity - Income Subaccount++......... 30.497 29.054 26.366
Fidelity VIP Growth
Subaccount++..................................... 70.305 51.818 37.631
Fidelity VIP II Asset Manager Subaccount++........ 24.899 22.705 19.991
Fidelity VIP II Index 500 Subaccount++............ 174.446 146.637 115.754
Fidelity VIP II Contrafund Subaccount++........... 31.666 25.816 20.120
Scudder VLIF Bond Subaccount+++................... 6.435
Scudder VLIF Capital Growth Subaccount+++......... 28.882
Scudder VLIF International Subaccount+++.......... 20.167
Dreyfus Socially Responsible Growth
Subaccount+++.................................... 40.084
J.P. Morgan Small Company Subaccount+++........... 16.965
Alger American Growth Subaccount+++............... 70.571
Alger American Small Capitalization
Subaccount+++.................................... 62.523
American Century VP Income & Growth
Subaccount+++.................................... 7.932
American Century VP Value Subaccount+++........... 5.899
<CAPTION>
PERIODIC PAYMENT CONTRACT
-----------------------------------------------------------------
1996++ 1995+ 1994*** 1993 1992** 1991 1990
------ ----- ------- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
American Century VP Value Subaccount+++........... --
ACCUMULATION UNIT VALUE AT END OF PERIOD
Kemper Money Market Subaccount.................... 2.199 2.120 2.033 1.981 1.950 1.910 1.827
Kemper Total Return
Subaccount....................................... 5.239 4.546 3.656 4.092 3.696 3.682 2.705
Kemper High Yield Subaccount...................... 5.493 4.879 4.210 4.363 3.683 3.168 2.114
Kemper Growth Subaccount.......................... 5.102 4.250 3.238 3.417 3.020 2.954 1.876
Kemper Government Securities Subaccount*.......... 1.566 1.547 1.317 1.371 1.305 1.248 1.097
Kemper International Subaccount**................. 1.567 1.363 1.223 1.285 .980
Kemper Small Cap Growth Subaccount***............. 1.673 1.323 1.031
Kemper Investment Grade Bond Subaccount++......... 1.027
Kemper Contrarian Value Subaccount++.............. 1.164
Kemper Small Cap Value Subaccount++............... 1.010
Kemper Value+Growth Subaccount++.................. 1.136
Kemper Horizon 20+ Subaccount++................... 1.144
Kemper Horizon 10+ Subaccount++................... 1.104
Kemper Horizon 5
Subaccount++...................................... 1.086
Janus Aspen Growth
Subaccount+...................................... 15.960 13.650
Janus Aspen Aggressive Growth Subaccount+......... 18.238 17.117
Janus Aspen Worldwide Growth Subaccount+.......... 19.490 15.302
Janus Aspen Balanced
Subaccount+...................................... 15.001 13.081
Lexington Natural Resources Subaccount+........... 14.154 11.305
Lexington Emerging Markets Subaccount+............ 10.009 9.436
Fidelity VIP Equity - Income Subaccount++......... 20.849
Fidelity VIP Growth
Subaccount++..................................... 30.872
Fidelity VIP II Asset Manager Subaccount++........ 16.784
Fidelity VIP II Index 500 Subaccount++............ 88.364
Fidelity VIP II Contrafund Subaccount++........... 16.418
Scudder VLIF Bond Subaccount+++...................
Scudder VLIF Capital Growth Subaccount+++.........
Scudder VLIF International Subaccount+++..........
Dreyfus Socially Responsible Growth
Subaccount+++....................................
J.P. Morgan Small Company Subaccount+++...........
Alger American Growth Subaccount+++...............
Alger American Small Capitalization
Subaccount+++....................................
American Century VP Income & Growth
Subaccount+++....................................
American Century VP Value Subaccount+++...........
</TABLE>
(CONTINUED ON NEXT PAGE)
8
<PAGE> 12
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
--------------------------------------------------------
1999+++ 1998 1997 1996++ 1995+ 1994***
------- ---- ---- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF
PERIOD (000'S OMITTED)
Kemper Money Market Subaccount.................... 333 309 633 770 591 733
Kemper Total Return Subaccount.................... 656 772 864 990 1,067 1,299
Kemper High Yield Subaccount...................... 197 260 323 422 506 532
Kemper Growth Subaccount.......................... 153 178 227 260 286 238
Kemper Government Securities Subaccount*.......... 145 146 149 165 273 237
Kemper International Subaccount**................. 170 212 376 429 612 625
Kemper Small Cap Growth Subaccount***............. 127 166 195 132 81 14
Kemper Investment Grade Bond Subaccount++......... 24 19 13
Kemper Contrarian Value Subaccount++.............. 57 94 59 8
Kemper Small Cap Value Subaccount++............... 6 4 3
Kemper Value+Growth Subaccount++.................. 33 60 24 12
Kemper Horizon 20+ Subaccount++................... 0 21
Kemper Horizon 10+ Subaccount++................... 7 13 10 10
Kemper Horizon 5
Subaccount++..................................... 0
Janus Aspen Growth Subaccount+.................... 12 7 11 9
Janus Aspen Aggressive Growth Subaccount+......... 4 0 1
Janus Aspen Worldwide Growth Subaccount+.......... 11 8 9 3
Janus Aspen Balanced Subaccount+.................. 11 6 4 3
Lexington Natural Resources Subaccount+........... 0 0 7 7
Lexington Emerging Markets Subaccount+............ 1 1 6 1
Fidelity VIP Equity - Income Subaccount++......... 1 2 2 1
Fidelity VIP Growth Subaccount++.................. 4 3
Fidelity VIP II Asset Manager Subaccount++........ 0 0 1
Fidelity VIP II Index 500 Subaccount++............ 2 1
Fidelity VIP II Contrafund Subaccount++........... 5 1
Scudder VLIF Bond Subaccount+++................... 0
Scudder VLIF Capital Growth Subaccount+++......... 0
Scudder VLIF International Subaccount+++.......... 1
Dreyfus Socially Responsible Growth
Subaccount+++.................................... 0
J.P. Morgan Small Company Subaccount+++........... 4
Alger American Growth Subaccount+++............... 0
Alger American Small Capitalization
Subaccount+++.................................... 0
American Century VP Income & Growth
Subaccount+++.................................... 0
American Century VP Value Subaccount+++........... 0
NON-TAX QUALIFIED
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD
Kemper Money Market Subaccount.................... $ 2.493 2.394 2.297 2.208 2.111 2.051
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS PERIODIC PAYMENT CONTRACT
--------------------------------- ----------------------------
1993 1992** 1991 1990 1999+++ 1998 1997
---- ------ ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF
PERIOD (000'S OMITTED)
Kemper Money Market Subaccount.................... 844 1,081 1,720 2,388 20,014 14,508 11,579
Kemper Total Return Subaccount.................... 1,511 1,859 1,924 2,355 60,736 72,971 82,149
Kemper High Yield Subaccount...................... 657 670 723 885 15,887 20,199 22,729
Kemper Growth Subaccount.......................... 222 303 255 251 40,027 50,548 54,987
Kemper Government Securities Subaccount*.......... 257 267 288 170 15,187 16,997 15,434
Kemper International Subaccount**................. 284 91 32,639 45,058 55,729
Kemper Small Cap Growth Subaccount***............. 31,772 38,394 33,789
Kemper Investment Grade Bond Subaccount++......... 2,396 2,529 694
Kemper Contrarian Value Subaccount++.............. 21,269 23,159 18,995
Kemper Small Cap Value Subaccount++............... 11,756 12,832 10,593
Kemper Value+Growth Subaccount++.................. 6,861 7,994 4,889
Kemper Horizon 20+ Subaccount++................... 1,713 1,764 1,170
Kemper Horizon 10+ Subaccount++................... 2,086 3,391 1,616
Kemper Horizon 5
Subaccount++..................................... 1,008 1,248 917
Janus Aspen Growth Subaccount+.................... 3,541 1,931 1,357
Janus Aspen Aggressive Growth Subaccount+......... 2,360 985 893
Janus Aspen Worldwide Growth Subaccount+.......... 6,003 4,883 3,418
Janus Aspen Balanced Subaccount+.................. 4,206 1,855 661
Lexington Natural Resources Subaccount+........... 290 302 347
Lexington Emerging Markets Subaccount+............ 742 587 598
Fidelity VIP Equity - Income Subaccount++......... 1,258 1,245 777
Fidelity VIP Growth Subaccount++.................. 1,132 576 275
Fidelity VIP II Asset Manager Subaccount++........ 284 210 134
Fidelity VIP II Index 500 Subaccount++............ 833 638 295
Fidelity VIP II Contrafund Subaccount++........... 2,175 1,701 1,109
Scudder VLIF Bond Subaccount+++................... 22
Scudder VLIF Capital Growth Subaccount+++......... 14
Scudder VLIF International Subaccount+++.......... 104
Dreyfus Socially Responsible Growth
Subaccount+++.................................... 57
J.P. Morgan Small Company Subaccount+++........... 13
Alger American Growth Subaccount+++............... 130
Alger American Small Capitalization
Subaccount+++.................................... 30
American Century VP Income & Growth
Subaccount+++.................................... 303
American Century VP Value Subaccount+++........... 85
NON-TAX QUALIFIED
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD
Kemper Money Market Subaccount.................... 2.014 1.966 1.875 1.751 $ 2.372 2.285 2.199
<CAPTION>
PERIODIC PAYMENT CONTRACT
-----------------------------------------------------------------
1996++ 1995+ 1994*** 1993 1992** 1991 1990
------ ----- ------- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF
PERIOD (000'S OMITTED)
Kemper Money Market Subaccount.................... 10,827 10,881 15,997 14,891 12,605 14,973 21,581
Kemper Total Return Subaccount.................... 89,982 100,774 110,428 108,395 100,100 81,776 70,620
Kemper High Yield Subaccount...................... 24,077 25,327 26,546 26,749 22,202 19,861 22,623
Kemper Growth Subaccount.......................... 58,672 60,187 58,845 50,289 42,078 28,271 22,451
Kemper Government Securities Subaccount*.......... 18,485 21,771 24,332 31,898 28,368 23,035 12,918
Kemper International Subaccount**................. 62,425 63,495 61,490 38,844 10,372
Kemper Small Cap Growth Subaccount***............. 25,931 17,371 8,304
Kemper Investment Grade Bond Subaccount++......... 326
Kemper Contrarian Value Subaccount++.............. 4,864
Kemper Small Cap Value Subaccount++............... 3,784
Kemper Value+Growth Subaccount++.................. 986
Kemper Horizon 20+ Subaccount++................... 406
Kemper Horizon 10+ Subaccount++................... 634
Kemper Horizon 5
Subaccount++..................................... 243
Janus Aspen Growth Subaccount+.................... 976 168
Janus Aspen Aggressive Growth Subaccount+......... 937 121
Janus Aspen Worldwide Growth Subaccount+.......... 1,413 95
Janus Aspen Balanced Subaccount+.................. 360 132
Lexington Natural Resources Subaccount+........... 243 58
Lexington Emerging Markets Subaccount+............ 443 80
Fidelity VIP Equity - Income Subaccount++......... 263
Fidelity VIP Growth Subaccount++.................. 116
Fidelity VIP II Asset Manager Subaccount++........ 55
Fidelity VIP II Index 500 Subaccount++............ 53
Fidelity VIP II Contrafund Subaccount++........... 488
Scudder VLIF Bond Subaccount+++...................
Scudder VLIF Capital Growth Subaccount+++.........
Scudder VLIF International Subaccount+++..........
Dreyfus Socially Responsible Growth
Subaccount+++....................................
J.P. Morgan Small Company Subaccount+++...........
Alger American Growth Subaccount+++...............
Alger American Small Capitalization
Subaccount+++....................................
American Century VP Income & Growth
Subaccount+++....................................
American Century VP Value Subaccount+++...........
NON-TAX QUALIFIED
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD
Kemper Money Market Subaccount.................... 2.120 2.033 1.981 1.950 1.910 1.827 1.712
</TABLE>
(CONTINUED ON NEXT PAGE)
9
<PAGE> 13
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
--------------------------------------------------------
1999+++ 1998 1997 1996++ 1995+ 1994***
------- ---- ---- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Kemper Total Return
Subaccount....................................... $ 6.862 6.019 5.068 4.384 3.515 3.922
Kemper High Yield Subaccount...................... 6.098 6.071 5.494 4.865 4.186 4.325
Kemper Growth Subaccount.......................... 7.236 6.350 5.285 4.389 3.334 3.508
Kemper Government Securities Subaccount*.......... 1.828 1.725 1.599 1.575 1.337 1.388
Kemper International Subaccount**................. 1.877 1.723 1.590 1.379 1.234 1.293
Kemper Small Cap Growth Subaccount***............. 2.625 2.240 1.686 1.330 1.033
Kemper Investment Grade Bond Subaccount++......... 1.187 1.111 1.029
Kemper Contrarian Value Subaccount++.............. 1.777 1.505 1.166
Kemper Small Cap Value Subaccount++............... 1.072 1.220 1.012
Kemper Value+Growth Subaccount++.................. 1.683 1.414 1.138
Kemper Horizon 20+ Subaccount++................... 1.530 1.367 1.146
Kemper Horizon 10+ Subaccount++................... 1.410 1.279 1.106
Kemper Horizon 5
Subaccount++..................................... 1.320 1.215 1.089
Janus Aspen Growth Subaccount+.................... 26.152 19.471 16.021 13.662
Janus Aspen Aggressive Growth Subaccount+......... 27.149 20.423 18.309 17.132
Janus Aspen Worldwide Growth Subaccount+.......... 30.205 23.633 19.565 15.315
Janus Aspen Balanced Subaccount+.................. 24.205 18.205 15.059 13.092
Lexington Natural Resources Subaccount+........... 12.008 15.089 14.211 11.315
Lexington Emerging Markets Subaccount+............ 6.255 8.799 10.048 9.445
Fidelity VIP Equity - Income Subaccount++......... 29.285 26.497 20.891
Fidelity VIP Growth Subaccount++.................. 52.235 37.821 30.933
Fidelity VIP II Asset Manager Subaccount++........ 22.885 20.090 16.818
Fidelity VIP II Index 500 Subaccount++............ 147.801 116.327 88.539
Fidelity VIP II Contrafund Subaccount++........... 26.021 20.220 16.450
Scudder VLIF Bond Subaccount+++................... 6.570
Scudder VLIF Capital Growth Subaccount+++......... 22.910
Scudder VLIF International Subaccount+++.......... 14.280
Dreyfus Socially Responsible Growth
Subaccount+++.................................... 33.680
J.P. Morgan Small Company Subaccount+++........... 11.930
Alger American Growth Subaccount+++............... 59.320
Alger American Growth
Small Capitalization
Subaccount+++.................................... 45.520
American Century VP Income & Growth
Subaccount+++.................................... 7.260
American Century VP Value Subaccount+++........... 6.700
ACCUMULATION UNIT VALUE AT END OF PERIOD
Kemper Money Market Subaccount.................... $ 2.588 2.493 2.394 2.297 2.208 2.111
Kemper Total Return
Subaccount....................................... 7.800 6.862 6.019 5.068 4.384 3.515
Kemper High Yield Subaccount...................... 6.168 6.098 6.071 5.494 4.865 4.186
Kemper Growth Subaccount.......................... 9.824 7.236 6.350 5.285 4.389 3.334
Kemper Government Securities Subaccount*.......... 1.823 1.828 1.725 1.599 1.575 1.337
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS PERIODIC PAYMENT CONTRACT
--------------------------------- ----------------------------
1993 1992** 1991 1990 1999+++ 1998 1997
---- ------ ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Kemper Total Return
Subaccount....................................... 3.533 3.509 2.570 2.471 $ 6.571 5.781 4.882
Kemper High Yield Subaccount...................... 3.640 3.122 2.077 2.481 5.904 5.896 5.351
Kemper Growth Subaccount.......................... 3.091 3.014 1.909 1.917 6.935 6.103 5.095
Kemper Government Securities Subaccount*.......... 1.317 1.256 1.101 1.013 1.779 1.684 1.566
Kemper International Subaccount**................. .983 1.000 1.839 1.693 1.567
Kemper Small Cap Growth Subaccount***............. 2.589 2.216 1.673
Kemper Investment Grade Bond Subaccount++......... 1.178 1.105 1.027
Kemper Contrarian Value Subaccount++.............. 1.763 1.498 1.164
Kemper Small Cap Value Subaccount++............... 1.063 1.214 1.010
Kemper Value+Growth Subaccount++.................. 1.669 1.407 1.136
Kemper Horizon 20+ Subaccount++................... 1.518 1.360 1.144
Kemper Horizon 10+ Subaccount++................... 1.399 1.273 1.104
Kemper Horizon 5
Subaccount++..................................... 1.310 1.209 1.086
Janus Aspen Growth Subaccount+.................... 25.897 19.338 15.960
Janus Aspen Aggressive Growth Subaccount+......... 26.884 20.284 18.238
Janus Aspen Worldwide Growth Subaccount+.......... 29.911 23.502 19.490
Janus Aspen Balanced Subaccount+.................. 23.969 18.081 15.001
Lexington Natural Resources Subaccount+........... 11.879 14.971 14.154
Lexington Emerging Markets Subaccount+............ 6.194 8.739 10.009
Fidelity VIP Equity - Income Subaccount++......... 29.054 26.366 20.849
Fidelity VIP Growth Subaccount++.................. 51.818 37.631 30.872
Fidelity VIP II Asset Manager Subaccount++........ 22.705 19.991 16.784
Fidelity VIP II Index 500 Subaccount++............ 146.637 115.754 88.364
Fidelity VIP II Contrafund Subaccount++........... 25.816 20.120 16.418
Scudder VLIF Bond Subaccount+++................... 6.570
Scudder VLIF Capital Growth Subaccount+++......... 22.910
Scudder VLIF International Subaccount+++.......... 14.280
Dreyfus Socially Responsible Growth
Subaccount+++.................................... 33.680
J.P. Morgan Small Company Subaccount+++........... 11.930
Alger American Growth Subaccount+++............... 59.320
Alger American Growth
Small Capitalization
Subaccount+++.................................... 45.520
American Century VP Income & Growth
Subaccount+++.................................... 7.260
American Century VP Value Subaccount+++........... 6.700
ACCUMULATION UNIT VALUE AT END OF PERIOD
Kemper Money Market Subaccount.................... 2.051 2.014 1.966 1.875 $ 2.455 2.372 2.285
Kemper Total Return
Subaccount....................................... 3.922 3.533 3.509 2.570 7.447 6.571 5.781
Kemper High Yield Subaccount...................... 4.325 3.640 3.122 2.077 5.954 5.904 5.896
Kemper Growth Subaccount.......................... 3.508 3.091 3.014 1.909 9.387 6.935 6.103
Kemper Government Securities Subaccount*.......... 1.388 1.317 1.256 1.101 1.769 1.779 1.684
<CAPTION>
PERIODIC PAYMENT CONTRACT
-----------------------------------------------------------------
1996++ 1995+ 1994*** 1993 1992** 1991 1990
------ ----- ------- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Kemper Total Return
Subaccount....................................... 4.236 3.406 3.812 3.444 3.431 2.520 2.431
Kemper High Yield Subaccount...................... 4.753 4.101 4.250 3.588 3.086 2.059 2.467
Kemper Growth Subaccount.......................... 4.244 3.233 3.412 3.015 2.949 1.873 1.887
Kemper Government Securities Subaccount*.......... 1.547 1.317 1.371 1.305 1.248 1.097 1.012
Kemper International Subaccount**................. 1.363 1.223 1.285 .980 1.000
Kemper Small Cap Growth Subaccount***............. 1.323 1.031
Kemper Investment Grade Bond Subaccount++.........
Kemper Contrarian Value Subaccount++..............
Kemper Small Cap Value Subaccount++...............
Kemper Value+Growth Subaccount++..................
Kemper Horizon 20+ Subaccount++...................
Kemper Horizon 10+ Subaccount++...................
Kemper Horizon 5
Subaccount++.....................................
Janus Aspen Growth Subaccount+.................... 13.650
Janus Aspen Aggressive Growth Subaccount+......... 17.117
Janus Aspen Worldwide Growth Subaccount+.......... 15.302
Janus Aspen Balanced Subaccount+.................. 13.081
Lexington Natural Resources Subaccount+........... 11.305
Lexington Emerging Markets Subaccount+............ 9.436
Fidelity VIP Equity - Income Subaccount++.........
Fidelity VIP Growth Subaccount++..................
Fidelity VIP II Asset Manager Subaccount++........
Fidelity VIP II Index 500 Subaccount++............
Fidelity VIP II Contrafund Subaccount++...........
Scudder VLIF Bond Subaccount+++...................
Scudder VLIF Capital Growth Subaccount+++.........
Scudder VLIF International Subaccount+++..........
Dreyfus Socially Responsible Growth
Subaccount+++....................................
J.P. Morgan Small Company Subaccount+++...........
Alger American Growth Subaccount+++...............
Alger American Growth
Small Capitalization
Subaccount+++....................................
American Century VP Income & Growth
Subaccount+++....................................
American Century VP Value Subaccount+++...........
ACCUMULATION UNIT VALUE AT END OF PERIOD
Kemper Money Market Subaccount.................... 2.199 2.120 2.033 1.981 1.950 1.910 1.827
Kemper Total Return
Subaccount....................................... 4.882 4.236 3.406 3.812 3.444 3.431 2.520
Kemper High Yield Subaccount...................... 5.351 4.753 4.101 4.250 3.588 3.086 2.059
Kemper Growth Subaccount.......................... 5.095 4.244 3.233 3.412 3.015 2.949 1.873
Kemper Government Securities Subaccount*.......... 1.566 1.547 1.317 1.371 1.305 1.248 1.097
</TABLE>
(CONTINUED ON NEXT PAGE)
10
<PAGE> 14
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
--------------------------------------------------------
1999+++ 1998 1997 1996++ 1995+ 1994***
------- ---- ---- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Kemper International Subaccount**................. $ 2.708 1.877 1.723 1.590 1.379 1.234
Kemper Small Cap Growth Subaccount***............. 3.498 2.625 2.240 1.686 1.330 1.033
Kemper Investment Grade Bond Subaccount++......... 1.151 1.187 1.111 1.029
Kemper Contrarian Value Subaccount++.............. 1.580 1.777 1.505 1.166
Kemper Small Cap Value Subaccount++............... 1.091 1.072 1.220 1.012
Kemper Value+Growth Subaccount++.................. 1.941 1.683 1.414 1.138
Kemper Horizon 20+ Subaccount++................... 1.630 1.530 1.367 1.146
Kemper Horizon 10+ Subaccount++................... 1.513 1.410 1.279 1.106
Kemper Horizon 5
Subaccount++..................................... 1.370 1.320 1.215 1.089
Janus Aspen Growth Subaccount+.................... 37.283 26.152 19.471 16.021 13.662
Janus Aspen Aggressive Growth Subaccount+......... 60.590 27.149 20.423 18.309 17.132
Janus Aspen Worldwide Growth Subaccount+.......... 49.181 30.205 23.663 19.565 15.315
Janus Aspen Balanced Subaccount+.................. 30.378 24.205 18.205 15.059 13.092
Lexington Natural Resources Subaccount+........... 13.565 12.008 15.089 14.211 11.315
Lexington Emerging Markets Subaccount+............ 14.118 6.255 8.799 10.048 9.445
Fidelity VIP Equity - Income Subaccount++......... 30.830 29.285 26.497 20.891
Fidelity VIP Growth
Subaccount++..................................... 71.079 52.235 37.821 30.933
Fidelity VIP II Asset Manager Subaccount++........ 25.172 22.885 20.090 16.818
Fidelity VIP II Index 500 Subaccount++............ 176.352 147.801 116.327 88.539
Fidelity VIP II Contrafund Subaccount++........... 32.012 26.021 20.220 16.450
Scudder VLIF Bond Subaccount+++................... 6.394
Scudder VLIF Capital Growth Subaccount+++......... 28.914
Scudder VLIF International Subaccount+++.......... 20.207
Dreyfus Socially Responsible Growth
Subaccount+++.................................... 40.163
J.P. Morgan Small Company Subaccount+++........... 16.998
Alger American Growth Subaccount+++............... 70.710
Alger American Small Capitalization
Subaccount+++.................................... 64.873
American Century VP Income & Growth
Subaccount+++.................................... 7.947
American Century VP Value Subaccount+++........... 5.911
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF
PERIOD (000'S OMITTED)
Kemper Money Market Subaccount.................... 3,501 3,812 4,338 4,762 5,512 6,914
Kemper Total Return
Subaccount....................................... 2,817 3,348 4,277 4,838 5,554 6,613
Kemper High Yield Subaccount...................... 1,138 1,480 2,096 2,440 2,821 3,621
Kemper Growth Subaccount.......................... 823 1,063 1,162 1,396 1,276 1,370
Kemper Government Securities Subaccount*.......... 779 1,073 908 1,187 1,330 1,465
Kemper International Subaccount**................. 457 744 1,006 1,190 1,257 2,450
Kemper Small Cap Growth Subaccount***............. 396 494 657 711 874 227
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS PERIODIC PAYMENT CONTRACT
--------------------------------- ----------------------------
1993 1992** 1991 1990 1999+++ 1998 1997
---- ------ ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Kemper International Subaccount**................. 1.293 .983 $ 2.645 1.839 1.693
Kemper Small Cap Growth Subaccount***............. 3.440 2.589 2.216
Kemper Investment Grade Bond Subaccount++......... 1.139 1.178 1.105
Kemper Contrarian Value Subaccount++.............. 1.563 1.763 1.498
Kemper Small Cap Value Subaccount++............... 1.079 1.063 1.214
Kemper Value+Growth Subaccount++.................. 1.920 1.669 1.407
Kemper Horizon 20+ Subaccount++................... 1.637 1.518 1.360
Kemper Horizon 10+ Subaccount++................... 1.497 1.399 1.273
Kemper Horizon 5
Subaccount++..................................... 1.356 1.310 1.209
Janus Aspen Growth Subaccount+.................... 36.810 25.897 19.338
Janus Aspen Aggressive Growth Subaccount+......... 59.822 26.884 20.284
Janus Aspen Worldwide Growth Subaccount+.......... 48.558 29.911 23.502
Janus Aspen Balanced Subaccount+.................. 29.993 23.969 18.081
Lexington Natural Resources Subaccount+........... 13.379 11.879 14.971
Lexington Emerging Markets Subaccount+............ 13.939 6.194 8.739
Fidelity VIP Equity - Income Subaccount++......... 30.497 29.054 26.366
Fidelity VIP Growth
Subaccount++..................................... 70.305 51.818 37.631
Fidelity VIP II Asset Manager Subaccount++........ 24.899 22.705 19.991
Fidelity VIP II Index 500 Subaccount++............ 174.446 146.637 115.754
Fidelity VIP II Contrafund Subaccount++........... 31.666 25.816 20.120
Scudder VLIF Bond Subaccount+++................... 6.435
Scudder VLIF Capital Growth Subaccount+++......... 28.882
Scudder VLIF International Subaccount+++.......... 20.167
Dreyfus Socially Responsible Growth
Subaccount+++.................................... 40.084
J.P. Morgan Small Company Subaccount+++........... 16.965
Alger American Growth Subaccount+++............... 70.571
Alger American Small Capitalization
Subaccount+++.................................... 62.523
American Century VP Income & Growth
Subaccount+++.................................... 7.932
American Century VP Value Subaccount+++........... 5.899
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF
PERIOD (000'S OMITTED)
Kemper Money Market Subaccount.................... 7,153 8,495 11,926 15,563 13,610 11,095 4,637
Kemper Total Return
Subaccount....................................... 8,042 8,853 9,586 10,291 9,110 11,360 13,699
Kemper High Yield Subaccount...................... 4,517 4,876 5,240 6,652 4,245 6,036 8,934
Kemper Growth Subaccount.......................... 1,671 2,032 1,773 1,955 6,263 9,612 11,574
Kemper Government Securities Subaccount*.......... 2,101 2,317 2,728 2,442 7,529 10,270 11,033
Kemper International Subaccount**................. 1,712 1,041 5,066 7,278 9,543
Kemper Small Cap Growth Subaccount***............. 3,242 4,843 4,509
<CAPTION>
PERIODIC PAYMENT CONTRACT
-----------------------------------------------------------------
1996++ 1995+ 1994*** 1993 1992** 1991 1990
------ ----- ------- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Kemper International Subaccount**................. 1.567 1.363 1.223 1.285 .980
Kemper Small Cap Growth Subaccount***............. 1.673 1.323 1.031
Kemper Investment Grade Bond Subaccount++......... 1.027
Kemper Contrarian Value Subaccount++.............. 1.164
Kemper Small Cap Value Subaccount++............... 1.010
Kemper Value+Growth Subaccount++.................. 1.136
Kemper Horizon 20+ Subaccount++................... 1.144
Kemper Horizon 10+ Subaccount++................... 1.104
Kemper Horizon 5
Subaccount++..................................... 1.086
Janus Aspen Growth Subaccount+.................... 15.960 13.650
Janus Aspen Aggressive Growth Subaccount+......... 18.238 17.117
Janus Aspen Worldwide Growth Subaccount+.......... 19.490 15.302
Janus Aspen Balanced Subaccount+.................. 15.001 13.081
Lexington Natural Resources Subaccount+........... 14.154 11.305
Lexington Emerging Markets Subaccount+............ 10.009 9.436
Fidelity VIP Equity - Income Subaccount++......... 20.849
Fidelity VIP Growth
Subaccount++..................................... 30.872
Fidelity VIP II Asset Manager Subaccount++........ 16.784
Fidelity VIP II Index 500 Subaccount++............ 88.364
Fidelity VIP II Contrafund Subaccount++........... 16.418
Scudder VLIF Bond Subaccount+++...................
Scudder VLIF Capital Growth Subaccount+++.........
Scudder VLIF International Subaccount+++..........
Dreyfus Socially Responsible Growth
Subaccount+++....................................
J.P. Morgan Small Company Subaccount+++...........
Alger American Growth Subaccount+++...............
Alger American Small Capitalization
Subaccount+++....................................
American Century VP Income & Growth
Subaccount+++....................................
American Century VP Value Subaccount+++...........
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF
PERIOD (000'S OMITTED)
Kemper Money Market Subaccount.................... 3,948 4,839 7,343 6,204 9,820 10,507 11,618
Kemper Total Return
Subaccount....................................... 17,433 20,342 24,773 26,640 26,043 19,953 18,485
Kemper High Yield Subaccount...................... 10,028 12,047 12,416 14,735 14,424 12,799 11,858
Kemper Growth Subaccount.......................... 14,340 16,369 19,776 17,851 15,849 9,577 7,812
Kemper Government Securities Subaccount*.......... 13,804 17,939 23,487 28,787 28,286 18,252 10,338
Kemper International Subaccount**................. 12,177 12,074 14,546 15,713 3,646
Kemper Small Cap Growth Subaccount***............. 4,091 3,022 1,242
</TABLE>
(CONTINUED ON NEXT PAGE)
11
<PAGE> 15
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
--------------------------------------------------------
1999+++ 1998 1997 1996++ 1995+ 1994***
------- ---- ---- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Kemper Investment Grade Bond Subaccount++......... 227 750 303 68
Kemper Contrarian Value Subaccount++.............. 110 80 95 238
Kemper Small Cap Value Subaccount++............... 66 94 58 7
Kemper Value+Growth Subaccount++.................. 33 173 119 33
Kemper Horizon 20+ Subaccount++................... 0
Kemper Horizon 10+ Subaccount++................... 9 9 9 20
Kemper Horizon 5
Subaccount++..................................... 0 35 42 45
Janus Aspen Growth
Subaccount+...................................... 46 16 7 22 2
Janus Aspen Aggressive Growth Subaccount+......... 17 2 6 2
Janus Aspen Worldwide Growth Subaccount+.......... 36 24 17 33
Janus Aspen Balanced
Subaccount+...................................... 52 24 13 10 4
Lexington Natural Resources Subaccount+........... 4 4 2
Lexington Emerging Markets Subaccount+............ 3 2 2 2 2
Fidelity VIP Equity - Income Subaccount++......... 8 8 5 1
Fidelity VIP Growth
Subaccount++..................................... 17 2
Fidelity VIP II Asset Manager Subaccount++........ 9 6 6
Fidelity VIP II Index 500 Subaccount++............ 14 11 13 1
Fidelity VIP II Contrafund Subaccount++........... 12 5 3 2
Scudder VLIF Bond
Subaccount+++.................................... 0
Scudder VLIF Capital Growth Subaccount+++......... 0
Scudder VLIF International Subaccount+++.......... 0
Dreyfus Socially Responsible Growth
Subaccount+++.................................... 0
J.P. Morgan Small Company Subaccount+++........... 0
Alger American Growth Subaccount+++............... 1
Alger American Small Capitalization
Subaccount+++.................................... 0
American Century VP Income & Growth
Subaccount+++.................................... 14
American Century VP Value Subaccount+++........... 1
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS PERIODIC PAYMENT CONTRACT
--------------------------------- ----------------------------
1993 1992** 1991 1990 1999+++ 1998 1997
---- ------ ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Kemper Investment Grade Bond Subaccount++......... 968 1,033 338
Kemper Contrarian Value Subaccount++.............. 3,541 3,847 9,619
Kemper Small Cap Value Subaccount++............... 1,319 1,756 1,519
Kemper Value+Growth Subaccount++.................. 1,727 2,094 824
Kemper Horizon 20+ Subaccount++................... 225 195 83
Kemper Horizon 10+ Subaccount++................... 306 419 261
Kemper Horizon 5
Subaccount++..................................... 323 357 192
Janus Aspen Growth
Subaccount+...................................... 591 243 157
Janus Aspen Aggressive Growth Subaccount+......... 267 105 85
Janus Aspen Worldwide Growth Subaccount+.......... 726 630 445
Janus Aspen Balanced
Subaccount+...................................... 535 334 105
Lexington Natural Resources Subaccount+........... 33 40 48
Lexington Emerging Markets Subaccount+............ 154 108 130
Fidelity VIP Equity - Income Subaccount++......... 216 223 120
Fidelity VIP Growth
Subaccount++..................................... 145 73 39
Fidelity VIP II Asset Manager Subaccount++........ 44 40 56
Fidelity VIP II Index 500 Subaccount++............ 127 99 46
Fidelity VIP II Contrafund Subaccount++........... 284 211 125
Scudder VLIF Bond
Subaccount+++.................................... 1
Scudder VLIF Capital Growth Subaccount+++......... 4
Scudder VLIF International Subaccount+++.......... 34
Dreyfus Socially Responsible Growth
Subaccount+++.................................... 8
J.P. Morgan Small Company Subaccount+++........... 4
Alger American Growth Subaccount+++............... 23
Alger American Small Capitalization
Subaccount+++.................................... 5
American Century VP Income & Growth
Subaccount+++.................................... 27
American Century VP Value Subaccount+++........... 13
<CAPTION>
PERIODIC PAYMENT CONTRACT
-----------------------------------------------------------------
1996++ 1995+ 1994*** 1993 1992** 1991 1990
------ ----- ------- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Kemper Investment Grade Bond Subaccount++......... 50
Kemper Contrarian Value Subaccount++.............. 1,625
Kemper Small Cap Value Subaccount++............... 840
Kemper Value+Growth Subaccount++.................. 454
Kemper Horizon 20+ Subaccount++................... 7
Kemper Horizon 10+ Subaccount++................... 229
Kemper Horizon 5
Subaccount++..................................... 84
Janus Aspen Growth
Subaccount+...................................... 99 14
Janus Aspen Aggressive Growth Subaccount+......... 115 11
Janus Aspen Worldwide Growth Subaccount+.......... 186 7
Janus Aspen Balanced
Subaccount+...................................... 42 3
Lexington Natural Resources Subaccount+........... 100 8
Lexington Emerging Markets Subaccount+............ 80 3
Fidelity VIP Equity - Income Subaccount++......... 36
Fidelity VIP Growth
Subaccount++..................................... 16
Fidelity VIP II Asset Manager Subaccount++........ 5
Fidelity VIP II Index 500 Subaccount++............ 10
Fidelity VIP II Contrafund Subaccount++........... 47
Scudder VLIF Bond
Subaccount+++....................................
Scudder VLIF Capital Growth Subaccount+++.........
Scudder VLIF International Subaccount+++..........
Dreyfus Socially Responsible Growth
Subaccount+++....................................
J.P. Morgan Small Company Subaccount+++...........
Alger American Growth Subaccount+++...............
Alger American Small Capitalization
Subaccount+++....................................
American Century VP Income & Growth
Subaccount+++....................................
American Century VP Value Subaccount+++...........
</TABLE>
* The Kemper Government Securities Subaccount commenced operations on November
6, 1989.
** The Kemper International Subaccount commenced operations on January 6, 1992.
*** The Kemper Small Cap Growth Subaccount commenced operations on May 2, 1994.
+ The Janus Aspen Growth, Janus Aspen Aggressive Growth, Janus Aspen Worldwide
Growth, and Janus Aspen Balanced Subaccounts and the Lexington Natural
Resources Trust and Lexington Emerging Markets Subaccounts were available
under the Contracts on September 15, 1995.
++ The Kemper Investment Grade Bond, Kemper Contrarian Value, Kemper Small Cap
Value, Kemper Value+Growth, Kemper Horizon 20+, Kemper Horizon 10+, Kemper
Horizon 5, Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP II
Asset Manager, Fidelity VIP II Index 500 and Fidelity VIP II Contrafund
Subaccounts were available under the Contracts on May 1, 1996.
+++ The Scudder VLIF Bond, Scudder VLIF Capital Growth, Scudder VLIF
International, Dreyfus Socially Responsible Growth, J.P. Morgan Small
Company, Alger American Growth, Alger American Small Capitalization,
American Century VP Income & Growth and American Century VP Value
Subaccounts were available under the Contracts on May 3, 1999.
The financial statements and reports of independent accountants for the KILICO
Variable Annuity Separate Account are also contained in the Statement of
Additional Information.
12
<PAGE> 16
KILICO, THE SEPARATE ACCOUNT AND THE FUNDS
KEMPER INVESTORS LIFE INSURANCE COMPANY
We were organized under the laws of the State of Illinois in 1947 as a stock
life insurance company. Our offices are located at 1 Kemper Drive, Long Grove,
Illinois 60049. We offer annuity and life insurance products and are admitted to
do business in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
KILICO and Kemper Corporation are wholly-owned subsidiaries of Zurich Financial
Services ("ZFS"). ZFS is owned by Zurich Allied A.G. and Allied Zurich p.l.c.,
fifty-seven percent and forty-three percent, respectively.
THE SEPARATE ACCOUNT
We established the KILICO Variable Annuity Separate Account on May 29, 1981
under Illinois law as the KILICO Money Market Separate Account. KILICO Money
Market Separate Account was initially registered with the Securities and
Exchange Commission ("SEC") as an open-end, diversified management investment
company. On November 2, 1989, contract owners approved a Reorganization under
which the Separate Account was restructured as a unit investment trust. The SEC
does not supervise the management, investment practices or policies of the
Separate Account or KILICO.
Benefits provided under the Contracts are our obligations. Although the assets
in the Separate Account are our property, they are held separately from our
other assets and are not chargeable with liabilities arising out of any other
business we may conduct. Income, capital gains and capital losses, whether or
not realized, from the assets allocated to the Separate Account are credited to
or charged against the Separate Account without regard to the income, capital
gains and capital losses arising out of any other business we may conduct.
Thirty-four Subaccounts of the Separate Account are currently available. Each
Subaccount invests exclusively in shares of one of the corresponding Funds or
Portfolios. We may add or delete Subaccounts in the future. Not all Subaccounts
may be available in all jurisdictions, under all Contracts or in all retirement
plans.
The Separate Account purchases and redeems shares from the Funds at net asset
value. We redeem shares of the Funds as necessary to provide benefits, to deduct
Contract charges and to transfer assets from one Subaccount to another as
requested by Owners. All dividends and capital gains distributions received by
the Separate Account from a Fund or Portfolio are reinvested in that Fund or
Portfolio at net asset value and retained as assets of the corresponding
Subaccount.
The Separate Account's financial statements appear in the Statement of
Additional Information.
THE FUNDS
The Separate Account invests in shares of the following registered, open-end
management investment companies:
- Kemper Variable Series
- Janus Aspen Series
- Lexington Natural Resources Trust
- Lexington Emerging Markets Fund, Inc.
- Fidelity Variable Insurance Products Fund
- Fidelity Variable Insurance Products Fund II
- Scudder Variable Life Investment Fund
- The Dreyfus Socially Responsible Growth Fund, Inc.
- J.P. Morgan Series Trust II
- The Alger American Fund
- American Century Variable Portfolios, Inc.
SEC registration does not involve SEC supervision of the Funds' management,
investment practices or policies. The Funds provide investment vehicles for
variable life insurance and variable annuity contracts and, in the case of the
Janus Aspen Series, certain qualified retirement plans. Shares of the Funds are
sold only to insurance company separate accounts and qualified retirement plans.
In addition to selling shares to our separate
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accounts, shares of the Funds may be sold to separate accounts of other
insurance companies. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts of other companies, or for variable life insurance
separate accounts, variable annuity separate accounts and qualified retirement
plans to invest simultaneously in the Funds. Currently, neither we nor the Funds
foresee any such disadvantages to variable life insurance owners, variable
annuity owners or qualified retirement plans. The Funds must monitor events to
identify material conflicts between such owners and determine what action, if
any, should be taken. In addition, if we believe a Fund's response to any of
those events or conflicts insufficiently protects Owners, we will take
appropriate action.
A Fund may consist of separate Portfolios. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has its own
distinct investment objective and policies. Each Portfolio operates as a
separate investment fund, and the investment performance of one Portfolio has no
effect on the investment performance of any other Portfolio.
The thirty-four Portfolios are summarized below:
KEMPER VARIABLE SERIES
KEMPER MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments. The Portfolio seeks to maintain a net asset value of $1.00
per share but there is no assurance that the Portfolio will be able to do so.
KEMPER TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, consistent with reasonable risk.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income.
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current income consistent with
preservation of capital.
KEMPER INTERNATIONAL PORTFOLIO seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income.
KEMPER CONTRARIAN VALUE PORTFOLIO seeks to achieve a high rate of total return.
KEMPER SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation.
KEMPER VALUE+GROWTH PORTFOLIO seeks growth of capital. A secondary objective of
the Portfolio is the reduction of risk over a full market cycle compared to a
portfolio of only growth stocks or only value stocks.
KEMPER HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER HORIZON 10+ PORTFOLIO, designed for investors with approximately a 10+
year investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
KEMPER HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
JANUS ASPEN SERIES
JANUS ASPEN GROWTH PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital.
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO seeks long-term growth of capital.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in a
manner consistent with the preservation of capital.
JANUS ASPEN BALANCED PORTFOLIO seeks long-term capital growth, consistent with
preservation of capital and balanced by current income.
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LEXINGTON NATURAL RESOURCES TRUST
This Fund seeks long-term growth of capital through investment primarily in
common stocks of companies that own or develop natural resources and other basic
commodities, or supply goods and services to such companies. Current income will
not be a factor. Total return will consist primarily of capital appreciation.
LEXINGTON EMERGING MARKETS FUND, INC.
This Fund seeks long-term growth of capital primarily through investment in
equity securities and equivalents of companies domiciled in, or doing business
in, emerging countries and emerging markets as described in the fund's
prospectus.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND (INITIAL CLASS SHARES)
FIDELITY VIP EQUITY-INCOME PORTFOLIO seeks reasonable income. The fund will also
consider the potential for capital appreciation. The fund seeks a yield which
exceeds the composite yield on the securities comprising the S&P 500.
FIDELITY VIP GROWTH PORTFOLIO seeks capital appreciation.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II (INITIAL CLASS SHARES)
FIDELITY VIP II ASSET MANAGER PORTFOLIO seeks high total return with reduced
risk over the long term by allocating its assets among stocks, bonds and
short-term instruments.
FIDELITY VIP II INDEX 500 PORTFOLIO seeks investment results that correspond to
the total return of common stocks publicly traded in the United States, as
represented by the S&P 500.
FIDELITY VIP II CONTRAFUND PORTFOLIO seeks long-term capital appreciation.
SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A SHARES)
SCUDDER VLIF BOND PORTFOLIO seeks to provide a high level of income consistent
with a high quality portfolio of debt securities.
SCUDDER VLIF CAPITAL GROWTH PORTFOLIO seeks to maximize long-term capital growth
through a broad and flexible investment program.
SCUDDER VLIF INTERNATIONAL PORTFOLIO seeks long-term growth of capital primarily
through diversified holdings of marketable foreign equity investments.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
This Fund's primary goal is to provide capital growth through investment in
common stocks of companies which not only meet traditional investment standards,
but also conduct their business in a manner that contributes to the enhancement
of the quality of life in America.
J.P. MORGAN SERIES TRUST II
J.P. MORGAN SMALL COMPANY PORTFOLIO seeks to provide a high total return from a
portfolio of small company stocks.
THE ALGER AMERICAN FUND
ALGER AMERICAN GROWTH PORTFOLIO seeks long-term capital appreciation.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO seeks long-term capital
appreciation.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
AMERICAN CENTURY VP INCOME & GROWTH PORTFOLIO seeks capital growth by investing
in common stocks. Income is a secondary objective.
AMERICAN CENTURY VP VALUE PORTFOLIO seeks long-term capital growth. Income is a
secondary objective.
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The Funds and Portfolios may not achieve their stated objectives. More detailed
information, including a description of risks involved in investing in the
Portfolios is found in the Funds' prospectuses accompanying this Prospectus and
Statements of Additional Information available from us upon request.
Scudder Kemper Investments, Inc. ("SKI"), our affiliate, serves as investment
manager for the available Portfolios of Kemper Variable Series and Scudder
Variable Life Investment Fund. Scudder Investments (U.K.) Limited ("Scudder
U.K."), an affiliate of SKI, serves as sub-adviser for the Kemper International
Portfolio.
Janus Capital Corporation is the investment adviser for the four available
Portfolios of the Janus Aspen Series.
Lexington Management Corporation is the investment adviser for the Lexington
Natural Resources Trust and the Lexington Emerging Markets Fund, Inc. However,
Lexington Global Asset Managers, Inc. ("LGAM"), the corporate parent of
Lexington Management Corporation, entered into an agreement dated February 28,
2000 with ReliaStar Financial Corporation ("ReliaStar") for ReliaStar to acquire
LGAM. If the acquisition is completed, the Directors/Trustees of the Lexington
Natural Resources Trust and the Lexington Emerging Markets Fund, Inc. will be
asked to approve a new investment advisory agreement with Pilgrim Investments,
Inc., a subsidiary of ReliaStar. If approved by the Directors/Trustees, the
shareholders of the Lexington Natural Resources Trust and the Lexington Emerging
Markets Fund, Inc., and our Contract Owners, will be asked to consider the new
investment advisory agreement at a special meeting of shareholders.
Fidelity Management & Research Company ("FMR") is the investment adviser for the
available Portfolios of the Fidelity Variable Insurance Products Fund and
Fidelity Variable Insurance Products Fund II. Bankers Trust Company, a
wholly-owned subsidiary of Bankers Trust New York Corporation, serves as the
sub-adviser to the Fidelity VIP II Index 500 Portfolio.
The Dreyfus Corporation serves as the investment adviser, and NCM Capital
Management Group, Inc. is the sub-adviser, for The Dreyfus Socially Responsible
Growth Fund, Inc.
J.P. Morgan Investment Management, Inc. is the investment adviser for the J.P.
Morgan Small Company Portfolio.
Fred Alger Management, Inc. serves as the investment adviser for the available
Portfolios of The Alger American Fund.
American Century Investment Management, Inc. is the investment adviser for the
two available Portfolios of the American Century Variable Portfolios, Inc.
The investment advisers are paid fees for their services by the Funds they
manage. We may receive compensation from the investment advisers of the Funds
for services related to the Funds. Such compensation will be consistent with the
services rendered or the cost savings resulting from the arrangements.
CHANGE OF INVESTMENTS
We reserve the right to make additions to, deletions from, or substitutions for
the shares held by the Separate Account or that the Separate Account may
purchase. We reserve the right to eliminate the shares of any of the Funds or
Portfolios and to substitute shares of another Portfolio or of another
investment company, if the shares of a Fund or Portfolio are no longer available
for investment, or if in our judgment further investment in any Fund or
Portfolio becomes inappropriate in view of the purposes of the Separate Account.
We will not substitute any shares attributable to your interest in a Subaccount
without prior notice and the SEC's prior approval, if required. The Separate
Account may purchase other securities for other series or classes of policies,
or may permit a conversion between series or classes of policies on the basis of
requests made by Owners.
We may establish additional subaccounts of the Separate Account, each of which
would invest in a new portfolio of the Funds, or in shares of another investment
company. New subaccounts may be established when, at our discretion, marketing
needs or investment conditions warrant. New subaccounts may be made available to
existing Owners as we determine. We may also eliminate or combine one or more
subaccounts, transfer assets, or substitute one subaccount for another
subaccount, if, in our discretion, marketing, tax, or investment conditions
warrant. We will notify all Owners of any such changes.
If we deem it to be in the best interests of persons having voting rights under
the Contract, the Separate Account may be: (a) operated as a management company
under the Investment Company Act of 1940 ("1940 Act"); (b) deregistered under
the 1940 Act in the event such registration is no longer required; or (c)
combined with our other separate accounts. To the extent permitted by law, we
may transfer the assets of the Separate Account to another separate account or
to the General Account.
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PERFORMANCE INFORMATION
The Separate Account may advertise several types of performance information for
the Subaccounts. All Subaccounts may advertise standardized "average annual
total return" and nonstandardized "total return." The Kemper High Yield
Subaccount, Kemper Government Securities Subaccount and Kemper Investment Grade
Bond Subaccount may also advertise 'yield'. The Kemper Money Market Subaccount
may advertise "yield" and "effective yield." Each of these figures is based upon
historical earnings and is not necessarily representative of a Subaccount's
future performance.
Standardized average annual total return and nonstandardized total return
calculations measure the Subaccount's net income plus the effect of any realized
or unrealized appreciation or depreciation of the Subaccount's underlying
investments for the period. Standardized average annual total return and
nonstandardized total return will be quoted for periods of at least one year,
three years, five years and ten years and a period covering the time the
underlying Portfolio has been held in the Subaccount (life of Subaccount) for
standardized average annual total return or a period covering the time the
underlying Portfolio has been in existence (life of Portfolio) for
nonstandardized total return. This information will be current for a period
ending with the most recent calendar quarter for standardized average annual
total return and the most recent calendar month for nonstandardized total
return. Standardized average annual total return figures are annualized, and,
therefore, represent the average annual percentage change in the value of a
Subaccount's investment over the applicable period. Nonstandardized total return
may include annualized and nonannualized (cumulative) figures. Nonannualized
figures represent the actual percentage change over the applicable period.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (seven-day period for the Kemper Money
Market Subaccount) expressed as a percentage of the value of the Subaccount's
Accumulation Units. Yield is an annualized figure, so the Subaccount generates
the same level of net income over a one year period which is compounded on a
semi-annual basis. The effective yield for the Kemper Money Market Subaccount is
calculated similarly but includes the effect of assumed compounding calculated
under rules prescribed by the SEC. The Kemper Money Market Subaccount's
effective yield will be slightly higher than its yield due to this compounding
effect.
The Subaccounts' units are sold at Accumulation Unit value. The Subaccounts'
performance figures and Accumulation Unit values will fluctuate. You may redeem
Subaccount units at Accumulation Unit value, which may be more or less than
original cost. The performance figures include the deduction of all expenses and
fees, including a prorated portion of the Records Maintenance Charge.
Redemptions within the first six years after purchase may be subject to a
Withdrawal Charge that ranges from 6% the first year to 0% after six years.
Yield, effective yield and nonstandardized total return figures do not include
the effect of any Withdrawal Charge that may be imposed upon the redemption of
units, and thus may be higher than if Withdrawal Charges were deducted.
Standardized average annual total return figures include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period in
question.
The Subaccounts may be compared to relevant indexes and performance data from
independent sources, including, but not limited to, the Dow Jones Industrial
Average, the Standard & Poor's 500 Stock Index, the Consumer Price Index, the
CDA Certificate of Deposit Index, the Salomon Brothers High Grade Corporate Bond
Index, the Lehman Brothers Government/Corporate Bond Index, the Merrill Lynch
Government/Corporate Master Index, the Lehman Brothers Long Government/Corporate
Bond Index, the Lehman Brothers Government/Corporate 1-3 Year Bond Index, the
Standard & Poor's Midcap 400 Index, the NASDAQ Composite Index, the Russell 2000
Index, the Morgan Stanley Capital International Europe, Australia, Far East
Index and M.S.C.I. Emerging Market Free Index. Please note the differences and
similarities between the investments which a Subaccount may purchase and the
investments measured by the indexes. In particular, it should be noted the
comparative information with regard to the indexes will not reflect the
deduction of any Contract charges or fees. Similarly, the indexes are unmanaged
and do not reflect the fees and expenses of management and acquisition costs. In
addition, certificates of deposit may offer fixed or variable yields, and
principal is guaranteed and may be insured. The units of the Subaccounts are not
insured. Also, the value of the Subaccounts will fluctuate.
From time to time, the Separate Account may quote information from publications
such as MORNINGSTAR, INC., THE WALL STREET JOURNAL, MONEY MAGAZINE, FORBES,
BARRON'S, FORTUNE, THE CHICAGO TRIBUNE, USA TODAY, INSTITUTIONAL INVESTOR,
NATIONAL UNDERWRITER, SELLING LIFE INSURANCE, BROKER WORLD, REGISTERED
REPRESENTATIVE, INVESTMENT ADVISOR and VARDS.
Additional information concerning a Subaccount's performance and independent
sources is provided in the Statement of Additional Information.
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FIXED ACCOUNT OPTION
Amounts allocated or transferred to the Fixed Account are part of our General
Account, supporting insurance and annuity obligations. Interests in the Fixed
Account are not registered under the Securities Act of 1933 ("1933 Act"), and
the Fixed Account is not registered as an investment company under the 1940 Act.
Accordingly, neither the Fixed Account nor any interests therein generally are
subject to the provisions of the 1933 or 1940 Acts. We have been advised that
the staff of the SEC has not reviewed the disclosures in this Prospectus
relating to the Fixed Account. Disclosures regarding the Fixed Account, however,
may be subject to the general provisions of the federal securities laws relating
to the accuracy and completeness of statements made in prospectuses.
Under the Fixed Account Option, we pay a fixed interest rate for stated periods.
This Prospectus describes only the aspects of the Contract involving the
Separate Account, unless we refer to fixed accumulation and annuity elements.
We guarantee that payments allocated to the Fixed Account earn a minimum fixed
interest rate of 3%. At our discretion, we may credit interest in excess of 3%.
We reserve the right to change the rate of excess interest credited. We also
reserve the right to declare different rates of excess interest depending on
when amounts are allocated or transferred to the Fixed Account. As a result,
amounts at any designated time may be credited with a different rate of excess
interest than the rate previously credited to such amounts and to amounts
allocated or transferred at any other designated time.
THE CONTRACTS
A. GENERAL INFORMATION.
This Prospectus offers both Qualified Contracts and Non-Qualified Contracts. The
minimum Purchase Payment for a Qualified Contract is $50. However, if annualized
contribution amounts from a payroll or salary deduction plan are $600, we accept
a periodic payment under $50. The maximum annual amount of Purchase Payments may
be limited by the retirement plan funded by the Contract. For a Non-Qualified
Contract the minimum initial Purchase Payment is $2,500 and the minimum
subsequent payment is $500. An initial allocation of less than $100 may be made
to the General Account or to a Subaccount, or to the General Account and one
Subaccount. For a Non-Qualified Contract, no subsequent allocations of Purchase
Payments may be made to any additional Subaccount until allocations total at
least $100 to each Subaccount in which the Contract has an interest. For a
Qualified Contract, if annualized contribution amounts to a new Subaccount from
a payroll or salary reduction plan are at least $25 per month, allocations to
another such Subaccount may be made.
You may make Purchase Payments to Non-Qualified Contracts and Contracts issued
as Individual Retirement Annuities ("IRAs") by authorizing us to draw on your
account via check or electronic debit ("Pre-Authorized Checking [PAC]
Agreement"). For Purchase Payments made pursuant to a PAC Agreement, the
following minimum Purchase Payment provisions apply:
- The minimum initial Purchase Payment to an IRA made pursuant to a PAC
Agreement is $100. The minimum initial Purchase Payment to a
Non-Qualified Contract made pursuant to a PAC Agreement is $1,000 unless
you also own an existing Contract, in which case the minimum is $100.
- The minimum subsequent Purchase Payment made pursuant to a PAC Agreement
is $100.
We may amend the Contract in accordance with changes in the law, including tax
laws, regulations or rulings, and for other purposes. Certain contracts are no
longer offered, although Purchase Payments are still permitted under these
previously issued contracts.
You may examine a Contract and return it for a refund during the "free look"
period. The length of the free look period depends upon the state in which the
Contract is issued. However, it will be at least 10 days from the date you
receive the Contract. The amount of the refund depends on the state in which the
Contract is issued. Generally, it will be an amount at least equal to the
Separate Account Contract Value plus amounts allocated to the General Account on
the date we receive the returned Contract, without any deduction for Withdrawal
Charges or Records Maintenance Charges. Some states require the return of the
Purchase Payment. If you decide to return your Contract for a refund during the
"free look" period, please also include a letter of instruction.
During the Accumulation Period, you may assign a Non-Qualified Contract or
change a Beneficiary at any time by signing our form. No assignment or
Beneficiary change is binding on us until we receive it. We assume no
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responsibility for the validity of the assignment or Beneficiary change. An
assignment may subject you to immediate tax liability and may subject you to a
10% tax penalty. (See "Federal Tax Matters.")
Amounts payable during the Annuity Period may not be assigned or encumbered. In
addition, to the extent permitted by law, annuity payments are not subject to
levy, attachment or other judicial process for the payment of the payee's debts
or obligations.
You designate the Beneficiary. If the Annuitant or you die, and no designated
Beneficiary or contingent beneficiary is alive at that time, we will pay the
Annuitant's or your estate.
Under a Qualified Contract, the provisions of the applicable plan may prohibit a
change of Beneficiary. Generally, an interest in a Qualified Contract may not be
assigned.
B. THE ACCUMULATION PERIOD.
1. APPLICATION OF PURCHASE PAYMENTS.
You select allocation of Purchase Payments to the Subaccount(s) or the Fixed
Account. The amount of each Purchase Payment allocated to a Subaccount is based
on the value of an Accumulation Unit, as computed after we receive the Purchase
Payment. Generally, we determine the value of an Accumulation Unit by 3:00 p.m.
Central time on each day that the New York Stock Exchange is open for trading.
Purchase Payments allocated to the Fixed Account begin earning interest one day
after we receive them. However, with respect to initial Purchase Payments, the
amount is credited only after we determine to issue the Contract. After the
initial purchase, we determine the number of Accumulation Units credited by
dividing the Purchase Payment allocated to a Subaccount by the Subaccount's
Accumulation Unit value, as computed after we receive the Purchase Payment. You
are limited to allocating Contract Value to a maximum of 18 allocation options
over the life of a Contract, plus the General Account.
The number of Accumulation Units will not change due to investment experience.
Accumulation Unit value varies to reflect the investment experience of the
Subaccount and the assessment of charges against the Subaccount other than the
Records Maintenance Charge. The number of Accumulation Units is reduced when the
Records Maintenance Charge is assessed.
If we are not provided with information sufficient to establish a Contract or to
properly credit the initial Purchase Payment, we will promptly request the
necessary information. If the requested information is not furnished within five
business days after we receive the initial Purchase Payment, or if we determine
that we cannot otherwise issue the Contract within the five day period, we will
return the initial Purchase Payment to you, unless you consent to our retaining
the initial Purchase Payment until the application is completed.
We may issue a Contract without a signed application if:
- a dealer provides us with application information, electronically or in
writing,
- we receive the initial Purchase Payment, and
- you confirm in writing, after the Contract is delivered, that all
information in the Contract is correct.
2. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, the number of units purchased is based on
the Subaccount's Accumulation Unit value at the end of the current Valuation
Period. When amounts are transferred out of or deducted from a Subaccount, units
are redeemed in a similar manner.
The Accumulation Unit value for each subsequent Valuation Period is the
investment experience factor for that Valuation Period times the Accumulation
Unit value for the preceding Valuation Period. Each Valuation Period has a
single Accumulation Unit value which applies to each day in the Valuation
Period.
Each Subaccount has its own investment experience factor. The investment
experience of the Separate Account is calculated by applying the investment
experience factor to the Accumulation Unit value in each Subaccount during a
Valuation Period.
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The investment experience factor of a Subaccount for any Valuation Period is
determined by the following formula:
(1 / 2)--3, where:
(1) is the net result of:
- the net asset value per share of the investment held in the Subaccount
determined at the end of the current Valuation Period; plus
- the per share amount of any dividend or capital gain distributions
made by the investments held in the Subaccount, if the "ex-dividend"
date occurs during the current Valuation Period; plus or minus
- a charge or credit for any taxes reserved for the current Valuation
Period which we determine have resulted from the investment operations
of the Subaccount;
(2) is the net asset value per share of the investment held in the
Subaccount determined at the end of the preceding Valuation Period; and
(3) is the factor representing the mortality and expense risk and
administration charges.
3. CONTRACT VALUE.
On any Valuation Date, the Contract Value equals the total of:
- the number of Accumulation Units credited to each Subaccount, times
- the value of a corresponding Accumulation Unit for each Subaccount, plus
- your interest in the General Account.
4. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, you may transfer the Contract Value among the
Subaccounts and the General Account subject to the following provisions:
- The General Account Contract Value, minus 125% of Debt, may be
transferred two times during the Contract Year to one or more Subaccounts
in the thirty days following an anniversary of a Contract Year or the
thirty days following the date of the confirmation statement provided for
the period through the anniversary date, if later; and
- You are limited to allocating Contract Value to a maximum of 18
allocation options over the life of a Contract, plus the General Account.
If you authorize a third party to transact transfers on your behalf, we will
reallocate the Contract Value pursuant to the authorized asset allocation
program. However, we do not currently offer or participate in any asset
allocation program and we take no responsibility for any third party asset
allocation program. We may suspend or cancel acceptance of a third party's
instructions at any time and may restrict the investment options available for
transfer under third party authorizations.
We will make transfers pursuant to proper written or telephone instructions
which specify in detail the requested changes. Before telephone transfer
instructions will be honored, you must complete a telephone transfer
authorization. The minimum partial transfer amount is $100. No partial transfer
may be made if the value of your remaining Contract interest in a Subaccount or
the General Account, from which amounts are to be transferred, would be less
than $100 after transfer. Transfers involving a Subaccount will be based upon
the Accumulation Unit values determined following our receipt of complete
transfer instructions. The transfer privilege may be suspended, modified or
terminated at any time (subject to state requirements). We disclaim all
liability for following instructions which are given in accordance with our
procedures, including requests for personal identifying information, that are
designed to limit unauthorized use of the privilege. Therefore, you bear the
risk of loss in the event of a fraudulent telephone transfer.
5. WITHDRAWAL DURING ACCUMULATION PERIOD.
You may redeem some or all of the Contract Value minus Debt, charges and
previous withdrawals. Withdrawals may be subject to income tax and a 10% penalty
tax. (See "Federal Tax Matters.") A withdrawal of all Contract Value is called a
surrender.
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You may withdraw up to 10% of the Contract Value minus Debt in any Contract Year
without charge. If you withdraw more than 10% of the Contract Value in any
Contract Year, the amount withdrawn in excess of 10% is subject to a Withdrawal
Charge. (See "Withdrawal Charge")
For Contracts in more than one investment option, your partial withdrawal
request must specify what portion of your interest is to be redeemed. If you do
not specify, we will redeem Accumulation Units from all investment options in
which you have an interest on a pro-rata basis. The Accumulation Units
attributable to the earliest Contribution Years are redeemed first.
You may request a partial withdrawal subject to the following:
- The amount requested must be at least $500 in each investment option or
the General Account from which withdrawal is requested.
- You must leave at least $500 in each investment option from which the
withdrawal is requested unless the total value is transferred.
Election to withdraw shall be made in writing to us at our home office: Kemper
Investors Life Insurance Company, Contact Center, 1 Kemper Drive, Long Grove, IL
60049 and should be accompanied by the Contract if surrender is requested.
Withdrawal requests are processed only on days when the New York Stock Exchange
is open for trading. The Withdrawal Value attributable to the Subaccounts is
determined on the basis of the Accumulation Unit values calculated after we
receive the request. The Withdrawal Value attributable to the Subaccounts will
be paid within seven days after the date we receive a written request at our
home office provided, however, that we may suspend withdrawals or delay payment
more than seven days
- during any period when the New York Stock Exchange is closed,
- when trading is restricted or the SEC determines an emergency exists, or
- as the SEC by order may permit.
Withdrawals are permitted from Contracts issued in connection with Section
403(b) Qualified Plans only under limited circumstances. (See "Federal Tax
Matters.")
A participant in the Texas Optional Retirement Program ("ORP") must obtain a
certificate of termination from the participant's employer before a Contract can
be redeemed. The Attorney General of Texas has ruled that participants in the
ORP may redeem their interest in a Contract issued pursuant to the ORP only upon
termination of employment in Texas public institutions of higher education, or
upon retirement, death or total disability. In those states adopting similar
requirements for optional retirement programs, we will follow similar
procedures.
6. DEATH BENEFIT.
If the Annuitant dies during the Accumulation Period, prior to attaining age 75,
we will pay to the designated Beneficiary the Contract Value less Debt as
computed at the end of the Valuation Period next following our receipt of proof
of death and the return of the Contract, or the total amount of Purchase
Payments less Debt, whichever is greater. If a Contract has been subject to any
partial withdrawal, the death benefit will be the greater of
- the Contract Value less Debt, or
- the total amount of Purchase Payments, minus both Debt and the aggregate
dollar amount of all previous partial withdrawals. If death occurs at age
75 or later, the death benefit is the Contract Value minus Debt. You or
the Beneficiary, as appropriate, may elect to have all or a part of the
death proceeds paid to the Beneficiary under one of the Annuity Options
described under "Annuity Options" below.
For Non-Qualified Contracts issued after January 19, 1985, if you are not the
Annuitant and you die before the Annuitant, the death benefit will be paid to
the designated Beneficiary. The available Annuity Options are limited by the
Code, as described under "Annuity Options." The death benefit is determined as
stated above, except that your age at death is used in determining the amount
payable. If the Beneficiary is your surviving spouse, the surviving spouse may
elect to be treated as the successor Owner of the Contract and is not required
to begin death benefit distribution. The issue age of the deceased Owner applies
in computing the death benefit, payable at the death of a spouse who has elected
to be treated as the successor Owner.
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For Contracts issued after March 1, 1997 and before May 1, 2000 as Individual
Retirement Annuities, Simplified Employee Pensions or Non-Qualified Contracts,
the death benefit will be determined as follows. If death occurs prior to the
deceased's attainment of age 90, the death benefit will be the greater of:
- the total amount of Purchase Payments minus Debt minus the aggregate
amount of all previous partial withdrawals,
- the Contract Value minus Debt, or
- the greatest Anniversary Value immediately preceding the date of death,
minus Debt. The greatest Anniversary Value is equal to the highest
Anniversary Value determined from the following. An Anniversary Value is
calculated for each Contract anniversary before the deceased's 81st
birthday. The Anniversary Value for a particular Contract anniversary is
the Contract Value on that anniversary, plus the dollar amount of any
Purchase Payments made since that anniversary minus any withdrawals since
that anniversary. If death occurs on or after the deceased's 90th
birthday, the death benefit will be the Contract Value minus Debt and
minus previous withdrawals.
7. LOANS.
If the Contract is issued as a tax sheltered annuity under Section 403(b) of the
Code or with a qualified plan under Code Section 401, you may request a loan (if
permitted by the ERISA qualified plan) any time during the Accumulation Period.
Loans are made from the General Account and are limited to the General Account
Contract Value minus any Withdrawal Charge that would apply to the Contract
Value and minus interest on the loan for the remainder of the Contract Year. In
general, under the Code loans may not exceed 50% of the Contract Value. If the
Contract Value is at least $20,000 or the Contract is part of an ERISA qualified
plan, the maximum loan amount (subject to ERISA qualified plan terms) is the
lesser of:
- 50% of the Contract Value, or
- $50,000 reduced by the highest loan balance over the prior 12 months.
If the Contract Value is less than $20,000 and is not part of an ERISA qualified
plan, the maximum loan amount is the lesser of:
- $10,000, or
- 80% of the Contract Value (less Debt and charges).
The minimum loan is $1,000.
For non-ERISA loans under Section 403(b), the loan interest rate is 5.5% per
year. For loans issued under ERISA plans, the loan interest rate will vary based
on current rates. Interest that is not paid when due is added to the loan and
bears interest at the same rate as the loan. While the loan is outstanding, the
portion of the General Account Contract Value that equals the Debt will earn
interest at a rate 2.5% less than the loan rate.
Loans must be repaid in substantially equal quarterly payments within 5 years.
Loans used to purchase your principal residence must be repaid within 30 years.
If a loan payment is not made when due, interest will continue to accrue. On
Code Section 403(b) Contracts, to the extent permitted by law, the amount of the
defaulted payment plus accrued interest will be deducted from the Contract and
paid to us. Any loan payment which is not made when due, plus interest, is
treated as a distribution of the entire outstanding loan balance and may be
taxable to the borrower, and may be subject to early withdrawal tax penalty.
If there is an outstanding loan balance when the Contract is surrendered or
annuitized, or when a death benefit is paid, the amount payable will be reduced
by the amount of the loan outstanding plus accrued interest. Any loans made
under a Contract will be subject to Code requirements, our administrative
procedures as reflected under our loan agreements, and, if applicable, ERISA.
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CONTRACT CHARGES AND EXPENSES
We deduct the following charges and expenses:
- mortality and expense risk charge,
- administrative expenses,
- Records Maintenance Charge,
- Withdrawal Charge, and
- Premium Tax.
Subject to certain expense limitations, investment management fees and other
Fund expenses are indirectly borne by you.
We assess each Subaccount a daily asset charge for administration and mortality
and expense risks at a rate of 1.30% per annum. Flexible Payment Contracts (no
longer offered) have a daily asset charge of 1.0%. We may decrease these charges
without notice, but will not exceed these amounts.
A. ASSET-BASED CHARGES AGAINST THE SEPARATE ACCOUNT.
1. MORTALITY RISK.
Variable Annuity payments reflect the investment experience of each Subaccount
but are not affected by changes in actual mortality experience or by actual
expenses we incur.
Our mortality risk arises from two obligations. The first obligation we assume
is to pay a guaranteed death benefit that may be greater than the Contract Value
minus Debt. The second obligation we assume is to continue making annuity
payments to each Annuitant for the entire life of the Annuitant under Annuity
Options involving life contingencies. This assures each Annuitant that neither
the Annuitant's own longevity nor an improvement in life expectancy generally
will have an adverse effect on the annuity payments received under a Contract
and relieves the Annuitant from the risk of outliving the amounts accumulated
for retirement.
2. EXPENSE RISK.
We also assume the risk that all administrative expenses including Contract
maintenance costs, administrative costs, data processing costs and costs of
other services may exceed the Records Maintenance Charge or the amount recovered
from the administrative cost portion of the daily asset charge.
3. ADMINISTRATIVE COSTS.
The daily asset charge for administrative costs reimburses us for the expenses
incurred for administering the Contracts, which include, among other things,
responding to Owner inquiries, processing changes in Purchase Payment
allocations and providing reports to Owners.
B. RECORDS MAINTENANCE CHARGE.
We assess an annual Records Maintenance Charge (assessed ratably each quarter)
during the Accumulation Period against each Contract participating in one or
more of the Subaccounts during the calendar year whether or not any Purchase
Payments have been made during the year. The Records Maintenance Charge is:
- $30 annually for Contracts with Contract Value under $25,000.
- $15 annually for Contracts with Contract Value between $25,000 and
$50,000.
- No Records Maintenance Charge for Contracts with Contract Value over
$50,000.
The Record Maintenance Charge is not assessed during the Annuity Period.
The Records Maintenance Charge reimburses us for expenses incurred in
establishing and maintaining the records relating to a Contract's participation
in the Separate Account. The Records Maintenance Charge is assessed at the end
of each calendar quarter and constitutes a reduction in the net assets of each
Subaccount.
At any time the Records Maintenance Charge is assessed, the applicable charge is
assessed ratably against each Subaccount in which the Contract is participating
and a number of Accumulation Units sufficient to equal the
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proper portion of the charge is redeemed from such Subaccount, or from the
General Account Contract Value if necessary to meet the assessment.
C. WITHDRAWAL CHARGE.
We do not deduct a sales charge from any Purchase Payment. However, a Withdrawal
Charge covers Contract sales expenses, including commissions and other
distribution, promotion and acquisition expenses.
Each Contract Year, you may withdraw, without Withdrawal Charge, 10% of the
Contract Value.
If you withdraw a larger amount, the excess Purchase Payments and interest
attributed to the Purchase Payments withdrawn are subject to a Withdrawal
Charge. The Withdrawal Charge applies in the first six Contribution Years
following each Purchase Payment as follows:
<TABLE>
<CAPTION>
CONTRIBUTION WITHDRAWAL
YEAR CHARGE
- ------------ ----------
<S> <C>
First...................................... 6%
Second..................................... 5%
Third...................................... 4%
Fourth..................................... 3%
Fifth...................................... 2%
Sixth...................................... 1%
Seventh and following...................... 0%
</TABLE>
Purchase Payments are deemed surrendered in the order in which they were
received.
When a withdrawal is requested, you receive a check in the amount requested. If
a Withdrawal Charge applies, Contract Value is reduced by the Withdrawal Charge
and the dollar amount sent to you.
Because Contribution Years are based on the date each Purchase Payment is made,
you may be subject to a Withdrawal Charge even though the Contract may have been
issued many years earlier. (For additional details, see "Withdrawal During
Accumulation Period.") The aggregate Withdrawal Charges assessed will never
exceed 7.25% of the aggregate Purchase Payments.
Currently, we anticipate Withdrawal Charges will not fully cover distribution
expenses. Unrecovered distribution expenses may be recovered from our general
assets. Those assets may include proceeds from the mortality and expense risk
charge.
The Withdrawal Charge also applies at annuitization to amounts attributable to
Purchase Payments in their sixth Contribution Year or earlier. No Withdrawal
Charge applies upon annuitization if you select Annuity Options 2, 3 or 4 or if
payments under Annuity Option 1 are scheduled to continue for at least five
years. See "The Annuity Period -- Annuity Options" for a discussion of the
Annuity Options available.
We may reduce or eliminate the Withdrawal Charge if we anticipate that we will
incur lower sales expenses or perform fewer services because of economies due to
the size of a group, the average contribution per participant, or the use of
mass enrollment procedures. No Withdrawal Charge applies to Contracts sold to
officers, directors and employees of KILICO and Kemper Variable Series ("KVS"),
KVS investment advisers and principal underwriter or certain affiliated
companies, or to any trust, pension, profit-sharing or other benefit plan for
such persons.
D. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
Each Portfolio's net asset value reflects the deductions of investment
management fees and certain general operating expenses. Subject to limitations,
you indirectly bear these fees and expenses. Investment management fees appear
on page 4. Further detail is provided in the attached prospectuses for the
Portfolios and the Funds' Statements of Additional Information.
E. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
of Purchase Payments. If we pay state premium taxes, we may charge the amount
paid against Contract Value upon annuitization if not previously assessed. See
"Appendix -- State Premium Tax Chart" in the Statement of Additional
Information.
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F. REDUCTION OR ELIMINATION OF CERTAIN CHARGES.
Contracts may be available for purchase in certain group or sponsored
arrangements that qualify for reductions or eliminations of certain charges, the
time periods in which such charges apply, or both. Group arrangements include
those in which a trustee, an employer or an association purchases Contracts
covering a group of individuals. Sponsored arrangements include those in which
an employer or association allows us to offer Contracts to its employees or
members on an individual basis.
In certain circumstances, the risk of adverse mortality and expense experience
for Contracts purchased in certain group or sponsored arrangements may be
reduced. Then, the daily asset charge for mortality and expense costs may
likewise be reduced. The daily asset charge for administrative costs and the
Records Maintenance Charge may also be reduced or eliminated if we anticipate
lower administrative expenses. In certain other circumstances, sales expenses
for Contracts purchased in certain group or sponsored arrangements may be
reduced or eliminated and the applicable Withdrawal Charges may be reduced or
eliminated.
In determining whether a group or sponsored arrangement qualifies for reduced or
eliminated charges, we will consider:
- the size and type of group to which sales are to be made and
administrative services provided, and the persistency expected from the
group;
- the total amount of Purchase Payments to be received and the method in
which they will be remitted;
- any prior or existing relationship with us;
- the level of commission paid to selling broker-dealers;
- the purpose for which the Contract is being purchased, and whether that
purchase makes it likely that sales costs and administrative expenses
will be reduced; and
- the frequency of projected surrenders or distributions.
We make any reductions or eliminations according to objective guidelines in
effect when an application for a Contract is approved. We may change these
guidelines from time to time. Any variation in the charges will reflect
differences in costs or services and will be offered uniformly to all members of
the group or sponsored arrangement. In no event will a charge reduction or
elimination be permitted if it is unfairly discriminatory to any person or
prohibited by law.
THE ANNUITY PERIOD
Contracts may be annuitized under one of several Annuity Options. Annuity
payments will begin on the Annuity Date under the Annuity Option you select.
1. ANNUITY PAYMENTS.
Annuity payments are based on:
- the annuity table specified in the Contract,
- the selected Annuity Option, and
- the investment performance of the selected Subaccount.
Under variable annuitization, the Annuitant receives the value of a fixed number
of Annuity Units each month. An Annuity Unit's value reflects the investment
performance of the Subaccount(s) selected. The amount of each annuity payment
varies accordingly. Annuity payments may be subject to a Withdrawal Charge. (For
additional details, see "Withdrawal Charge.")
2. ANNUITY OPTIONS.
You may elect one of the Annuity Options. You may decide at any time (subject to
the provisions of any applicable retirement plan) to begin annuity payments. You
may change an Annuity Option before the Annuity Date. For a Non-Qualified
Contract, if no other Annuity Option is elected, monthly annuity payments will
be made in accordance with Option 3 below with a ten (10) year period certain.
For a Qualified Contract, if no other Annuity Option is elected, monthly annuity
payments will be made in the form of a qualified joint and survivor annuity with
a monthly income at two-thirds of the full amount payable during the lifetime of
the surviving payee. Generally, annuity payments are made in monthly
installments. However, we may make a
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lump sum payment if the net proceeds available to apply under an Annuity Option
are less than $2,000. In addition, if the first monthly payment is less than
$25, we may change the frequency of payments to quarterly, semiannual or annual
intervals so that the initial payment is at least $25.
The amount of periodic annuity payments may depend upon:
- the Annuity Option selected;
- the age and sex of the payee; and
- the investment experience of the selected Subaccount(s).
For example:
- if Option 1, income for a specified period, is selected, shorter periods
result in fewer payments with higher values.
- if Option 2, life income, is selected, it is likely that each payment
will be smaller than would result if income for a short period were
specified.
- if Option 3, life income with installments guaranteed, is selected, each
payment will probably be smaller than would result if the life income
Option were selected.
- if Option 4, the joint and survivor annuity, is selected, each payment is
smaller than those measured by an individual life income option.
The age of the payee also influences the amount of periodic annuity payments
because an older payee is expected to have a shorter life span, resulting in
larger payments. The sex of the payee influences the amount of periodic
payments. Finally, if you participate in a Subaccount with higher investment
performance, it is likely the payee will receive a higher periodic payment.
If you die before the Annuity Date, available Annuity Options are limited. The
Annuity Options available are:
- Option 2, or
- Option 1 or 3 for a period no longer than the life expectancy of the
Beneficiary (but not less than 5 years from your death).
If the Beneficiary is not an individual, the entire interest must be distributed
within 5 years of your death. The Death Benefit distribution must begin no later
than one year from your death, unless a later date is prescribed by federal
regulation.
OPTION 1--INCOME FOR SPECIFIED PERIOD.
Option 1 provides an annuity payable monthly for a selected number of years
ranging from five to thirty. Upon the payee's death, if the Beneficiary is an
individual, we automatically continue payments to the Beneficiary for the
remainder of the period specified. If the Beneficiary is not an individual
(e.g., an estate or trust), we pay the discounted value of the remaining
payments in the specified period. Although there is no life contingency risk
associated with Option 1, we continue to deduct the daily asset charges for
mortality and expense risks and administrative costs.
Payees may elect to cancel all or part of the remaining payments due under
Option 1. We then pay the discounted value of the remaining payments.
OPTION 2--LIFE INCOME.
Option 2 provides for an annuity over the lifetime of the payee. If Option 2 is
elected, annuity payments terminate automatically and immediately on the payee's
death without regard to the number or total amount of payments made. Thus, it is
possible for a payee to receive only one payment if death occurred prior to the
date the second payment was due.
OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED.
Option 3 provides an annuity payable monthly during the payee's lifetime.
However, Option 3 also provides for the automatic continuation of payments for
the remainder of the specified period if the Beneficiary is an individual and
payments have been made for less than the specified period. The period specified
may be five, ten, fifteen or twenty years. If the Beneficiary is not an
individual, we pay the discounted value of the remaining payments in the
specified period.
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<PAGE> 30
OPTION 4--JOINT AND SURVIVOR ANNUITY.
Option 4 provides an annuity payable monthly while both payees are living. Upon
either payee's death, the monthly income payable continues over the life of the
surviving payee at a percentage specified when Option 4 is elected. Annuity
payments terminate automatically and immediately upon the surviving payee's
death without regard to the number or total amount of payments received.
3. ALLOCATION OF ANNUITY.
You may elect to have payments made on a fixed or variable basis, or a
combination of both. You may exercise the transfer privilege during the
Accumulation Period for the purposes of such allocation. Any General Account
Contract Value will be annuitized on a fixed basis. Any Separate Account
Contract Value will be annuitized on a variable basis. Transfers during the
Annuity Period are permitted subject to certain limitations.
4. TRANSFER DURING ANNUITY PERIOD.
During the Annuity Period, the payee may, by written request, transfer
Subaccount Value from one Subaccount to another Subaccount or to the Fixed
Account, subject to the following limitations:
- Transfers to a Subaccount are prohibited during the first year of the
Annuity Period; subsequent transfers are limited to one per year.
- All interest in a Subaccount must be transferred.
- If we receive notice of transfer to a Subaccount more than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the date we receive the notice.
- If we receive notice of transfer to a Subaccount less than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the annuity payment date.
- Transfers to the Fixed Account are available only on an anniversary of
the first Annuity Date. We must receive notice at least thirty (30) days
prior to the anniversary.
A Subaccount's Annuity Unit value is determined at the end of the Valuation
Period preceding the effective date of the transfer. We may suspend, change or
terminate the transfer privilege at any time.
5. ANNUITY UNIT VALUE.
Annuity Unit value is determined independently for each Subaccount.
Annuity Unit value for any Valuation Period is:
- Annuity Unit value for the preceding Valuation Period, times
- the net investment factor for the current Valuation Period, times
- an interest factor which offsets the 2.5% per annum rate of investment
earnings assumed by the Contract's annuity tables.
The net investment factor for a Subaccount for any Valuation Period is:
- the Subaccount's Accumulation Unit value at the end of the current
Valuation Period, plus or minus the per share charge or credit for taxes
reserved, divided by
- the Subaccount's Accumulation Unit value at the end of the preceding
Valuation Period, plus or minus the per share charge or credit for taxes
reserved.
6. FIRST PERIODIC PAYMENT UNDER VARIABLE ANNUITY.
When annuity payments begin, the value of your Contract interest is:
- Accumulation Unit values at the end of the Valuation Period falling on
the 20th or 7th day of the month before the first annuity payment is due,
times
- the number of Accumulation Units credited at the end of the Valuation
Period, minus
- premium taxes and Withdrawal Charges.
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<PAGE> 31
The first annuity payment is determined by multiplying the benefit per $1,000 of
value shown in the applicable annuity table by the number of thousands of
dollars of Contract Value.
A 2.5% per annum rate of investment earnings is assumed by the Contract's
annuity tables. If the actual net investment earnings rate exceeds 2.5% per
annum, payments increase accordingly. Conversely, if the actual rate is less
than 2.5% per annum, annuity payments decrease.
7. LATER PERIODIC PAYMENTS UNDER A VARIABLE ANNUITY.
Later annuity payments are determined by multiplying the number of Annuity Units
by the Annuity Unit value at the Valuation Period before each annuity payment is
due. The first annuity payment is divided by the Annuity Unit value as of the
Annuity Date to establish the number of Annuity Units representing each annuity
payment. This number does not change.
8. FIXED ANNUITY PAYMENTS.
Each Fixed Annuity payment is determined from tables we prepare. These tables
show the monthly payment for each $1,000 of Contract Value allocated to a Fixed
Annuity. Payment is based on the Contract Value at the date before the annuity
payment is due. Fixed Annuity payments do not change regardless of investment,
mortality or expense experience.
9. DEATH PROCEEDS.
If the payee dies after the Annuity Date while the Contract is in force, the
death proceeds, if any, depend upon the form of annuity payment in effect at the
time of death. (See "Annuity Options.")
FEDERAL TAX MATTERS
A. INTRODUCTION
This discussion is not exhaustive and is not intended as tax advice. A qualified
tax adviser should always be consulted with regard to the application of the law
to individual circumstances. This discussion is based on the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Department regulations, and
interpretations existing on the date of this Prospectus. These authorities,
however, are subject to change by Congress, the Treasury Department, and the
courts.
This discussion does not address state or local tax consequences, nor federal
estate or gift tax consequences, associated with buying a Contract. IN ADDITION,
WE MAKE NO GUARANTEE REGARDING ANY TAX TREATMENT--FEDERAL, STATE, OR LOCAL--OF
ANY CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
B. OUR TAX STATUS
We are taxed as a life insurance company and the operations of the Separate
Account are treated as a part of our total operations. The Separate Account is
not separately taxed as a "regulated investment company". Investment income and
capital gains of the Separate Account are not taxed to the extent they are
applied under a Contract. We do not anticipate that we will incur federal income
tax liability attributable to the income and gains of the Separate Account, and
therefore we do not intend to provide for these taxes. If we are taxed on
investment income or capital gains of the Separate Account, then we may charge
the Separate Account to pay these taxes.
C. TAXATION OF ANNUITIES IN GENERAL
1. TAX DEFERRAL DURING ACCUMULATION PERIOD
Under the Code, except as described below, increases in the Contract Value of a
Non-Qualified Contract are generally not taxable to the Owner or Annuitant until
received as annuity payments or otherwise distributed. However, certain
requirements must be satisfied for this general rule to apply, including:
- the Contract must be owned by an individual,
- Separate Account investments must be "adequately diversified",
- we, rather than you, must be considered the owner of Separate Account
assets for federal tax purposes, and
- annuity payments must appropriately amortize Purchase Payments and
Contract earnings.
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NON-NATURAL OWNER. As a general rule, deferred annuity contracts held by
"non-natural persons", such as corporations, trusts or similar entities, are not
annuity contracts for federal income tax purposes. The investment income on
these contracts is taxed each year as ordinary income received or accrued by the
non-natural owner. There are exceptions to this general rule for non-natural
owners. Contracts are generally treated as held by a natural person if the
nominal owner is a trust or other entity holding the contract as an agent for a
natural person. However, this special exception does not apply to an employer
who is the nominal owner of a contract under a non-qualified deferred
compensation plan for its employees.
Additional exceptions to this rule include:
- certain contracts acquired by a decedent's estate,
- certain Qualified Plan Contracts,
- certain contracts used with structured settlement agreements, and
- certain contracts purchased with a single premium when the annuity
starting date is no later than a year from contract purchase and
substantially equal periodic payments are made at least annually.
DIVERSIFICATION REQUIREMENTS. For a contract to be treated as an annuity for
federal income tax purposes, separate account investments must be "adequately
diversified". The Treasury Secretary issued regulations prescribing standards
for adequately diversifying separate account investments. If the Separate
Account failed to comply with these diversification standards, the contract
would not be treated as an annuity contract for federal income tax purposes and
the owner would generally be taxed on the difference between the contract value
and the purchase payments.
Although we do not control Fund investments, we expect that each Fund will
comply with these regulations so that each Subaccount of the Separate Account
will be considered "adequately diversified."
OWNERSHIP TREATMENT. In certain circumstances, a variable annuity contract owner
may be considered the owner of the assets of the separate account supporting the
contract. Then, income and gains from separate account assets are includible in
the owner's gross income. The Internal Revenue Service ("IRS"), in published
rulings, stated that a variable contract owner will be considered the owner of
separate account assets if the owner possesses the ability to exercise
investment control over the assets. As of the date of the Prospectus, no
comprehensive guidance has been issued by the IRS clarifying the circumstances
when such investment control by a variable contract owner would exist. As a
result, your right to allocate the Contract Value among the Subaccounts may
cause you to be considered the owner of the assets of the Separate Account.
We do not know what limits may be set forth in any guidance that the IRS may
issue, or whether any such limits will apply to existing Contracts. We therefore
reserve the right to modify the Contract as necessary to attempt to prevent you
from being considered the owner of the Separate Account assets. However, there
is no assurance that such efforts would be successful.
DELAYED ANNUITY DATES. If the Annuity Date occurs (or is scheduled to occur)
when the Annuitant has reached an advanced age, E.G., past age 85, the Contract
might not be treated as an annuity for federal income tax purposes. In that
event, the income and gains under the Contract could be currently includible in
your income.
The following discussion assumes that the Contract is treated as an annuity
contract for tax purposes and that we are treated as the owner of Separate
Account assets.
2. TAXATION OF PARTIAL AND FULL WITHDRAWALS
Partial withdrawals from a Non-Qualified Contract are includible in income to
the extent the Contract Value exceeds the "investment in the contract". This
amount is referred to as the "income on the contract". Full withdrawals are also
includible in income to the extent they exceed the "investment in the contract."
Investment in the contract equals the total of Purchase Payments minus any
amounts previously received from the Contract that were not includible in your
income.
Any assignment or pledge (or agreement to assign or pledge) of Contract Value is
treated as a withdrawal. Investment in the contract is increased by the amount
includible in income with respect to such assignment or pledge. If you transfer
a contract interest, without adequate consideration, to someone other than your
spouse (or to a former spouse incident to divorce), you will be taxed on the
income on the contract. In this case, the transferee's investment in the
contract is increased to reflect the increase in your income.
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The Contract's death benefit may exceed Purchase Payments or Contract Value. As
described in this Prospectus, we impose certain charges with respect to the
death benefit. It is possible that those charges (or some portion) could be
treated as a partial withdrawal.
There may be special income tax issues present in situations where the Owner and
the Annuitant are not the same person and are not married to one another. A tax
adviser should be consulted in those situations.
3. TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as income equals the
payment minus the exclusion amount. The exclusion amount for variable annuity
payments is the "investment in the contract" allocated to the variable annuity
option and adjusted for any period certain or refund feature, divided by the
number of payments expected to be made. The exclusion amount for fixed annuity
payments is the payment times the ratio of the investment in the contract
allocated to the fixed annuity option and adjusted for any period certain or
refund feature, to the expected value of the fixed annuity payments.
Once the total amount of the investment in the contract is excluded using these
ratios, annuity payments will be fully taxable. If annuity payments stop because
the Annuitant dies before the total amount of the investment in the contract is
recovered, the unrecovered amount generally is allowed as a deduction to the
annuitant in the last taxable year.
4. TAXATION OF DEATH BENEFITS
Amounts may be distributed upon your or the Annuitant's death. Before the
Annuity Date, death benefits are includible in income and:
- if distributed in a lump sum are taxed like a full withdrawal, or
- if distributed under an Annuity Option are taxed like annuity payments.
After the Annuity Date, where a guaranteed period exists and the Annuitant dies
before the end of that period, payments made to the Beneficiary for the
remainder of that period are includible in income and:
- if received in a lump sum are includible in income if they exceed the
unrecovered investment, or
- if distributed in accordance with the selected annuity option are fully
excludable from income until the remaining investment in the contract is
deemed to be recovered.
Thereafter, all annuity payments are fully includible in income.
5. PENALTY TAX ON PREMATURE DISTRIBUTIONS
A 10% penalty tax applies to a taxable payment from a Non-Qualified Contract
unless:
- received on or after you reach age 59 1/2,
- due to your disability,
- made to a Beneficiary after your death or, for non-natural Owners, after
the primary Annuitant's death,
- made as a series of substantially equal periodic payments (at least
annually) for your life (or life expectancy) or for the joint lives (or
joint life expectancies) of you and a designated beneficiary (within the
meaning of the tax law),
- made under a Contract purchased with a single premium when the annuity
starting date is no later than a year from Contract purchase and
substantially equal periodic payments are made at least annually, or
- made with annuities used with certain structured settlement agreements.
6. AGGREGATION OF CONTRACTS
The taxable amount of an annuity payment or withdrawal from a Non-Qualified
Contract may be determined by combining some or all of the Non-Qualified
Contracts you own. For example, if you purchase a Contract and also purchase an
immediate annuity at approximately the same time, the IRS may treat the two
contracts as one contract. Similarly, if a person transfers part of his interest
in one annuity contract to purchase another annuity contract, the IRS might
treat the two contracts as one contract. In addition, if you purchase two or
more deferred annuity contracts from the same company (or its affiliates) during
any calendar year, these contracts are treated as one contract. The effects of
this aggregation are not always clear. However, it could
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affect the taxable amount of an annuity payment or withdrawal and the amount
which might be subject to the 10% penalty tax.
7. LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
For Contracts issued after June 8, 1997 to a non-natural owner, all or some
portion of otherwise deductible interest may not be deductible by the owner.
However, this interest deduction disallowance does not affect Contracts where
the Owner is taxable each year on the investment income under the Contract.
Entities considering purchasing the Contract, or entities that will be
beneficiaries under a Contract, should consult a tax adviser.
D. QUALIFIED PLANS
The Contracts are also designed for use in connection with retirement plans
which receive favorable treatment under Sections 401, 403, 408, 408A or 457 of
the Code ("Qualified Plans"). Such Contracts are referred to as "Qualified
Contracts." Numerous special tax rules apply to the participants in Qualified
Plans and to Qualified Contracts. We make no attempt in this Prospectus to
provide more than general information about use of the Contract with the various
types of Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of plan
and the terms and conditions of the plan. For example, for both withdrawals and
annuity payments under certain Qualified Contracts, there may be no "investment
in the contract" and the total amount received may be taxable. Also, loans from
Qualified Contracts, where allowed, are subject to a variety of limitations,
including restrictions as to the amount that may be borrowed, the duration of
the loan, the number of allowable loans and the manner in which the loan must be
repaid. (You should always consult your tax adviser and retirement plan
fiduciary prior to exercising loan privileges.) Both the amount of the
contribution that may be made, and the tax deduction or exclusion that you may
claim for such contribution, are limited under Qualified Plans. If this Contract
is used with a Qualified Plan, you and the Annuitant must be the same
individual. If a joint Annuitant is named, all distributions made while the
Annuitant is alive must be made to the Annuitant. Also, if a joint Annuitant is
named who is not the Annuitant's spouse, the annuity options which are available
may be limited, depending on the difference in their ages. Furthermore, the
length of any guarantee period may be limited in some circumstances to satisfy
certain minimum distribution requirements under the Code.
Qualified Contracts are subject to special rules specifying the time at which
distributions must begin and the amount that must be distributed each year. In
the case of Individual Retirement Annuities, distributions of minimum amounts
must generally begin by April 1 of the calendar year following the calendar year
in which the owner attains age 70 1/2. An excise tax is imposed for the failure
to comply with the minimum distribution requirements. This excise tax generally
equals 50% of the amount by which a minimum required distribution exceeds the
actual distribution.
A 10% penalty tax may apply to the taxable amount of payments from Qualified
Contracts. For Individual Retirement Annuities, the penalty tax does not apply
to a payment:
- received after you reach age 55 and have separated from service,
- received after you reach age 59 1/2,
- received after your death or because of your disability, or
- made as a series of substantially equal periodic payments (at least
annually) for your life (or life expectancy) or for the joint lives (or
joint life expectancies) of you and your designated beneficiary.
In addition, the penalty tax does not apply to certain distributions used for
qualified first time home purchases or for higher education expenses. Special
conditions must be met to qualify for these exceptions. If you wish to take a
distribution for these purposes you should consult your tax adviser. Other
exceptions may apply.
Qualified Contracts are amended to conform to plan requirements. However, you
are cautioned that the rights of any person to any benefits under Qualified
Plans may be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Contract. In addition, we are not
bound by terms and conditions of Qualified Plans if they are inconsistent with
the Contract.
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1. QUALIFIED PLAN TYPES
We may issue Contracts for the following types of Qualified Plans.
INDIVIDUAL RETIREMENT ANNUITIES. The Code permits eligible individuals to
contribute to an individual retirement annuity known as an "IRA." IRAs limit the
amounts contributed, the persons eligible and the time when distributions start.
Also, subject to direct rollover and mandatory withholding requirements,
distributions from other types of Qualified Plans may be "rolled over" on a
tax-deferred basis into an IRA. The Contract may not fund an "Education IRA."
Pursuant to IRS regulations, IRAs may not invest in life insurance contracts. We
do not believe that these regulations prohibit the death benefit provided under
this Contract when issued as an IRA, Simplified Employee Pension-IRA, SIMPLE
IRA, or Roth IRA. However, the law is unclear and it is possible that the
presence of the death benefit under the Contract could result in increased taxes
to you.
SIMPLIFIED EMPLOYEE PENSIONS (SEP IRAS). The Code allows employers to establish
simplified employee pension plans, using the employees' IRAs. Under these plans
the employer may make limited deductible contributions on behalf of the
employees to IRAs. Employers and employees intending to use the Contract in
connection with these plans should consult a tax adviser.
As discussed above (see Individual Retirement Annuities), there is some
uncertainty regarding the proper characterization of the Contract's death
benefit for purposes of the tax rules governing IRAs (which would include SEP
IRAs).
SIMPLE IRAS. The Code permits certain small employers to establish "SIMPLE
retirement accounts," including SIMPLE IRAs, for their employees. Under SIMPLE
IRAs, certain deductible contributions are made by both employees and employers.
SIMPLE IRAs are subject to various requirements, including limits on the amounts
that may be contributed, the persons who may be eligible, and the time when
distributions may commence. As discussed above (see Individual Retirement
Annuities), there is some uncertainty regarding the proper characterization of
the Contract's death benefit for purposes of the tax rules governing IRAs (which
would include SIMPLE IRAs). Employers and employees intending to use the
Contract in connection with such plans should consult a tax adviser.
ROTH IRAS. The Code permits contributions to an IRA known as a "Roth IRA." Roth
IRAs differ from other IRAs in certain respects, including:
- Roth IRA contributions are never deductible,
- "qualified distributions" from a Roth IRA are excludable from income,
- mandatory distribution rules do not apply before death,
- a rollover to a Roth IRA must be a "qualified rollover contribution,"
under the Code,
- special eligibility requirements apply, and
- contributions to a Roth IRA can be made after the Owner has reached age
70 1/2.
All or part of an IRA may be converted into a Roth IRA without taking an actual
distribution. You may convert by notifying the IRA issuer or trustee. You must
be eligible for a qualified rollover contribution to convert an IRA to a Roth
IRA. A conversion typically results in the inclusion of some or all of the IRA
value in gross income, except that the 10% penalty tax does not apply. Persons
with adjusted gross incomes in excess of $100,000 or who are married and file a
separate return are not eligible to make a qualified rollover contribution or a
transfer in a taxable year from a non-Roth IRA to a Roth IRA.
Any "qualified distribution", as defined in Code Section 408A, from a Roth IRA
is excludible from gross income. A qualified distribution includes a
distribution made after you reach age 59 1/2, after your death, because of your
disability, or made to a first-time homebuyer.
As discussed above (see Individual Retirement Annuities), there is some
uncertainty regarding the proper characterization of the Contract's death
benefit for purposes of the tax rules governing IRAs (which would include Roth
IRAs). It is possible that the presence of the death benefit under the Contract
could result in increased taxes to you.
TAX-SHELTERED ANNUITIES. Code Section 403(b) permits public school employees and
employees of certain types of charitable, educational and scientific
organizations to have their employers purchase annuity contracts for
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them and, subject to certain limitations, to exclude the amount of purchase
payments from taxable gross income. These annuity contracts are commonly
referred to as "tax-sheltered annuities". If you purchase a Contract for such
purposes, you should seek competent advice as to eligibility, limitations on
permissible amounts of purchase payments and other tax consequences associated
with the Contracts. In particular, you should consider that the Contract
provides a death benefit that in certain circumstances may exceed the greater of
the Purchase Payments and the Contract Value. It is possible that such death
benefit could be characterized as an incidental death benefit. If the death
benefit were so characterized, this could result in currently taxable income to
you. In addition, there are limitations on the amount of incidental benefits
that may be provided under a tax-sheltered annuity. Even if the death benefit
under the Contract were characterized as an incidental death benefit, it is
unlikely to violate those limits unless you also purchase a life insurance
contract as part of your tax-sheltered annuity plan.
Tax-sheltered annuity contracts must contain restrictions on withdrawals of:
- contributions made pursuant to a salary reduction agreement in years
beginning after December 31, 1988,
- earnings on those contributions, and
- earnings after December 31, 1988 on amounts attributable to salary
reduction contributions held as of December 31, 1988. These amounts can
be paid only if you have reached age 59 1/2, separated from service,
died, or becomes disabled (within the meaning of the tax law), or in the
case of hardship (within the meaning of the tax law). Amounts permitted
to be distributed in the event of hardship are limited to actual
contributions; earnings thereon cannot be distributed on account of
hardship. Amounts subject to the withdrawal restrictions applicable to
Section 403(b)(7) custodial accounts may be subject to more stringent
restrictions. (These limitations on withdrawals generally do not apply to
the extent you direct us to transfer some or all of the Contract Value to
the issuer of another tax-sheltered annuity or into a Section 403(b)(7)
custodial account.)
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. The Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. Generally, a Contract purchased by a state or local
government or a tax-exempt organization will not be treated as an annuity
contract for federal income tax purposes. Those who intend to use the Contracts
in connection with such plans should seek competent advice.
2. DIRECT ROLLOVERS
If the Contract is used with a retirement plan that is qualified under Sections
401(a), 403(a), or 403(b) of the Code, any "eligible rollover distribution" from
the Contract will be subject to "direct rollover" and mandatory withholding
requirements. An eligible rollover distribution generally is any taxable
distribution from such a qualified retirement plan, excluding certain amounts
such as:
- minimum distributions required under Section 401(a)(9) of the Code, and
- certain distributions for life, life expectancy, or for 10 years or more
which are part of a "series of substantially equal periodic payments."
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, you cannot elect out of withholding with respect to an eligible
rollover distribution. However, this 20% withholding will not apply if, instead
of receiving the eligible rollover distribution, you elect to have it directly
transferred to certain Qualified Plans. Prior to receiving an eligible rollover
distribution, a notice will be provided explaining generally the direct rollover
and mandatory withholding requirements and how to avoid the 20% withholding by
electing a direct rollover.
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E. FEDERAL INCOME TAX WITHHOLDING
We withhold and send to the U.S. Government a part of the taxable portion of
each distribution unless the payee notifies us before distribution of an
available election not to have any amounts withheld. In certain circumstances,
we may be required to withhold tax. The withholding rates for the taxable
portion of periodic annuity payments are the same as the withholding rates for
wage payments. In addition, the withholding rate for the taxable portion of
non-periodic payments (including withdrawals prior to the maturity date and
conversions of, or rollovers from, non-Roth IRAs to Roth IRAs) is 10%. The
withholding rate for eligible rollover distributions is 20%.
DISTRIBUTION OF CONTRACTS
The Contracts are sold by licensed insurance agents in those states where the
Contract may be lawfully sold. The agents are also registered representatives of
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc. Sales commissions may vary, but are not expected to
exceed 6.25% of Purchase Payments. In addition to commissions, we may pay
additional promotional incentives, in the form of cash or other compensation, to
selling broker-dealers. These incentives may be offered to certain licensed
broker-dealers that sell or are expected to sell certain minimum amounts during
specified time periods. The Contracts are distributed through the principal
underwriter for the Separate Account:
Investors Brokerage Services, Inc. ("IBS")
1 Kemper Drive
Long Grove, Illinois, 60049
IBS is our wholly-owned subsidiary. IBS enters into selling group agreements
with affiliated and unaffiliated broker-dealers. All of the investment options
may not be available to all Owners. The investment options are available only
under Contracts that are sold or serviced by broker-dealers having a selling
group agreement with IBS authorizing the sale of Contracts with the investment
options specified in this Prospectus. Other distributors may sell and service
contracts with different investment options.
VOTING RIGHTS
Proxy materials in connection with any Fund shareholder meeting are delivered to
each Owner with Subaccount interests invested in the Fund as of the record date.
Proxy materials include a voting instruction form. We vote all Fund shares
proportionately in accordance with instructions received from Owners. We will
also vote any Fund shares attributed to amounts we have accumulated in the
Subaccounts in the same proportion that Owners vote. A Fund is not required to
hold annual shareholders' meetings. Funds hold special meetings as required or
deemed desirable for such purposes as electing trustees, changing fundamental
policies or approving an investment advisory agreement.
Owners have voting rights in a Fund or Portfolio based upon the Owner's
proportionate interest in the corresponding Subaccount as measured by units.
Owners have voting rights before surrender, the Annuity Date or the death of the
Annuitant. Thereafter, the payee entitled to receive Variable Annuity payments
has voting rights. During the Annuity Period, Annuitants' voting rights decrease
as Annuity Units decrease.
REPORTS TO CONTRACT OWNERS AND INQUIRIES
Each calendar quarter we send you a statement showing amounts credited to each
Subaccount and to the Fixed Account Option. It also shows the interest rate(s)
that we are crediting upon amounts held in the Fixed Account Option. In
addition, if you transfer amounts among the investment options or make
additional payments, you receive written confirmation of these transactions. We
will also send a current statement upon your request. We also send you annual
and semi-annual reports for the Funds or Portfolios that correspond to the
Subaccounts in which you invest and a list of the securities held by that Fund
or Portfolio. Read all reports carefully. If you find any errors, please contact
us promptly to correct them.
You may direct inquiries to the selling agent or may call (888) 477-9700 or
write to Kemper Investors Life Insurance Company, Contact Center, 1 Kemper
Drive, Long Grove, Illinois 60049.
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DOLLAR COST AVERAGING
Under our Dollar Cost Averaging program, a predesignated portion of the Kemper
Money Market or Kemper Government Securities Subaccount Value is automatically
transferred monthly for a specified duration to other Subaccounts and the
General Account. The Dollar Cost Averaging program is available only during the
Accumulation Period. You may also elect transfers from the General Account on a
quarterly basis. You may enroll any time by completing our Dollar Cost Averaging
form. Transfers are made on the second Tuesday of the month. We must receive the
enrollment form at least five business days before the transfer date.
The minimum transfer amount is $500 per Subaccount or General Account. The total
Contract Value in the Kemper Money Market or Kemper Government Securities
Subaccount at the time Dollar Cost Averaging is elected must be at least equal
to the amount designated to be transferred on each transfer date times the
duration selected.
Dollar Cost Averaging ends if:
- the number of designated monthly transfers has been completed,
- Contract Value in the transferring account is insufficient to complete
the next transfer; the remaining amount is transferred,
- we receive your written termination at least five business days before
the next transfer date, or
- the Contract is surrendered or annuitized.
If the General Account balance is at least $10,000, you may elect automatic
calendar quarter transfers of interest accrued in the General Account to one or
more of the Subaccounts. Transfers are made within five business days of the end
of the calendar quarter. We must receive the enrollment form at least ten days
before the end of the calendar quarter.
Dollar Cost Averaging is not available during the Annuity Period.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing you to preauthorize
periodic withdrawals during the Accumulation Period. You instruct us to withdraw
selected amounts from the General Account or from any of the Subaccounts on a
monthly, quarterly, semi-annual or annual basis. The SWP is available when you
request a minimum $100 periodic payment. If the amounts distributed under the
SWP exceed the free withdrawal amount, the Withdrawal Charge is applied on any
amounts exceeding the free withdrawal amount. WITHDRAWALS TAKEN UNDER THE SWP
MAY BE SUBJECT TO THE 10% TAX PENALTY ON EARLY WITHDRAWALS AND TO INCOME TAXES
AND WITHHOLDING. If you are interested in SWP, you may obtain an application and
information concerning this program and its restrictions from us or your agent.
We give thirty days' notice if we amend the SWP. The SWP may be terminated at
any time by you or us.
PROVISIONS OF PRIOR CONTRACTS
Certain provisions of the Contract became effective upon the later of June 1,
1993 or the date of state approval. Please consult your Contract for its
specific provisions. If the provisions are not yet approved in your state, you
will receive an earlier version of the Contract and the following provisions
will apply:
FIXED ACCUMULATION OPTIONS. Fixed accumulations and benefits under the prior
contracts are provided in two Fixed Accumulation Options of the General Account.
Any portion of the purchase payment allocated to a Fixed Accumulation Option is
credited with interest daily at a rate declared by us in our sole discretion,
but not less than 4%.
TRANSFER DURING ACCUMULATION PERIOD. During the Accumulation Period, you may
transfer the General Account II Contract value minus 125% of Debt twice during
the Contract Year to one or more Subaccounts or to General Account I in the
thirty day period following the anniversary of a Contract year or the thirty day
period following the date of the confirmation statement provided for the period
through the anniversary date, if later.
WITHDRAWALS DURING ACCUMULATION PERIOD. You may request a partial withdrawal
subject to the following conditions:
- The amount requested must be at least $500 or your entire interest in the
Subaccount, General Account I or General Account II from which withdrawal
is requested.
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- Your Contract interest in the Subaccount, General Account I or General
Account II from which the withdrawal is requested must be at least $500
after the withdrawal is completed.
LOANS. For non-ERISA loans under Section 403(b), the loan interest rate is 6%.
While the loan is outstanding, the portion of the General Account Contract Value
that equals the debt will earn interest at a rate 2% less than loan rate.
RECORDS MAINTENANCE CHARGE. We will assess an annual Records Maintenance Charge
of $25 during the Accumulation period against each contract which has
participated in one or more of the Subaccounts during the calendar year whether
or not any purchase payments have been made during the year. The imposition of
the Records Maintenance Charge will be made on December 31st of each year.
ANNUITY UNIT VALUE AND FIRST PERIODIC PAYMENT. For purposes of determining the
value of an Annuity Unit and the amount of the first annuity payment, the
assumed interest rate is 4%, which is also reflected in the annuity tables
contained in the Contracts.
LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Separate Account,
KILICO or IBS is a party.
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information, Table of Contents is: Services to the
Separate Account; Performance Information of Subaccounts; State Regulation;
Experts; Financial Statements; and Appendix. The Statement of Additional
Information should be read in conjunction with this Prospectus.
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APPENDIX
KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND VARIABLE ANNUITY IRA,
ROTH IRA AND SIMPLE IRA DISCLOSURE STATEMENT
This Disclosure Statement describes the statutory and regulatory provisions
applicable to the operation of traditional Individual Retirement Annuities
(IRAs), Roth Individual Retirement Annuities (Roth IRAs) and Simple Individual
Retirement Annuities (SIMPLE IRAs). Internal Revenue Service regulations require
that this be given to each person desiring to establish an IRA, Roth IRA or a
SIMPLE IRA. Except where otherwise indicated, IRA discussion includes Simplified
Employee Pension IRAs (SEP IRA). Further information can be obtained from Kemper
Investors Life Insurance Company and from any district office of the Internal
Revenue Service.
A. REVOCATION
Within 7 days of the date you signed your enrollment application, you may revoke
the Contract and receive back 100% of your money. To do so, write Kemper
Investors Life Insurance Company, 1 Kemper Drive, Long Grove, Illinois 60049, or
call (888) 477-9700.
B. STATUTORY REQUIREMENTS
This Contract is intended to meet the requirements of Section 408(b) of the
Internal Revenue Code (Code), Section 408A of the Code for use as a Roth IRA, or
of Section 408(p) of the Code for use as a SIMPLE IRA, whichever is applicable.
The Contract has not been approved as to form for use as an IRA, Roth IRA or a
SIMPLE IRA by the Internal Revenue Service. Such approval by the Internal
Revenue Service is a determination only as to form of the Contract, and does not
represent a determination on the merits of the Contract.
1. The amount in your IRA, Roth IRA, and SIMPLE IRA, whichever is applicable,
must be fully vested at all times and the entire interest of the owner must be
nonforfeitable.
2. The Contract must be nontransferable by the owner.
3. The Contract must have flexible premiums.
4. For IRAs and SIMPLE IRAs, you must start receiving distributions on or before
April 1 of the year following the year in which you reach age 70 1/2 (the
required beginning date)(see "Required Distributions"). However, Section
401(a)(9)(A) of the Code (relating to minimum distributions required to commence
at age 70 1/2), and the incidental death benefit requirements of Section 401(a)
of the Code, do not apply to Roth IRAs.
If you die before your entire interest in your Contract is distributed, unless
otherwise permitted under applicable law, any remaining interest in the Contract
must be distributed to your beneficiary by December 31 of the calendar year
containing the fifth anniversary of your death; except that: (1) if the interest
is payable to an individual who is your designated beneficiary (within the
meaning of Section 401(a)(9) of the Code), the designated beneficiary may elect
to receive the entire interest over his or her life, or over a period certain
not extending beyond his or her life expectancy, commencing on or before
December 31 of the calendar year immediately following the calendar year in
which you die; and (2) if the designated beneficiary is your spouse, the
Contract will be treated as his or her own IRA, or, where applicable, Roth IRA.
5. Except in the case of a rollover contribution or a direct transfer (see
"Rollovers and Direct Transfers"), or a contribution made in accordance with the
terms of a Simplified Employee Pension (SEP), (1) all contributions to an IRA,
including a Roth IRA, must be cash contributions which do not exceed $2,000 for
any taxable year, and (2) all contributions to a SIMPLE IRA must be cash
contributions, including matching or nonelective employer contributions (see
"SIMPLE IRAs"), which do not exceed $6,000 for any year (as adjusted for
inflation).
6. The Contract must be for the exclusive benefit of you and your beneficiaries.
C. ROLLOVERS AND DIRECT TRANSFERS FOR IRAS AND SIMPLE IRAS
1. A rollover is a tax-free transfer from one retirement program to another that
you cannot deduct on your tax return. There are two kinds of tax-free rollover
payments under an IRA. In one, you transfer amounts from one IRA to another.
With the other, you transfer amounts from a qualified employee benefit plan or
tax-sheltered annuity to an IRA. Tax-free rollovers can be made from a SIMPLE
IRA to another SIMPLE IRA or to a SIMPLE Individual Retirement Account under
Section 408(p) of the Code. An individual can make a tax-free
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rollover to an IRA from a SIMPLE IRA after a two-year period has expired since
the individual first participated in a SIMPLE plan.
2. You must complete the transfer by the 60th day after the day you receive the
distribution from your IRA or other qualified employee benefit plan or SIMPLE
IRA.
3. A rollover distribution may be made to you only once a year. The one-year
period begins on the date you receive the rollover distribution, not on the date
you roll it over (reinvest it).
4. A direct transfer to an IRA of funds in an IRA from one trustee or insurance
company to another is not a rollover. It is a transfer that is not affected by
the one-year waiting period.
5. All or a part of the premium for this Contract used as an IRA may be paid
from a rollover from an IRA, qualified pension or profit-sharing plan or
tax-sheltered annuity, or from a direct transfer from another IRA. All or part
of the premium for this Contract used as a SIMPLE IRA may be paid from a
rollover from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the
extent permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE
Individual Retirement Account.
6. A distribution that is eligible for rollover treatment from a qualified
employee benefit plan or tax-sheltered annuity will be subject to twenty percent
(20%) withholding by the Internal Revenue Service even if you roll the
distribution over within the 60-day rollover period. One way to avoid this
withholding is to make the distribution as a direct transfer to the IRA trustee
or insurance company.
D. CONTRIBUTION LIMITS AND ALLOWANCE OF DEDUCTION FOR IRAS
1. In general, the amount you can contribute each year to an IRA is the lesser
of $2,000 or your taxable compensation for the year. If you have more than one
IRA, the limit applies to the total contributions made to your own IRAs for the
year. Generally, if you work the amount that you earn is compensation. Wages,
salaries, tips, professional fees, bonuses and other amounts you receive for
providing personal services are compensation. If you own and operate your own
business as a sole proprietor, your net earnings reduced by your deductible
contributions on your behalf to self-employed retirement plans is compensation.
If you are an active partner in a partnership and provide services to the
partnership, your share of partnership income reduced by deductible
contributions made on your behalf to qualified retirement plans is compensation.
All taxable alimony and separate maintenance payments received under a decree of
divorce or separate maintenance is compensation.
2. In the case of a married couple filing a joint return, up to $2,000 can be
contributed to each spouse's IRA, even if one spouse has little or no
compensation. This means that the total combined contributions that can be made
to both IRAs can be as much as $4,000 for the year. Previously, if one spouse
had no compensation or elected to be treated as having no compensation, the
total combined contributions to both IRAs could not be more than $2,250.
3. In the case of a married couple with unequal compensation who file a joint
return, the limit on the deductible contributions to the IRA of the spouse with
less compensation is the smaller of:
a. $2,000, or
b. The total compensation of both spouses, reduced by any deduction allowed
for contributions to IRAs of the spouse with more compensation.
The deduction for contributions to both spouses' IRAs may be further limited if
either spouse is covered by an employer retirement plan.
4. Even if your spouse is covered by an employer retirement plan, you may be
able to deduct your contributions to an IRA if you are not covered by an
employer plan. The deduction is limited to $2,000 and it must be reduced if your
adjusted gross income on a joint return is more than $150,000 but less than
$160,000. Your deduction is eliminated if your income on a joint return is
$160,000 or more.
5. Contributions to your IRA can be made at any time. If you make the
contribution between January 1 and April 15, however, you may elect to treat the
contribution as made either in that year or in the preceding year. You may file
a tax return claiming a deduction for your IRA contribution before the
contribution is actually made. You must, however, make the contribution by the
due date of your return not including extensions.
6. You cannot make a contribution other than a rollover contribution to your IRA
for the year in which you reach age 70 1/2 or thereafter.
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E. SEP IRAS
1. SEP IRA rules concerning eligibility and contributions are governed by Code
Section 408(k). The maximum deductible contribution for a SEP IRA is the lesser
of $30,000 or 15% of compensation.
2. A SEP must be established and maintained by an employer (corporation,
partnership, sole proprietor). Information about the Kemper SEP is available
upon request.
F. SIMPLE IRAS
1. A SIMPLE IRA must be established with your employer using a qualified salary
reduction agreement.
2. You may elect to have your employer contribute to your SIMPLE IRA, under a
qualified salary reduction agreement, an amount (expressed as a percentage of
your compensation) not to exceed $6,000 (as adjusted for inflation) for the
year. In addition to these employee elective contributions, your employer is
required to make each year either (1) a matching contribution equal to up to 3
percent, and not less than 1 percent, of your SIMPLE IRA contribution for the
year, or (2) a nonelective contribution equal to 2 percent of your compensation
for the year (up to $150,000 of compensation, as adjusted for inflation). No
other contributions may be made to a SIMPLE IRA.
3. Employee elective contributions and employer contributions (i.e., matching
contributions and nonelective contributions) to your SIMPLE IRA are excluded
from your gross income.
4. To the extent an individual with a SIMPLE IRA is no longer participating in a
SIMPLE plan (e.g., the individual has terminated employment), and two years has
passed since the individual first participated in the plan, the individual may
treat the SIMPLE IRA as an IRA.
G. TAX STATUS OF THE CONTRACT AND DISTRIBUTIONS FOR IRAS AND SIMPLE IRAS
1. Earnings of your IRA annuity contract are not taxed until they are
distributed to you.
2. In general, taxable distributions are included in your gross income in the
year you receive them.
3. Distributions under your IRA are non-taxable to the extent they represent a
return of non-deductible contributions (if any). The non-taxable percentage of a
distribution is determined by dividing your total undistributed, non-deductible
IRA contributions by the value of all your IRAs (including SEPs and rollovers).
4. You cannot choose the special five-year or ten-year averaging that may apply
to lump sum distributions from qualified employer plans.
H. REQUIRED DISTRIBUTIONS FOR IRAS AND SIMPLE IRAS
You must start receiving minimum distributions required under the Contract and
Section 401(a)(9) of the Code from your IRA and SIMPLE IRA starting with the
year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, the required minimum
distribution for a particular year must be received by December 31 of that year.
However, you may delay the required minimum distribution for the year you reach
age 70 1/2 until April 1 of the following year (i.e., the required beginning
date).
Annuity payments which begin by April 1 of the year following your 70 1/2 year
satisfy the minimum distribution requirement if they provide for non-increasing
payments over the life or the lives of you and your spouse, provided that, if
installments are guaranteed, the guaranty period does not exceed the lesser of
20 years or the applicable life expectancy.
The applicable life expectancy is your remaining life expectancy or the
remaining joint life and last survivor expectancy of you and your designated
beneficiary. Life expectancies are determined using the expected return multiple
tables shown in IRS Publication 590 "Individual Retirement Arrangements." To
obtain a free copy of IRS Publication 590 and other IRS forms, phone the IRS
toll free at 1-800-729-3676 or write the IRS Forms Distribution Center for your
area as shown in your income tax return instructions.
If you have more than one IRA, you must determine the required minimum
distribution separately for each IRA; however, you can take the actual
distributions of these amounts from any one or more of your IRAs.
If the actual distribution from your Contract is less than the minimum amount
that should be distributed in accordance with the minimum distribution
requirements mentioned above, the difference generally is an excess
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can
39
<PAGE> 43
request that this 50% excise tax be excused by filing with your tax return an
IRS Form 5329, together with a letter of explanation and the excise tax payment.
I. ROTH IRAS
1. If your Contract is a special type of individual retirement plan known as a
Roth IRA, it will be administered in accordance with the requirements of section
408A of the Code. Roth IRAs are treated the same as other IRAs, except as
described here.
2. The IRS is not presently accepting submissions for opinion letters approving
annuities as Roth IRAs, but will issue in the future procedures for requesting
such opinion letters. We will apply for approval as soon as possible after the
IRS issues its procedures on this matter. Such approval will be a determination
only as to the form of the annuity, and will not represent a determination of
the merits of the annuity.
3. If your Contract is a Roth IRA, we will send you a Roth IRA endorsement to be
attached to, and to amend, your Contract after we obtain approval of the
endorsement from the IRS and your state insurance department. The Company
reserves the right to amend the Contract as necessary or advisable from time to
time to comply with future changes in the Internal Revenue Code, regulations or
other requirements imposed by the IRS to obtain or maintain its approval of the
annuity as a Roth IRA.
4. Earnings in your Roth IRA are not taxed until they are distributed to you,
and will not be taxed if they are paid as a "qualified distribution," as
described to you in section L, below.
J. ELIGIBILITY AND CONTRIBUTIONS FOR ROTH IRAS
1. Generally, you are eligible to establish or make a contribution to your Roth
IRA only if you meet certain income limits. No deduction is allowed for
contributions to your Roth IRA. Contributions to your Roth IRA may be made even
after you attain age 70 1/2.
2. The aggregate amount of contributions for any taxable year to all IRAs,
including all Roth IRAs, maintained for your benefit (the "contribution limit")
generally is the lesser of $2,000 and 100% of your compensation for the taxable
year. However, if you file a joint return and receive less compensation for the
taxable year than your spouse, the contribution limit for the taxable year is
the lesser of $2,000 and the sum of (1) your compensation for the taxable year,
and (2) your spouse's compensation for the taxable year reduced by any
deductible contributions to an IRA of your spouse, and by any contributions to a
Roth IRA for your spouse, for the taxable year.
The contribution limit for any taxable year is reduced (but not below zero) by
the amount which bears the same ratio to such amount as:
(a) the excess of (i) your adjusted gross income for the taxable year, over
(ii) the "applicable dollar amount," bears to
(b) $15,000 (or $10,000 if you are married).
For this purpose, "adjusted gross income" is determined under the Code and (1)
excludes any amount included in gross income as a result of any rollover from,
transfer from, or conversion of an IRA to a Roth IRA, and (2) is reduced by any
deductible IRA contribution. In addition, the "applicable dollar amount" is
equal to $150,000 for a married individual filing a joint return, $0 for a
married individual filing a separate return, and $95,000 for any other
individual.
A "qualified rollover contribution" (discussed in section K, below), and a
non-taxable transfer from another Roth IRA, are not taken into account for
purposes of determining the contribution limit.
K. ROLLOVERS, TRANSFERS AND CONVERSIONS TO ROTH IRAS
1. Rollovers and Transfers--A rollover may be made to a Roth IRA only if it is a
"qualified rollover contribution." A "qualified rollover contribution" is a
rollover to a Roth IRA from another Roth IRA or from an IRA, but only if such
rollover contribution also meets the rollover requirements for IRAs under
Section 408(d)(3). In addition, a transfer may be made to a Roth IRA directly
from another Roth IRA or from an IRA.
You may not make a qualified rollover contribution or transfer in a taxable year
from an IRA to a Roth IRA if (a) your adjusted gross income for the taxable year
exceeds $100,000 or (b) you are married and file a separate return.
40
<PAGE> 44
The rollover requirements of Section 408(d)(3) are complex and should be
carefully considered before you make a rollover. One of the requirements is that
the amount received be paid into another IRA (or Roth IRA) within 60 days after
receipt of the distribution. In addition, a rollover contribution from a Roth
IRA may be made by you only once a year. The one-year period begins on the date
you receive the Roth IRA distribution, not on the date you roll it over
(reinvest it) into another Roth IRA. If you withdraw assets from a Roth IRA, you
may roll over part of the withdrawal tax free into another Roth IRA and keep the
rest of it. A portion of the amount you keep may be included in your gross
income.
2. Taxation of Rollovers and Transfers to Roth IRAs--A qualified rollover
contribution or transfer from a Roth IRA maintained for your benefit to another
Roth IRA maintained for your benefit which meets the rollover requirements for
IRAs under Section 408(d)(3) is tax-free.
In the case of a qualified rollover contribution or a transfer from an IRA
maintained for your benefit to a Roth IRA maintained for your benefit, any
portion of the amount rolled over or transferred which would be includible in
your gross income were it not part of a qualified rollover contribution or a
nontaxable transfer will be includible in your gross income. However, Code
Section 72(t) (relating to the 10 percent penalty tax on premature
distributions) will not apply. If such a rollover or transfer occurred before
January 1, 1999, any portion of the amount rolled over or transferred which is
required to be included in gross income will be so included ratably over the
4-taxable year period beginning with the taxable year in which the rollover or
transfer is made.
3. Transfers of Excess IRA Contributions to Roth IRAs--If, before the due date
of your federal income tax return for any taxable year (not including
extensions), you transfer, from an IRA, contributions for such taxable year (and
earnings thereon) to a Roth IRA, such amounts will not be includible in gross
income to the extent that no deduction was allowed with respect to such amount.
4. Taxation of Conversions of IRAs to Roth IRAs--All or part of amounts in an
IRA maintained for your benefit may be converted into a Roth IRA maintained for
your benefit. The conversion of an IRA to a Roth IRA is treated as special type
of qualified rollover contribution. Hence, you must be eligible to make a
qualified rollover contribution in order to convert an IRA to a Roth IRA. A
conversion typically will result in the inclusion of some or all of your IRA's
value in gross income, as described above.
A conversion of an IRA to a Roth IRA can be made without taking an actual
distribution from your IRA. For example, an individual may make a conversion by
notifying the IRA issuer or trustee, whichever is applicable.
UNDER SOME CIRCUMSTANCES, IT MIGHT NOT BE ADVISABLE TO ROLLOVER, TRANSFER, OR
CONVERT ALL OR PART OF AN IRA TO A ROTH IRA. WHETHER YOU SHOULD DO SO WILL
DEPEND ON YOUR PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING, BUT NOT LIMITED
TO, SUCH FACTORS AS WHETHER YOU QUALIFY TO MAKE SUCH A ROLLOVER, TRANSFER, OR
CONVERSION, YOUR FINANCIAL SITUATION, AGE, CURRENT AND FUTURE INCOME NEEDS,
YEARS TO RETIREMENT, CURRENT AND FUTURE TAX RATES, YOUR ABILITY AND DESIRE TO
PAY CURRENT INCOME TAXES WITH RESPECT TO AMOUNTS ROLLED OVER, TRANSFERRED, OR
CONVERTED, AND WHETHER SUCH TAXES MIGHT NEED TO BE PAID WITH WITHDRAWALS FROM
YOUR ROTH IRA (SEE DISCUSSION BELOW OF "NONQUALIFIED DISTRIBUTIONS"). YOU SHOULD
CONSULT A QUALIFIED TAX ADVISER BEFORE ROLLING OVER, TRANSFERRING, OR CONVERTING
ALL OR PART OF AN IRA TO A ROTH IRA.
5. Separate Roth IRAs--Due to the complexity of, and proposed changes to, the
tax law, it may be advantageous to maintain amounts rolled over, transferred, or
converted from an IRA in separate Roth IRAs from those containing regular Roth
IRA contributions. For the same reason, you should consider maintaining a
separate Roth IRA for each amount rolled over, transferred, or converted from an
IRA. These considerations should be balanced against the additional costs you
may incur from maintaining multiple Roth IRAs. You should consult your tax
adviser if you intend to contribute rollover, transfer, or conversion amounts to
your Contract, or if you intend to roll over or transfer amounts from your
Contract to another Roth IRA maintained for your benefit.
L. INCOME TAX CONSEQUENCES OF ROTH IRAS
1. Qualified Distributions--Any "qualified distribution" from a Roth IRA is
excludible from gross income. A "qualified distribution" is a payment or
distribution which satisfies two requirements. First, the payment or
distribution must be (a) made after you attain 59 1/2, (b) made after your
death, (c) attributable to your being disabled, or (d) a "qualified special
purpose distribution" (I.E., a qualified first-time homebuyer distribution under
the Code). Second, the payment or distribution must be made in a taxable year
that is at least five years after (1) the first taxable year for which a
contribution was made to any Roth IRA established for you, or (2) in the case of
a rollover from, or a conversion of, an IRA to a Roth IRA, the taxable year in
which the rollover or
41
<PAGE> 45
conversion was made if the payment or distribution is allocable (as determined
in the manner set forth in guidance issued by the IRS) to the rollover
contribution or conversion (or to income allocable thereto).
2. Nonqualified Distributions--A distribution from a Roth IRA which is not a
qualified distribution is taxed under Section 72 (relating to annuities), except
that such distribution is treated as made first from contributions to the Roth
IRA to the extent that such distribution, when added to all previous
distributions from the Roth IRA, does not exceed the aggregate amount of
contributions to the Roth IRA. For purposes of determining the amount taxed, (a)
all Roth IRAs established for you will be treated as one contract, (b) all
distributions during any taxable year from Roth IRAs established for you will be
treated as one distribution, and (c) the value of the contract, income on the
contract, and investment in the contract, if applicable, will be computed as of
the close of the calendar year in which the taxable year begins.
An additional tax of 10% is imposed on nonqualified distributions (including
amounts deemed distributed as the result of a prohibited loan or use of your
Roth IRA as security for a loan) made before the benefited individual has
attained age 59 1/2, unless one of the exceptions discussed in Section N
applies.
M. TAX ON EXCESS CONTRIBUTIONS
1. You must pay a 6% excise tax each year on excess contributions that remain in
your Contract. Generally, an excess contribution is the amount contributed to
your Contract that is more than you can contribute. The excess is taxed for the
year of the excess contribution and for each year after that until you correct
it.
2. You will not have to pay the 6% excise tax if you withdraw the excess amount
by the date your tax return is due including extensions for the year of the
contribution. You do not have to include in your gross income an excess
contribution that you withdraw from your Contract before your tax return is due
if the income earned on the excess was also withdrawn and no deduction was
allowed for the excess contribution. You must include in your gross income the
income earned on the excess contribution.
N. TAX ON PREMATURE DISTRIBUTIONS
There is an additional tax on premature distributions from your IRA, Roth IRA,
or SIMPLE IRA, equal to 10% of the taxable amount. For premature distributions
from a SIMPLE IRA made within the first 2 years you participate in a SIMPLE
plan, the additional tax is equal to 25% of the amount of the premature
distribution that must be included in gross income. Premature distributions are
generally amounts you withdraw before you are age 59 1/2. However, the tax on
premature distributions does not apply:
1. To amounts that are rolled over tax free;
2. To a distribution which is made on or after your death, or on account of you
being disabled within the meaning of Code Section 72(m)(7);
3. To a distribution which is part of a series of substantially equal periodic
payments (made at least annually) over your life or your life expectancy or the
joint life or joint life expectancy of you and your beneficiary; or
4. To a distribution which is used for qualified first-time homebuyer expenses,
qualified higher education expenses, certain medical expenses, or by an
unemployed individual to pay health insurance premiums.
O. EXCISE TAX REPORTING
Use Form 5329, Additional Taxes Attributable to Qualified Retirement Plans
(Including IRAs), Annuities, and Modified Endowment Contracts, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA, SIMPLE IRA or Roth IRA excise taxes,
you do not need Form 5329. Further information can be obtained from any district
office of the Internal Revenue Service.
P. BORROWING
If you borrow money against your Contract or use it as security for a loan, the
Contract will lose its classification as an IRA, Roth IRA, or SIMPLE IRA,
whichever is applicable, and you must include in gross income the fair market
value of the Contract as of the first day of your tax year. In addition, you may
be subject to the tax on premature distributions described above. (Note: This
Contract does not allow borrowings against it, nor may it be assigned or pledged
as collateral for a loan.)
Q. REPORTING
We will provide you with any reports required by the Internal Revenue Service.
42
<PAGE> 46
R. ESTATE TAX
Generally, the value of your IRA, including your Roth IRA, is included in your
gross estate for federal estate tax purposes.
S. FINANCIAL DISCLOSURE
1. If contributions to the Contract are made by other than rollover
contributions and direct transfers, the following information based on the
charts shown on the next pages, which assumes you were to make a level
contribution to the fixed account at the beginning of each year of $1,000 must
be completed prior to your signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- ------------------------------------------------------------------------------------------------------
2 65
- ------------------------------------------------------------------------------------------------------
3 70
- ------------------------------------------------------------------------------------------------------
4
- ------------------------------------------------------------------------------------------------------
5
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
2. If contributions to the Contract are made by rollover contributions and/or
direct transfers, the following information, based on the charts shown on the
next page, and all of which assumes you make one contribution to the fixed
account of $1,000 at the beginning of this year, must be completed prior to your
signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- ------------------------------------------------------------------------------------------------------
2 65
- ------------------------------------------------------------------------------------------------------
3 70
- ------------------------------------------------------------------------------------------------------
4
- ------------------------------------------------------------------------------------------------------
5
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
T. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Contract will be assessed a daily charge of an amount which will equal an
aggregate of 1.30% per annum for Periodic Payment Contracts.
2. A maximum annual records maintenance charge of $30.00 will be assessed
ratably each quarter against the Separate Account value, if you have
participated in a Subaccount during the year. If insufficient values are in the
Subaccounts when the charge is assessed, the charge will be assessed against
General Account value.
3. Withdrawal (early annuitization) charges will be assessed based on the years
elapsed since the purchase payments (in a given contract year) were received by
KILICO; under 1 year, 6%; over 1 to 2 years, 5%; over 2 to 3 years, 4%; over 3
to 4 years, 3%; over 4 to 5 years, 2%; over 5 to 6 years, 1%; 6th year and
thereafter, 0%.
4. The method used to compute and allocate the annual earnings is contained in
the Prospectus under the heading "Accumulation Unit Value."
5. The growth in value of your Contract is neither guaranteed nor projected but
is based on the investment experience of the Separate Account.
43
<PAGE> 47
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF
EACH YEAR.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,000 14 $17,371 27 $41,703 40 $ 77,436
- -----------------------------------------------------------------------------------------
2 2,000 15 18,929 28 43,991 41 80,796
- -----------------------------------------------------------------------------------------
3 3,038 16 20,534 29 46,348 42 84,256
- -----------------------------------------------------------------------------------------
4 4,130 17 22,187 30 48,775 43 87,821
- -----------------------------------------------------------------------------------------
5 5,264 18 23,889 31 51,275 44 91,492
- -----------------------------------------------------------------------------------------
6 6,442 19 25,643 32 53,850 45 95,274
- -----------------------------------------------------------------------------------------
7 7,665 20 27,449 33 56,503 46 99,169
- -----------------------------------------------------------------------------------------
8 8,932 21 29,309 34 59,235 47 103,181
- -----------------------------------------------------------------------------------------
9 10,236 22 31,225 35 62,048 48 107,313
- -----------------------------------------------------------------------------------------
10 11,580 23 33,199 36 64,947 49 111,569
- -----------------------------------------------------------------------------------------
11 12,965 24 35,232 37 67,932 50 115,953
- -----------------------------------------------------------------------------------------
12 14,390 25 37,326 38 71,007
- -----------------------------------------------------------------------------------------
13 15,859 26 39,482 39 74,174
- -----------------------------------------------------------------------------------------
</TABLE>
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 SINGLE PREMIUM.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $1,000 14 $1,513 27 $2,221 40 $3,262
- -----------------------------------------------------------------------------------------
2 1,013 15 1,558 28 2,288 41 3,360
- -----------------------------------------------------------------------------------------
3 1,053 16 1,605 29 2,357 42 3,461
- -----------------------------------------------------------------------------------------
4 1,095 17 1,653 30 2,427 43 3,565
- -----------------------------------------------------------------------------------------
5 1,138 18 1,702 31 2,500 44 3,671
- -----------------------------------------------------------------------------------------
6 1,183 19 1,754 32 2,575 45 3,782
- -----------------------------------------------------------------------------------------
7 1,230 20 1,806 33 2,652 46 3,895
- -----------------------------------------------------------------------------------------
8 1,267 21 1,860 34 2,732 47 4,012
- -----------------------------------------------------------------------------------------
9 1,305 22 1,916 35 2,814 48 4,132
- -----------------------------------------------------------------------------------------
10 1,344 23 1,974 36 2,898 49 4,256
- -----------------------------------------------------------------------------------------
11 1,384 24 2,033 37 2,985 50 4,384
- -----------------------------------------------------------------------------------------
12 1,426 25 2,094 38 3,075
- -----------------------------------------------------------------------------------------
13 1,469 26 2,157 39 3,167
- -----------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges.
44
<PAGE> 48
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
- --------------------------------------------------------------------------------
PERIODIC PAYMENT
VARIABLE ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
KEMPER ADVANTAGE III
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
IN CONNECTION WITH
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (888) 477-9700
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated May 1, 2000. The Prospectus may be obtained from Kemper
Investors Life Insurance Company by writing or calling the address or telephone
number listed above.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Services to the Separate Account............................ B-1
Performance Information of Subaccounts...................... B-1
State Regulation............................................ B-13
Experts..................................................... B-14
Financial Statements........................................ B-14
Appendix.................................................... B-78
</TABLE>
<PAGE> 49
SERVICES TO THE SEPARATE ACCOUNT
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Fund by
each of the Subaccounts. All expenses incurred in the operations of the Separate
Account, except the charge for mortality and expense risk and administrative
expenses, and records maintenance charge (as described in the Prospectus) are
borne by KILICO.
The independent auditors for the Separate Account are PricewaterhouseCoopers
LLP, Chicago, Illinois, for the years ended December 31, 1999, 1998 and 1997.
PricewaterhouseCoopers LLP performed the annual audit of the financial
statements of the Separate Account and KILICO for the years ended December 31,
1999, 1998 and 1997.
The Contracts are sold by licensed insurance agents, where the Contracts may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. The Contracts are distributed
through the principal underwriter for the Separate Account, Investors Brokerage
Services, Inc. ("IBS"), a wholly owned subsidiary of KILICO, which enters into
selling group agreements with affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to (6.25%) of Purchase Payments. During
1999, 1998 and 1997 KILICO incurred gross commissions payable of approximately
$19,858,000, $14,785,000 and $14,741,000, respectively, to licensed insurance
agents.
PERFORMANCE INFORMATION OF SUBACCOUNTS
As described in the prospectus, a Subaccount's historical performance may be
shown in the form of standardized "average annual total return" and
nonstandardized "total return" calculations in the case of all Subaccounts;
"yield" information may be provided in the case of the Kemper High Yield
Subaccount, Kemper Investment Grade Bond Subaccount, the Kemper Government
Securities Subaccount and the Scudder VLIF Bond Subaccount; and "yield" and
"effective yield" information may be provided in the case of the Kemper Money
Market Subaccount. These various measures of performance are described below.
A Subaccount's standardized average annual total return quotation is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. The standardized average annual total return for a
Subaccount for a specific period is found by first taking a hypothetical $1,000
investment in each of the Subaccount's units on the first day of the period at
the maximum offering price, which is the Accumulation Unit value per unit
("initial investment") and computing the ending redeemable value ("redeemable
value") of that investment at the end of the period. The redeemable value
reflects the effect of the applicable Withdrawal Charge that may be imposed at
the end of the period as well as all other recurring charges and fees applicable
under the Contract to all Contract Owner accounts. Premium taxes are not
included in the term charges. The redeemable value is then divided by the
initial investment and this quotient is taken to the Nth root (N represents the
number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. Average annual total return figures are
annualized and, therefore, represent the average annual percentage change in the
value of a Subaccount over the applicable period.
No standard formula has been prescribed for calculating nonstandardized total
return performance. Nonstandardized total return performance for a specific
period is calculated by first taking an investment (assumed to be $10,000 below)
in each Subaccount's units on the first day of the period at the maximum
offering price, which is the Accumulation Unit Value per unit ("initial
investment") and computing the ending value ("ending value") of that investment
at the end of the period. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Premium taxes are not
included in the term charges. The nonstandardized total return percentage is
then determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. An assumed investment of $10,000 was chosen because that
approximates the size of a typical account. The account size used affects the
performance figure because the Records Maintenance Charge is a fixed per account
charge. Both annualized and nonannualized (cumulative) nonstandardized total
return figures may be provided. Annualized non-
B-1
<PAGE> 50
standardized total return figures represent the average annual percentage change
in the value of a Subaccount over the applicable period while nonannualized
(cumulative) figures represent the actual percentage change over the applicable
period.
Standardized average annual total return quotations will be current to the last
day of the calendar quarter and nonstandardized total return quotations will be
current to the last day of the calendar month preceding the date on which an
advertisement is submitted for publication. Standardized average annual total
return will cover periods of one, three, five and ten years, if applicable, and
a period covering the time the underlying Portfolio has been held in a
Subaccount (life of Subaccount). Nonstandardized total return will cover periods
of one, three, five and ten years, if applicable, and a period covering the time
the underlying Portfolio held in a Subaccount has been in existence (life of
Portfolio). For those underlying Portfolios which have not been held as
Subaccounts within the Separate Account for one of the quoted periods, the
nonstandardized total return quotations will show the investment performance
such underlying Portfolios would have achieved (reduced by the applicable
charges) had they been held as Subaccounts within the Separate Account for the
period quoted.
Performance information will be shown for periods from April 6, 1982 (inception)
for the Kemper Money Market Subaccount, Kemper Total Return Subaccount and
Kemper High Yield Subaccount, and for periods from December 9, 1983 (inception)
for the Kemper Growth Subaccount. This performance information is stated to
reflect that the Separate Account was reorganized on November 3, 1989 as a unit
investment trust with Subaccounts investing in corresponding Portfolios of the
Fund. In addition, on that date the Kemper Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Kemper Government Securities Subaccount, performance figures
will reflect investment experience as if the Kemper Government Securities
Subaccount had been available under the Contracts since September 3, 1987, the
inception date of the Kemper Government Securities Portfolio.
The yield for the Kemper High Yield Subaccount, the Kemper Investment Grade Bond
Subaccount, the Kemper Government Securities Subaccount, and the Scudder VLIF
Bond Subaccount is computed in accordance with a standard method prescribed by
rules of the Securities and Exchange Commission. The yields for the Kemper High
Yield Subaccount, the Kemper Government Securities Subaccount and the Kemper
Investment Grade Bond Subaccount, based upon the one month period ended March
31, 2000 were 10.54%, 4.82%, and 4.81%, respectively. The yield quotation is
computed by dividing the net investment income per unit earned during the
specified one month or 30-day period by the accumulation unit values on the last
day of the period, according to the following formula that assumes a semi-annual
reinvestment of income:
<TABLE>
<S> <C> <C>
a - b
-------
YIELD = 2[( +1)(6) - 1
cd
</TABLE>
a = net dividends and interest earned during the period by the Fund attributable
to the Subaccount
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Accumulation Units outstanding during the period
d = the Accumulation Unit value per unit on the last day of the period
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to each Subaccount, but does not reflect the deduction of
withdrawal charges or premium taxes.
The Kemper Money Market Subaccount's yield is computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit Value during
the period is divided by the Accumulation Unit Value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Account's portfolio are not included in the calculation. The
Kemper Money Market Subaccount's yield for the seven-day period ended March 31,
2000 was 4.23% and average portfolio maturity was 23 days.
The Kemper Money Market Subaccount's effective yield is determined by taking the
base period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is: (base period return
+1) (365)/(7) -- 1. The Kemper Money Market Subaccount's effective yield for the
seven day period ended March 31, 2000 was 4.32%.
In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.
B-2
<PAGE> 51
A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first six years after purchase may be subject to
a Withdrawal Charge that ranges from 6% the first year to 0% after six years.
Yield, effective yield and nonstandardized total return do not reflect the
effect of the Withdrawal Charge or premium taxes that may be imposed upon the
redemption of units. Standardized average annual total return reflects the
effect of the applicable Withdrawal Charge (but not premium tax) that may be
imposed at the end of the period in question.
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes described in the
Prospectus. In addition, the Subaccounts may provide performance analysis
rankings of Lipper Analytical Services, Inc., the VARDS Report, MORNINGSTAR,
INC., Ibbotson Associates or Micropal. From time to time, the Separate Account
may quote information from publications such as MORNINGSTAR, INC., THE WALL
STREET JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE,
USA TODAY, INSTITUTIONAL INVESTOR, NATIONAL UNDERWRITER, SELLING LIFE INSURANCE,
BROKER WORLD, REGISTERED REPRESENTATIVE, INVESTMENT ADVISER and VARDS.
The following tables include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1999.
B-3
<PAGE> 52
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
------------------------ RETURN(2)
YEAR TO DATE CUMULATIVE ANNUALIZED ------------
(%) ENDING (%) (%) ANNUALIZED
RETURN(3) VALUE(4) RETURN RETURN (%) RETURN
------------ -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT....................... -11.38%
Life of Subaccount (from 05/01/96)..................... $15,628 56.28% 12.94% 11.80%
Life of Portfolio (from 05/01/96)...................... 15,628 56.28 12.94 11.80
Three Years............................................ 13,431 34.31 10.33 8.98
One Year............................................... 8,864 -11.38 -11.38 -16.17
KEMPER VALUE+GROWTH SUBACCOUNT........................... 15.00
Life of Subaccount (from 05/01/96)..................... 19,202 92.02 19.46 18.26
Life of Portfolio (from 05/01/96)...................... 19,202 92.02 19.46 18.26
Three Years............................................ 16,901 69.01 19.12 17.65
One Year............................................... 11,502 15.00 15.00 8.79
KEMPER HORIZON 20+ SUBACCOUNT............................ 7.83
Life of Subaccount (from 05/01/96)..................... 16,371 63.71 14.38 13.23
Life of Portfolio (from 05/01/96)...................... 16,371 63.71 14.38 13.23
Three Years............................................ 14,313 43.13 12.70 11.31
One Year............................................... 10,785 7.83 7.83 2.01
JANUS ASPEN GROWTH SUBACCOUNT............................ 42.14
Life of Subaccount (from 09/15/95)..................... 27,865 178.65 26.90 26.12
Life of Portfolio (from 09/13/93)...................... 36,247 262.47 22.69 N/A
Five Years............................................. 34,654 246.54 28.22 N/A
Three Years............................................ 23,604 130.64 32.12 30.71
One Year............................................... 14,214 42.14 42.14 34.87
FIDELITY VIP EQUITY-INCOME SUBACCOUNT.................... 4.97
Life of Subaccount (from 05/01/96)..................... 15,647 56.47 12.98 11.84
Life of Portfolio (from 10/09/86)...................... 46,526 365.26 12.32 N/A
Ten Years.............................................. 34,004 240.04 13.01 N/A
Five Years............................................. 22,007 120.07 17.09 N/A
Three Years............................................ 14,627 46.27 13.52 12.12
One Year............................................... 10,497 4.97 4.97 -0.72
FIDELITY VIP GROWTH SUBACCOUNT........................... 35.67
Life of Subaccount (from 05/01/96)..................... 23,584 135.84 26.35 25.27
Life of Portfolio (from 10/09/86)...................... 82,056 720.56 17.24 N/A
Ten Years.............................................. 54,127 441.27 18.39 N/A
Five Years............................................. 34,457 244.57 28.07 N/A
Three Years............................................ 22,773 127.73 31.56 30.14
One Year............................................... 13,567 35.67 35.67 28.40
FIDELITY VIP II INDEX 500 SUBACCOUNT..................... 18.96
Life of Subaccount (from 05/01/96)..................... 22,457 124.57 24.67 23.55
Life of Portfolio (from 08/27/92)...................... 37,072 270.72 19.52 N/A
Five Years............................................. 32,416 224.16 26.49 N/A
Three Years............................................ 19,742 97.42 25.45 23.91
One Year............................................... 11,896 18.96 18.96 12.52
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that units,
when redeemed, may be worth
more or less than their original cost. See page B-9 for additional information.
B-4
<PAGE> 53
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
------------------------------ -------------
YEAR TO DATE(%) ENDING CUMULATIVE(%) ANNUALIZED(%) ANNUALIZED(%)
RETURN(3) VALUE(4) RETURN RETURN RETURN
--------------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
KEMPER MONEY MARKET SUBACCOUNT #1 (7).......... 3.48%
Life of Subaccount (from 04/06/81)........... $24,551 145.51% 5.20% 5.19%
Life of Portfolio (from 04/06/82)............ 24,551 145.51 5.20 5.19
Ten Years.................................... 14,345 43.45 3.67 3.66
Five Years................................... 12,078 20.78 3.85 3.45
Three Years.................................. 11,165 11.65 3.74 2.46
One Year..................................... 10,350 3.48 3.48 -2.11
KEMPER HIGH YIELD SUBACCOUNT(6)................ 0.82
Life of Subaccount (from 04/06/82)........... 61,121 511.21 10.75 10.75
Life of Portfolio (from 04/06/82)............ 61,121 511.21 10.75 10.75
Ten Years.................................... 24,134 141.34 9.21 9.20
Five Years................................... 14,519 45.19 7.74 7.34
Three Years.................................. 11,127 11.27 3.62 2.35
One Year..................................... 10,084 0.82 0.82 -4.62
KEMPER GOVERNMENT SECURITIES SUBACCOUNT........ -0.63
Life of Subaccount (from 11/03/89)........... 17,685 76.85 5.77 5.76
Life of Portfolio (from 09/03/87)............ 20,135 101.35 5.84 N/A
Ten Years.................................... 17,471 74.71 5.73 5.72
Five Years................................... 13,431 34.31 6.08 5.68
Three Years.................................. 11,295 12.95 4.14 2.86
One Year..................................... 9,939 -0.63 -0.63 -6.00
KEMPER INVESTMENT GRADE BOND SUBACCOUNT........ -3.34
Life of Subaccount (from 05/01/96)........... 11,386 13.86 3.60 2.55
Life of Portfolio (from 05/01/96)............ 11,386 13.86 3.60 2.55
Three Years.................................. 11,088 10.88 3.50 2.23
One Year..................................... 9,668 -3.34 -3.34 -8.56
SCUDDER VLIF BOND SUBACCOUNT................... -2.22
Life of Subaccount (from 05/01/99)........... N/A N/A N/A N/A
Life of Portfolio (from 07/16/85)............ 24,326 143.26 6.34 N/A
Ten Years.................................... 17,902 79.02 6.00 N/A
Five Years................................... 13,120 31.20 5.58 N/A
Three Years.................................. 11,080 10.80 3.48 N/A
One Year..................................... 9,778 -2.22 -2.22 N/A
KEMPER GROWTH SUBACCOUNT....................... 35.34
Life of Subaccount (from 12/09/83)........... 94,008 839.76 14.97 14.97
Life of Portfolio (from 12/09/83)............ 94,008 839.76 14.97 14.97
Ten Years.................................... 49,759 397.59 17.41 17.40
Five Years................................... 29,036 190.36 23.76 23.30
Three Years.................................. 18,424 84.24 22.59 21.09
One Year..................................... 13,536 35.34 35.34 28.09
FIDELITY VIP II CONTRAFUND SUBACCOUNT.......... 22.66
Life of Subaccount (from 05/01/96)........... 21,512 115.12 29.99 22.06
Life of Portfolio (from 01/03/95)............ 31,838 218.38 31.33 N/A
Three Years.................................. 19,288 92.88 24.48 22.95
One Year..................................... 12,266 22.66 22.66 16.02
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that units,
when redeemed, may be worth
more or less than their original cost. See page B-9 for additional information.
B-5
<PAGE> 54
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(CONTINUED)
<TABLE>
<CAPTION>
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
-------------------------------- --------------
YEAR TO DATE (%) ENDING CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED (%)
RETURN(3) VALUE(4) RETURN RETURN RETURN
---------------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
LEXINGTON NATURAL RESOURCES
SUBACCOUNT........................... 12.63%
Life of Subaccount (from 09/15/95)... $11,882 18.82% 4.09% 3.41%
Life of Portfolio (10/14/91)......... 14,526 45.26 4.65 N/A
Five Years........................... 13,654 36.54 6.43 N/A
Three Years.......................... 9,452 -5.48 -1.86 -3.07
One Year............................. 11,263 12.63 12.63 6.53
DREYFUS SOCIALLY RESPONSIBLE GROWTH
SUBACCOUNT........................... 28.42
Life of Subaccount (from 05/01/99)... N/A N/A N/A N/A
Life of Portfolio (from 10/07/93).... 35,482 254.82 22.52 N/A
Five Years........................... 33,086 230.86 27.04 N/A
Three Years.......................... 20,804 108.04 27.66 N/A
One Year............................. 12,842 28.42 28.42 N/A
SCUDDER VLIF CAPITAL GROWTH
SUBACCOUNT........................... 33.50
Life of Subaccount (from 05/01/99)... N/A N/A N/A N/A
Life of Portfolio (from 07/16/85).... 86,398 763.98 16.07 N/A
Ten Years............................ 46,109 361.09 16.51 N/A
Five Years........................... 32,776 227.76 26.80 N/A
Three Years.......................... 21,764 117.64 29.59 N/A
One Year............................. 13,350 33.50 33.50 N/A
ALGER AMERICAN GROWTH
SUBACCOUNT........................... 32.03
Life of Subaccount (from 05/01/99)... N/A N/A N/A N/A
Life of Portfolio (from 01/06/89).... 84,605 746.05 21.45 N/A
Ten Years............................ 69,046 590.46 21.31 N/A
Five Years........................... 36,085 260.85 29.26 N/A
Three Years.......................... 23,957 139.57 33.81 N/A
One Year............................. 13,203 32.03 32.03 N/A
AMERICAN CENTURY VP INCOME & GROWTH
SUBACCOUNT........................... 16.51
Life of Subaccount (from 05/01/99)... N/A N/A N/A N/A
Life of Portfolio (from 10/30/97).... 15,695 56.95 23.09 N/A
One Year............................. 11,651 16.51 16.51 N/A
AMERICAN CENTURY VP VALUE
SUBACCOUNT........................... -2.12
Life of Subaccount (from 05/01/99)... N/A N/A N/A N/A
Life of Portfolio (from 05/01/96).... 14,031 40.31 9.67 N/A
Three Years.......................... 12,605 26.05 8.02 N/A
One Year............................. 9,788 -2.12 -2.12 N/A
KEMPER SMALL CAP GROWTH SUBACCOUNT..... 32.82
Life of Subaccount (from 05/01/94)... 34,396 243.96 24.35 23.95
Life of Portfolio (from 05/01/94).... 34,396 243.96 24.35 23.95
Five Years........................... 33,375 233.75 27.26 26.79
Three Years.......................... 20,565 105.65 27.17 25.64
One Year............................. 13,284 32.82 32.82 25.65
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that units,
when redeemed, may be worth
more or less than their original cost. See page B-9 for additional information.
B-6
<PAGE> 55
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
-------------------------------- --------------
YEAR TO DATE (%) ENDING CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED (%)
RETURN(3) VALUE(4) RETURN RETURN RETURN
---------------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
KEMPER SMALL CAP VALUE SUBACCOUNT.......... 1.46%
Life of Subaccount (from 05/01/96)....... $10,789 7.89% 2.09% 1.06%
Life of Portfolio (from 05/01/96)........ 10,789 7.89 2.09 1.06
Three Years.............................. 10,684 6.84 2.23 0.97
One Year................................. 10,148 1.46 1.46 -4.02
JANUS ASPEN AGGRESSIVE GROWTH SUBACCOUNT... 122.52
Life of Subaccount (from 09/15/95)....... 36,904 269.04 35.47 34.84
Life of Portfolio (from 09/13/93)........ 59,403 494.03 32.69 N/A
Five Years............................... 43,985 339.85 34.48 N/A
Three Years.............................. 32,799 227.99 48.58 47.47
One Year................................. 22,252 122.52 122.52 115.25
J.P. MORGAN SMALL COMPANY SUBACCOUNT....... 42.54
Life of Subaccount (from 05/01/99)....... N/A N/A N/A N/A
Life of Portfolio (from 12/31/94)........ 24,027 140.27 19.15 N/A
Five Years............................... 24,027 140.27 33.94 N/A
Three Years.............................. 16,013 60.13 16.99 N/A
One Year................................. 14,254 42.54 42.54 N/A
ALGER AMERICAN SMALL CAPITALIZATION
SUBACCOUNT............................... 44.73
Life of Subaccount (from 05/01/99)....... N/A N/A N/A N/A
Life of Portfolio (from 09/21/88)........ 73,215 632.15 19.29 N/A
Ten Years................................ 46,823 368.23 16.69 N/A
Five Years............................... 26,004 160.04 21.06 N/A
Three Years.............................. 17,755 77.55 21.09 N/A
One Year................................. 14,473 44.73 44.73 N/A
KEMPER INTERNATIONAL SUBACCOUNT(5)......... 43.82
Life of Subaccount (from 01/06/92)....... 26,451 164.51 12.95 12.94
Life of Portfolio (from 01/06/92)........ 26,451 164.51 12.95 12.94
Five Years............................... 21,622 116.22 16.66 16.22
Three Years.............................. 16,882 68.82 19.07 17.61
One Year................................. 14,384 43.82 43.82 36.57
JANUS ASPEN WORLDWIDE GROWTH
SUBACCOUNT(5)............................ 62.34
Life of Subaccount (from 09/15/95)....... 33,100 231.00 32.08 31.40
Life of Portfolio (from 09/13/93)........ 47,451 374.51 28.05 N/A
Five Years............................... 39,900 299.00 31.89 N/A
Three Years.............................. 24,914 149.14 35.56 34.23
One Year................................. 16,234 62.34 62.34 55.07
LEXINGTON EMERGING MARKETS(5)
SUBACCOUNT............................... 163.18
Life of Subaccount (from 09/15/95)....... 16,499 65.00 12.35 11.62
Life of Portfolio (from 03/30/94)........ 15,997 59.97 8.50 N/A
Five Years............................... 16,383 63.83 10.38 N/A
Three Years.............................. 16,286 62.86 17.65 16.21
One Year................................. 26,318 163.18 163.18 155.91
SCUDDER VLIF INTERNATIONAL SUBACCOUNT(5)... 52.53
Life of Subaccount (from 05/01/99)....... N/A N/A N/A N/A
Life of Portfolio (from 05/01/87)........ 42,369 323.69 12.06 N/A
Ten Years................................ 30,501 205.01 11.80 N/A
Five Years............................... 23,873 138.73 19.01 N/A
Three Years.............................. 19,209 92.09 24.31 N/A
One Year................................. 15,253 52.53 52.53 N/A
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that units,
when redeemed, may be worth
more or less than their original cost. See page B- 9 for additional information.
B-7
<PAGE> 56
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
-------------------------------- --------------
YEAR TO DATE (%) ENDING CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED (%)
RETURN(3) VALUE(4) RETURN RETURN RETURN
---------------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
KEMPER TOTAL RETURN SUBACCOUNT(6).......... 13.32%
Life of Subaccount (from 04/06/82)....... $79,931 699.31% 12.44% 12.44%
Life of Portfolio (from 04/06/82)........ 79,931 699.31 12.44 12.44
Ten Years................................ 30,640 206.40 11.85 11.84
Five Years............................... 21,865 118.65 16.94 16.50
Three Years.............................. 15,256 52.56 15.12 13.70
One Year................................. 11,334 13.32 13.32 7.20
KEMPER HORIZON 10+ SUBACCOUNT.............. 6.97
Life of Subaccount (from 05/01/96)....... 14,966 49.66 11.62 10.49
Life of Portfolio (from 05/01/96)........ 14,966 49.66 11.62 10.49
Three Years.............................. 13,555 35.55 10.67 9.31
One Year................................. 10,699 6.97 6.97 1.20
KEMPER HORIZON 5 SUBACCOUNT................ 3.49
Life of Subaccount (from 05/01/96)....... 13,556 35.56 8.65 7.55
Life of Portfolio (from 05/01/96)........ 13,556 35.56 8.65 7.55
Three Years.............................. 12,477 24.77 7.66 6.33
One Year................................. 10,351 3.49 3.49 -2.10
JANUS ASPEN BALANCED SUBACCOUNT............ 25.13
Life of Subaccount (from 09/15/95)....... 24,188 141.88 22.80 22.01
Life of Portfolio (from 09/13/93)........ 30,030 200.30 19.07 N/A
Five Years............................... 28,246 182.46 23.08 N/A
Three Years.............................. 19,993 99.93 25.98 24.43
One Year................................. 12,513 25.13 25.13 18.35
FIDELITY VIP II ASSET MANAGER SUBACCOUNT... 9.67
Life of Subaccount (from 05/01/96)....... 16,211 62.11 14.07 12.93
Life of Portfolio (from 09/06/89)........ 31,322 213.22 11.69 N/A
Ten Years................................ 31,196 211.96 12.05 N/A
Five Years............................... 19,376 93.76 14.14 N/A
Three Years.............................. 14,835 48.35 14.05 12.65
One Year................................. 10,967 9.67 9.67 3.72
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that units,
when redeemed, may be worth
more or less than their original cost. See page B-9 for additional information.
B-8
<PAGE> 57
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Nonstandardized Total Return figures quoted are based on a hypothetical
$10,000 initial investment and assumes the deduction of all recurring
charges and fees applicable under the Contract except for the Withdrawal
Charge and any charge for applicable premium taxes which may be imposed in
certain states.
(2) The Standardized Average Annual Total Return figures quoted are based on a
hypothetical $1,000 initial investment and assumes the deduction of all
recurring charges and fees applicable under the Contract including the
applicable Withdrawal Charge that may be imposed at the end of the quoted
period. Premium taxes are not reflected.
(3) The Year to Date percentage return figures quoted are based on the change in
unit values.
(4) The Ending Values quoted are based on a $10,000 initial investment and
assumes the deduction of all recurring charges and fees applicable under the
Contract except for the Withdrawal Charge and any charge for applicable
premium taxes which may be imposed in certain states.
(5) There are special risks associated with investing in non-U.S. companies,
including fluctuating foreign currency exchange rates, foreign governmental
regulations and differing degrees of liquidity that may adversely affect
portfolio securities.
(6) The high yield potential offered by these Subaccounts reflect the
substantial risks associated with investments in high-yield bonds.
(7) An investment in the Kemper Money Market Subaccount #1 is neither insured
nor guaranteed by the U.S. government. There can be no assurance that the
Kemper Money Market Portfolio will be able to maintain a stable net asset
value of $1.00 per share.
B-9
<PAGE> 58
The following tables illustrate an assumed $10,000 investment in shares of
certain Subaccounts. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Each table covers the
period from commencement of operations of the Subaccount to December 31, 1999.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<C> <S> <C> <C>
1982 .................... $12,336 $11,769
1983 .................... 14,313 13,211
1984 .................... 13,427 12,508
1985 .................... 17,019 15,853
1986 .................... 19,328 18,003
1987 .................... 19,188 17,872
1988 .................... 21,207 19,752
1989 .................... 25,945 24,164
1990 .................... 26,889 25,043
1991 .................... 36,583 34,069
1992 .................... 36,703 34,179
1993 .................... 40,598 37,805
1994 .................... 36,253 33,758
1995 .................... 45,056 41,953
1996 .................... 51,903 48,327
1997 .................... 61,440 57,204
1998 .................... 69,811 64,996
1999 .................... 79,931 74,474
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<C> <S> <C> <C>
1982 .................... $12,363 $11,920
1983 .................... 14,000 13,427
1984 .................... 15,557 15,155
1985 .................... 18,686 18,203
1986 .................... 21,710 21,149
1987 .................... 22,693 22,105
1988 .................... 25,944 25,273
1989 .................... 25,278 24,624
1990 .................... 21,092 20,546
1991 .................... 31,597 30,778
1992 .................... 36,712 35,760
1993 .................... 43,466 42,338
1994 .................... 41,931 40,843
1995 .................... 48,576 47,315
1996 .................... 54,699 53,249
1997 .................... 60,215 58,651
1998 .................... 60,289 58,723
1999 .................... 61,121 59,542
</TABLE>
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1992 ................................ $ 9,803
1993 ................................ 12,836
1994 ................................ 12,187
1995 ................................ 13,559
1996 ................................ 15,576
1997 ................................ 16,818
1998 ................................ 18,253
1999 ................................ 26,451
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1994 ................................ $10,296
1995 ................................ 13,208
1996 ................................ 16,680
1997 ................................ 22,085
1998 ................................ 25,795
1999 ................................ 34,396
</TABLE>
<TABLE>
<CAPTION>
KEMPER GROWTH SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<C> <S> <C> <C>
1983... $10,290 $10,271
1984 .................... 11,254 11,237
1985 .................... 13,898 13,877
1986 .................... 14,986 14,965
1987 .................... 15,043 15,022
1988 .................... 14,908 14,887
1989 .................... 18,871 18,844
1990 .................... 18,736 18,709
1991 .................... 29,479 29,437
1992 .................... 30,123 30,080
1993 .................... 34,063 34,011
1994 .................... 32,261 32,215
1995 .................... 42,330 42,269
1996 .................... 50,798 50,725
1997 .................... 60,828 60,741
1998 .................... 69,098 68,998
1999 .................... 94,008 93,874
</TABLE>
<TABLE>
<CAPTION>
KEMPER MONEY MARKET SUBACCOUNT #1
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1982 ................................ $10,747
1983 ................................ 11,575
1984 ................................ 12,630
1985 ................................ 13,479
1986 ................................ 14,185
1987 ................................ 14,922
1988 ................................ 15,827
1989 ................................ 17,045
1990 ................................ 18,195
1991 ................................ 19,003
1992 ................................ 19,385
1993 ................................ 19,661
1994 ................................ 20,157
1995 ................................ 21,001
1996 ................................ 21,755
1997 ................................ 22,581
1998 ................................ 23,418
1999 ................................ 24,551
</TABLE>
B-10
<PAGE> 59
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1987 ................................ $10,030
1988 ................................ 10,232
1989 ................................ 11,437
1990 ................................ 12,396
1991 ................................ 14,084
1992 ................................ 14,708
1993 ................................ 15,559
1994 ................................ 14,925
1995 ................................ 17,511
1996 ................................ 17,711
1997 ................................ 19,032
1998 ................................ 20,092
1999 ................................ 20,135
</TABLE>
<TABLE>
<CAPTION>
KEMPER CONTRARIAN VALUE SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,628
1997 ................................ 14,954
1998 ................................ 17,595
1999 ................................ 15,628
</TABLE>
<TABLE>
<CAPTION>
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $10,260
1997 ................................ 11,033
1998 ................................ 11,746
1999 ................................ 11,386
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 20+ SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,422
1997 ................................ 13,566
1998 ................................ 15,123
1999 ................................ 16,371
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 5 SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $10,850
1997 ................................ 12,049
1998 ................................ 13,037
1999 ................................ 13,556
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP VALUE SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $10,091
1997 ................................ 12,117
1998 ................................ 10,606
1999 ................................ 10,789
</TABLE>
<TABLE>
<CAPTION>
KEMPER VALUE+GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,354
1997 ................................ 14,051
1998 ................................ 16,656
1999 ................................ 19,202
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 10+ SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,028
1997 ................................ 12,689
1998 ................................ 13,941
1999 ................................ 14,966
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $10,327
1996 ................................ 12,062
1997 ................................ 14,602
1998 ................................ 19,541
1999 ................................ 27,865
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN WORLDWIDE GROWTH
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $10,425
1996 ................................ 13,266
1997 ................................ 15,984
1998 ................................ 20,330
1999 ................................ 33,100
</TABLE>
<TABLE>
<CAPTION>
LEXINGTON EMERGING MARKETS
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $ 9,547
1996 ................................ 10,111
1997 ................................ 8,820
1998 ................................ 6,244
1999 ................................ 16,499
</TABLE>
B-11
<PAGE> 60
<TABLE>
<CAPTION>
JANUS ASPEN AGGRESSIVE GROWTH
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $10,552
1996 ................................ 11,231
1997 ................................ 12,477
1998 ................................ 16,524
1999 ................................ 36,904
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN BALANCED SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $10,547
1996 ................................ 12,082
1997 ................................ 14,549
1998 ................................ 19,273
1999 ................................ 24,188
</TABLE>
<TABLE>
<CAPTION>
LEXINGTON NATURAL RESOURCES
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $10,032
1996 ................................ 12,556
1997 ................................ 13,272
1998 ................................ 10,523
1999 ................................ 11,882
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP EQUITY-INCOME SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $10,687
1997 ................................ 13,502
1998 ................................ 14,867
1999 ................................ 15,647
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP II ASSET MANAGER SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $10,916
1997 ................................ 12,987
1998 ................................ 14,736
1999 ................................ 16,211
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP II CONTRAFUND SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,145
1997 ................................ 13,646
1998 ................................ 17,498
1999 ................................ 21,512
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $10,347
1997 ................................ 12,599
1998 ................................ 17,336
1999 ................................ 23,584
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP II INDEX 500 SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,366
1997 ................................ 14,874
1998 ................................ 18,828
1999 ................................ 22,457
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF BOND SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1999 ................................ $ 9,794
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF CAPITAL GROWTH
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1999 ................................ $12,607
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF INTERNATIONAL
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1999 ................................ $14,123
</TABLE>
<TABLE>
<CAPTION>
DREYFUS SOCIALLY RESPONSIBLE GROWTH
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1999 ................................ $11,901
</TABLE>
<TABLE>
<CAPTION>
J.P. MORGAN SMALL COMPANY SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1999 ................................ $14,220
</TABLE>
B-12
<PAGE> 61
<TABLE>
<CAPTION>
ALGER AMERICAN GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1999 ................................ $11,897
</TABLE>
<TABLE>
<CAPTION>
ALGER AMERICAN SMALL CAPITALIZATION
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1999... $13,735
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY VP INCOME & GROWTH
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1999 ................................ $10,925
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY VP VALUE SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1999 ................................ $8,805
</TABLE>
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
TAX-DEFERRED NON-QUALIFIED
RETIREMENT ANNUITY ANNUITY CONVENTIONAL
BEFORE-TAX CONTRIBUTIONS AFTER-TAX CONTRIBUTIONS SAVINGS PLAN
AND TAX-DEFERRED EARNINGS. AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- -------------------------------- CONTRIBUTIONS
TAXABLE LUMP TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL NO WITHDRAWALS SUM WITHDRAWAL EARNINGS.
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
10 Years............... $ 36,256 $ 25,017 $ 25,017 $ 22,395 $ 21,974
20 Years............... 114,532 79,027 79,027 64,795 59,581
30 Years............... 283,522 195,630 195,630 150,385 123,940
</TABLE>
This chart compares the accumulation of monthly contributions into a
Tax-Deferred Retirement Annuity (such as a SIMPLE IRA or a Section 403(b)
annuity) through a payroll reduction program, a Non-Qualified Annuity and a
Conventional Savings Plan. Before-tax contributions to the Tax-Deferred
Retirement Annuity are $200 per month and the entire amount of a taxable lump
sum withdrawal will be subject to income tax. After-tax contributions to the
Non-Qualified Annuity and the Conventional Savings Plan are $138 per month. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 31% federal marginal tax rate,
representative of the target market, and an 8% annual return. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts.
Tax-deferred retirement accumulations, as well as the income on Non-Qualified
Annuities, are taxed as ordinary income upon withdrawal. A 10% tax penalty may
apply to early withdrawals. See "Federal Income Taxes" in the prospectus. The
chart does not reflect the following charges and expenses under Kemper Advantage
III: 1.00% mortality and expense risk; .30% administration charges; 6% maximum
deferred withdrawal charge; and a maximum of $30 annual records maintenance
charge. The tax-deferred accumulation would be reduced if these charges were
reflected. No implication is intended by the use of these assumptions that the
return shown is guaranteed in any way or that the return shown represents an
average or expected rate of return over the period of the Contracts.
[IMPORTANT--THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN]
Unlike savings plans, contributions to tax qualified retirement plans and
Non-Qualified Annuities provide tax-deferred treatment on earnings. In addition,
contributions to tax qualified retirement plans are not subject to current tax
in the year of contribution. When monies are received from a tax-deferred
retirement annuity or Non-Qualified Annuity (and you have many different options
on how you receive your funds), they are subject to income tax. At the time of
receipt, if the person receiving the monies is retired, not working or has
additional tax exemptions, these monies may be taxed at a lesser rate.
STATE REGULATION
KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of Insurance each year.
KILICO's books and accounts are subject to review by the Department of Insurance
at all times, and a full examination of its operations is conducted
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, KILICO is subject
to regulation under the insurance laws of other jurisdictions in which it may
operate.
B-13
<PAGE> 62
EXPERTS
The consolidated balance sheets of KILICO as of December 31, 1999 and 1998 and
the related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the years ended December 31, 1999, 1998
and 1997 have been included herein and in the registration statement in reliance
upon the report of PricewaterhouseCoopers LLP, independent accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The statements of assets and liabilities and contract owners' equity of the
Separate Account as of December 31, 1999, and the related statements of
operations and the statements of changes in contract owners' equity for each of
the two years then ended and for each period presented have been included herein
in reliance upon the report of PricewaterhouseCoopers LLP, independent
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
FINANCIAL STATEMENTS
This Statement of Additional Information contains financial statements for the
Separate Account which reflect assets attributable to the Contracts and also
reflect assets attributable to other variable annuity contracts offered by
KILICO through the Separate Account.
B-14
<PAGE> 63
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS OF KEMPER INVESTORS LIFE INSURANCE COMPANY AND
CONTRACT OWNERS OF KEMPER INVESTORS LIFE INSURANCE COMPANY'S KILICO
VARIABLE ANNUITY SEPARATE ACCOUNT
In our opinion, the accompanying statements of assets and liabilities and
contract owners' equity and the related statements of operations and changes in
contract owners' equity present fairly, in all material respects, the financial
position of the subaccounts of Kemper Investors Life Insurance Company's (the
"Company") KILICO Variable Annuity Separate Account, which includes the Kemper
Money Market Subaccount #1, Kemper Total Return Subaccount, Kemper High Yield
Subaccount, Kemper Growth Subaccount, Kemper Government Securities Subaccount,
Kemper International Subaccount, Kemper Small Cap Growth Subaccount, Kemper
Investment Grade Bond Subaccount, Kemper Contrarian Value Subaccount, Kemper
Small Cap Value Subaccount, Kemper Value+Growth Subaccount, Kemper Horizon 20+
Subaccount, Kemper Horizon 10+ Subaccount, Kemper Horizon 5 Subaccount
(investment options within the Kemper Variable Series, formerly Investors Fund
Series), Janus Aspen Growth Subaccount, Janus Aspen Aggressive Growth
Subaccount, Janus Aspen Worldwide Growth Subaccount, Janus Aspen Balanced
Subaccount (investment options within the Janus Aspen Series), Lexington Natural
Resources Subaccount (investment option within the Lexington Natural Resources
Trust), Lexington Emerging Markets Subaccount (investment option within the
Lexington Emerging Markets Fund, Inc.), Fidelity VIP Equity-Income Subaccount,
Fidelity VIP Growth Subaccount (investment options within the Fidelity Variable
Insurance Products Fund), Fidelity VIP II Asset Manager Subaccount, Fidelity VIP
II Index 500 Subaccount, Fidelity VIP II Contrafund Subaccount (investment
options within the Fidelity Variable Insurance Products Fund II), Scudder VLIF
Bond Subaccount, Scudder VLIF Capital Growth Subaccount, Scudder VLIF
International Subaccount (investment options within the Scudder Variable Life
Investment Fund), Dreyfus Socially Responsible Growth Subaccount (investment
option within The Dreyfus Socially Responsible Growth Fund, Inc.), J.P. Morgan
Small Company Subaccount (investment option within the J.P. Morgan Series Trust
II), Alger American Growth Subaccount, Alger American Small Capitalization
Subaccount (investment options within The Alger American Fund), American Century
VP Income & Growth Subaccount, American Century VP Value Subaccount (investment
options within the American Century Variable Portfolios, Inc.) thereof at
December 31, 1999, and the results of their operations for the period presented
and the changes in their contract owners' equity for each of the two years then
ended, except for the Scudder VLIF Bond Subaccount as to which the period is
April 7, 1999 (commencement of operations) to December 31, 1999, the Dreyfus
Socially Responsible Growth Subaccount, the J.P. Morgan Small Company
Subaccount, the Alger American Growth Subaccount, the Alger American Small
Capitalization Subaccount, the American Century VP Income & Growth Subaccount
and the American Century VP Value Subaccount as to which the period is May 3,
1999 (commencement of operations) to December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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 of these financial statements in accordance
with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included direct
confirmation of investments owned at December 31, 1999 provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 24, 2000
B-15
<PAGE> 64
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
---------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY TOTAL HIGH KEMPER GOVERNMENT KEMPER
MARKET RETURN YIELD GROWTH SECURITIES INTERNATIONAL
SUBACCOUNT #1 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio
funds, at current values.............. $137,366 716,720 218,357 574,900 71,783 159,793
Dividends and other receivables......... 432 36 31 1 -- 1
-------- ------- ------- ------- ------ -------
Total assets..................... 137,798 716,756 218,388 574,901 71,783 159,794
-------- ------- ------- ------- ------ -------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and
administrative charges.............. 120 731 225 586 68 156
Other payables........................ 1 217 445 282 6 86
-------- ------- ------- ------- ------ -------
Total liabilities................ 121 948 670 868 74 242
-------- ------- ------- ------- ------ -------
Contract owners' equity................. $137,677 715,808 217,718 574,033 71,709 159,552
======== ======= ======= ======= ====== =======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess (deficiency) of proceeds from
units sold over payments for units
redeemed.............................. $ 60,415 (6,653) 1,825 9,349 34,942 42,661
Accumulated net investment income....... 77,262 466,966 220,219 275,309 37,352 29,318
Accumulated net realized gain on sales
of investments........................ -- 138,146 3,970 100,375 346 39,837
Unrealized appreciation (depreciation)
of investments........................ -- 117,349 (8,296) 189,000 (931) 47,736
-------- ------- ------- ------- ------ -------
Contract owners' equity................. $137,677 715,808 217,718 574,033 71,709 159,552
======== ======= ======= ======= ====== =======
</TABLE>
- ---------------
* Formerly Investors Fund Series
See accompanying notes to financial statements.
B-16
<PAGE> 65
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
-------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
SMALL CAP INVESTMENT CONTRARIAN SMALL CAP VALUE+ KEMPER KEMPER KEMPER
GROWTH GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
166,144 18,607 92,226 31,631 48,370 10,321 15,416 9,194
67 290 134 5 -- -- -- --
------- ------ ------ ------ ------ ------ ------ -----
166,211 18,897 92,360 31,636 48,370 10,321 15,416 9,194
------- ------ ------ ------ ------ ------ ------ -----
155 11 82 28 44 10 12 6
-- 6 4 4 2 -- -- --
------- ------ ------ ------ ------ ------ ------ -----
155 17 86 32 46 10 12 6
------- ------ ------ ------ ------ ------ ------ -----
166,056 18,880 92,274 31,604 48,324 10,311 15,404 9,188
======= ====== ====== ====== ====== ====== ====== =====
65,173 18,577 77,678 31,478 32,016 7,600 11,824 7,948
23,953 312 7,165 79 763 119 195 96
25,083 368 15,069 1,825 6,973 1,033 1,727 537
51,847 (377) (7,638) (1,778) 8,572 1,559 1,658 607
------- ------ ------ ------ ------ ------ ------ -----
166,056 18,880 92,274 31,604 48,324 10,311 15,404 9,188
======= ====== ====== ====== ====== ====== ====== =====
</TABLE>
B-17
<PAGE> 66
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
-----------------------------------------------------------------------
JANUS ASPEN JANUS ASPEN
JANUS ASPEN AGGRESSIVE WORLDWIDE JANUS ASPEN
GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio funds, at
current values................................. $240,663 158,602 329,390 144,185
Dividends and other receivables.................. 23 42 121 66
-------- -------- -------- --------
Total assets.............................. 240,686 158,644 329,511 144,251
-------- -------- -------- --------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and administrative
charges...................................... 159 154 332 151
Other payables................................. 28 97 163 7
-------- -------- -------- --------
Total liabilities......................... 187 251 495 158
-------- -------- -------- --------
Contract owners' equity.......................... $240,499 158,393 329,016 144,093
======== ======== ======== ========
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess of proceeds from units sold over payments
for units redeemed............................. $167,597 78,989 166,827 108,887
Accumulated net investment income................ 1,903 659 940 2,457
Accumulated net realized gain (loss) on sales of
investments.................................... 6,108 3,986 8,485 2,244
Unrealized appreciation (depreciation) of
investments.................................... 64,891 74,759 152,764 30,505
-------- -------- -------- --------
Contract owners' equity.......................... $240,499 158,393 329,016 144,093
======== ======== ======== ========
</TABLE>
- ---------------
See accompanying notes to financial statements.
B-18
<PAGE> 67
<TABLE>
<CAPTION>
LEXINGTON LEXINGTON
NATURAL EMERGING
RESOURCES MARKETS
TRUST FUND, INC. FIDELITY VARIABLE INSURANCE PRODUCTS FUND
---------- ---------- -----------------------------------------
LEXINGTON LEXINGTON FIDELITY VIP
NATURAL EMERGING EQUITY- FIDELITY VIP
RESOURCES MARKETS INCOME GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
4,378 12,549 45,335 91,361
-- 13 -- 63
----- ------ ------ ------
4,378 12,562 45,335 91,424
----- ------ ------ ------
4 13 50 95
-- -- 56 27
----- ------ ------ ------
4 13 106 122
----- ------ ------ ------
4,374 12,549 45,229 91,302
===== ====== ====== ======
4,138 8,771 36,821 62,171
421 180 3,108 5,541
(141) (2,112) 1,884 2,043
(44) 5,710 3,416 21,547
----- ------ ------ ------
4,374 12,549 45,229 91,302
===== ====== ====== ======
<CAPTION>
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
---------------------------------------------------------
FIDELITY VIP II
ASSET FIDELITY VIP II FIDELITY VIP II
MANAGER INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------- --------------- ---------------
<S> <C> <C> <C>
8,403 170,471 78,493
1 5 --
----- ------- ------
8,404 170,476 78,493
----- ------- ------
9 180 82
2 17 15
----- ------- ------
11 197 97
----- ------- ------
8,393 170,279 78,396
===== ======= ======
6,616 123,271 50,097
944 750 2,348
151 11,070 8,444
682 35,188 17,507
----- ------- ------
8,393 170,279 78,396
===== ======= ======
</TABLE>
B-19
<PAGE> 68
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND
---------------------------------------------
SCUDDER VLIF
SCUDDER VLIF CAPITAL SCUDDER VLIF
BOND GROWTH INTERNATIONAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Investments in underlying portfolio funds, at current
values.................................................. $176 13,725 27,586
Dividends and other receivables........................... -- -- 1
---- ------ ------
Total assets....................................... 176 13,725 27,587
---- ------ ------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and administrative charges... -- -- 3
Other payables.......................................... -- -- 2
---- ------ ------
Total liabilities.................................. -- -- 5
---- ------ ------
Contract owners' equity................................... $176 13,725 27,582
==== ====== ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess of proceeds from units sold over payments for units
redeemed................................................ $174 11,279 21,253
Accumulated net investment income (loss).................. (1) 188 728
Accumulated net realized gain (loss) on sales of
investments............................................. 2 36 2,930
Unrealized appreciation (depreciation) of investments..... 1 2,222 2,671
---- ------ ------
Contract owners' equity................................... $176 13,725 27,582
==== ====== ======
</TABLE>
- ---------------
See accompanying notes to financial statements.
B-20
<PAGE> 69
<TABLE>
<CAPTION>
THE DREYFUS
SOCIALLY RESPONSIBLE J.P. MORGAN SERIES AMERICAN CENTURY VARIABLE
GROWTH FUND, INC. TRUST II THE ALGER AMERICAN FUND PORTFOLIOS, INC.
-------------------- ------------------ -------------------------------- ------------------------------------
DREYFUS ALGER AMERICAN AMERICAN CENTURY AMERICAN CENTURY
SOCIALLY RESPONSIBLE J.P. MORGAN ALGER AMERICAN SMALL VP INCOME & VP
GROWTH SMALL COMPANY GROWTH CAPITALIZATION GROWTH VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------------------- ------------------ -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
2,809 370 10,920 2,149 2,727 581
61 -- 3 -- -- --
----- --- ------ ----- ----- ---
2,870 370 10,923 2,149 2,727 581
----- --- ------ ----- ----- ---
3 -- 11 2 3 1
-- -- 1 4 -- --
----- --- ------ ----- ----- ---
3 -- 12 6 3 1
----- --- ------ ----- ----- ---
2,867 370 10,911 2,143 2,724 580
===== === ====== ===== ===== ===
2,481 301 9,538 1,538 2,487 633
87 6 (32) (10) (13) (2)
31 19 42 255 11 (3)
268 44 1,363 360 239 (48)
----- --- ------ ----- ----- ---
2,867 370 10,911 2,143 2,724 580
===== === ====== ===== ===== ===
</TABLE>
B-21
<PAGE> 70
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
---------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY TOTAL HIGH KEMPER GOVERNMENT KEMPER
MARKET RETURN YIELD GROWTH SECURITIES INTERNATIONAL
SUBACCOUNT #1 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Dividends and capital gains distributions... $5,645 60,683 24,402 -- 3,826 17,715
EXPENSES
Mortality and expense risk and
administrative charges.................... 1,424 9,543 3,256 7,131 1,011 1,859
------ ------ ------- ------- ------ ------
Net investment income (loss).................. 4,221 51,140 21,146 (7,131) 2,815 15,856
------ ------ ------- ------- ------ ------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on sales of
investments............................... -- 29,197 (6,838) 30,772 (611) 9,865
Change in unrealized appreciation
(depreciation) of investments............. -- 8,683 (10,902) 134,497 (2,754) 24,305
------ ------ ------- ------- ------ ------
Net realized and unrealized gain (loss) on
investments................................. -- 37,880 (17,740) 165,269 (3,365) 34,170
------ ------ ------- ------- ------ ------
Net increase (decrease) in contract owners'
equity resulting from operations............ $4,221 89,020 3,406 158,138 (550) 50,026
====== ====== ======= ======= ====== ======
</TABLE>
- ---------------
*Formerly Investors Fund Series
See accompanying notes to financial statements.
B-22
<PAGE> 71
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
---------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
SMALL CAP INVESTMENT CONTRARIAN SMALL CAP VALUE+ KEMPER HORIZON KEMPER
GROWTH GRADE BOND VALUE VALUE GROWTH HORIZON 20+ 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-- 465 7,006 279 1,163 186 321 168
1,739 214 1,206 423 580 124 200 128
------ ---- ------- ---- ----- --- ----- ---
(1,739) 251 5,800 (144) 583 62 121 40
------ ---- ------- ---- ----- --- ----- ---
9,762 (16) 6,046 (229) 4,628 459 1,175 203
32,251 (733) (24,707) 497 1,178 215 (258) 47
------ ---- ------- ---- ----- --- ----- ---
42,013 (749) (18,661) 268 5,806 674 917 250
------ ---- ------- ---- ----- --- ----- ---
40,274 (498) (12,861) 124 6,389 736 1,038 290
====== ==== ======= ==== ===== === ===== ===
</TABLE>
B-23
<PAGE> 72
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
-------------------------------------------------
JANUS JANUS
JANUS ASPEN ASPEN JANUS
ASPEN AGGRESSIVE WORLDWIDE ASPEN
GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE
Dividends and capital gains distributions.................. $ 997 2,287 385 2,622
EXPENSES
Mortality and expense risk and administrative charges.... 1,735 946 2,942 1,342
------- ------ ------- ------
Net investment income (loss)............................... (738) 1,341 (2,557) 1,280
------- ------ ------- ------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on sales of investments......... 3,417 2,697 4,592 1,371
Change in unrealized appreciation (depreciation) of
investments............................................ 51,260 65,836 119,130 20,883
------- ------ ------- ------
Net realized and unrealized gain on investments............ 54,677 68,533 123,722 22,254
------- ------ ------- ------
Net increase in contract owners' equity resulting from
operations............................................... $53,939 69,874 121,165 23,534
======= ====== ======= ======
</TABLE>
- ---------------
See accompanying notes to financial statements.
B-24
<PAGE> 73
<TABLE>
<CAPTION>
LEXINGTON NATURAL LEXINGTON EMERGING FIDELITY VARIABLE INSURANCE
RESOURCES TRUST MARKETS FUND, INC. PRODUCTS FUND FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
----------------- ------------------ --------------------------- ---------------------------------------------------
FIDELITY
LEXINGTON LEXINGTON VIP FIDELITY FIDELITY VIP II
NATURAL EMERGING EQUITY- VIP ASSET FIDELITY VIP II FIDELITY VIP II
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------- ------------------ ------------ ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
28 36 2,030 4,962 455 2,006 2,128
65 73 623 857 123 1,892 881
------ ------ ----- ------ --- ------ ------
(37) (37) 1,407 4,105 332 114 1,247
------ ------ ----- ------ --- ------ ------
(767) (1,031) 1,480 1,734 12 4,761 4,962
1,253 7,793 (945) 15,088 335 19,511 7,841
------ ------ ----- ------ --- ------ ------
486 6,762 535 16,822 347 24,272 12,803
------ ------ ----- ------ --- ------ ------
449 6,725 1,942 20,927 679 24,386 14,050
====== ====== ===== ====== === ====== ======
</TABLE>
B-25
<PAGE> 74
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND
------------------------------------------------
SCUDDER VLIF
SCUDDER VLIF CAPITAL SCUDDER VLIF
BOND GROWTH INTERNATIONAL
SUBACCOUNT(a) SUBACCOUNT(b) SUBACCOUNT(b)
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE
Dividends and capital gains distributions................. $ -- 244 737
EXPENSES
Mortality and expense risk and administrative charges..... 1 54 4
---- ----- -----
Net investment income (loss)................................ (1) 190 733
---- ----- -----
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on sales of investments.......... 2 49 2,937
Change in unrealized appreciation (depreciation) of
investments............................................. 1 2,162 2,620
---- ----- -----
Net realized and unrealized gain (loss) on investments...... 3 2,211 5,557
---- ----- -----
Net increase (decrease) in contract owners' equity resulting
from operations........................................... $ 2 2,401 6,290
==== ===== =====
</TABLE>
- ---------------
(a) For the period (commencement of operations): April 7, 1999 -- Scudder VLIF
Bond Subaccount; May 3, 1999 -- Dreyfus Socially Responsible Growth
Subaccount, J.P. Morgan Small Company Subaccount, Alger American Growth
Subaccount, Alger American Small Capitalization Subaccount, American Century
VP Income & Growth Subaccount and American Century VP Value Subaccount; to
December 31, 1999.
(b) Scudder VLIF Capital Growth Subaccount and Scudder VLIF International
Subaccount made available to Kemper Advantage III Contract Owners beginning
May 3, 1999.
See accompanying notes to financial statements.
B-26
<PAGE> 75
<TABLE>
<CAPTION>
THE DREYFUS SOCIALLY
RESPONSIBLE
GROWTH FUND, INC. J.P. MORGAN SERIES TRUST II THE ALGER AMERICAN FUND
-------------------- --------------------------- --------------------------------------
DREYFUS
SOCIALLY RESPONSIBLE J.P. MORGAN ALGER AMERICAN ALGER AMERICAN
GROWTH SMALL COMPANY GROWTH SMALL CAPITALIZATION
SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a)
-------------------- --------------------------- -------------- --------------------
<S> <C> <C> <C> <C>
93......... 7 15 1
6.......... 1 47 11
--- -- ----- ---
87......... 6 (32) (10)
--- -- ----- ---
31......... 19 42 255
268........ 44 1,363 360
--- -- ----- ---
299........ 63 1,405 615
--- -- ----- ---
386........ 69 1,373 605
=== == ===== ===
<CAPTION>
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
-------------------------------------------
AMERICAN CENTURY
VP INCOME & AMERICAN CENTURY VP
GROWTH VALUE
SUBACCOUNT(a) SUBACCOUNT(a)
------------------ ---------------------
<S> <C> <C>
-- --
13 2
--- ---
(13) (2)
--- ---
11 (3)
239 (48)
--- ---
250 (51)
--- ---
237 (53)
=== ===
</TABLE>
B-27
<PAGE> 76
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
---------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY TOTAL HIGH KEMPER GOVERNMENT KEMPER
MARKET RETURN YIELD GROWTH SECURITIES INTERNATIONAL
SUBACCOUNT #1 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income.................. $ 4,221 51,140 21,146 (7,131) 2,815 15,856
Net realized gain (loss) on sales of
investments.......................... -- 29,197 (6,838) 30,772 (611) 9,865
Change in unrealized appreciation
(depreciation) of investments........ -- 8,683 (10,902) 134,497 (2,754) 24,305
-------- -------- -------- ------- ------- -------
Net increase (decrease) in contract
owners' equity resulting from
operations......................... 4,221 89,020 3,406 158,138 (550) 50,026
-------- -------- -------- ------- ------- -------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold............... 45,378 42,169 22,709 25,447 12,331 12,302
Net transfers (to) from affiliate and
subaccounts.......................... 18,795 (49,778) (27,431) (66,997) (4,399) (27,423)
Payments for units redeemed............ (37,819) (101,982) (43,328) (80,300) (14,018) (20,534)
-------- -------- -------- ------- ------- -------
Net increase (decrease) in contract
owners' equity from account unit
transactions....................... 26,354 (109,591) (48,050) (121,850) (6,086) (35,655)
-------- -------- -------- ------- ------- -------
Total increase (decrease) in contract
owners' equity......................... 30,575 (20,571) (44,644) 36,288 (6,636) 14,371
Beginning of period...................... 107,102 736,379 262,362 537,745 78,345 145,181
-------- -------- -------- ------- ------- -------
End of period............................ $137,677 715,808 217,718 574,033 71,709 159,552
======== ======== ======== ======= ======= =======
</TABLE>
- ---------------
* Formerly Investors Fund Series
See accompanying notes to financial statements.
B-28
<PAGE> 77
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
- -------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
SMALL CAP INVESTMENT CONTRARIAN SMALL CAP VALUE+ KEMPER KEMPER KEMPER
GROWTH GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(1,739) 251 5,800 (144) 583 62 121 40
9,762 (16) 6,046 (229) 4,628 459 1,175 203
32,251 (733) (24,707) 497 1,178 215 (258) 47
------- ------ ------- ------ ------ ------ ------ -----
40,274 (498) (12,861) 124 6,389 736 1,038 290
------- ------ ------- ------ ------ ------ ------ -----
17,628 6,620 19,424 4,836 6,147 1,140 2,541 1,504
(22,588) 3,501 1,432 (2,966) (5,820) (365) (1,509) 1,348
(13,139) (2,364) (11,571) (3,756) (5,397) (413) (2,105) (771)
------- ------ ------- ------ ------ ------ ------ -----
(18,099) 7,757 9,285 (1,886) (5,070) 362 (1,073) 2,081
------- ------ ------- ------ ------ ------ ------ -----
22,175 7,259 (3,576) (1,762) 1,319 1,098 (35) 2,371
143,881 11,621 95,850 33,366 47,005 9,213 15,439 6,817
------- ------ ------- ------ ------ ------ ------ -----
166,056 18,880 92,274 31,604 48,324 10,311 15,404 9,188
======= ====== ======= ====== ====== ====== ====== =====
</TABLE>
B-29
<PAGE> 78
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
-----------------------------------------------------
JANUS ASPEN JANUS ASPEN
JANUS ASPEN AGGRESSIVE WORLDWIDE JANUS ASPEN
GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)............................. $ (738) 1,341 (2,557) 1,280
Net realized gain (loss) on sales of investments......... 3,417 2,697 4,592 1,371
Change in unrealized appreciation (depreciation) of
investments............................................ 51,260 65,836 119,130 20,883
-------- ------- ------- -------
Net increase in contract owners' equity resulting from
operations........................................... 53,939 69,874 121,165 23,534
-------- ------- ------- -------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold................................. 57,097 10,948 30,001 22,203
Net transfers (to) from affiliate and subaccounts........ 77,006 52,502 23,985 51,714
Payments for units redeemed.............................. (7,417) (4,293) (11,997) (6,532)
-------- ------- ------- -------
Net increase (decrease) in contract owners' equity from
account unit transactions............................ 126,686 59,157 41,989 67,385
-------- ------- ------- -------
Total increase in contract owners' equity.................. 180,625 129,031 163,154 90,919
Beginning of period...................................... 59,874 29,362 165,862 53,174
-------- ------- ------- -------
End of period............................................ $240,499 158,393 329,016 144,093
======== ======= ======= =======
</TABLE>
- ---------------
See accompanying notes to financial statements.
B-30
<PAGE> 79
<TABLE>
<CAPTION>
LEXINGTON LEXINGTON
NATURAL EMERGING
RESOURCES MARKETS FIDELITY VARIABLE INSURANCE
TRUST FUND, INC. PRODUCTS FUND FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
---------- ---------- ---------------------------------- -----------------------------------------------------
LEXINGTON LEXINGTON FIDELITY VIP FIDELITY VIP II
NATURAL EMERGING EQUITY- FIDELITY VIP ASSET FIDELITY VIP II FIDELITY VIP II
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------ ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(37) (37) 1,407 4,105 332 114 1,247
(767) (1,031) 1,480 1,734 12 4,761 4,962
1,253 7,793 (945) 15,088 335 19,511 7,841
----- ------ ------ ------ ----- ------- ------
449 6,725 1,942 20,927 679 24,386 14,050
----- ------ ------ ------ ----- ------- ------
538 1,069 5,940 12,390 2,494 25,337 11,021
(505) 1,015 (2,461) 27,143 390 18,897 7,273
(223) (582) (3,126) (3,092) (978) (8,265) (3,468)
----- ------ ------ ------ ----- ------- ------
(190) 1,502 353 36,441 1,906 35,969 14,826
----- ------ ------ ------ ----- ------- ------
259 8,227 2,295 57,368 2,585 60,355 28,876
4,115 4,322 42,934 33,934 5,808 109,924 49,520
----- ------ ------ ------ ----- ------- ------
4,374 12,549 45,229 91,302 8,393 170,279 78,396
===== ====== ====== ====== ===== ======= ======
</TABLE>
B-31
<PAGE> 80
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND
--------------------------------------------------
SCUDDER VLIF
SCUDDER VLIF CAPITAL SCUDDER VLIF
BOND GROWTH INTERNATIONAL
SUBACCOUNT(a) SUBACCOUNT(b) SUBACCOUNT(b)
------------- ------------- -------------
<S> <C> <C> <C>
OPERATIONS
Net investment income (loss).............................. $ (1) 190 733
Net realized gain (loss) on sales of investments.......... 2 49 2,937
Change in unrealized appreciation (depreciation) of
investments............................................. 1 2,162 2,620
---- ------ ------
Net increase (decrease) in contract owners' equity
resulting from operations........................ 2 2,401 6,290
---- ------ ------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold.................................. 46 7,470 8,107
Net transfers from affiliate and subaccounts.............. 130 3,461 12,443
Payments for units redeemed............................... (2) (211) (127)
---- ------ ------
Net increase in contract owners' equity from
account unit transactions........................ 174 10,720 20,423
---- ------ ------
Total increase in contract owners' equity................... 176 13,121 26,713
Beginning of period......................................... -- 604 869
---- ------ ------
End of period............................................... $176 13,725 27,582
==== ====== ======
</TABLE>
- ---------------
(a) For the period (commencement of operations): April 7, 1999 -- Scudder VLIF
Bond Subaccount; May 3, 1999 -- Dreyfus Socially Responsible Growth
Subaccount, J.P. Morgan Small Company Subaccount, Alger American Growth
Subaccount, Alger American Small Capitalization Subaccount, American Century
VP Income & Growth Subaccount and American Century VP Value Subaccount; to
December 31, 1999.
(b) Scudder VLIF Capital Growth Subaccount and Scudder VLIF International
Subaccount made available to Kemper Advantage III Contract Owners beginning
May 3, 1999.
See accompanying notes to financial statements.
B-32
<PAGE> 81
<TABLE>
<CAPTION>
THE DREYFUS SOCIALLY
RESPONSIBLE GROWTH J.P. MORGAN
FUND, INC. SERIES TRUST II THE ALGER AMERICAN FUND AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
-------------------- --------------- -------------------------------- ------------------------------------------
DREYFUS ALGER AMERICAN AMERICAN CENTURY AMERICAN CENTURY
SOCIALLY RESPONSIBLE J.P. MORGAN ALGER AMERICAN SMALL VP INCOME & VP
GROWTH SMALL COMPANY GROWTH CAPITALIZATION GROWTH VALUE
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
-------------------- ------------- -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
87 6 (32) (10) (13) (2)
31 19 42 255 11 (3)
268 44 1,363 360 239 (48)
----- --- ------ ----- ----- ---
386 69 1,373 605 237 (53)
----- --- ------ ----- ----- ---
1,363 69 1,752 435 718 59
1,127 234 8,014 1,123 1,864 574
(9) (2) (228) (20) (95) --
----- --- ------ ----- ----- ---
2,481 301 9,538 1,538 2,487 633
----- --- ------ ----- ----- ---
2,867 370 10,911 2,143 2,724 580
-- -- -- -- -- --
----- --- ------ ----- ----- ---
2,867 370 10,911 2,143 2,724 580
===== === ====== ===== ===== ===
</TABLE>
B-33
<PAGE> 82
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
-----------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY TOTAL HIGH KEMPER GOVERNMENT
MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT #1 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income.................................... $ 3,168 114,564 17,149 79,715 3,569
Net realized gain (loss) on sales of investments......... -- 20,649 4,283 8,570 (67)
Change in unrealized appreciation (depreciation) of
investments............................................ -- (41,076) (17,978) (20,871) 553
-------- -------- ------- ------- -------
Net increase (decrease) in contract owners' equity
resulting from operations............................ 3,168 94,137 3,454 67,414 4,055
-------- -------- ------- ------- -------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold................................. 22,035 35,608 27,800 29,595 10,692
Net transfers (to) from affiliate and subaccounts........ 29,478 (47,643) (40,100) (26,086) 5,342
Payments for units redeemed.............................. (21,333) (88,507) (34,613) (60,278) (14,565)
-------- -------- ------- ------- -------
Net increase (decrease) in contract owners' equity from
account unit transactions............................ 30,180 (100,542) (46,913) (56,769) 1,469
-------- -------- ------- ------- -------
Total increase (decrease) in contract owners' equity....... 33,348 (6,405) (43,459) 10,645 5,524
Beginning of period...................................... 73,754 742,784 305,821 527,100 72,821
-------- -------- ------- ------- -------
End of period............................................ $107,102 736,379 262,362 537,745 78,345
======== ======== ======= ======= =======
</TABLE>
- ---------------
* Formerly Investors Fund Series
See accompanying notes to financial statements.
B-34
<PAGE> 83
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
-----------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
KEMPER SMALL CAP INVESTMENT CONTRARIAN SMALL CAP VALUE+ KEMPER KEMPER KEMPER
INTERNATIONAL GROWTH GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5,475 18,381 98 1,760 443 404 143 157 103
11,865 4,201 311 6,261 911 1,727 397 414 236
(3,914) (2,782) 78 6,236 (6,089) 3,626 309 604 115
------- ------- ------ ------ ------ ------ ----- ------ -----
13,426 19,800 487 14,257 (4,735) 5,757 849 1,175 454
------- ------- ------ ------ ------ ------ ----- ------ -----
8,825 17,275 2,850 15,517 6,528 7,814 2,155 2,644 1,628
(20,766) 2,566 3,781 (5,407) 1,040 8,749 116 3,301 221
(16,900) (8,623) (955) (6,599) (2,717) (3,236) (375) (841) (384)
------- ------- ------ ------ ------ ------ ----- ------ -----
(28,841) 11,218 5,676 3,511 4,851 13,327 1,896 5,104 1,465
------- ------- ------ ------ ------ ------ ----- ------ -----
(15,415) 31,018 6,163 17,768 116 19,084 2,745 6,279 1,919
160,596 112,863 5,458 78,082 33,250 27,921 6,468 9,160 4,898
------- ------- ------ ------ ------ ------ ----- ------ -----
145,181 143,881 11,621 95,850 33,366 47,005 9,213 15,439 6,817
======= ======= ====== ====== ====== ====== ===== ====== =====
</TABLE>
B-35
<PAGE> 84
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
--------------------------------------------------------
JANUS ASPEN JANUS ASPEN
JANUS ASPEN AGGRESSIVE WORLDWIDE JANUS ASPEN
GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)............................. $ 1,973 (338) 3,219 884
Net realized gain (loss) on sales of investments......... 1,775 1,084 1,984 615
Change in unrealized appreciation (depreciation) of
investments............................................ 9,281 6,612 23,208 7,717
------- ------ ------- ------
Net increase (decrease) in contract owners' equity
resulting from operations............................ 13,029 7,358 28,411 9,216
------- ------ ------- ------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold................................. 9,559 3,981 26,915 8,429
Net transfers (to) from affiliate and subaccounts........ 10,386 (176) 25,114 22,838
Payments for units redeemed.............................. (2,747) (1,761) (5,974) (1,464)
------- ------ ------- ------
Net increase (decrease) in contract owners' equity from
account unit transactions............................ 17,198 2,044 46,055 29,803
------- ------ ------- ------
Total increase (decrease) in contract owners' equity....... 30,227 9,402 74,466 39,019
Beginning of period...................................... 29,647 19,960 91,396 14,155
------- ------ ------- ------
End of period............................................ $59,874 29,362 165,862 53,174
======= ====== ======= ======
</TABLE>
- ---------------
See accompanying notes to financial statements.
B-36
<PAGE> 85
<TABLE>
<CAPTION>
LEXINGTON NATURAL LEXINGTON EMERGING FIDELITY VARIABLE INSURANCE
RESOURCES TRUST MARKETS FUND, INC. PRODUCTS FUND
----------------- ------------------ ----------------------------
LEXINGTON LEXINGTON FIDELITY VIP
NATURAL EMERGING EQUITY- FIDELITY VIP
RESOURCES MARKETS INCOME GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C>
323 375 1,183 1,409
(326) (1,236) 344 255
(1,259) (875) 1,560 5,035
------ ------ ------ ------
(1,262) (1,736) 3,087 6,699
------ ------ ------ ------
903 741 9,818 4,184
(1,060) (690) 7,688 11,823
(527) (424) (1,505) (583)
------ ------ ------ ------
(684) (373) 16,001 15,424
------ ------ ------ ------
(1,946) (2,109) 19,088 22,123
6,061 6,431 23,846 11,811
------ ------ ------ ------
4,115 4,322 42,934 33,934
====== ====== ====== ======
<CAPTION>
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
-----------------------------------------------------
FIDELITY VIP II
ASSET FIDELITY VIP II FIDELITY VIP II
MANAGER INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------- --------------- ---------------
<S> <C> <C> <C>
498 731 1,031
76 5,669 2,232
114 11,176 6,651
----- ------- ------
688 17,576 9,914
----- ------- ------
1,495 20,110 9,117
295 36,674 6,996
(603) (5,493) (1,390)
----- ------- ------
1,187 51,291 14,723
----- ------- ------
1,875 68,867 24,637
3,933 41,057 24,883
----- ------- ------
5,808 109,924 49,520
===== ======= ======
</TABLE>
B-37
<PAGE> 86
(This Page Intentionally Left Blank)
<PAGE> 87
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
KILICO Variable Annuity Separate Account (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 an indirect, wholly-owned subsidiary of Zurich Financial Services
("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven
percent and forty-three percent, respectively. Zurich Allied AG is listed on the
Swiss Market Index (SMI). Allied Zurich p.l.c. is included in the FTSE-100 Share
Index in London.
The Separate Account is used to fund contracts or certificates (collectively
referred to as "Contracts") for Kemper Advantage III periodic and flexible
payment variable annuity contracts ("Kemper Advantage III"), Kemper Passport
individual and group variable, fixed and market value adjusted deferred annuity
contracts ("Kemper Passport"), Kemper Destinations individual and group
variable, fixed and market value adjusted deferred annuity contracts ("Kemper
Destinations") and Farmers Variable Annuity I individual and group variable,
fixed and market value adjusted deferred annuity contracts ("Farmers Variable
Annuity I"). The Separate Account is divided into a total of fifty-nine
subaccounts with various subaccount options available to Contract Owners
depending upon their respective Contracts. The Kemper Advantage III contracts
have thirty-four subaccount options available to Contract Owners and each
subaccount invests exclusively in the shares of a corresponding portfolio in the
Kemper Variable Series (formerly Investors Fund Series), the Janus Aspen Series,
the Lexington Natural Resources Trust, the Lexington Emerging Markets Fund,
Inc., the Fidelity Variable Insurance Products Fund, the Fidelity Variable
Insurance Products Fund II, the Scudder Variable Life Investment Fund, The
Dreyfus Socially Responsible Growth Fund, Inc., the J.P. Morgan Series Trust II,
The Alger American Fund and the American Century Variable Portfolios, Inc., all
of which are open-end diversified management companies. The Kemper Passport
contracts have seventeen subaccount options available to the Contract Owners and
each subaccount invests exclusively in the shares of a corresponding portfolio
in the Kemper Variable Series, an open-end diversified management company. The
Kemper Destinations contracts have thirty-seven subaccount options available to
the Contract Owners and each subaccount invests exclusively in the shares of a
corresponding portfolio in the Kemper Variable Series, the Scudder Variable Life
Investment Fund, The Alger American Fund, the Dreyfus Investment Portfolios, The
Dreyfus Socially Responsible Growth Fund, Inc., the Janus Aspen Series and the
Warburg Pincus Trust, all of which are open-end diversified management
companies. The Farmers Variable Annuity I contracts have thirteen subaccount
options available to the Contract Owners and each subaccount invests exclusively
in the shares of a corresponding portfolio in the Kemper Variable Series, the
Scudder Variable Life Investment Fund, the Janus Aspen Series, the PIMCO
Variable Insurance Trust and the Templeton Variable Products Series Fund, all of
which are open-end diversified management companies.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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, 1999.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are generally accounted for on the trade date (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 generally reported on a first in, first out (FIFO)
cost basis.
B-39
<PAGE> 88
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(Central time) or the close of the Exchange by dividing the total value of each
subaccount's investments and other assets, less liabilities, by the number of
accumulation units outstanding in the respective subaccount.
FEDERAL INCOME TAXES
The operations of the Separate Account are included in the federal income tax
return of KILICO. Under existing federal income tax law, investment income and
realized capital gains and losses of the Separate Account increase liabilities
under the contract and are, therefore, not taxed. Thus the Separate Account may
realize net investment income and capital gains and losses without federal
income tax consequences.
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1999, are as follows (in thousands,
differences are due to rounding):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------- ----------
<S> <C> <C>
INVESTMENTS
KEMPER VARIABLE SERIES:
Kemper Money Market Subaccount #1........................... 137,366 $ 137,366
Kemper Total Return Subaccount.............................. 248,650 599,371
Kemper High Yield Subaccount................................ 190,485 226,653
Kemper Growth Subaccount.................................... 141,800 385,900
Kemper Government Securities Subaccount..................... 62,065 72,714
Kemper International Subaccount............................. 74,482 112,057
Kemper Small Cap Growth Subaccount.......................... 62,603 114,297
Kemper Investment Grade Bond Subaccount..................... 16,897 18,984
Kemper Contrarian Value Subaccount.......................... 62,749 99,864
Kemper Small Cap Value Subaccount........................... 29,154 33,409
Kemper Value+Growth Subaccount.............................. 25,519 39,798
Kemper Horizon 20+ Subaccount............................... 6,393 8,762
Kemper Horizon 10+ Subaccount............................... 10,424 13,758
Kemper Horizon 5 Subaccount................................. 6,892 8,587
JANUS ASPEN SERIES:
Janus Aspen Growth Subaccount............................... 7,152 175,772
Janus Aspen Aggressive Growth Subaccount.................... 2,657 83,843
Janus Aspen Worldwide Growth Subaccount..................... 6,898 176,626
Janus Aspen Balanced Subaccount............................. 5,164 113,680
LEXINGTON NATURAL RESOURCES TRUST:
Lexington Natural Resources Subaccount...................... 350 4,422
LEXINGTON EMERGING MARKETS FUND, INC.:
Lexington Emerging Markets Subaccount....................... 980 6,839
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
Fidelity VIP Equity-Income Subaccount....................... 1,763 41,919
Fidelity VIP Growth Subaccount.............................. 1,663 69,814
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Fidelity VIP II Asset Manager Subaccount.................... 450 7,721
Fidelity VIP II Index 500 Subaccount........................ 1,018 135,283
Fidelity VIP II Contrafund Subaccount....................... 2,693 60,986
SCUDDER VARIABLE LIFE INVESTMENT FUND:
Scudder VLIF Bond Subaccount................................ 27 175
Scudder VLIF Capital Growth Subaccount...................... 471 11,503
Scudder VLIF International Subaccount....................... 1,356 24,915
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
Dreyfus Socially Responsible Growth Subaccount.............. 72 2,541
</TABLE>
B-40
<PAGE> 89
<TABLE>
<CAPTION>
SHARES
OWNED COST
------- ----------
<S> <C> <C>
J.P. MORGAN SERIES TRUST II:
J.P. Morgan Small Company Subaccount........................ 22 $ 326
THE ALGER AMERICAN FUND:
Alger American Growth Subaccount............................ 170 9,557
Alger American Small Capitalization Subaccount.............. 39 1,789
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. :
American Century VP Income & Growth Subaccount.............. 341 2,488
American Century VP Value Subaccount........................ 98 629
----------
TOTAL INVESTMENTS AT COST........................... $2,802,348
==========
</TABLE>
A description of the underlying investments of the subaccounts are summarized
below.
KEMPER VARIABLE SERIES
KEMPER MONEY MARKET SUBACCOUNT: This subaccount invests in the Kemper Money
Market Portfolio of the Kemper Variable Series. The Portfolio seeks maximum
current income to the extent consistent with stability of principal from a
portfolio of high quality money market instruments. The Portfolio seeks to
maintain a net asset value of $1.00 per share but there can be no assurance that
the Portfolio will be able to do so. The Kemper Money Market Subaccount #1
represents the Kemper Advantage III, Kemper Passport and Kemper Destinations
Money Market Subaccount.
KEMPER TOTAL RETURN SUBACCOUNT: This subaccount invest in the Kemper Total
Return Portfolio of the Kemper Variable Series. The Portfolio seeks high total
return, a combination of income and capital appreciation.
KEMPER HIGH YIELD SUBACCOUNT: This subaccount invests in the Kemper High Yield
Portfolio of the Kemper Variable Series. The Portfolio seeks to provide a high
level of current income.
KEMPER GROWTH SUBACCOUNT: This subaccount invests in the Kemper Growth Portfolio
of the Kemper Variable Series. The Portfolio seeks maximum appreciation of
capital.
KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests in the Kemper
Government Securities Portfolio of the Kemper Variable Series. The Portfolio
seeks high current income consistent with preservation of capital.
KEMPER INTERNATIONAL SUBACCOUNT: This subaccount invests in the Kemper
International Portfolio of the Kemper Variable Series. The Portfolio seeks total
return, a combination of capital growth and income.
KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount invests in the Kemper Small
Cap Growth Portfolio of the Kemper Variable Series. The Portfolio seeks maximum
appreciation of investors' capital.
KEMPER INVESTMENT GRADE BOND SUBACCOUNT: This subaccount invests in the Kemper
Investment Grade Bond Portfolio of the Kemper Variable Series. The Portfolio
seeks high current income.
KEMPER CONTRARIAN VALUE SUBACCOUNT: This subaccount invests in the Kemper
Contrarian Value Portfolio of the Kemper Variable Series. The Portfolio seeks to
achieve a high rate of total return.
KEMPER SMALL CAP VALUE SUBACCOUNT: This subaccount invests in the Kemper Small
Cap Value Portfolio of the Kemper Variable Series. The Portfolio seeks long-term
capital appreciation.
KEMPER VALUE+GROWTH SUBACCOUNT: This subaccount invests in the Kemper
Value+Growth Portfolio of the Kemper Variable Series. The Portfolio seeks growth
of capital. A secondary objective of the Portfolio is the reduction of risk over
a full market cycle compared to a portfolio of only growth stocks or only value
stocks.
KEMPER HORIZON 20+ SUBACCOUNT: This subaccount invests in the Kemper Horizon 20+
Portfolio of the Kemper Variable Series. The Portfolio, designed for investors
with approximately a 20+ year investment horizon, seeks growth of capital, with
income as a secondary objective.
KEMPER HORIZON 10+ SUBACCOUNT: This subaccount invests in the Kemper Horizon 10+
Portfolio of the Kemper Variable Series. The Portfolio, designed for investors
with approximately a 10+ year investment horizon, seeks a balance between growth
of capital and income, consistent with moderate risk.
KEMPER HORIZON 5 SUBACCOUNT: This subaccount invests in the Kemper Horizon 5
Portfolio of the Kemper Variable Series. The Portfolio, designed for investors
with approximately a 5 year investment horizon, seeks income consistent with
preservation of capital, with growth of capital as a secondary objective.
B-41
<PAGE> 90
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
JANUS ASPEN SERIES
JANUS ASPEN GROWTH SUBACCOUNT: This subaccount invests in the Janus Aspen Growth
Portfolio of the Janus Aspen Series. The Portfolio seeks long-term growth of
capital in a manner consistent with the preservation of capital.
JANUS ASPEN AGGRESSIVE GROWTH SUBACCOUNT: This subaccount invests in the Janus
Aspen Aggressive Growth Portfolio of the Janus Aspen Series. The Portfolio seeks
long-term growth of capital.
JANUS ASPEN WORLDWIDE GROWTH SUBACCOUNT: This subaccount invests in the Janus
Aspen Worldwide Growth Portfolio of the Janus Aspen Series. The Portfolio seeks
long-term growth of capital in a manner consistent with the preservation of
capital.
JANUS ASPEN BALANCED SUBACCOUNT: This subaccount invests in the Janus Aspen
Balanced Portfolio of the Janus Aspen Series. The Portfolio seeks long-term
capital growth, consistent with preservation of capital and balanced by current
income.
LEXINGTON NATURAL RESOURCES TRUST
LEXINGTON NATURAL RESOURCES SUBACCOUNT: This subaccount invests in the Lexington
Natural Resources Trust. The Fund seeks long-term growth of capital through
investment primarily in common stocks of companies that own or develop natural
resources and other basic commodities, or supply goods and services to such
companies. Current income will not be a factor. Total return will consist
primarily of capital appreciation.
LEXINGTON EMERGING MARKETS FUND, INC.
LEXINGTON EMERGING MARKETS SUBACCOUNT: This subaccount invests in the Lexington
Emerging Markets Fund, Inc. The Fund seeks long-term growth of capital primarily
through investment in equity securities and equivalents of companies domiciled
in, or doing business in, emerging countries and emerging markets as described
in the Fund's prospectus.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
FIDELITY VIP EQUITY-INCOME SUBACCOUNT: This subaccount invests in the Fidelity
VIP Equity-Income Portfolio of the Fidelity Variable Insurance Products Fund.
The Portfolio seeks reasonable income.
FIDELITY VIP GROWTH SUBACCOUNT: The subaccount invests in the Fidelity VIP
Growth Portfolio of the Fidelity Variable Insurance Products Fund. The Portfolio
seeks capital appreciation.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
FIDELITY VIP II ASSET MANAGER SUBACCOUNT: This subaccount invests in the
Fidelity VIP II Asset Manager Portfolio of the Fidelity Variable Insurance
Products Fund II. The Portfolio seeks high total return with reduced risk over
the long term by allocating its assets among stocks, bonds and short-term
instruments.
FIDELITY VIP II INDEX 500 SUBACCOUNT: This subaccount invests in the Fidelity
VIP II Index 500 Portfolio of the Fidelity Variable Insurance Products Fund II.
The Portfolio seeks investment results that correspond to the total return of
common stocks publicly traded in the United States, as represented by the S&P
500.
FIDELITY VIP II CONTRAFUND SUBACCOUNT: This subaccount invests in the Fidelity
VIP II Contrafund Portfolio of the Fidelity Variable Insurance Products Fund II.
The Portfolio seeks long-term capital appreciation.
SCUDDER VARIABLE LIFE INVESTMENT FUND
SCUDDER VLIF BOND SUBACCOUNT: This subaccount invests in the Scudder VLIF Bond
Portfolio (Class A Shares) of the Scudder Variable Life Investment Fund. The
Portfolio seeks high income from a high quality portfolio of bonds.
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT: This subaccount invests in the Scudder
VLIF Capital Growth Portfolio (Class A Shares) of the Scudder Variable Life
Investment Fund. The Portfolio seeks to maximize long-term capital growth from a
portfolio consisting primarily of equity securities.
B-42
<PAGE> 91
SCUDDER VLIF INTERNATIONAL SUBACCOUNT: This subaccount invests in the Scudder
VLIF International Portfolio (Class A Shares) of the Scudder Variable Life
Investment Fund. The Portfolio seeks long-term growth of capital principally
from a diversified portfolio of foreign equity securities.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
DREYFUS SOCIALLY RESPONSIBLE GROWTH SUBACCOUNT: This subaccount invests in The
Dreyfus Socially Responsible Growth Fund, Inc. The Fund's primary goal is to
provide capital growth through investment in common stocks of companies which
not only meet traditional investment standards, but also conduct their business
in a manner that contributes to the enhancement of the quality of life in
America.
J.P. MORGAN SERIES TRUST II
J.P. MORGAN SMALL COMPANY SUBACCOUNT: This subaccount invests in the J.P. Morgan
Small Company Portfolio of the J.P. Morgan Series Trust II. The Portfolio seeks
to provide a high total return from a portfolio of small company stocks.
THE ALGER AMERICAN FUND
ALGER AMERICAN GROWTH SUBACCOUNT: This subaccount invests in the Alger American
Growth Portfolio of The Alger American Fund. The Portfolio seeks long-term
capital appreciation.
ALGER AMERICAN SMALL CAPITALIZATION SUBACCOUNT: This subaccount invests in the
Alger American Small Capitalization Portfolio of The Alger American Fund. The
Portfolio seeks long-term capital appreciation.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
AMERICAN CENTURY VP INCOME & GROWTH SUBACCOUNT: This subaccount invests in the
American Century VP Income & Growth Portfolio of the American Century Variable
Portfolios, Inc. The Portfolio seeks dividend growth, current income and capital
appreciation.
AMERICAN CENTURY VP VALUE SUBACCOUNT: This subaccount invests in the American
Century VP Value Portfolio of the American Century Variable Portfolios, Inc. The
Portfolio seeks long-term capital growth.
(3) TRANSACTIONS WITH AFFILIATES
KILICO assumes mortality risks associated with the annuity contracts and incurs
all expenses involved in administering the contracts. In return, KILICO assesses
that portion of each subaccount representing assets under the Kemper Advantage
III flexible payment contracts with a daily charge for mortality and expense
risk and administrative costs which amounts to an aggregate of one percent
(1.00%) per annum. KILICO also assesses that portion of each subaccount
representing assets under the Kemper Advantage III periodic payment contracts
with a daily asset charge for mortality and expense risk and administrative
costs which amounts to an aggregate of one and three-tenths percent (1.30%) per
annum. KILICO assesses that portion of each subaccount representing assets under
the Kemper Passport contracts with a daily asset charge for mortality and
expense risk and administrative costs which amounts to an aggregate of one and
one-quarter percent (1.25%) per annum. KILICO assesses that portion of each
subaccount representing assets under the Kemper Destinations contracts with a
daily asset charge for mortality and expense risk and administrative costs which
amounts to an aggregate of one and four-tenths percent (1.40%) per annum. KILICO
assesses that portion of each subaccount representing assets under the Farmers
Variable Annuity I contracts with a daily asset charge for mortality and expense
risk and administrative costs which amounts to an aggregate of one and
four-tenths percent (1.40%) per annum. The Kemper Passport and Kemper
Destinations DCA Money Market Subaccount #2, available for participation in the
dollar cost averaging program, has no daily asset charge deduction. For the year
ended December 31, 1999, asset charges totaled $30,487,471, $6,803,293,
$2,551,583 and $9,209 for Kemper Advantage III, Kemper Passport, Kemper
Destinations and Farmers Variable Annuity I contracts, respectively.
KILICO also assesses against each Kemper Advantage III contract participating in
one or more of the subaccounts at any time during the year a records maintenance
charge. For contracts purchased prior to June 1, 1993, the charge is $25 and is
assessed on December 31st of each calendar year. For contracts purchased June 1,
1993 and subsequent, the charge is a maximum of $30 and is assessed ratably
every quarter of each calendar year, except in those states which have yet to
approve these contract changes. The charge is assessed whether or not any
purchase payments have been made during the year. KILICO also assesses against
each Kemper Passport, Kemper Destinations and Farmers Variable Annuity I
contract participating in one or more of
B-43
<PAGE> 92
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) TRANSACTIONS WITH AFFILIATES (CONTINUED)
the subaccounts a records maintenance charge of $30, generally taken at the end
of each contract year. The records maintenance charge for Kemper Advantage III,
Kemper Passport, Kemper Destinations and Farmers Variable Annuity I contracts
are waived for all individual contracts whose investment value exceeds $50,000
on the date of assessment. For the year ended December 31, 1999, records
maintenance charges totaled $1,395,893, $149,119 and $12,715 for Kemper
Advantage III, Kemper Passport and Kemper Destinations contracts, respectively.
For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the Kemper Advantage III Contract Owners participating in the Kemper
Money Market, Kemper Total Return, Kemper High Yield and Kemper Growth
Subaccounts, whose direct and indirect operating expenses exceed eighty
hundredths of one percent (.80%) of average daily net assets. In determining
reimbursement of direct and indirect operating expenses, for each subaccount,
charges for mortality and expense risks and administrative expenses, and records
maintenance charges are excluded and, for each subaccount, charges for taxes,
extraordinary expenses, and brokerage and transaction costs are excluded. During
the year ended December 31, 1999, no such payment was made.
KILICO assesses an optional annual charge for the Guaranteed Retirement Income
Benefit ("GRIB"), related to the Kemper Destinations and Farmers Variable
Annuity I contracts. The annual charge of .25% of Contract Value, if taken, will
be deducted pro rata from each invested subaccount on each Contract Quarter
anniversary. For the year ended December 31, 1999, GRIB charges totaled $351,417
and $1,019 for Kemper Destinations and Farmers Variable Annuity I contracts,
respectively.
Proceeds payable on the redemption of units are reduced by the amount of any
applicable contingent deferred sales charge due to KILICO.
Scudder Kemper Investments, Inc., an affiliated company, is the investment
manager of the Kemper Variable Series and the Scudder Variable Life Investment
Fund. Investors Brokerage Services, Inc., a wholly-owned subsidiary of KILICO,
is the principal underwriter for the Separate Account.
Janus Capital is the investment manager of the Janus Aspen Series. Lexington
Management Corporation is the investment manager for the Lexington Natural
Resources Trust and the Lexington Emerging Markets Fund, Inc. Fidelity
Management & Research Company is the investment manager for the Fidelity
Variable Insurance Products Fund and the Fidelity Variable Insurance Products
Fund II. The Dreyfus Corporation is the investment manager of The Dreyfus
Socially Responsible Growth Fund, Inc. J.P. Morgan Investment Management, Inc.
is the investment manager of the J.P. Morgan Series Trust II. Fred Alger
Management, Inc. is the investment manager for The Alger American Fund. American
Century Investment Management, Inc. is the investment manager of the American
Century Variable Portfolios, Inc. None of these entities are affiliated with
KILICO.
(4) NET TRANSFERS (TO) FROM AFFILIATE AND SUBACCOUNTS
Net transfers (to) from affiliate or subaccounts include transfers of all or
part of the Contract Owner's interest to or from another eligible subaccount or
to the general account of KILICO.
(5) CONTRACT OWNERS' EQUITY
The Contract Owners' equity is affected by the investment results of, and
contract charges to, each subaccount. The accompanying financial statements
include only Contract Owners' payments pertaining to the variable portions of
their contracts and exclude any payments for the market value adjusted or fixed
portions, 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.
B-44
<PAGE> 93
Contract Owners' equity at December 31, 1999, 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>
KEMPER ADVANTAGE III CONTRACTS
KEMPER VARIABLE SERIES:
KEMPER MONEY MARKET SUBACCOUNT #1
Flexible Payment, Qualified............................... 333 $ 2.588 $ 861
Flexible Payment, Nonqualified............................ 3,501 2.588 9,061
Periodic Payment, Qualified............................... 20,014 2.455 49,137
Periodic Payment, Nonqualified............................ 13,610 2.455 33,415
----------
92,474
----------
KEMPER TOTAL RETURN SUBACCOUNT
Flexible Payment, Qualified............................... 656 8.425 5,525
Flexible Payment, Nonqualified............................ 2,817 7.800 21,972
Periodic Payment, Qualified............................... 60,736 7.993 485,467
Periodic Payment, Nonqualified............................ 9,110 7.447 67,848
----------
580,812
----------
KEMPER HIGH YIELD SUBACCOUNT
Flexible Payment, Qualified............................... 197 6.442 1,268
Flexible Payment, Nonqualified............................ 1,138 6.168 7,018
Periodic Payment, Qualified............................... 15,887 6.112 97,105
Periodic Payment, Nonqualified............................ 4,245 5.954 25,274
----------
130,665
----------
KEMPER GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 153 9.858 1,509
Flexible Payment, Nonqualified............................ 823 9.824 8,084
Periodic Payment, Qualified............................... 40,027 9.401 376,285
Periodic Payment, Nonqualified............................ 6,263 9.387 58,790
----------
444,668
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Flexible Payment, Qualified............................... 145 1.823 264
Flexible Payment, Nonqualified............................ 779 1.823 1,421
Periodic Payment, Qualified............................... 15,187 1.769 26,859
Periodic Payment, Nonqualified............................ 7,529 1.769 13,315
----------
41,859
----------
KEMPER INTERNATIONAL SUBACCOUNT
Flexible Payment, Qualified............................... 170 2.708 460
Flexible Payment, Nonqualified............................ 457 2.708 1,237
Periodic Payment, Qualified............................... 32,639 2.645 86,334
Periodic Payment, Nonqualified............................ 5,066 2.645 13,399
----------
101,430
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 127 3.498 443
Flexible Payment, Nonqualified............................ 396 3.498 1,384
Periodic Payment, Qualified............................... 31,772 3.440 109,283
Periodic Payment, Nonqualified............................ 3,242 3.440 11,152
----------
122,262
----------
</TABLE>
B-45
<PAGE> 94
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
KEMPER ADVANTAGE III CONTRACTS (CONTINUED)
KEMPER VARIABLE SERIES (CONTINUED):
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Flexible Payment, Qualified............................... 24 $ 1.151 $ 28
Flexible Payment, Nonqualified............................ 227 1.151 261
Periodic Payment, Qualified............................... 2,396 1.139 2,728
Periodic Payment, Nonqualified............................ 968 1.139 1,103
----------
4,120
----------
KEMPER CONTRARIAN VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 57 1.580 91
Flexible Payment, Nonqualified............................ 110 1.580 174
Periodic Payment, Qualified............................... 21,269 1.563 33,239
Periodic Payment, Nonqualified............................ 3,541 1.563 5,534
----------
39,038
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 6 1.091 6
Flexible Payment, Nonqualified............................ 66 1.091 72
Periodic Payment, Qualified............................... 11,756 1.079 12,684
Periodic Payment, Nonqualified............................ 1,319 1.079 1,423
----------
14,185
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 33 1.941 65
Flexible Payment, Nonqualified............................ 33 1.941 64
Periodic Payment, Qualified............................... 6,861 1.920 13,176
Periodic Payment, Nonqualified............................ 1,727 1.920 3,316
----------
16,621
----------
KEMPER HORIZON 20+ SUBACCOUNT
Flexible Payment, Qualified............................... -- 1.655 --
Flexible Payment, Nonqualified............................ -- 1.630 --
Periodic Payment, Qualified............................... 1,713 1.637 2,804
Periodic Payment, Nonqualified............................ 225 1.637 369
----------
3,173
----------
KEMPER HORIZON 10+ SUBACCOUNT
Flexible Payment, Qualified............................... 7 1.513 11
Flexible Payment, Nonqualified............................ 9 1.513 13
Periodic Payment, Qualified............................... 2,086 1.497 3,121
Periodic Payment, Nonqualified............................ 306 1.497 458
----------
3,603
----------
KEMPER HORIZON 5 SUBACCOUNT
Flexible Payment, Qualified............................... -- 1.362 --
Flexible Payment, Nonqualified............................ -- 1.370 --
Periodic Payment, Qualified............................... 1,008 1.356 1,367
Periodic Payment, Nonqualified............................ 323 1.356 438
----------
1,805
----------
</TABLE>
B-46
<PAGE> 95
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
JANUS ASPEN SERIES:
JANUS ASPEN GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 12 $37.283 $ 440
Flexible Payment, Nonqualified............................ 46 37.283 1,710
Periodic Payment, Qualified............................... 3,541 36.810 130,333
Periodic Payment, Nonqualified............................ 591 36.810 21,769
----------
154,252
----------
JANUS ASPEN AGGRESSIVE GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 4 60.590 241
Flexible Payment, Nonqualified............................ 17 60.590 1,011
Periodic Payment, Qualified............................... 2,360 59.822 141,193
Periodic Payment, Nonqualified............................ 267 59.822 15,948
----------
158,393
----------
JANUS ASPEN WORLDWIDE GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 11 49.181 527
Flexible Payment, Nonqualified............................ 36 49.181 1,781
Periodic Payment, Qualified............................... 6,003 48.558 291,479
Periodic Payment, Nonqualified............................ 726 48.558 35,229
----------
329,016
----------
JANUS ASPEN BALANCED SUBACCOUNT
Flexible Payment, Qualified............................... 11 30.378 338
Flexible Payment, Nonqualified............................ 52 30.378 1,569
Periodic Payment, Qualified............................... 4,206 29.993 126,147
Periodic Payment, Nonqualified............................ 535 29.993 16,039
----------
144,093
----------
LEXINGTON NATURAL RESOURCES TRUST:
LEXINGTON NATURAL RESOURCES SUBACCOUNT
Flexible Payment, Qualified............................... -- 13.565 --
Flexible Payment, Nonqualified............................ 4 13.565 54
Periodic Payment, Qualified............................... 290 13.379 3,884
Periodic Payment, Nonqualified............................ 33 13.379 436
----------
4,374
----------
LEXINGTON EMERGING MARKETS FUND, INC. :
LEXINGTON EMERGING MARKETS SUBACCOUNT
Flexible Payment, Qualified............................... 1 14.118 17
Flexible Payment, Nonqualified............................ 3 14.118 48
Periodic Payment, Qualified............................... 742 13.939 10,342
Periodic Payment, Nonqualified............................ 154 13.939 2,142
----------
12,549
----------
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
FIDELITY VIP EQUITY-INCOME SUBACCOUNT
Flexible Payment, Qualified............................... 1 30.830 26
Flexible Payment, Nonqualified............................ 8 30.830 261
Periodic Payment, Qualified............................... 1,258 30.497 38,364
Periodic Payment, Nonqualified............................ 216 30.497 6,578
----------
45,229
----------
</TABLE>
B-47
<PAGE> 96
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
KEMPER ADVANTAGE III CONTRACTS (CONTINUED)
FIDELITY VARIABLE INSURANCE PRODUCTS FUND (CONTINUED):
FIDELITY VIP GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 4 $71.079 $ 296
Flexible Payment, Nonqualified............................ 17 71.079 1,230
Periodic Payment, Qualified............................... 1,132 70.305 79,601
Periodic Payment, Nonqualified............................ 145 70.305 10,175
----------
91,302
----------
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
FIDELITY VIP II ASSET MANAGER SUBACCOUNT
Flexible Payment, Qualified............................... 0 25.172 0
Flexible Payment, Nonqualified............................ 9 25.172 224
Periodic Payment, Qualified............................... 284 24.899 7,077
Periodic Payment, Nonqualified............................ 44 24.899 1,092
----------
8,393
----------
FIDELITY VIP II INDEX 500 SUBACCOUNT
Flexible Payment, Qualified............................... 2 176.352 272
Flexible Payment, Nonqualified............................ 14 176.352 2,435
Periodic Payment, Qualified............................... 833 174.446 145,342
Periodic Payment, Nonqualified............................ 127 174.446 22,230
----------
170,279
----------
FIDELITY VIP II CONTRAFUND SUBACCOUNT
Flexible Payment, Qualified............................... 5 32.012 147
Flexible Payment, Nonqualified............................ 12 32.012 385
Periodic Payment, Qualified............................... 2,175 31.666 68,874
Periodic Payment, Nonqualified............................ 284 31.666 8,990
----------
78,396
----------
SCUDDER VARIABLE LIFE INVESTMENT FUND:
SCUDDER VLIF BOND SUBACCOUNT
Flexible Payment, Qualified............................... -- 6.394 --
Flexible Payment, Nonqualified............................ -- 6.394 --
Periodic Payment, Qualified............................... 22 6.435 144
Periodic Payment, Nonqualified............................ 1 6.435 5
----------
149
----------
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... -- 28.914 --
Flexible Payment, Nonqualified -- 28.914 --
Periodic Payment, Qualified............................... 14 28.882 405
Periodic Payment, Nonqualified............................ 4 28.882 103
----------
508
----------
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Flexible Payment, Qualified............................... 1 20.207 24
Flexible Payment, Nonqualified............................ -- 20.207 --
Periodic Payment, Qualified............................... 104 20.167 2,090
Periodic Payment, Nonqualified............................ 34 20.167 681
----------
2,795
----------
</TABLE>
B-48
<PAGE> 97
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. :
DREYFUS SOCIALLY RESPONSIBLE GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... -- $39.967 $ --
Flexible Payment, Nonqualified............................ 0 40.163 9
Periodic Payment, Qualified............................... 57 40.084 2,277
Periodic Payment, Nonqualified............................ 8 40.084 328
----------
2,614
----------
J.P. MORGAN SERIES TRUST II:
J.P. MORGAN SMALL COMPANY SUBACCOUNT
Flexible Payment, Qualified............................... 4 16.998 66
Flexible Payment, Nonqualified............................ -- 16.998 --
Periodic Payment, Qualified............................... 13 16.965 228
Periodic Payment, Nonqualified............................ 4 16.965 76
----------
370
----------
THE ALGER AMERICAN FUND:
ALGER AMERICAN GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... -- 71.618 --
Flexible Payment, Nonqualified............................ 1 70.710 78
Periodic Payment, Qualified............................... 130 70.571 9,202
Periodic Payment, Nonqualified............................ 23 70.571 1,631
----------
10,911
----------
ALGER AMERICAN SMALL CAPITALIZATION SUBACCOUNT
Flexible Payment, Qualified............................... -- 64.873 --
Flexible Payment, Nonqualified............................ -- 64.873 --
Periodic Payment, Qualified............................... 30 62.523 1,852
Periodic Payment, Nonqualified............................ 5 62.523 291
----------
2,143
----------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. :
AMERICAN CENTURY VP INCOME & GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... -- 7.834 --
Flexible Payment, Nonqualified............................ 14 7.947 109
Periodic Payment, Qualified............................... 303 7.932 2,403
Periodic Payment, Nonqualified............................ 27 7.932 212
----------
2,724
----------
AMERICAN CENTURY VP VALUE SUBACCOUNT
Flexible Payment, Qualified............................... -- 5.898 --
Flexible Payment, Nonqualified............................ 1 5.911 5
Periodic Payment, Qualified............................... 85 5.899 499
Periodic Payment, Nonqualified............................ 13 5.899 76
----------
580
----------
TOTAL KEMPER ADVANTAGE III CONTRACT OWNERS' EQUITY..... $2,815,785
==========
KEMPER PASSPORT CONTRACTS
KEMPER VARIABLE SERIES:
KEMPER MONEY MARKET SUBACCOUNT #1
Qualified................................................. 5,707 $ 1.290 $ 7,360
Nonqualified.............................................. 16,496 1.290 21,273
----------
28,633
----------
</TABLE>
B-49
<PAGE> 98
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
KEMPER PASSPORT CONTRACTS (CONTINUED)
KEMPER VARIABLE SERIES (CONTINUED):
KEMPER MONEY MARKET SUBACCOUNT #2
Qualified................................................. 324 $ 1.424 $ 462
Nonqualified.............................................. 670 1.424 954
----------
1,416
----------
KEMPER TOTAL RETURN SUBACCOUNT
Qualified................................................. 11,261 2.173 24,475
Nonqualified.............................................. 36,480 2.173 79,286
----------
103,761
----------
KEMPER HIGH YIELD SUBACCOUNT
Qualified................................................. 7,927 1.903 15,088
Nonqualified.............................................. 27,992 1.903 53,278
----------
68,366
----------
KEMPER GROWTH SUBACCOUNT
Qualified................................................. 9,649 3.181 30,699
Nonqualified.............................................. 27,217 3.181 86,590
----------
117,289
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 3,318 1.429 4,740
Nonqualified.............................................. 11,272 1.429 16,103
----------
20,843
----------
KEMPER INTERNATIONAL SUBACCOUNT
Qualified................................................. 4,123 2.655 10,950
Nonqualified.............................................. 15,971 2.655 42,410
----------
53,360
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 2,345 3.449 8,089
Nonqualified.............................................. 6,735 3.449 23,230
----------
31,319
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 1,056 1.141 1,206
Nonqualified.............................................. 3,599 1.141 4,105
----------
5,311
----------
KEMPER CONTRARIAN VALUE SUBACCOUNT
Qualified................................................. 5,661 1.566 8,862
Nonqualified.............................................. 17,129 1.566 26,818
----------
35,680
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Qualified................................................. 2,899 1.081 3,133
Nonqualified.............................................. 8,400 1.081 9,079
----------
12,212
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Qualified................................................. 3,403 1.924 6,546
Nonqualified.............................................. 9,891 1.924 19,028
----------
25,574
----------
</TABLE>
B-50
<PAGE> 99
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
KEMPER HORIZON 20+ SUBACCOUNT
Qualified................................................. 1,054 $ 1.640 $ 1,728
Nonqualified.............................................. 2,654 1.640 4,352
----------
6,080
----------
KEMPER HORIZON 10+ SUBACCOUNT
Qualified................................................. 1,317 1.499 1,974
Nonqualified.............................................. 3,949 1.499 5,921
----------
7,895
----------
KEMPER HORIZON 5 SUBACCOUNT
Qualified................................................. 370 1.358 503
Nonqualified.............................................. 2,951 1.358 4,008
----------
4,511
----------
TOTAL KEMPER PASSPORT CONTRACT OWNERS' EQUITY.......... $ 522,250
==========
KEMPER DESTINATIONS CONTRACTS
KEMPER VARIABLE SERIES:
KEMPER MONEY MARKET SUBACCOUNT #1
Qualified................................................. 786 $10.559 $ 8,303
Nonqualified.............................................. 783 10.559 8,267
----------
16,570
----------
KEMPER MONEY MARKET SUBACCOUNT #2
Qualified................................................. 68 10.795 732
Nonqualified.............................................. 50 10.795 542
----------
1,274
----------
KEMPER TOTAL RETURN SUBACCOUNT
Qualified................................................. 1,224 11.936 14,608
Nonqualified.............................................. 1,393 11.936 16,627
----------
31,235
----------
KEMPER HIGH YIELD SUBACCOUNT
Qualified................................................. 778 9.717 7,563
Nonqualified.............................................. 1,145 9.717 11,124
----------
18,687
----------
KEMPER GROWTH SUBACCOUNT
Qualified................................................. 407 13.532 5,512
Nonqualified.............................................. 485 13.532 6,564
----------
12,076
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 263 10.259 2,700
Nonqualified.............................................. 594 10.259 6,090
----------
8,790
----------
KEMPER INTERNATIONAL SUBACCOUNT
Qualified................................................. 163 13.549 2,210
Nonqualified.............................................. 188 13.549 2,552
----------
4,762
----------
</TABLE>
B-51
<PAGE> 100
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
KEMPER DESTINATIONS CONTRACTS (CONTINUED)
KEMPER VARIABLE SERIES (CONTINUED):
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 394 $14.691 $ 5,793
Nonqualified.............................................. 449 14.691 6,602
----------
12,395
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 422 10.062 4,243
Nonqualified.............................................. 518 10.062 5,206
----------
9,449
----------
KEMPER CONTRARIAN VALUE SUBACCOUNT
Qualified................................................. 907 9.485 8,601
Nonqualified.............................................. 944 9.485 8,955
----------
17,556
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Qualified................................................. 313 8.547 2,672
Nonqualified.............................................. 297 8.547 2,535
----------
5,207
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Qualified................................................. 231 12.291 2,843
Nonqualified.............................................. 267 12.291 3,286
----------
6,129
----------
KEMPER HORIZON 20+ SUBACCOUNT
Qualified................................................. 46 11.021 510
Nonqualified.............................................. 50 11.021 548
----------
1,058
----------
KEMPER HORIZON 10+ SUBACCOUNT
Qualified................................................. 124 10.998 1,361
Nonqualified.............................................. 231 10.998 2,545
----------
3,906
----------
KEMPER HORIZON 5 SUBACCOUNT
Qualified................................................. 172 10.707 1,840
Nonqualified.............................................. 96 10.707 1,032
----------
2,872
----------
JANUS ASPEN SERIES:
JANUS GROWTH SUBACCOUNT
Qualified................................................. 2,556 16.958 43,343
Nonqualified.............................................. 2,530 16.958 42,904
----------
86,247
----------
</TABLE>
B-52
<PAGE> 101
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
SCUDDER VARIABLE LIFE INVESTMENT FUND:
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT
Qualified................................................. 443 $14.435 $ 6,394
Nonqualified.............................................. 473 14.435 6,823
----------
13,217
----------
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Qualified................................................. 541 14.990 8,109
Nonqualified.............................................. 1,112 14.990 16,665
----------
24,774
----------
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. :
DREYFUS SOCIALLY RESPONSIBLE GROWTH SUBACCOUNT
Qualified................................................. 21 11.289 241
Nonqualified.............................................. 1 11.289 12
----------
253
----------
TOTAL KEMPER DESTINATIONS CONTRACT OWNERS' EQUITY...... $ 276,457
==========
FARMERS VARIABLE ANNUITY I CONTRACTS
KEMPER VARIABLE SERIES:
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 1 $ 9.924 $ 15
Nonqualified.............................................. 20 9.924 202
----------
217
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 4 $15.122 $ 64
Nonqualified.............................................. 1 15.122 16
----------
80
----------
SCUDDER VARIABLE LIFE INVESTMENT FUND:
SCUDDER VLIF BOND SUBACCOUNT
Qualified................................................. 0 9.763 3
Nonqualified.............................................. 2 9.763 24
----------
27
----------
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Qualified................................................. 0 15.038 6
Nonqualified.............................................. 0 15.038 7
----------
13
----------
TOTAL FARMERS VARIABLE ANNUITY I CONTRACT OWNERS'
EQUITY................................................ $ 337
==========
</TABLE>
B-53
<PAGE> 102
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholder of
Kemper Investors Life Insurance Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income, stockholder's
equity and cash flows present fairly, in all material respects, the financial
position of Kemper Investors Life Insurance Company and subsidiaries (the
"Company") at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. In addition, in our opinion, the financial statement schedules
listed in the accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 17, 2000
B-54
<PAGE> 103
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1999, $3,397,188, December
31, 1998, $3,421,535)..................................... $ 3,276,017 $ 3,482,820
Trading account securities at fair value (amortized cost:
December 31, 1998, $99,095)............................... -- 101,781
Equity securities (cost: December 31, 1999, $65,235;
December 31, 1998, $66,776)............................... 61,592 66,854
Short-term investments...................................... 42,391 58,334
Joint venture mortgage loans................................ 67,242 65,806
Third-party mortgage loans.................................. 63,875 76,520
Other real estate-related investments....................... 20,506 22,049
Policy loans................................................ 261,788 271,540
Other invested assets....................................... 25,621 23,645
----------- -----------
Total investments................................. 3,819,032 4,169,349
Cash........................................................ 12,015 13,486
Accrued investment income................................... 127,219 124,213
Goodwill.................................................... 203,907 216,651
Value of business acquired.................................. 119,160 118,850
Deferred insurance acquisition costs........................ 159,667 91,543
Deferred income taxes....................................... 93,502 35,059
Reinsurance recoverable..................................... 309,696 344,837
Receivable on sales of securities........................... 3,500 3,500
Other assets and receivables................................ 29,950 23,029
Assets held in separate accounts............................ 9,778,068 7,099,204
----------- -----------
Total assets...................................... $.14,655,716 $12,239,721
=========== ===========
LIABILITIES
Future policy benefits...................................... $ 3,718,833 $ 3,906,391
Other policyholder benefits and funds payable............... 457,328 318,369
Other accounts payable and liabilities...................... 71,482 61,898
Liabilities related to separate accounts.................... 9,778,068 7,099,204
----------- -----------
Total liabilities................................. 14,025,711 11,385,862
----------- -----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY
Capital stock--$10 par value, authorized 300,000 shares;
outstanding 250,000 shares................................ 2,500 2,500
Additional paid-in capital.................................. 804,347 804,347
Accumulated other comprehensive income (loss)............... (120,819) 32,975
Retained earnings (deficit)................................. (56,023) 14,037
----------- -----------
Total stockholder's equity........................ 630,005 853,859
----------- -----------
Total liabilities and stockholder's equity........ $14,655,716 $12,239,721
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
B-55
<PAGE> 104
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Net investment income....................................... $264,640 $273,512 $296,195
Realized investment gains (losses).......................... (9,549) 51,868 10,546
Premium income.............................................. 21,990 22,346 22,239
Separate account fees and charges........................... 74,715 61,982 85,413
Other income................................................ 11,623 10,031 11,087
-------- -------- --------
Total revenue..................................... 363,419 419,739 425,480
-------- -------- --------
BENEFIT AND EXPENSES
Interest credited to policyholders.......................... 162,243 176,906 199,782
Claims incurred and other policyholder benefits............. 18,185 28,029 28,372
Taxes, licenses and fees.................................... 30,234 30,292 52,608
Commissions................................................. 67,555 39,046 32,602
Operating expenses.......................................... 45,989 44,575 36,837
Deferral of insurance acquisition costs..................... (69,814) (46,565) (38,177)
Amortization of insurance acquisition costs................. 5,524 12,082 3,204
Amortization of value of business acquired.................. 12,955 17,677 24,948
Amortization of goodwill.................................... 12,744 12,744 15,295
-------- -------- --------
Total benefits and expenses....................... 285,615 314,786 355,471
-------- -------- --------
Income before income tax expense............................ 77,804 104,953 70,009
Income tax expense.......................................... 32,864 39,804 31,292
-------- -------- --------
Net income........................................ $ 44,940 $ 65,149 $ 38,717
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
B-56
<PAGE> 105
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
NET INCOME.................................................. $ 44,940 $ 65,149 $ 38,717
--------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains (losses) on investments arising
during period:
Unrealized holding gains (losses) on investments.......... (180,267) 25,372 60,802
Adjustment to value of business acquired.................. 12,811 (9,332) (28,562)
Adjustment to deferred insurance acquisition costs........ 5,726 (2,862) (2,680)
--------- -------- --------
Total unrealized holding gains (losses) on
investments arising during period............... (161,730) 13,178 29,560
--------- -------- --------
Less reclassification adjustments for items included in
net income:
Adjustment for (gains) losses included in realized
investment gains (losses)............................ 16,651 6,794 (9,016)
Adjustment for amortization of premium on fixed
maturities included in net investment income......... (10,533) (17,064) (17,866)
Adjustment for (gains) losses included in amortization
of value of business acquired........................ (454) (7,378) (2,353)
Adjustment for (gains) losses included in amortization
of insurance acquisition costs....................... 1,892 (463) (355)
--------- -------- --------
Total reclassification adjustments for items
included in net income.......................... 7,556 (18,111) (29,590)
--------- -------- --------
Other comprehensive income (loss), before related income tax
expense (benefit)......................................... (169,286) 31,289 59,150
Related income tax expense (benefit)........................ (15,492) 10,952 (985)
--------- -------- --------
Other comprehensive income (loss), net of tax..... (153,794) 20,337 60,135
--------- -------- --------
Comprehensive income (loss)....................... $(108,854) $ 85,486 $ 98,852
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
B-57
<PAGE> 106
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of period.................. $ 2,500 $ 2,500 $ 2,500
--------- -------- --------
ADDITIONAL PAID-IN CAPITAL, beginning of period............. 804,347 806,538 761,538
Capital contributions from parent........................... -- 4,261 45,000
Adjustment to prior period capital contribution from
parent.................................................... -- (6,452) --
--------- -------- --------
End of period..................................... 804,347 804,347 806,538
--------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), beginning of
period.................................................... 32,975 12,637 (47,498)
Other comprehensive income (loss), net of tax............... (153,794) 20,338 60,135
--------- -------- --------
End of period..................................... (120,819) 32,975 12,637
--------- -------- --------
RETAINED EARNINGS, beginning of period...................... 14,037 43,888 34,421
Net income.................................................. 44,940 65,149 38,717
Dividends to parent......................................... (115,000) (95,000) (29,250)
--------- -------- --------
End of period..................................... (56,023) 14,037 43,888
--------- -------- --------
Total stockholder's equity........................ $ 630,005 $853,859 $865,563
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
B-58
<PAGE> 107
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 44,940 $ 65,149 $ 38,717
Reconcilement of net income to net cash provided:
Realized investment (gains) losses.................... 9,549 (51,868) (10,546)
Net change in trading account securities.............. (51,239) (6,727) --
Interest credited and other charges................... 158,557 173,958 198,206
Deferred insurance acquisition costs, net............. (64,290) (34,483) (34,973)
Amortization of value of business acquired............ 12,955 17,677 24,948
Amortization of goodwill.............................. 12,744 12,744 15,295
Amortization of discount and premium on investments... 11,157 17,353 17,866
Deferred income taxes................................. (42,952) (12,469) (99,370)
Net change in current federal income taxes............ (10,594) (73,162) 97,386
Benefits and premium taxes due related to separate
account bank-owned life insurance................... 149,477 123,884 180,546
Other, net (11,901) (41,477) 17,168
----------- ----------- ---------
Net cash provided from operating activities...... 218,403 190,579 445,243
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity..................... 335,735 491,699 229,208
Fixed maturities sold prior to maturity............... 1,269,290 882,596 633,872
Equity securities..................................... 11,379 107,598 --
Mortgage loans, policy loans and other invested
assets.............................................. 75,389 180,316 131,866
Cost of investments purchased or loans originated:
Fixed maturities...................................... (1,455,496) (1,319,119) (606,028)
Equity securities..................................... (8,703) (83,303) --
Mortgage loans, policy loans and other invested
assets.............................................. (43,665) (66,331) (76,350)
Short-term investments, net.............................. 15,943 177,723 (164,361)
Net change in receivable and payable for securities
transactions.......................................... -- (677) 29,746
Net change in other assets............................... (2,725) -- 244
----------- ----------- ---------
Net cash provided from investing activities...... 197,147 370,502 178,197
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits.............................................. 383,874 180,124 145,687
Withdrawals........................................... (694,848) (649,400) (745,510)
Capital contributions from parent........................ -- 4,261 45,000
Dividends to parent...................................... (115,000) (95,000) (29,250)
Other.................................................... 8,953 (11,448) (18,275)
----------- ----------- ---------
Net cash used in financing activities............ (417,021) (571,463) (602,348)
----------- ----------- ---------
Net increase (decrease) in cash............. (1,471) (10,382) 21,092
CASH, beginning of period.................................. 13,486 23,868 2,776
----------- ----------- ---------
CASH, end of period........................................ $ 12,015 $ 13,486 $ 23,868
=========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
B-59
<PAGE> 108
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues
fixed and variable annuity products, variable life, term life and
interest-sensitive life insurance products marketed primarily through a network
of financial institutions, securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). Kemper and the Company are wholly-owned subsidiaries of
Zurich Financial Services ("ZFS" or "Zurich"). ZFS is owned by Zurich Allied AG
and Allied Zurich p.l.c., fifty-seven percent and forty-three percent,
respectively. Zurich Allied AG is listed on the Swiss Market Index. Allied
Zurich p.l.c. is included in the FTSE-100 Share Index in London.
The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements in order for them to conform to the 1999
presentation. The accompanying consolidated financial statements of the Company
as of and for the years ended December 31, 1999, 1998 and 1997, have been
prepared in conformity with accounting principles generally accepted in the
United States.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that could affect the reported amounts of assets and liabilities
as well as the disclosure of contingent assets or liabilities at the date of the
financial statements. As a result, actual results reported as revenue and
expenses could differ from the estimates reported in the accompanying financial
statements. As further discussed in the accompanying notes to the consolidated
financial statements, significant estimates and assumptions affect goodwill,
deferred insurance acquisition costs, the value of business acquired, provisions
for real estate-related losses and reserves, other-than-temporary declines in
values for fixed maturities, the valuation allowance for deferred income taxes
and the calculation of fair value disclosures for certain financial instruments.
GOODWILL
The Company reviews goodwill to determine if events or changes in circumstances
may have affected the recoverability of the outstanding goodwill as of each
reporting period. In the event that the Company determines that goodwill is not
recoverable, it would amortize such amounts as additional goodwill expense in
the accompanying financial statements. As of December 31, 1999, the Company
believes that no such adjustment is necessary.
In December of 1997, the Company changed its amortization period from
twenty-five years to twenty years in order to conform to Zurich's accounting
practices and policies. As a result of the change in amortization periods, the
Company recorded an increase in goodwill amortization expense of $5.1 million
during 1997.
VALUE OF BUSINESS ACQUIRED
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.
The value of the business acquired is amortized over the estimated contract life
of the business acquired in relation to the present value of estimated gross
profits using current assumptions based on an interest rate equal
B-60
<PAGE> 109
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to the liability or contract rate on the value of business acquired. The
estimated amortization and accretion of interest for the value of business
acquired for each of the years through December 31, 2004 are as follows:
<TABLE>
<CAPTION>
PROJECTED
(IN THOUSANDS) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- ------------------------------------------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1997 (actual).......................................... 168,692 (34,906) 9,958 143,744
1998 (actual).......................................... 143,744 (26,807) 9,129 126,066
1999 (actual).......................................... 126,066 (20,891) 7,936 113,111
2000................................................... 113,111 (23,418) 6,971 96,664
2001................................................... 96,664 (21,493) 5,890 81,061
2002................................................... 81,061 (17,805) 4,970 68,226
2003................................................... 68,226 (16,160) 4,185 56,251
2004................................................... 56,251 (14,625) 3,438 45,064
</TABLE>
The projected ending balance of the value of business acquired will be further
adjusted to reflect the impact of unrealized gains or losses on fixed maturities
held as available for sale in the investment portfolio. Such adjustments are not
recorded in the Company's net income but rather are recorded as a credit or
charge to accumulated other comprehensive income, net of income tax. This
adjustment increased the value of business acquired by $6.0 million as of
December 31, 1999 and decreased the value of business acquired by $7.2 million
as of December 31, 1998. Accumulated other comprehensive income increased by
approximately $3.9 million as of December 31, 1999 due to this adjustment and
decreased accumulated other comprehensive income by $4.7 million as of December
31, 1998.
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs.
Premiums for term life policies are reported as earned when due. Profits for
such policies are recognized over the duration of the insurance policies by
matching benefits and expenses to premium income.
REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities and to individual death claims. The Company
generally cedes 100 percent of the related annuity liabilities under the terms
of the reinsurance agreements. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not
discharge the Company from its primary liabilities and obligations to
policyholders. As such, these amounts paid or deemed to have been paid are
recorded on the Company's consolidated balance sheet as reinsurance recoverables
and ceded future policy benefits.
DEFERRED INSURANCE ACQUISITION COSTS
The costs of acquiring new business, principally commission expense and certain
policy issuance and underwriting expenses, have been deferred to the extent they
are recoverable from estimated future gross profits on the related contracts and
policies. The deferred insurance acquisition costs for annuities, separate
account business and interest-sensitive life insurance products are being
amortized over the estimated contract life in relation to the present value of
estimated gross profits. Deferred insurance acquisition costs related to such
interest-sensitive products also reflect the estimated impact of unrealized
gains or losses on fixed maturities held as available for sale in the investment
portfolio, through a credit or charge to accumulated other comprehensive income,
net of income tax. The deferred insurance acquisition costs for term-life
insurance products are being amortized over the premium paying period of the
policies.
B-61
<PAGE> 110
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE POLICY BENEFITS
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 3.0 percent to 10.0 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 2.5 percent to 12.0
percent.
Liabilities for future term life policy benefits have been computed principally
by a net level premium method. Anticipated rates of mortality are based on the
1975-1980 Select and Ultimate Table modified by Company experience, including
withdrawals. Estimated future investment yields are a level 7.1 percent.
GUARANTY FUND ASSESSMENTS
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1999 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders.
INVESTED ASSETS AND RELATED INCOME
Investments in fixed maturities and equity securities are carried at fair value.
Short-term investments are carried at cost, which approximates fair value.
The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed and
asset-backed securities, over the estimated life of the security. Such
amortization is included in net investment income. Amortization of the discount
or premium from mortgage-backed and asset-backed securities is recognized using
a level effective yield method which considers the estimated timing and amount
of prepayments of the underlying loans and is adjusted to reflect differences
which arise between the prepayments originally anticipated and the actual
prepayments received and currently anticipated. To the extent that the estimated
lives of such securities change as a result of changes in prepayment rates, the
adjustment is also included in net investment income. The Company does not
accrue interest income on fixed maturities deemed to be impaired on an
other-than-temporary basis, or on mortgage loans and other real estate loans
where the likelihood of collection of interest is doubtful.
Mortgage loans are carried at their unpaid balance, net of unamortized discount
and any applicable reserves or write-downs. Other real estate-related
investments, net of any applicable reserves and write-downs, include notes
receivable from real estate ventures and investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures. Real
estate reserves are established when declines in collateral values, estimated in
light of current economic conditions, indicate a likelihood of loss.
Investments in policy loans and other invested assets, consisting primarily of
venture capital investments and a leveraged lease, are carried primarily at
cost.
Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, recognition
of other-than-temporary declines in value and changes in real estate-related
reserves and write-downs are included in revenue. Net unrealized gains or losses
on revaluation of investments are credited or charged to accumulated other
comprehensive income (loss). Such unrealized gains are recorded net of deferred
income tax expense, while unrealized losses are not tax benefitted.
SEPARATE ACCOUNT BUSINESS
The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives administrative fees from
B-62
<PAGE> 111
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the separate account and retains varying amounts of withdrawal charges to cover
expenses in the event of early withdrawals by contract holders. The assets and
liabilities of the separate accounts are carried at fair value.
INCOME TAX
The Company files a separate Federal income tax return. Deferred taxes are
provided on the temporary differences between the tax and financial statement
basis of assets and liabilities.
(2) CASH FLOW INFORMATION
The Company defines cash as cash in banks and money market accounts. The Company
paid federal income taxes of $83.8 million, $126.0 million and $29.0 million
directly to the United States Treasury Department during 1999, 1998 and 1997,
respectively.
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturities are considered available for sale. The carrying
value of fixed maturities compared with amortized cost, adjusted for
other-than-temporary declines in value, were as follows:
<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED ---------------------
VALUE COST GAINS LOSSES
(in thousands) ---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
U.S. treasury securities and obligations of U.S.
government agencies and authorities.............. $ 6,516 $ 6,631 $ -- $ (115)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................ 21,656 22,107 -- (451)
Debt securities issued by foreign governments...... 23,890 24,749 380 (1,239)
Corporate securities............................... 2,063,054 2,147,606 2,750 (87,302)
Mortgage and asset-backed securities............... 1,160,901 1,196,095 450 (35,644)
---------- ---------- ------- ---------
Total fixed maturities...................... $3,276,017 $3,397,188 $ 3,580 $(124,751)
========== ========== ======= =========
DECEMBER 31, 1998
U.S. treasury securities and obligations of U.S.
government agencies and authorities.............. $ 7,951 $ 7,879 $ 81 $ (9)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................ 27,039 26,768 362 (91)
Debt securities issued by foreign governments...... 69,357 67,239 2,266 (148)
Corporate securities............................... 1,908,850 1,866,372 46,664 (4,186)
Mortgage and asset-backed securities............... 1,469,623 1,453,277 19,063 (2,717)
---------- ---------- ------- ---------
Total fixed maturities...................... $3,482,820 $3,421,535 $68,436 $ (7,151)
========== ========== ======= =========
</TABLE>
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1999, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have
B-63
<PAGE> 112
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
the right to call or prepay obligations with or without call or prepayment
penalties and because mortgage-backed and asset-backed securities provide for
periodic payments throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST
(in thousands) ---------- ----------
<S> <C> <C>
One year or less............................................ $ 49,221 $ 48,953
Over one year through five years............................ 747,086 765,064
Over five years through ten years........................... 1,022,850 1,073,468
Over ten years.............................................. 295,959 313,608
Securities not due at a single maturity date, primarily
mortgage and asset-backed securities(1)................... 1,160,901 1,196,095
---------- ----------
Total fixed maturities............................... $3,276,017 $3,397,188
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 4.9 years.
Proceeds from sales of investments in fixed maturities prior to maturity were
$1,269.3 million, $882.6 million and $633.9 million during 1999, 1998 and 1997,
respectively. Gross gains of $7.9 million, $10.1 million and $3.1 million and
gross losses of $17.7 million, $8.0 million and $13.7 million were realized on
sales and write-downs of fixed maturities in 1999, 1998 and 1997, respectively.
Excluding agencies of the U.S. government, there were no individual investments
that exceeded ten percent of stockholder's equity at December 31, 1999.
At December 31, 1999, securities carried at approximately $6.2 million were on
deposit with governmental agencies as required by law.
Upon default or indication of potential default by an issuer of fixed maturity
securities, the issue(s) of such issuer would be placed on nonaccrual status
and, since declines in fair value would no longer be considered by the Company
to be temporary, would be analyzed for possible write-down. Any such issue would
be written down to its net realizable value during the fiscal quarter in which
the impairment was determined to have become other than temporary. Thereafter,
each issue on nonaccrual status is regularly reviewed, and additional
write-downs may be taken in light of later developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $151.6 million real estate portfolio at December 31, 1999 consists
of joint venture and third-party mortgage loans and other real estate-related
investments. At December 31, 1999 and 1998, total impaired real estate-related
loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross...................... $ 74.9 $ 83.9
Impaired loans with reserves--gross......................... 23.4 25.0
------ ------
Total gross impaired loans........................... 98.3 108.9
Reserves related to impaired loans.......................... (18.5) (18.5)
Write-downs related to impaired loans....................... (3.5) (3.5)
------ ------
Net impaired loans................................... $ 76.3 $ 86.9
====== ======
</TABLE>
Impaired loans without reserves include loans in which the deficit in equity
investments in real estate-related investments is considered in determining
reserves and write-downs. The Company had an average balance of $100.0 million
and $54.6 million in impaired loans for 1999 and 1998, respectively. Cash
payments received on impaired loans are generally applied to reduce the
outstanding loan balance.
B-64
<PAGE> 113
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
At December 31, 1999 and 1998, loans on nonaccrual status, before reserves and
write-downs, amounted to $98.3 million and $37.4 million, respectively. The
Company's nonaccrual loans are generally included in impaired loans.
NET INVESTMENT INCOME
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.................. $231,176 $232,707 $250,170
Dividends on equity securities.............................. 4,618 2,143 2,123
Income from short-term investments.......................... 3,568 5,391 4,128
Income from mortgage loans.................................. 6,296 14,964 16,283
Income from policy loans.................................... 20,131 21,096 20,549
Income from other real estate-related investments........... 155 352 6,631
Income from other loans and investments..................... 2,033 2,223 2,045
-------- -------- --------
Total investment income.............................. $267,977 $278,876 $301,929
Investment expense.......................................... (3,337) (5,364) (5,734)
-------- -------- --------
Net investment income................................ $264,640 $273,512 $296,195
======== ======== ========
</TABLE>
NET REALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the years ended December 31, 1999,
1998 and 1997, were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
------------------------------
1999 1998 1997
(in thousands) ------- ------- --------
<S> <C> <C> <C>
Real estate-related......................................... $ 4,201 $41,362 $ 19,758
Fixed maturities............................................ (9,755) 2,158 (10,656)
Trading account securities--gross gains..................... 491 3,254 --
Trading account securities--gross losses.................... (7,794) (417) --
Trading account securities--holding losses.................. -- (151) --
Equity securities........................................... 1,039 5,496 914
Other....................................................... 2,269 166 530
------- ------- --------
Realized investment gains (losses) before income tax
expense (benefit)...................................... $(9,549) $51,868 $ 10,546
Income tax expense (benefit)................................ (3,342) 18,154 3,691
------- ------- --------
Net realized investment gains (losses).................... $(6,207) $33,714 $ 6,855
======= ======= ========
</TABLE>
Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity and other securities--the
difference between fair value and cost. The change in net unrealized investment
gains (losses) by class of investment for the years ended December 31, 1999,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
-------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
(in thousands) ------------ ------------ -----------
<S> <C> <C> <C>
Fixed maturities............................................ $(182,456) $36,717 $ 87,787
Equity and other securities................................. (3,929) (1,075) (103)
Adjustment to deferred insurance acquisition costs.......... 3,834 (2,399) (2,325)
Adjustment to value of business acquired.................... 13,265 (1,954) (26,209)
--------- ------- --------
Unrealized gain (loss) before income tax expense
(benefit).............................................. (169,286) 31,289 59,150
Income tax expense (benefit)................................ (15,492) 10,952 (985)
--------- ------- --------
Net unrealized gain (loss) on investments............ $(153,794) $20,337 $ 60,135
========= ======= ========
</TABLE>
B-65
<PAGE> 114
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) UNCONSOLIDATED INVESTEES
At December 31, 1999 and 1998 the Company, along with other Kemper subsidiaries,
directly held partnership interests in a number of real estate joint ventures.
The Company's direct and indirect real estate joint venture investments are
accounted for utilizing the equity method, with the Company recording its share
of the operating results of the respective partnerships. The Company, as an
equity owner, has the ability to fund, and historically has elected to fund,
operating requirements of certain of the joint ventures. Consolidation
accounting methods are not utilized as the Company, in most instances, does not
own more than 50 percent in the aggregate, and in any event, major decisions of
the partnership must be made jointly by all partners.
As of December 31, 1999 and 1998, the Company's net equity investment in
unconsolidated investees amounted to $0.9 million and $1.2 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $155 thousand, $241 thousand and $835 thousand in 1999,
1998 and 1997, respectively.
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage and
asset-backed securities and real estate.
Approximately 20.0 percent of the Company's investment-grade fixed maturities at
December 31, 1999 were mortgage-backed securities, down from 28.0 percent at
December 31, 1998, due to sales and paydowns during 1999. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally AAA credit
quality.
Approximately 16.8 percent and 15.4 percent of the Company's investment-grade
fixed maturities at December 31, 1999 and 1998, respectively, consisted of
corporate asset-backed securities. The majority of the Company's investments in
asset-backed securities were backed by home equity loans (24.0%), commercial
mortgage-backed securities (22.8%), manufactured housing loans (12.5%), other
commercial assets (11.3%) and collateralized loan and bond obligations (10.6%).
The Company's real estate portfolio is distributed by geographic location and
property type. The geographic distribution of a majority of the real estate
portfolio as of December 31, 1999 was as follows: California (36.8%), Hawaii
(13.6%), Washington (10.9%) and Colorado (10.1%). The property type distribution
of a majority of the real estate portfolio as of December 31, 1999 was as
follows: hotels (36.3%), land (36.1%) and residential (13.5%).
To maximize the value of certain land and other projects, additional development
has been proceeding or has been planned. Such development of existing projects
would continue to require funding, either from the Company or third parties. In
the present real estate markets, third-party financing can require credit
enhancing arrangements (e.g., standby financing arrangements and loan
commitments) from the Company. The values of development projects are dependent
on a number of factors, including Kemper's and the Company's plans with respect
thereto, obtaining necessary construction and zoning permits and market demand
for the permitted use of the property. There can be no assurance that such
permits will be obtained as planned or at all, nor that such expenditures will
occur as scheduled, nor that Kemper's and the Company's plans with respect to
such projects may not change substantially.
Slightly more than half of the Company's real estate mortgage loans are on
properties or projects where the Company, Kemper, or their affiliates have taken
ownership positions in joint ventures with a small number of partners.
At December 31, 1999, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate
developer, have ownership interests constituted approximately $63.9 million, or
42.2 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties, one office building and one retail property.
At December 31, 1999, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.
B-66
<PAGE> 115
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
At December 31, 1999, loans to a master limited partnership (the "MLP") between
subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company
("Lumbermens"), a former affiliate, constituted approximately $55.4 million, or
36.5 percent, of the Company's real estate portfolio. Kemper's interest in the
MLP is 75.0 percent at December 31, 1999. Loans to the MLP were placed on
non-accrual status at the beginning of 1999 due to management's desire not to
increase book value of the MLP over net realizable value, as interest on these
loans has historically been added to principal. At December 31, 1999,
MLP-related commitments accounted for approximately $0.1 million of the
Company's off-balance-sheet legal commitments.
The remaining significant real estate-related investments amounted to $20.7
million at December 31, 1999 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, the Company has placed these real estate-related investments on
nonaccrual status as of December 31, 1996. The Company is currently pursuing the
zoning of all remaining unzoned properties, as well as pursuing steps to sell
all remaining zoned properties. However, due to the state of Hawaii's economy,
which has lagged behind the economic expansion of most of the rest of the United
States, the Company anticipates that it could be several additional years until
it completely disposes of all of its investments in Hawaii. At December 31,
1999, off-balance sheet legal commitments related to Hawaiian properties totaled
$4.0 million.
At December 31, 1999, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold. However, the Company continues to have Prime
Group-related commitments, which accounted for $25.7 million of the Company's
off-balance-sheet legal commitments at December 31, 1999.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Current..................................................... $ 75,816 $ 52,273 $130,662
Deferred.................................................... (42,952) (12,469) (99,370)
-------- -------- --------
Total............................................. $ 32,864 $ 39,804 $ 31,292
======== ======== ========
</TABLE>
Additionally, the deferred income tax (benefit) expense related to items
included in other comprehensive income was as follows for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- ------- -------
<S> <C> <C> <C>
Unrealized gains and losses on investments.................. $(21,477) $12,476 $ 9,002
Value of business acquired.................................. 4,643 (684) (9,173)
Deferred insurance acquisition costs........................ 1,342 (840) (814)
-------- ------- -------
Total............................................. $(15,492) $10,952 $ (985)
======== ======= =======
</TABLE>
B-67
<PAGE> 116
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The actual income tax expense for 1999, 1998 and 1997 differed from the
"expected" tax expense for those years as displayed below. "Expected" tax
expense was computed by applying the U.S. federal corporate tax rate of 35
percent in 1999, 1998, and 1997 to income before income tax expense.
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) ------- ------- -------
<S> <C> <C> <C>
Computed expected tax expense............................... $27,232 $36,734 $24,503
Difference between "expected" and actual tax expense:
State taxes............................................... 1,608 (434) 1,801
Amortization of goodwill.................................. 4,460 4,460 5,353
Dividend received deduction............................... -- (540) --
Foreign tax credit........................................ (306) (250) (278)
Other, net................................................ (130) (166) (87)
------- ------- -------
Total actual tax expense.......................... $32,864 $39,804 $31,292
======= ======= =======
</TABLE>
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company only records deferred tax
assets if future realization of the tax benefit is more likely than not, with a
valuation allowance recorded for the portion that is not likely to be realized.
The valuation allowance is subject to future adjustments based upon, among other
items, the Company's estimates of future operating earnings and capital gains.
The Company has established a valuation allowance to reduce the deferred federal
tax asset related to real estate and unrealized losses on investments to a
realizable amount. This amount is based on the evidence available and
management's judgment. Any reversals of the valuation allowance are contingent
upon the recognition of future capital gains in the Company's federal income tax
return or a change in circumstances which causes the recognition of the benefits
to become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred federal tax asset or liability from
unrealized gains or losses on investments.
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred federal tax assets or liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance acquisition costs ("DAC Tax").......... $121,723 $ 86,332 $ 75,522
Unrealized losses on investments.......................... 43,758 -- --
Life policy reserves...................................... 43,931 27,240 43,337
Unearned revenue.......................................... 59,349 42,598 37,243
Real estate-related....................................... 7,103 13,944 13,400
Other investment-related.................................. 928 5,770 3,298
Other..................................................... 3,133 4,923 4,371
-------- -------- --------
Total deferred federal tax assets...................... 279,925 180,807 177,171
Valuation allowance....................................... (58,959) (15,201) (15,201)
-------- -------- --------
Total deferred federal tax assets after valuation
allowance............................................ 220,966 165,606 161,970
-------- -------- --------
</TABLE>
B-68
<PAGE> 117
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Deferred federal tax liabilities:
Value of business acquired................................ 55,884 41,598 48,469
Deferred insurance acquisition costs...................... 41,706 32,040 20,811
Depreciation and amortization............................. 19,957 19,111 20,201
Other investment-related.................................. 7,670 14,337 18,774
Unrealized gains on investments........................... -- 21,477 9,002
Other..................................................... 2,247 1,984 4,720
-------- -------- --------
Total deferred federal tax liabilities................. 127,464 130,547 121,977
-------- -------- --------
Net deferred federal tax assets............................. $ 93,502 $ 35,059 $ 39,993
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the DAC Tax
associated with $1.6 billion and $1.5 billion of new and renewal sales in 1999
and 1998, respectively, from a non-registered individual and group variable
bank-owned life insurance contract ("BOLI"). Management believes that it is more
likely than not that the results of future operations will generate sufficient
taxable income over the ten year amortization period of the unearned revenue and
DAC Tax to realize such deferred tax assets.
The tax returns through the year 1993 have been examined by the Internal Revenue
Service ("IRS"). Changes proposed are not material to the Company's financial
position. The tax returns for the years 1994 through 1996 are currently under
examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received capital contributions from Kemper of $4.3 million and $45.0
million during 1998 and 1997, respectively. The Company paid cash dividends of
$115.0 million, $95.0 million and $29.3 million to Kemper during 1999, 1998 and
1997, respectively.
The Company has loans to joint ventures, consisting primarily of mortgage loans
on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1999 and 1998, joint venture mortgage loans
totaled $67.2 million and $65.8 million, respectively, and during 1999, 1998 and
1997, the Company earned interest income on these joint venture loans of $0.6
million, $6.8 million and $7.5 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life Assurance
Company ("FKLA"), an affiliated company. The Company is allocated expenses for
the utilization of FKLA employees and facilities, the investment management
services of Scudder Kemper Investments, Inc. ("SKI") an affiliated company, and
the information systems of Kemper Service Company ("KSvC"), an SKI subsidiary,
based on the Company's share of administrative, legal, marketing, investment
management, information systems and operation and support services. During 1999
and 1998, expenses allocated to the Company from SKI amounted to $17 thousand
and $43 thousand, respectively. During 1997, expenses allocated to the Company
from SKI and KSvC amounted to $114 thousand. The Company also paid to SKI
investment management fees of $1.8 million, $3.1 million and $3.5 million during
1999, 1998 and 1997, respectively. In addition, expenses allocated to the
Company from FKLA during 1999, 1998 and 1997 amounted to $34.1 million, $35.5
million and $30.0 million, respectively. The Company also paid to Kemper real
estate subsidiaries fees of $1.0 million, $1.5 million and $2.2 million in 1999,
1998 and 1997, respectively, related to the management of the Company's real
estate portfolio.
(8) REINSURANCE
As of December 31, 1999 and 1998, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to an affiliate amounted to $309.7 million
and $344.8 million, respectively.
In 1996, the Company assumed, on a yearly renewable term basis, term life
insurance from FKLA. Premiums assumed during 1999 under the terms of the treaty
amounted to $21.3 million and the face amount which remained outstanding at
December 31, 1999 amounted to $10.4 billion.
B-69
<PAGE> 118
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
Effective January 1, 1997, the Company ceded 90 percent of all new direct life
insurance premiums to outside reinsurers. Life reserves ceded to outside
reinsurers on the Company's direct business amounted to approximately $595
thousand and $413 thousand as of December 31, 1999 and 1998, respectively.
During December 1997, the Company entered into a funds withheld reinsurance
agreement with a Zurich affiliated company, Zurich Insurance Company, Bermuda
Branch ("ZICBB"), formerly ZC Life Reinsurance Limited. Under the terms of this
agreement, the Company ceded, on a yearly renewable term basis, 90 percent of
the net amount at risk (death benefit payable to the insured less the insured's
separate account cash surrender value) related to BOLI, which is held in the
Company's separate accounts. As consideration for this reinsurance coverage, the
Company cedes separate account fees (cost of insurance charges) to ZICBB and
retains a portion of such funds under the terms of the reinsurance agreement in
a funds withheld account which is included as a component of benefits and funds
payable in the accompanying consolidated balance sheets. During 1998, the
Company modified the reinsurance agreement to increase the reinsurance from
ninety percent to one hundred percent.
The following table contains amounts related to the BOLI funds withheld
reinsurance agreement (in millions):
BANK OWNED LIFE INSURANCE (BOLI)
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Face amount in force........................................ $ 82,021 $ 66,186 $ 59,338
======== ======== ========
Net amount at risk ceded.................................... $(75,979) $(62,160) $(51,066)
======== ======== ========
Cost of insurance charges ceded............................. $ 166.4 $ 175.5 $ 24.3
======== ======== ========
Funds withheld account...................................... $ 263.4 $ 170.9 $ 23.4
======== ======== ========
</TABLE>
The Company has a funds withheld account ("FWA") supporting reserve credits on
reinsurance ceded on the BOLI product. Amendments to the reinsurance contracts
during 1998 changed the methodology used to determine increases to the FWA. A
substantial portion of the FWA was marked-to-market based predominantly upon the
total return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, the Company recorded a $2.5 million increase to
the FWA related to this mark-to-market. In November 1998, to properly match
revenue and expenses, the Company had also placed assets supporting the FWA in a
segmented portion of its General Account. This portfolio was classified as
"trading" under Statement of Financial Accounting Standards No. 115 ("FAS 115")
at December 31, 1998 and through November 30, 1999. FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
During 1998, the Company recorded a realized capital gain of $2.8 million upon
transfer of these assets from "available for sale" to the trading portfolio as
required by FAS 115. In addition, the Company recorded realized capital losses
of $7.3 million and $0.2 million related to the changes in fair value of this
portfolio during 1999 and 1998, respectively.
Due to a change in the reinsurance strategy related to the BOLI product,
effective December 1, 1999, the Company no longer marked-to-market a portion of
the FWA liability and therefore no longer designated the related portion of
assets as "trading". As a result, changes in fair value to the FWA and the
assets supporting the FWA no longer flow through the Company's operating
results.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FKLA sponsors a health and welfare benefit plan that provides insurance benefits
covering substantially all eligible, active and retired employees of FKLA and
their covered dependents and beneficiaries. The Company is allocated a portion
of the costs of providing such benefits. The Company is self insured with
respect to medical benefits, and the plan is not funded except with respect to
certain disability-related medical claims. The medical plan provides for medical
insurance benefits at retirement, with eligibility based upon age and the
participant's number of years of participation attained at retirement. The plan
is contributory for pre-Medicare retirees, and
B-70
<PAGE> 119
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
will be contributory for all retiree coverage for most current employees, with
contributions generally adjusted annually. Postretirement life insurance
benefits are noncontributory and are limited to $10,000 per participant.
The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $1.2 million and $2.0 million at December 31, 1999 and 1998,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 8.0 percent and 7.0 percent for 1999 and 1998, respectively. The
assumed health care trend rate used was based on projected experience for 1999,
7.2 percent for 2000, gradually declining to 5.6 percent by the year 2004 and
gradually declining thereafter.
A one percentage point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1999 and 1998 by $190 thousand and $312 thousand, respectively.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although neither the Company nor its joint venture projects have been identified
as a "potentially responsible party" under Federal environmental guidelines,
inherent in the ownership of, or lending to, real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1999, the Company had future legal loan commitments and stand-by
financing agreements totaling $29.8 million to support the financing needs of
various real estate investments. To the extent these arrangements are called
upon, amounts loaned would be collateralized by assets of the joint ventures,
including first mortgage liens on the real estate. The Company's criteria in
making these arrangements are the same as for its mortgage loans and other real
estate investments. These Commitments are included in the Company's analysis of
real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. Fair value estimates for financial instruments not
carried at fair value are generally determined using discounted cash flow models
and assumptions that are based on judgments regarding current and future
economic conditions and the risk characteristics of the investments. Although
fair value estimates are calculated using assumptions that management believes
are appropriate, changes in assumptions could significantly affect the estimates
and such estimates should be used with care.
B-71
<PAGE> 120
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
FIXED MATURITIES AND EQUITY SECURITIES: Fair values were determined by using
market quotations, or independent pricing services that use prices provided by
market makers or estimates of fair values obtained from yield data relating to
instruments or securities with similar characteristics, or fair value as
determined in good faith by the Company's portfolio manager, SKI.
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate fair values.
MORTGAGE LOANS AND OTHER REAL ESTATE-RELATED INVESTMENTS: Fair values were
estimated based upon the investments observable market price, net of estimated
costs to sell. The estimates of fair value should be used with care given the
inherent difficulty in estimating the fair value of real estate due to the lack
of a liquid quotable market.
OTHER LOANS AND INVESTMENTS: The carrying amounts reported in the consolidated
balance sheets for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.
LIFE POLICY BENEFITS: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1999 and 1998 to be 4.78 percent and 4.75 percent,
respectively, while the assumed average market crediting rate was 5.0 percent in
both 1999 and 1998.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities............................ $3,276,017 $3,276,017 $3,482,820 $3,482,820
Trading account securities.................. -- -- 101,781 101,781
Cash and short-term investments............. 54,406 54,406 71,820 71,820
Mortgage loans and other real estate-related
assets................................... 151,623 151,623 164,375 164,375
Policy loans................................ 261,788 261,788 271,540 271,540
Equity securities........................... 61,592 61,592 66,854 66,854
Other invested assets....................... 25,620 26,226 23,645 27,620
Financial instruments recorded as liabilities:
Life policy benefits, excluding term life
reserves................................. 3,399,299 3,299,254 3,551,050 3,657,510
Funds withheld account...................... 263,428 263,428 170,920 170,920
</TABLE>
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. The maximum amount of dividends which can
be paid by the Company without prior approval in 2000 is $59.1 million. The
Company
B-72
<PAGE> 121
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS (CONTINUED)
paid cash dividends of $115.0 million, $95.0 million and $29.3 million to Kemper
during 1999, 1998 and 1997, respectively.
The Company's net income and capital and surplus as determined in accordance
with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $ 59,116 $ 64,871 $ 58,372
======== ======== ========
Statutory capital and surplus............................... $394,966 $455,213 $476,924
======== ======== ========
</TABLE>
In March 1998, the National Association of Insurance Commissioners approved the
codification of statutory accounting principles. Codification is effective
January 1, 2001. The Company has not quantified the impact that codification
will have on its statutory financial position or results of operations.
(14) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table sets forth the Company's unaudited quarterly financial
information:
(in thousands)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
QUARTER ENDED -------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1999 OPERATING SUMMARY
Revenues................................ $95,646 $ 86,164 $78,301 $103,308 $363,419
======= ======== ======= ======== ========
Net operating income, excluding realized
gains (losses)....................... $11,222 $ 14,385 $11,568 $ 13,971 $ 51,147
Net realized investment gains
(losses)............................. (627) (1,286) (5,098) 805 (6,207)
------- -------- ------- -------- --------
Net income...................... $10,595 $ 13,099 $ 6,470 $ 14,776 $ 44,940
======= ======== ======= ======== ========
1998 OPERATING SUMMARY
Revenues................................ $98,026 $110,003 $98,752 $112,958 $419,739
======= ======== ======= ======== ========
Net operating income, excluding realized
gains................................ $ 8,025 $ 5,700 $ 7,169 $ 10,541 $ 31,435
Net realized investment gains........... 1,205 10,187 5,818 16,504 33,714
------- -------- ------- -------- --------
Net income...................... $ 9,230 $ 15,887 $12,987 $ 27,045 $ 65,149
======= ======== ======= ======== ========
1997 OPERATING SUMMARY
Revenues................................ $89,055 $ 99,293 $86,071 $151,061 $425,480
======= ======== ======= ======== ========
Net operating income, excluding realized
gains(losses)........................ $ 9,590 $ 7,701 $ 6,075 $ 8,496 $ 31,862
Net realized investment gains
(losses)............................. 578 5,305 (1,971) 2,943 6,855
------- -------- ------- -------- --------
Net income...................... $10,168 $ 13,006 $ 4,104 $ 11,439 $ 38,717
======= ======== ======= ======== ========
</TABLE>
(15) OPERATING SEGMENTS AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 131 ("FAS 131"), DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. FAS 131 established
standards for how to report information about operating segments. It also
established standards for related disclosures about products and services,
geographic areas and major customers. The Company adopted FAS 131 as of December
31, 1998 and the impact of implementation did not affect the Company's
consolidated financial position, results of operations or cash flows. In the
initial year of adoption, FAS 131 requires comparative information for earlier
years to be restated, unless impracticable to do so.
The Company, FKLA, Zurich Life Insurance Company of America, ("ZLICA"), and
Fidelity Life Association ("FLA"), a Mutual Legal Reserve Company, owned by its
policyholders, operate under the trade name Zurich
B-73
<PAGE> 122
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
Kemper Life. For purposes of this operating segment disclosure, Zurich Kemper
Life will also include the operations of Zurich Direct, Inc., an affiliated
direct marketing life insurance agency and excludes FLA, as it is owned by its
policyholders.
Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The SBU
concept employed by ZFS has each SBU concentrate on a specific customer market.
The SBU is the focal point of Zurich Kemper Life, because it is at the SBU level
that Zurich Kemper Life can clearly identify customer segments and then work to
understand and satisfy the needs of each customer. The contributions of Zurich
Kemper Life's SBUs to consolidated revenues, operating results and certain
balance sheet data pertaining thereto, are shown in the following tables on the
basis of accounting principles generally accepted in the United States.
Zurich Kemper Life is segregated into the Life Brokerage, Financial, Retirement
Solutions Group ("RSG") and Direct SBUs. The SBUs are not managed at the legal
entity level, but rather at the Zurich Kemper Life level. Zurich Kemper Life's
SBUs cross legal entity lines, as certain similar products are sold by more than
one legal entity. The vast majority of the Company's business is derived from
the Financial and RSG SBUs.
Each SBU's revenue is derived from geographically dispersed areas as Zurich
Kemper Life is licensed in the District of Columbia and all states except New
York. During 1999, 1998 and 1997, Zurich Kemper Life did not derive net revenue
from one customer that exceeded 10 percent of the total revenue of Zurich Kemper
Life.
The principal products and markets of Zurich Kemper Life's SBUs are as follows:
LIFE BROKERAGE: The Life Brokerage SBU develops low cost term and universal life
insurance, as well as fixed annuities, to market through independent agencies
and national marketing organizations.
FINANCIAL: The Financial SBU focuses on a wide range of products that provide
for the accumulation, distribution and transfer of wealth and primarily includes
variable and fixed annuities, variable universal life and bank-owned life
insurance. These products are distributed to consumers through financial
intermediaries such as banks, brokerage firms and independent financial
planners. Institutional business includes BOLI and funding agreements (included
in FKLA).
RSG: The RSG SBU has a sharp focus on its target customer. This SBU markets
variable annuities to K-12 schoolteachers, administrators, and healthcare
workers, along with college professors and certain employees of selected
non-profit organizations. This target market is eligible for what the IRS
designates as retirement-oriented savings or investment plans that qualify for
special tax treatment.
DIRECT: The Direct SBU is a direct marketer of basic, low-cost term life
insurance through various marketing media.
B-74
<PAGE> 123
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
Summarized financial information for ZKL's SBU's are as follows:
As of and for the period ending December 31, 1999:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG DIRECT TOTAL
INCOME STATEMENT ---------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income.................. $ 145,533 $ 410 $ -- $ 8,038 $ 153,981
Net investment income........... 137,106 175,590 101,202 1,297 415,195
Realized investment gains
(losses)..................... 976 (6,980) (98) -- (6,102)
Fees and other income........... 70,477 48,873 35,742 44,528 199,620
---------- ----------- ---------- -------- -----------
Total revenue........... 354,092 217,893 136,846 53,863 762,694
---------- ----------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder benefits........... 200,161 112,869 68,801 3,529 385,360
Intangible asset amortization... 54,957 12,053 13,989 -- 80,999
Net deferral of insurance
acquisition costs............ (37,433) (43,664) (20,624) (41,412) (143,133)
Commissions and taxes, licenses
and fees..................... 21,881 66,702 26,700 17,411 132,694
Operating expenses.............. 56,179 25,101 23,611 71,194 176,085
---------- ----------- ---------- -------- -----------
Total benefits and
expenses.............. 295,745 173,061 112,477 50,722 632,005
---------- ----------- ---------- -------- -----------
Income before income tax
expense......................... 58,347 44,832 24,369 3,141 130,689
Income tax expense................ 25,707 19,235 10,966 1,114 57,022
---------- ----------- ---------- -------- -----------
Net income.............. $ 32,640 $ 25,597 $ 13,403 $ 2,027 $ 73,667
========== =========== ========== ======== ===========
BALANCE SHEET
Total assets.................... $3,066,956 $10,311,850 $4,755,437 $144,189 $18,278,432
========== =========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- ------- -------------
<S> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:.................................................... $762,694 $73,667 $18,278,432
-------- ------- -----------
Less:
Revenue, net income and assets of FKLA.................... 305,334 24,801 3,162,048
Revenue, net income and assets of ZLICA................... 49,460 8,528 456,283
Revenue, net loss and assets of Zurich Direct............. 44,481 (4,602) 4,385
-------- ------- -----------
Totals per the Company's consolidated financial
statements............................................. $363,419 $44,940 $14,655,716
======== ======= ===========
</TABLE>
B-75
<PAGE> 124
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
As of and for the period ending December 31, 1998:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG DIRECT TOTAL
INCOME STATEMENT ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income................... $ 160,067 $ 56 $ -- $ 5,583 $ 165,706
Net investment income............ 141,171 180,721 100,695 271 422,858
Realized investment gains........ 20,335 33,691 15,659 30 69,715
Fees and other income............ 80,831 40,421 31,074 23,581 175,907
---------- ---------- ---------- -------- -----------
Total revenue............... 402,404 254,889 147,428 29,465 834,186
---------- ---------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder benefits............ 243,793 117,742 73,844 2,110 437,489
Intangible asset amortization.... 58,390 15,669 15,703 -- 89,762
Net deferral of insurance
acquisition costs............. (55,569) (9,444) (22,964) (22,765) (110,742)
Commissions and taxes, licenses
and fees...................... 29,539 43,919 22,227 11,707 107,392
Operating expenses............... 61,659 24,924 20,279 35,593 142,455
---------- ---------- ---------- -------- -----------
Total benefits and
expenses................. 337,812 192,810 109,089 26,645 666,356
---------- ---------- ---------- -------- -----------
Income before income tax expense... 64,592 62,079 38,339 2,820 167,830
Income tax expense................. 26,774 24,340 14,794 1,001 66,909
---------- ---------- ---------- -------- -----------
Net income.................. $ 37,818 $ 37,739 $ 23,545 $ 1,819 $ 100,921
========== ========== ========== ======== ===========
BALANCE SHEET
Total assets..................... $3,194,530 $8,232,927 $4,172,828 $ 46,254 $15,646,539
========== ========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- -------- -----------
<S> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:.................................................... $834,186 $100,921 $15,646,539
-------- -------- -----------
Less:
Revenue, net income and assets of FKLA.................... 336,841 35,953 2,986,381
Revenue, net loss and assets of ZLICA..................... 54,058 (1,066) 416,115
Revenue, net income and assets of Zurich Direct........... 23,548 885 4,322
-------- -------- -----------
Totals per the Company's consolidated financial
statements........................................ $419,739 $ 65,149 $12,239,721
======== ======== ===========
</TABLE>
B-76
<PAGE> 125
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
As of and for the period ending December 31, 1997:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG DIRECT TOTAL
INCOME STATEMENT ---------- ---------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income.................... $ 167,439 $ -- $ -- $ 4,249 $ 171,688
Net investment income............. 155,885 212,767 91,664 455 460,771
Realized investment gains......... 2,503 7,744 2,692 50 12,989
Fees and other income............. 78,668 73,823 23,663 8,007 184,161
---------- ---------- ---------- ------- -----------
Total revenue................ 404,495 294,334 118,019 12,761 829,609
---------- ---------- ---------- ------- -----------
BENEFITS AND EXPENSES
Policyholder benefits............. 247,878 153,327 60,061 2,234 463,500
Intangible asset amortization..... 58,534 25,593 15,589 -- 99,716
Net deferral of insurance
acquisition costs.............. (50,328) (18,222) (13,033) (5,242) (86,825)
Commissions and taxes, licenses
and fees....................... 39,477 66,552 16,668 3,518 126,215
Operating expenses................ 55,859 20,282 14,320 19,472 109,933
---------- ---------- ---------- ------- -----------
Total benefits and
expenses.................. 351,420 247,532 93,605 19,982 712,539
---------- ---------- ---------- ------- -----------
Income (loss) before income tax
expense (benefit)................. 53,075 46,802 24,414 (7,221) 117,070
Income tax expense (benefit)........ 25,554 21,144 10,545 (2,528) 54,715
---------- ---------- ---------- ------- -----------
Net income (loss)............ $ 27,521 $ 25,658 $ 13,869 $(4,693) $ 62,355
========== ========== ========== ======= ===========
BALANCE SHEET
Total assets...................... $2,877,854 $7,416,791 $3,759,173 $41,669 $14,095,487
========== ========== ========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- ------- -----------
<S> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:.................................................... $829,609 $62,355 $14,095,487
Less:
Revenue, net income and assets of FKLA.................... 338,854 24,740 3,105,396
Revenue, net income and assets of ZLICA................... 57,233 2,193 398,786
Revenue, net loss and assets of Zurich Direct............. 8,042 (3,295) 1,655
-------- ------- -----------
Totals per the Company's consolidated financial
statements........................................ $425,480 $38,717 $10,589,650
======== ======= ===========
</TABLE>
(16) SUBSEQUENT EVENT
In February 2000, the Company announced that it had entered into an agreement to
purchase for $5.5 million the following related entities, all privately held New
York corporations:
- PMG Securities Corporation
- PMG Asset Management, Inc.
- PMG Life Agency, Inc., and
- PMG Marketing, Inc.
These companies were primarily purchased for their specialization in the target
market of the RSG SBU. The acquisition is expected to close at the end of the
first quarter 2000.
B-77
<PAGE> 126
APPENDIX
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
-------------------------------
QUALIFIED NON-QUALIFIED
PLANS PLANS
--------- -------------
<S> <C> <C>
STATE
California.................................................. .50% 2.35%*
Kentucky.................................................... 2.00%* 2.00%*
Maine....................................................... -- 2.00%
Nevada...................................................... -- 3.50%*
South Dakota................................................ -- 1.25%
West Virginia............................................... 1.00% 1.00%
Wyoming..................................................... -- 1.00%
</TABLE>
* Taxes become due when annuity benefits commence, rather than when the premiums
are collected. At the time of annuitization, the premium tax payable will be
charged against the Contract Value.
B-78
<PAGE> 127
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS:
(1) Financial Statements included in Part A of the Registration
Statement: Condensed Financial Information
(2) Financial Statements included in Part B of the Registration
Statement:
(i) KILICO Variable Annuity Separate Account
Report of Independent Accountants
Statements of Assets and Liabilities and Contract Owners' Equity
as of December 31, 1999
Statements of Operations for the Year Ended December 31, 1999
Statements of Changes in Contract Owners' Equity for the Years
Ended December 31, 1999 and 1998
Notes to Financial Statements
(ii) Kemper Investors Life Insurance Company
Report of Independent Accountants
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Balance Sheets as of December 31, 1999 and 1998
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Operations, years ended December 31,
1999, 1998 and 1997
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Comprehensive Income, years ended
December 31, 1999, 1998 and 1997
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity, years ended
December 31, 1999, 1998 and 1997
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows, years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(b) EXHIBITS:
<TABLE>
<S> <C>
(5)1.1 A copy of resolution of the Board of Directors of Kemper
Investors Life Insurance Company dated September 13, 1977.
(5)1.2 A copy of Record of Action of Kemper Investors Life
Insurance Company dated April 15, 1983.
2. Not Applicable.
(3)3.1 Distribution Agreement between Investors Brokerage Services,
Inc. and KILICO.
(1)3.2 Addendum to Selling Group Agreement of Kemper Financial
Services, Inc.
(6)3.3 Selling Group Agreement of Investors Brokerage Services,
Inc.
(6)3.4 General Agent Agreement.
(7)4. Form of Variable Annuity Contract.
(7)5. Form of application.
(3)6.1 Kemper Investors Life Insurance Company articles of
incorporation.
(6)6.2 Kemper Investors Life Insurance Company bylaws.
7. Inapplicable.
(2)8.1 Fund Participation Agreement among KILICO, Lexington Natural
Resources Trust and Lexington Management Corporation.
(2)8.2 Fund Participation Agreement among KILICO, Lexington
Emerging Markets Fund and Lexington Management Corporation.
</TABLE>
C-1
<PAGE> 128
<TABLE>
<S> <C>
(2)8.3 Fund Participation Agreement among KILICO, Janus Aspen
Series and Janus Capital Corporation.
(7)8.3(a) Service Agreement between KILICO and Janus Capital
Corporation.
(4)8.4(a) Fund Participation Agreement among KILICO, Fidelity Variable
Insurance Products Fund and Fidelity Distributors
Corporation.
(13)8.4(b) Amendment to Fund Participation Agreement among KILICO,
Fidelity Variable Insurance Products Fund and Fidelity
Distributors Corporation.
(4)8.5(a) Fund Participation Agreement among KILICO, Fidelity Variable
Insurance Products Fund II and Fidelity Distributors
Corporation.
(13)8.5(b) Amendment to Fund Participation Agreement among KILICO,
Fidelity Variable Insurance Products Fund II and Fidelity
Distributors Corporation
(10)8.6(a) Participation Agreement between KILICO and Scudder Variable
Life Investment Fund
(10)8.6(b) Participating Contract and Policy Agreement between KILICO
and Scudder Kemper Investments, Inc.
(10)8.6(c) Indemnification Agreement between KILICO and Scudder Kemper
Investments, Inc.
(15)8.7
(a) Fund Participation Agreement between KILICO and The Dreyfus
Socially Responsible Growth Fund, Inc.
(16)8.7
(b) Administrative Services Agreement by and between The Dreyfus
Corporation and KILICO (redacted).
(16)8.7(c) November 1, 1999 Amendment to Fund Participation Agreement
between KILICO and The Dreyfus Socially Responsible Growth
Fund, Inc.
(16)8.7(d) November 1, 1999 Amendment to Administrative Services
Agreement by and between The Dreyfus Corporation and KILICO
(redacted).
8.8 Fund Participation Agreement between KILICO and J.P. Morgan
Series Trust II.
(16)8.9(a) Fund Participation Agreement by and among The Alger American
Fund, KILICO and Fred Alger & Company, Incorporated
(16)8.9(b) Service Agreement between Fred Alger Management, Inc. and
KILICO (redacted)
(14)8.10 Fund Participation Agreement by and between KILICO and
American Century Investment Management, Inc.
(17)8.11 Fund Participation Agreement among KILICO, Investors Fund
Series (formerly known as Kemper Investors Fund), Zurich
Kemper Investments, Inc. and Kemper Distributors, Inc.
(7)9. Opinion and Consent of Counsel.
10. Consents of PricewaterhouseCoopers LLP, Independent
Accountants.
11. Inapplicable.
12. Inapplicable.
(8)13. Schedules for Computation of Performance Information.
14. Organizational Chart.
(11)17.1 Schedule III: Supplementary Insurance Information (years
ended December 31, 1999 and 1998).
(11)17.2 Schedule IV: Reinsurance (year ended December 31, 1999).
(12)17.3 Schedule IV: Reinsurance (year ended December 31, 1998)
(9)17.4 Schedule IV: Reinsurance (year ended December 31, 1997).
(11)17.5 Schedule V: Valuation and qualifying accounts (year ended
December 31, 1999).
(12)17.6 Schedule V: Valuation and qualifying accounts (year ended
December 31, 1998).
(9)17.7 Schedule V: Valuation and qualifying accounts (year ended
December 31, 1997)
</TABLE>
- ---------------
(1) Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-4 filed on or about April 27, 1995.
(2) Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-4 filed on or about September 14, 1995.
(3) Incorporated by reference to Exhibits filed with the Registration Statement
on Form S-1 for KILICO (File No. 333-02491) filed on or about April 12,
1996.
C-2
<PAGE> 129
( 4) Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-4 filed on or about April 26, 1996.
( 5) Incorporated by reference to the Registration Statement on Form N-4 (File
No. 333-22375) filed on or about February 26, 1997.
( 6) Incorporated by reference to Amendment No. 2 to the Registration Statement
on Form S-1 (File No. 333-02491) filed on or about April 23, 1997.
( 7) Incorporated by reference to Amendment No. 25 to the Registration Statement
on Form N-4 (File No. 2-72671) filed on or about April 28, 1997.
( 8) Incorporated by reference to Amendment No. 26 to the Registration Statement
on Form N-4 (File No. 2-72671) filed on or about November 3, 1997.
( 9) Incorporated by reference to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-4 for KILICO Variable Annuity Separate
Account (File No. 33-43501) filed on or about April 16, 1998.
(10) Incorporated by reference to Amendment No. 5 to the Registration Statement
on Form S-1 (File No. 333-22389) filed on or about April 20, 1999.
(11) Incorporated by reference to Form 10-K for Kemper Investors Life Insurance
Company for fiscal year ended December 31, 1999 filed on or about March 29,
2000.
(12) Incorporated by reference to Amendment No. 4 to the Registration Statement
on Form S-1 (File No. 333-02491) filed on or about April 20, 1999.
(13) Incorporated by reference to Post-Effective Amendment No. 6 to the
Registration Statement on Form S-6 (File No. 33-65399) filed on or about
April 23, 1999.
(14) Incorporated by reference to the Registration Statement on Form S-1 (File
No. 333-32840) filed on or about March 20, 2000.
(15) Incorporated by reference to Post-Effective Amendment No. 28 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 28, 1999.
(16) Incorporated by reference to Amendment No. 6 to the Registration Statement
on Form S-1 (File No. 333-22389) filed on or about April 17, 2000.
(17) Incorporated by reference to Amendment No. 3 to the Registration Statement
of KILICO on Form S-1 (File No. 333-22389) filed on or about April 8, 1998.
ITEM 25. DIRECTORS AND OFFICERS OF KEMPER INVESTORS LIFE INSURANCE COMPANY
The directors and principal officers of KILICO are listed below
together with their current positions. The address of each officer and
director is 1 Kemper Drive, Long Grove, Illinois 60049.
<TABLE>
<CAPTION>
OFFICE WITH KILICO
NAME ------------------
<S> <C>
Gale K. Caruso............................... President, Chief Executive Officer and Director
Frederick L. Blackmon........................ Senior Vice President and Chief Financial Officer
Edward L. Robbins............................ Senior Vice President and Chief Actuary
James E. Hohmann............................. Senior Vice President
William H. Bolinder.......................... Chairman of the Board and Director
David A. Bowers.............................. Director
Gunther Gose................................. Director
Eliane C. Frye............................... Executive Vice President
Debra P. Rezabek............................. Senior Vice President, General Counsel, and Corporate
Secretary
James C. Harkensee........................... Senior Vice President
Edward K. Loughridge......................... Senior Vice President and Corporate Development
Officer
Kenneth M. Sapp.............................. Senior Vice President
George Vlaisavljevich........................ Senior Vice President
Russell M. Bostick........................... Senior Vice President and Chief Information Officer
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE INSURANCE
COMPANY OR REGISTRANT
See Exhibit 14 for organizational charts of persons controlled or
under common control with Kemper Investors Life Insurance Company.
Investors Brokerage Services, Inc. and Investors Brokerage Services
Insurance Agency, Inc. are wholly owned subsidiaries of KILICO.
C-3
<PAGE> 130
ITEM 27. NUMBER OF CONTRACT OWNERS
At March 31, 2000, the Registrant had approximately 108,409 qualified
and non-qualified Advantage III Contract Owners.
ITEM 28. INDEMNIFICATION
To the extent permitted by law of the State of Illinois and subject to
all applicable requirements thereof, Article VI of the By-Laws of Kemper
Investors Life Insurance Company ("KILICO") provides for the
indemnification of any person against all expenses (including attorneys
fees), judgments, fines, amounts paid in settlement and other costs
actually and reasonably incurred by him in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative in which he is a party or is threatened to
be made a party by reason of his being or having been a director, officer,
employee or agent of KILICO, or serving or having served, at the request of
KILICO, as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of his
holding a fiduciary position in connection with the management or
administration of retirement, pension, profit sharing or other benefit
plans including, but not limited to, any fiduciary liability under the
Employee Retirement Income Security Act of 1974 and any amendment thereof,
if he acted in good faith and in a manner he reasonably believed to be in
and not opposed to the best interests of KILICO, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE
or its equivalent, shall not, of itself, create a presumption that he did
not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of KILICO, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful. No indemnification shall be made in respect of any
claim, issue or matter as to which a director or officer shall have been
adjudged to be liable for negligence or misconduct in the performance of
his duty to the company, unless and only to the extent that the court in
which such action or suit was brought or other court of competent
jurisdiction shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
he is fairly and reasonably entitled to indemnity for such expenses as the
court shall deem proper.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, employees
or agents of KILICO pursuant to the foregoing provisions, or otherwise,
KILICO has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
that Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by KILICO
of expenses incurred or paid by a director, officer, employee of agent of
KILICO in the successful defense of any action, suit or proceeding) is
asserted by such director, officer, employee or agent of KILICO in
connection with variable annuity contracts, KILICO will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by KILICO is against public policy as
expressed in that Act and will be governed by the final adjudication of
such issue.
ITEM 29.(a) PRINCIPAL UNDERWRITER
Investors Brokerage Services, Inc., a wholly owned subsidiary of
Kemper Investors Life Insurance Company, acts as principal underwriter for
KILICO Variable Annuity Separate Account, KILICO Variable Separate Account,
Kemper Investors Life Insurance Company Variable Annuity Account C and FKLA
Variable Separate Account.
ITEM 29.(b) INFORMATION REGARDING PRINCIPAL UNDERWRITER, INVESTORS BROKERAGE
SERVICES, INC.
The address of each officer is 1 Kemper Drive, Long Grove, IL 60049.
C-4
<PAGE> 131
<TABLE>
<CAPTION>
POSITION AND OFFICES
NAME WITH UNDERWRITER
---- --------------------
<S> <C>
John B. Scott....................................... Chairman and Director
Michael E. Scherrman................................ President and Director
Debra P. Rezabek.................................... Secretary
Kenneth M. Sapp..................................... Director
Eliane C. Frye...................................... Director
Michael A. Kelly.................................... Vice President
David S. Jorgensen.................................. Vice President and Treasurer
Frank J. Julian..................................... Assistant Secretary
George Vlaisavljevich............................... Director
Cheryl L. Johns..................................... Assistant Vice President
Allen R. Reed....................................... Assistant Secretary
</TABLE>
ITEM 29.(c)
Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are maintained by Kemper Investors Life Insurance
Company at its home office at 1 Kemper Drive, Long Grove, Illinois 60049
and at 222 South Riverside Plaza, Chicago, Illinois 60606-5808.
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
Representation Regarding Fees and Charges Pursuant to Section 26 of
the Investment Company Act of 1940
Kemper Investors Life Insurance Company ("KILICO") represents that the
fees and charges deducted under the Contract, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by KILICO.
Representation Regarding Contracts Issued to Participants of Tax-Sheltered
Annuity Programs
KILICO, depositor and sponsor of the registrant KILICO Variable Annuity
Separate Account (the "Separate Account"), and Investors Brokerage Services,
Inc. ("IBS"), the principal underwriter of the periodic payment variable annuity
contracts (the "Contracts") issued by the registrant, will issue the Contracts
to participants in IRC 403(b) Tax-Sheltered Annuity Programs in reliance upon,
and in compliance with, the no-action letter dated November 28, 1988 to American
Counsel of Life Insurance. In connection therewith, KILICO, the Separate Account
and IBS represent that they will:
1. Include appropriate disclosure regarding the restrictions on
redemptions imposed by IRC Section 403(b)(11) in each registration
statement, including the prospectus, used in connection with the Program;
2. Include appropriate disclosure regarding the restrictions on
redemption imposed by IRC Section 403(b)(11) in any sales literature used
in connection with the offer of annuity contracts to 403(b) participants;
3. Instruct salespeople who solicit participants to purchase annuity
contracts specifically to bring the restrictions on redemption imposed by
IRC Section 403(b)11 to the attention of potential participants; and
4. Obtain from each participant who purchases an IRC Section 403(b)
annuity contract, prior to or at the time of such purchase, a signed
statement acknowledging the restrictions on redemption imposed by IRC
Section 403(b) and the investment alternatives available under the
employer's IRC Section 403(b) arrangement, to which the participant may
elect to transfer his or her contract value.
C-5
<PAGE> 132
Representation Regarding Contracts Issued to Participants in the Texas
Optional Retirement Program.
KILICO, depositor and sponsor of the registrant KILICO Variable Annuity
Separate Account, and Investors Brokerage Services, Inc., the principal
underwriter of the periodic payment variable annuity contracts (the "Contracts")
issued by the registrant, will issue the Contracts to participants in the Texas
Optional Retirement Program ("Program") in reliance upon, and in compliance
with, Rule 6c-7 of the Investment Company Act of 1940, and represent that they
will:
1. Include appropriate disclosure regarding the restrictions on
redemptions imposed by the Program in each registration statement,
including the prospectus, used in connection with the Program;
2. Include appropriate disclosure regarding the restrictions on
redemption imposed by the Program in any sales literature used in
connection with the offer of annuity contracts to Program participants;
3. Instruct salespeople who solicit Program participants to purchase
annuity contracts specifically to bring the restrictions on redemption
imposed by the Program to the attention of potential Program participants;
and
4. Obtain from each Program participant who purchases an annuity
contract in connection with the Program, prior to or at the time of such
purchase, a signed statement acknowledging the restrictions on redemption
imposed by the Program.
C-6
<PAGE> 133
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, KILICO Variable Annuity Separate Account, certifies that
it meets the requirements of Securities Act Rule 485(b) for effectiveness of
this Amendment to the Registration Statement and has duly caused this Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Long Grove and State of Illinois on
the 24th day of April, 2000.
KILICO VARIABLE ANNUITY SEPARATE
ACCOUNT
(Registrant)
By: Kemper Investors Life Insurance
Company
BY: /s/ GALE K. CAURSO
--------------------------------------
Gale K. Caruso,
President and Chief Executive
Officer
KEMPER INVESTORS LIFE INSURANCE
COMPANY
(Depositor)
BY: /s/ GALE K. CARUSO
--------------------------------------
Gale K. Caruso,
President and Chief Executive
Officer
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed below by the following directors and principal
officers of Kemper Investors Life Insurance Company in the capacities indicated
on the 24th day of April, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ GALE K. CARUSO President, Chief Executive Officer and Director
- ----------------------------------------------------- (Principal Executive Officer)
Gale K. Caruso
/s/ W. H. BOLINDER Chairman of the Board and Director
- -----------------------------------------------------
William H. Bolinder
/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer
Frederick L. Blackmon (Principal Financial Officer and
Principal Accounting Officer)
/s/ DAVID A. BOWERS Director
- -----------------------------------------------------
David A. Bowers
/s/ ELIANE C. FRYE Director
- -----------------------------------------------------
Eliane C. Frye
/s/ GUNTHER GOSE Director
- -----------------------------------------------------
Gunther Gose
/s/ JAMES E. HOHMANN Director
- -----------------------------------------------------
James E. Hohmann
</TABLE>
C-7
<PAGE> 134
EXHIBIT INDEX
<TABLE>
<C> <S>
8.8 Fund Participation Agreement between KILICO and J.P. Morgan
Series Trust II
10 Consents of PricewaterhouseCoopers LLP, Independent
Accountants
14 Organizational Chart
</TABLE>
<PAGE> 1
EXHIBIT 8.8
FUND PARTICIPATION AGREEMENT
This Agreement is entered into as of the 1st day of May, 1999, between Kemper
Investors Life Insurance Company ("Insurance Company"), a life insurance company
organized under the laws of the State of Illinois, and J.P. Morgan Series Trust
II ("Fund"), a business trust organized under the laws of Delaware, with respect
to the Fund's portfolio or portfolios set forth on Schedule 1 hereto, as such
Schedule may be revised from time to time (the "Series"; if there are more than
one Series to which this Agreement applies, the provisions herein shall apply
severally to each such Series).
ARTICLE I
1. DEFINITIONS
1.1 "Act" shall mean the Investment Company Act of 1940, as amended.
1.2 "Board" shall mean the Board of Trustees of the Fund having the
responsibility for management and control of the Fund.
1.3 "Business Day" shall mean any day for which the Fund calculates net
asset value per share as described in the Fund's Prospectus.
1.4 "Commission" shall mean the Securities and Exchange Commission.
1.5 "Contract" shall mean a variable annuity or variable life insurance
contract issued by Insurance Company that uses the Fund as an
underlying investment medium. Individuals who participate under a group
Contract are "Participants".
1.6 "Contractholder" shall mean any entity that is a party to a Contract
with Insurance Company.
1.7 "Disinterested Board Members" shall mean those members of the Board
that are not deemed to be "interested persons" of the Fund, as defined
by the Act.
1.8 "Participating Companies" shall mean any insurance company (including
Insurance Company), which offers variable annuity and/or variable life
insurance contracts to the public and which has entered into an
agreement with the Fund for the purpose of making Fund shares available
to serve as the underlying investment medium for the aforesaid
Contracts.
1.9 "Plans" shall mean qualified pension and retirement benefit plans.
1.10 "Prospectus" shall mean the Fund's current prospectus and statement of
additional information, as most recently filed with the Commission,
with respect to the Series.
1.11 "Separate Account" shall mean any of the separate accounts listed on
Schedule 2, as may be amended from time to time, each a separate
account established by Insurance Company in accordance with the laws of
the State of Illinois.
1.12 "Software Program" shall mean the software program used by the Fund for
providing Fund and account balance information including net asset
value per share.
1.13 "Insurance Company's General Account(s)" shall mean the general
account(s) of Insurance Company and its affiliates which invest in the
Fund.
ARTICLE II
2. REPRESENTATIONS
2.1 Insurance Company represents and warrants that (a) it is an insurance
company duly organized and in good standing under applicable law; (b)
it has legally and validly established the Separate Account pursuant to
the Illinois Insurance Code for the purpose of offering to the public
certain individual variable annuity contracts; (c) it has registered
the Separate Account as a unit investment trust under the Act to serve
as the segregated
<PAGE> 2
investment account for the Contracts; (d) each Separate Account is
eligible to invest in shares of the Fund without such investment
disqualifying the Fund as an investment medium for insurance company
separate accounts supporting variable annuity contracts or variable
life insurance contracts; and (e) each Separate Account shall comply
with all applicable legal requirements.
2.2 Insurance Company represents and warrants that (a) the Contracts will
be described in a registration statement filed under the Securities Act
of 1933, as amended ("1933 Act"); (b) the Contracts will be issued and
sold in compliance in all material respects with all applicable federal
and state laws; and (c) the sale of the Contracts shall comply in all
material respects with state insurance law requirements. Insurance
Company agrees to inform the Fund promptly of any investment
restrictions imposed by state insurance law and applicable to the Fund.
2.3 Insurance Company represents and warrants that the income, gains and
losses, whether or not realized, from assets allocated to the Separate
Account are, in accordance with the applicable Contracts, to be
credited to or charged against such Separate Account without regard to
other income, gains or losses from assets allocated to any other
accounts of Insurance Company. Insurance Company represents and
warrants that the assets of the Separate Account are and will be kept
separate from Insurance Company's General Account and any other
separate accounts Insurance Company may have, and will not be charged
with liabilities from any business that Insurance Company may conduct
or the liabilities of any companies affiliated with Insurance Company.
2.4 Fund represents that the Fund is registered with the Commission under
the Act as an open-end management investment company and possesses, and
shall maintain, all legal and regulatory licenses, approvals, consents
and/or exemptions required for the Fund to operate and offer its shares
as an underlying investment medium for Participating Companies. The
Fund has established five portfolios and may in the future establish
other portfolios.
2.5 Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), and that it will make every effort to
maintain such qualification (under Subchapter M or any successor or
similar provision) and that it will notify Insurance Company
immediately upon having a reasonable basis for believing that it has
ceased to so qualify or that it might not so qualify in the future.
2.6 Insurance Company represents and agrees that the Contracts are
currently, and at the time of issuance will be, treated as life
insurance policies or annuity contracts, whichever is appropriate,
under applicable provisions of the Code, and that it will make every
effort to maintain such treatment and that it will notify the Fund and
its investment advisor immediately upon having a reasonable basis for
believing that the Contracts have ceased to be so treated or that they
might not be so treated in the future. Insurance Company agrees that
any prospectus offering a Contract that is a "modified endowment
contract," as that term is defined in Section 7702A of the Code, will
identify such Contract as a modified endowment contract (or policy).
2.7 Fund agrees that the Fund's assets shall be managed and invested in a
manner that complies with the requirements of Section 817(h) of the
Code.
2.8 Insurance Company agrees that the Fund shall be permitted (subject to
the other terms of this Agreement) to make Series' shares available to
other Participating Companies and contractholders and to Plans.
2.9 Fund represents and warrants that any of its trustees, officers,
employees, investment advisers, and other individuals/entities who deal
with the money and/or securities of the Fund are and shall continue to
be at all times covered by a blanket fidelity bond or similar coverage
for the benefit of the Fund in an amount not less than that required by
Rule 17g-1 under the Act. The aforesaid Bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable bonding
company.
2.10 Insurance Company represents and warrants that all of its employees and
agents who deal with the money and/or securities of the Fund are and
shall continue to be at all times covered by a blanket fidelity bond or
similar coverage in an amount not less than the coverage required to be
maintained by the Fund. The aforesaid Bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable bonding
company.
2.11 Insurance Company agrees that the Fund's investment adviser shall be
deemed a third party beneficiary under this Agreement and may enforce
any and all rights conferred by virtue of this Agreement.
<PAGE> 3
ARTICLE III
3. FUND SHARES
3.1 The Contracts funded through the Separate Account will provide for the
investment of certain amounts in the Series' shares
3.2 Fund agrees to make the shares of its Series available for purchase at
the then applicable net asset value per share by Insurance Company and
the Separate Account on each Business Day pursuant to rules of the
Commission. Notwithstanding the foregoing, the Fund may refuse to sell
the shares of any Series to any person, or suspend or terminate the
offering of the shares of any Series if such action is required by law
or by regulatory authorities having jurisdiction or is, in the sole
discretion of the Board, acting in good faith and in light of its
fiduciary duties under federal and any applicable state laws, necessary
and in the best interests of the shareholders of such Series.
3.3 Fund agrees that shares of the Fund will be sold only to Participating
Companies and their separate accounts and to the general accounts of
those Participating Companies and their affiliates and to Plans. No
shares of any Series will be sold to the general public.
3.4 Fund shall use its best efforts to provide closing net asset value,
dividend and capital gain information for each Series available on a
per-share and Series basis to Insurance Company by 7:00 p.m. Eastern
Time on each Business Day. Any material errors in the calculation of
net asset value, dividend and capital gain information shall be
reported immediately upon discovery to Insurance Company. Non-material
errors will be corrected in the next Business Day's net asset value per
share for the Series in question.
3.5 At the end of each Business Day, Insurance Company will use the
information described in Sections 3.2 and 3.4 to calculate the Separate
Account unit values for the day. Using this unit value, Insurance
Company will process the day's Separate Account transactions received
by it by the close of trading on the floor of the New York Stock
Exchange (currently 4:00 p.m. Eastern time) to determine the net dollar
amount of Series shares which will be purchased or redeemed at that
day's closing net asset value per share for such Series. The net
purchase or redemption orders will be transmitted to the Fund by
Insurance Company by 10:00 a.m. Eastern Time on the Business Day next
following Insurance Company's receipt of that information. Subject to
Sections 3.6 and 3.8, all purchase and redemption orders for Insurance
Company's General Accounts shall be effected at the net asset value per
share of the relevant Series next calculated after receipt of the order
by the Fund or its Transfer Agent.
3.6 Fund appoints Insurance Company as its agent for the limited purpose of
accepting orders for the purchase and redemption of shares of each
Series for the Separate Account. Fund will execute orders for any
Series at the applicable net asset value per share determined as of the
close of trading on the day of receipt of such orders by Insurance
Company acting as agent ("effective trade date"), provided that the
Fund receives notice of such orders by 10:00 a.m. Eastern Time on the
next following Business Day and, if such orders request the purchase of
Series shares, the conditions specified in Section 3.8, as applicable,
are satisfied. A redemption or purchase request for any Series that
does not satisfy the conditions specified above and in Section 3.8, as
applicable, will be effected at the net asset value computed for such
Series on the Business Day immediately preceding the next following
Business Day upon which such conditions have been satisfied.
3.7 Insurance Company will make its best efforts to notify Fund in advance
of any unusually large purchase or redemption orders.
3.8 If Insurance Company's order requests the purchase of Series shares,
Insurance Company will pay for such purchases by wiring Federal Funds
to Fund or its designated custodial account on the day the order is
transmitted. Insurance Company shall make all reasonable efforts to
transmit to the Fund payment in Federal Funds by the close of the
Federal Reserve wire system on the Business Day the Fund receives the
notice of the order pursuant to Section 3.5. Fund will execute such
orders at the applicable net asset value per share determined as of the
close of trading on the effective trade date if Fund receives payment
in Federal Funds by the close of the Federal Reserve wire system on the
Business Day the Fund receives the notice of the order pursuant to
Section 3.5. If payment in Federal Funds for any purchase is not
received on such Business Day, Insurance Company shall promptly upon
the Fund's request, reimburse the Fund for any charges, costs, fees,
interest or other expenses incurred by the Fund in connection with any
advances to, or borrowings or overdrafts by, the Fund, or any similar
expenses incurred by the Fund, as a result of portfolio transactions
effected by the Fund based upon such purchase request.
<PAGE> 4
Unless otherwise agreed, if Insurance Company requests the redemption
of Series shares, Fund will redeem such shares for cash. Fund shall
make all reasonable efforts to transmit by wire to Insurance Company's
account payment in Federal Funds by the close of the Federal Reserve
wire system on the Business Day the Fund receives the notice of the
redemption order from Insurance Company pursuant to Section 3.5. Fund
will execute such orders at the applicable net asset value per share
determined as of the close of trading on the effective trade date if
Fund receives the notice of the order pursuant to Section 3.5. If
payment in Federal Funds for any redemption is not received on such
Business Day, Fund shall promptly upon Insurance Company's request,
reimburse Insurance Company for any charges, costs, fees, interest or
other expenses incurred by Insurance Company as a result of portfolio
transactions effected by the Insurance Company based upon such
redemption request. Fund reserves the right to delay payment under the
circumstances and to the extent permitted by the Act.
3.9 Fund has the obligation to ensure that Series shares are registered
with applicable federal agencies at all times.
3.10 Fund will confirm each purchase or redemption order made by Insurance
Company. Transfer of Series shares will be by book entry only. No share
certificates will be issued to Insurance Company. Insurance Company
will record shares ordered from Fund in an appropriate title for the
corresponding account.
3.11 Fund shall credit Insurance Company with the appropriate number of
shares.
3.12 In advance of each ex-dividend date, as practicable, but at the very
latest, on each ex-dividend date of the Fund or, if not a Business Day,
on the first Business Day thereafter, Fund shall communicate to
Insurance Company the amount of dividend and capital gain, if any, per
share of each Series. Unless Insurance Company elects otherwise, all
dividends and capital gains of any Series shall be reinvested in
additional shares of the relevant Series at the applicable net asset
value per share of such Series on the payable date. Fund shall, on the
day after the payable date or, if not a Business Day, on the first
Business Day thereafter, notify Insurance Company of the number of
shares so issued.
ARTICLE IV
4. STATEMENTS AND REPORTS
4.1 Fund shall provide monthly statements of account as of the end of each
month for all of Insurance Company's accounts by the fifteenth (15th)
Business Day of the following month.
4.2 Fund shall distribute to Insurance Company copies of the Fund's
Prospectuses, proxy materials, notices, periodic reports and other
printed materials (which the Fund customarily provides to its
shareholders) in quantities as Insurance Company may reasonably request
for distribution to each Contractholder and Participant. Fund shall
endeavor to provide such materials to Insurance Company at least ten
Business Days prior to Insurance Company's obligation to mail the
materials to Contractholders and Participants.
4.3 Fund will provide to Insurance Company at least one complete copy of
all registration statements, Prospectuses, reports, proxy statements,
sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any
of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with the Commission or other
regulatory authorities.
4.4 Insurance Company will provide to the Fund at least one copy of all
registration statements, Prospectuses, reports, proxy statements, sales
literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any
of the above, that relate to the Contracts or the Separate Account,
contemporaneously with the filing of such document with the Commission.
ARTICLE V
5. EXPENSES
5.1 The charge to the Fund for all expenses and costs of the Series,
including but not limited to management fees, administrative expenses
and legal and regulatory costs, will be made in the determination of
the relevant Series' daily net asset value per share so as to
accumulate to an annual charge at the rate set forth in the
<PAGE> 5
Fund's Prospectus. Excluded from the expense limitation described
herein shall be brokerage commissions and transaction fees and
extraordinary expenses.
5.2 Except as provided in this Article V and, in particular in the next
sentence, Insurance Company shall not be required to pay directly any
expenses of the Fund or expenses relating to the distribution of its
shares. Insurance Company shall pay the following expenses or costs:
a. Such amount of the production expenses of any Fund materials,
including the cost of printing the Fund's Prospectus, or
marketing materials for prospective Insurance Company
Contractholders and Participants as the Fund's investment
adviser and Insurance Company shall agree from time to time.
b. Distribution expenses of any Fund materials or marketing
materials for prospective Insurance Company Contractholders
and Participants.
c. Distribution expenses of Fund materials or marketing materials
for Insurance Company Contractholders and Participants.
Except as provided herein, all other Fund expenses shall not be borne
by Insurance Company.
ARTICLE VI
6. EXEMPTIVE RELIEF
6.1 Insurance Company has reviewed a copy of the order dated December 1996
of the Securities and Exchange Commission under Section 6(c) of the Act
and, in particular, has reviewed the conditions to the relief set forth
in the related Notice. As set forth therein, Insurance Company agrees
to report any potential or existing conflicts promptly to the Board,
and in particular whenever contract voting instructions are
disregarded, and recognizes that it will be responsible for assisting
the Board in carrying out its responsibilities under such application.
Insurance Company agrees to carry out such responsibilities with a view
to the interests of existing Contractholders.
6.2 If a majority of the Board, or a majority of Disinterested Board
Members, determines that a material irreconcilable conflict exists with
regard to Contractholder investments in the Fund, the Board shall give
prompt notice to all Participating Companies. If the Board determines
that Insurance Company is responsible for causing or creating said
conflict, Insurance Company shall at its sole cost and expense, and to
the extent reasonably practicable (as determined by a majority of the
Disinterested Board Members), take such action as is necessary to
remedy or eliminate the irreconcilable material conflict.
Such necessary action may include, but shall not be limited to:
a. Withdrawing the assets allocable to the Separate Account from
the Series and reinvesting such assets in a different
investment medium, or submitting the question of whether such
segregation should be implemented to a vote of all affected
Contractholders; and/or
b. Establishing a new registered management investment company.
6.3 If a material irreconcilable conflict arises as a result of a decision
by Insurance Company to disregard Contractholder voting instructions
and said decision represents a minority position or would preclude a
majority vote by all Contractholders having an interest in the Fund,
Insurance Company may be required, at the Board's election, to withdraw
the Separate Account's investment in the Fund.
6.4 For the purpose of this Article, a majority of the Disinterested Board
Members shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict, but in no event will the
Fund be required to bear the expense of establishing a new funding
medium for any Contract. Insurance Company shall not be required by
this Article to establish a new funding medium for any Contract if an
offer to do so has been declined by vote of a majority of the
Contractholders materially adversely affected by the irreconcilable
material conflict.
6.5 No action by Insurance Company taken or omitted, and no action by the
Separate Account or the Fund taken or omitted as a result of any act or
failure to act by Insurance Company pursuant to this Article VI shall
relieve Insurance Company of its obligations under, or otherwise affect
the operation of, Article V.
<PAGE> 6
ARTICLE VII
7. VOTING OF FUND SHARES
7.1 Fund shall provide Insurance Company with copies at no cost to
Insurance Company, of the Fund's proxy material, reports to
shareholders and other communications to shareholders in such quantity
as Insurance Company shall reasonably require for distributing to
Contractholders or Participants.
If and to the extent required by law, Insurance Company shall:
(a) solicit voting instructions from Contractholders or
Participants on a timely basis and in accordance with
applicable law;
(b) vote the Series shares in accordance with instructions
received from Contractholders or Participants; and
(c) vote Series shares for which no instructions have been
received in the same proportion as Series shares for which
instructions have been received.
If and to the extent required by law, Insurance Company agrees at all
times to votes its General Account shares in the same proportion as
Series shares for which instructions have been received from
Contractholders or Participants. If and to the extent required by law,
Insurance Company further agrees to be responsible for assuring that
voting Series shares for the Separate Account is conducted in a manner
consistent with other Participating Companies.
ARTICLE VIII
8. MARKETING AND REPRESENTATIONS
8.1 The Fund or its underwriter shall periodically furnish Insurance
Company with the following documents, in quantities as Insurance
Company may reasonably request:
a. Current Prospectus and any supplements thereto;
b. other marketing materials.
Expenses for the production of such documents shall be borne by
Insurance Company in accordance with Section 5.2 of this Agreement.
8.2 Insurance Company shall designate certain persons or entities which
shall have the requisite licenses to solicit applications for the sale
of Contracts. No representation is made as to the number or amount of
Contracts that are to be sold by Insurance Company. Insurance Company
shall make reasonable efforts to market the Contracts and shall comply
with all applicable federal and state laws in connection therewith.
8.3 Insurance Company shall furnish, or shall cause to be furnished, to the
Fund, each piece of sales literature or other promotional material in
which the Fund, its investment adviser or the administrator is named,
at least fifteen Business Days prior to its use. No such material shall
be used unless the Fund approves such material. Such approval (if
given) must be in writing and shall be presumed not given if not
received within ten Business Days after receipt of such material. The
Fund shall use all reasonable efforts to respond within ten days of
receipt.
8.4 Insurance Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the
Fund or any Series in connection with the sale of the Contracts other
than the information or representations contained in the registration
statement or Prospectus, as may be amended or supplemented from time to
time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund.
8.5 Fund shall furnish, or shall cause to be furnished, to Insurance
Company, each piece of the Fund's sales literature or other promotional
material in which Insurance Company or the Separate Account is named,
at least fifteen Business Days prior to its use. No such material shall
be used unless Insurance Company approves such material. Such approval
(if given) must be in writing and shall be presumed not given if not
<PAGE> 7
received within ten Business Days after receipt of such material.
Insurance Company shall use all reasonable efforts to respond within
ten days of receipt.
8.6 Fund shall not, in connection with the sale of Series shares, give any
information or make any representations on behalf of Insurance Company
or concerning Insurance Company, the Separate Account, or the Contracts
other than the information or representations contained in a
registration statement or prospectus for the Contracts, as may be
amended or supplemented from time to time, or in published reports for
the Separate Account which are in the public domain or approved by
Insurance Company for distribution to Contractholders or Participants,
or in sales literature or other promotional material approved by
Insurance Company.
8.7 For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for
use, in a newspaper, magazine or other periodical, radio, television,
telephone or tape recording, videotape display, signs or billboards,
motion pictures or other public media), sales literature (such as any
written communication distributed or made generally available to
customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, or reprints or
excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications
distributed or made generally available to some or all agents or
employees, registration statements, prospectuses, statements of
additional information, shareholder reports and proxy materials, and
any other material constituting sales literature or advertising under
National Association of Securities Dealers, Inc. rules, the Act or the
1933 Act.
ARTICLE IX
9. INDEMNIFICATION
9.1 Insurance Company agrees to indemnify and hold harmless the Fund, its
investment adviser, any sub-investment adviser of a Series, and their
affiliates, and each of their directors, trustees, officers, employees,
agents and each person, if any, who controls or is associated with any
of the foregoing entities or persons within the meaning of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of Section 9.1),
against any and all losses, claims, damages or liabilities joint or
several (including any investigative, legal and other expenses
reasonably incurred in connection with, and any amounts paid in
settlement of, any action, suit or proceeding or any claim asserted)
for which the Indemnified Parties may become subject, under the 1933
Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect to thereof) (i) arise out of or are
based upon any untrue statement or alleged untrue statement of any
material fact contained in information furnished by Insurance Company
for use in the registration statement or Prospectus or sales literature
or advertisements of the Fund or with respect to the Separate Account
or Contracts, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading;
(ii) arise out of or as a result of conduct, statements or
representations (other than statements or representations contained in
the Prospectus and sales literature or advertisements of the Fund) of
Insurance Company or its agents, with respect to the sale and
distribution of Contracts for which Series shares are an underlying
investment; (iii) arise out of the wrongful conduct of Insurance
Company or persons under its control with respect to the sale or
distribution of the Contracts or Series shares; (iv) arise out of
Insurance Company's incorrect calculation and/or untimely reporting of
net purchase or redemption orders; or (v) arise out of any breach by
Insurance Company of a material term of this Agreement or as a result
of any failure by Insurance Company to provide the services and furnish
the materials or to make any payments provided for in this Agreement.
Insurance Company will reimburse any Indemnified Party in connection
with investigating or defending any such loss, claim, damage, liability
or action; provided, however, that with respect to clauses (i) and (ii)
above Insurance Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or
is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement,
prospectus, sales literature, or advertisement in conformity with
written information furnished to Insurance Company by the Fund or its
investment adviser specifically for use therein; and provided, further,
that Insurance Company shall not be liable for special, consequential
or incidental damages. This indemnity agreement will be in addition to
any liability which Insurance Company may otherwise have.
<PAGE> 8
9.2 Fund agrees to indemnify and hold harmless the Insurance Company and
its affiliates, and each of their directors, officers, employees,
agents and each person, if any, who controls or is associated with any
of the foregoing entities or persons within the meaning of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section
9.2 and Section 9.3), against any and all losses, claims, damages or
liabilities joint or several (including any investigative, legal and
other expenses reasonably incurred in connection with, and any amounts
paid in settlement of, any action, suit or proceeding or any claim
asserted) for which the Indemnified Parties may become subject, under
the 1933 Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect to thereof) (i) arise out of or are
based upon any untrue statement or alleged untrue statement of any
material fact contained in the registration statement or Prospectus or
sales literature or advertisements of the Fund, or arise out of or are
based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; (ii) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in the registration statement or Prospectus or sales
literature or advertisements with respect to the Separate Account or
the Contracts and such statements were based on information provided to
Insurance Company by the Fund; (iii) arise out of any breach by the
Fund of a material term of this Agreement (including a failure to
comply with the diversification requirements of Section 817(h) of the
Code). Fund will reimburse any Indemnified Party in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that with respect to clauses (i) and (ii)
above Fund will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon
any untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, prospectus, sales
literature, or advertisement in conformity with written information
furnished to the Fund by Insurance Company specifically for use
therein; and provided, further, that Fund shall not be liable for
special, consequential or incidental damages. This indemnity agreement
will be in addition to any liability which Fund may otherwise have.
9.3 The Fund shall indemnify and hold the Indemnified Parties harmless
against any and all liability, loss, damages, costs or expenses which
the Indemnified Parties may incur, suffer or be required to pay due to
the Fund's (1) incorrect calculation of the daily net asset value,
dividend rate or capital gain distribution rate of a Series; (2)
incorrect reporting of the daily net asset value, dividend rate or
capital gain distribution rate; and (3) untimely reporting of the net
asset value, dividend rate or capital gain distribution rate; provided
that the Fund shall have no obligation to indemnify and hold harmless
the Indemnified Parties if the incorrect calculation or incorrect or
untimely reporting was the result of incorrect information furnished by
Insurance Company or information furnished untimely by Insurance
Company or otherwise as a result of or relating to a breach of this
Agreement by Insurance Company; and provided, further, that the Fund
shall not be liable for special, consequential or incidental damages.
9.4 No indemnifying party under this Article IX will be liable to the
extent any loss, claim, damage or liability incurred by or assessed
against an indemnified party under this Article IX arises from the
indemnified party's gross negligence, willful misconduct or bad faith
in the performance of its obligations or duties under this Agreement.
9.5 Promptly after receipt by an indemnified party under this Article of
notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying
party under this Article, notify the indemnifying party of the
commencement thereof. The omission to so notify the indemnifying party
will not relieve the indemnifying party from any liability under this
Article IX, except to the extent that the omission results in a failure
of actual notice to the indemnifying party and such indemnifying party
is damaged solely as a result of the failure to give such notice. In
case any such action is brought against any indemnified party, and it
notified the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the
extent that it may wish, assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party, and to the extent
that the indemnifying party has given notice to such effect to the
indemnified party and is performing its obligations under this Article,
the indemnifying party shall not be liable for any legal or other
expenses subsequently incurred by such indemnified party in connection
with the defense thereof, other than reasonable costs of investigation.
Notwithstanding the foregoing, in any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such indemnified
party unless (i) the indemnifying party and the indemnified party shall
have mutually agreed to the retention of such counsel or (ii) the named
parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between
them. The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent.
<PAGE> 9
A successor by law of the parties to this Agreement shall be entitled
to the benefits of the indemnification contained in this Article IX.
9.6 Insurance Company shall indemnify and hold the Fund, its investment
adviser and any sub-investment adviser of a Series harmless against any
tax liability incurred by the Fund under Section 851 of the Code
arising from purchases or redemptions by Insurance Company's General
Accounts or the account of its affiliates.
ARTICLE X
10. COMMENCEMENT AND TERMINATION
10.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions
herein.
10.2 This Agreement shall terminate without penalty as to one or more Series
at the option of the terminating party:
a. At the option of Insurance Company or the Fund at any time
from the date hereof upon 180 days' notice, unless a shorter
time is agreed to by the parties;
b. At the option of Insurance Company, if shares of any Series
are not reasonably available to meet the requirements of the
Contracts as determined by Insurance Company. Prompt notice of
election to terminate shall be furnished by Insurance Company,
said termination to be effective ten days after receipt of
notice unless the Fund makes available a sufficient number of
shares to meet the requirements of the Contracts within said
ten-day period;
c. At the option of Insurance Company, upon the institution of
formal proceedings against the Fund by the Commission,
National Association of Securities Dealers or any other
regulatory body, the expected or anticipated ruling, judgment
or outcome of which would, in Insurance Company's reasonable
judgment, materially impair the Fund's ability to meet and
perform the Fund's obligations and duties hereunder. Prompt
notice of election to terminate shall be furnished by
Insurance Company with said termination to be effective upon
receipt of notice;
d. At the option of the Fund, upon the institution of formal
proceedings against Insurance Company by the Commission,
National Association of Securities Dealers or any other
regulatory body, the expected or anticipated ruling, judgment
or outcome of which would, in the Fund's reasonable judgment,
materially impair Insurance Company's ability to meet and
perform Insurance Company's obligations and duties hereunder.
Prompt notice of election to terminate shall be furnished by
the Fund with said termination to be effective upon receipt of
notice;
e. At the option of the Fund, if the Fund shall determine, in its
sole judgment reasonably exercised in good faith, that
Insurance Company has suffered a material adverse change in
its business or financial condition or is the subject of
material adverse publicity and such material adverse change or
material adverse publicity is likely to have a material
adverse impact upon the business and operation of the Fund or
its investment adviser, the Fund shall notify Insurance
Company in writing of such determination and its intent to
terminate this Agreement, and after considering the actions
taken by Insurance Company and any other changes in
circumstances since the giving of such notice, such
determination of the Fund shall continue to apply on the
sixtieth (60th) day following the giving of such notice, which
sixtieth day shall be the effective date of termination;
f. Upon termination of the Investment Advisory Agreement between
the Fund and its investment adviser or its successors unless
Insurance Company specifically approves the selection of a new
Fund investment adviser. The Fund shall promptly furnish
notice of such termination to Insurance Company;
g. In the event the Fund's shares are not registered, issued or
sold in accordance with applicable federal law, or such law
precludes the use of such shares as the underlying investment
medium of Contracts issued or to be issued by Insurance
Company. Termination shall be effective immediately upon such
occurrence without notice;
<PAGE> 10
h. At the option of the Fund upon a determination by the Board in
good faith that it is no longer advisable and in the best
interests of shareholders for the Fund to continue to operate
pursuant to this Agreement. Termination pursuant to this
Subsection (h) shall be effective upon notice by the Fund to
Insurance Company of such termination;
i. At the option of the Fund if the Contracts cease to qualify as
annuity contracts or life insurance policies, as applicable,
under the Code, or if the Fund reasonably believes that the
Contracts may fail to so qualify;
j. At the option of Insurance Company, if the Insurance Company
shall determine, in its sole judgment reasonably exercised in
good faith, that the Fund has suffered a material adverse
change in its business or financial condition or is the
subject of material adverse publicity and such material
adverse change or material adverse publicity is likely to have
a material adverse impact upon the business and operation of
the Insurance Company, the Insurance Company shall notify the
Fund in writing of such determination and its intent to
terminate this Agreement, and after considering the actions
taken by the Fund and any other changes in circumstances since
the giving of such notice, such determination of Insurance
Company shall continue to apply on the sixtieth (60th) day
following the giving of such notice, which sixtieth day shall
be the effective date of termination;
k. At the option of the Insurance Company, if the Fund fails to
meet either the requirements for diversification under Section
817(h) of the Code or for Regulated Investment Company status
under Subchapter M of the Code;
l. At the option of either party to this Agreement, upon another
party's breach of any material provision of this Agreement;
m. At the option of the Fund, if the Contracts are not
registered, issued or sold in accordance with applicable
federal and/or state law; or
n. Upon assignment of this Agreement, unless made with the
written consent of the non-assigning party.
Any such termination pursuant to Section 10.2a, 10.2d, 10.2e, 10.2f or
10.2m herein shall not affect the operation of Article V of this
Agreement. Any termination of this Agreement shall not affect the
operation of Article IX of this Agreement.
10.3 Notwithstanding any termination of this Agreement pursuant to Section
10.2 hereof, the Insurance Company may, at its option, continue to
purchase additional Series shares, as provided in this Section 10.3,
pursuant to the terms and conditions of this Agreement as provided
below, for all Contracts in effect on the effective date of termination
of this Agreement (hereinafter referred to as "Existing Contracts").
Under such circumstance, either the owners of the Existing Contracts or
Insurance Company, whichever shall have legal authority to do so, shall
be permitted to reallocate investments in the Series, redeem
investments in the Fund and/or invest in the Fund upon the making of
additional purchase payments under the Existing Contracts. If Series
shares continue to be made available after a termination of this
Agreement pursuant to Section 10.2 hereof, the provisions of this
Agreement shall remain in effect and thereafter either the Fund or
Insurance Company may terminate the Agreement, as so continued pursuant
to this Section 10.3, upon prior written notice to the other party,
such notice to be for a period that is reasonable under the
circumstances but, if given by the Fund, need not be for more than six
months.
ARTICLE XI
11. AMENDMENTS
11.1 Any other changes in the terms of this Agreement shall be made by
agreement in writing between the parties hereto.
ARTICLE XII
12. NOTICE
<PAGE> 11
12.1 Each notice required by this Agreement shall be given by certified
mail, return receipt requested, to the appropriate parties at the
following addresses:
Insurance Company:
Allen Reed
Assistant General Counsel
Kemper Investors Life Insurance Company
One Kemper Drive
Long Grove, Illinois 60049-0001
Fund:
J.P. Morgan Series Trust II
c/o Morgan Guaranty Trust Company
522 Fifth Avenue
New York, New York 10036
Attention: Kathleen H. Tripp
Notice shall be deemed to be given on the date of receipt by the
addresses as evidenced by the return receipt.
ARTICLE XIII
13. MISCELLANEOUS
13.1 This Agreement has been executed on behalf of the Fund by the
undersigned officer of the Fund in his capacity as an officer of the
Fund. The obligations of this Agreement shall only be binding upon the
assets and property of the Fund and shall not be binding upon any
Trustee, officer or shareholder of the Fund individually.
13.2 Subject to the requirements of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses
of the Contractholders and Participants and all information reasonably
identified as confidential in writing by any other party hereto and,
except as permitted by this Agreement, shall not disclose, disseminate
or utilize such names and addresses and other confidential information
without the express written consent of the affected party unless and
until that information may come into the public domain.
ARTICLE XIV
14. LAW
14.1 This Agreement shall be construed in accordance with the internal laws
of the State of New York, without giving effect to principles of
conflict of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be duly
executed and attested as of the date first above written.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /s/ George Vlaisavljevich
Its: Senior Vice President
J.P.MORGAN SERIES TRUST II
By: /s/ Stephanie Pierce
Its: Vice President
<PAGE> 12
SCHEDULE 1
Name of Series
J. P. Morgan Small Company Portfolio
<PAGE> 13
SCHEDULE II
Separate Accounts
KILICO Variable Annuity Separate Account
<PAGE> 1
EXHIBIT 10
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Periodic Payment Variable Annuity Contracts
We consent to the inclusion in this registration statement on Form N-4 (File
No. 2-72671) of our report dated February 24, 2000, on our audit of the
financial statements of KILICO Variable Annuity Separate Account and to the
reference to our firm under the caption "Experts".
PricewaterhouseCoopers LLP
Chicago, Illinois
April 24, 2000
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Periodic Payment Variable Annuity Contracts
We consent to the inclusion in this registration statement on Form N-4 (File
No. 2-72671) of our report dated March 17, 2000, on our audit of the
consolidated financial statements of Kemper Investors Life Insurance Company and
to the reference to our firm under the caption "Experts".
PricewaterhouseCoopers LLP
Chicago, Illinois
April 24, 2000
<PAGE> 1
EXHIBIT 14
ZURICH FINANCIAL SERVICES GROUP
<TABLE>
<CAPTION>
ORGANIZATIONAL CHART
<S><C>
Allied Zurich p.l.c. owns 43% of Zurich Financial Services
Zurich Allied AG owns 57% of Zurich Financial Services
Zurich Financial Services owns 100% of Allied Zurich Holdings
Zurich Financial Services owns 90% of Farmers Group, Inc.
Allied Zurich Holdings owns 10% of Farmers Group, Inc.
Zurich Financial Services owns 99.091% of Zurich Insurance Company
Minority Shareholders from Exchange Offer own .9% of Zurich Insurance Company
(Zurich, Switzerland)
Zurich Insurance Company and certain affiliates own 14% of Provident Companies, Inc.
(US - TN)
Provident Companies, Inc. owns 100% of Provident Life and Accident Insurance Co
(US - TN)
Provident Companies, Inc. owns 100% of Provident Life and Casualty Insurance Co
(US - TN)
Provident Companies, Inc. owns 100% of Provident National Assurance Co (US - TN)
Provident Companies, Inc. owns 100% of The Paul Revere Corporation (US - MA)
Provident Companies, Inc. owns 100% of The Paul Revere Life Insurance Company
(US - MA)
The Paul Revere Life Insurance Company owns 100% of The Paul Revere Protective
Life Insurance Company (US - DE)
The Paul Revere Life Insurance Company owns 100% of The Paul Revere Variable
Annuity Insurance Company (US - MA)
Zurich Insurance Company owns 100% of Zurich Holding Company of America (US -
DE)
Zurich Holding Company of America owns 100% of Zurich American Insurance
Company (US - NY)
Zurich Holding Company of America owns 100% of Universal Underwriters Acceptance
Corp. (US - KS)
Zurich Holding Company of America owns 100% of Zurich Global, Ltd. (Bda)
Zurich Holding Company of America owns 100% of Universal Underwriters Service
Corp. of Texas (US - TX)
Zurich Holding Company of America owns 100% of The Zurich Services Corporation
(US - IL)
Zurich Holding Company of America owns 99.9923% of Risk Enterprise Management
Limited (US - DE)
Insurance Partners Advisors, L.P. (US - DE) owns .007% of Risk Enterprise
Management Limited
Zurich Holding Company of America owns 100% of Zurich American Brokerage, Inc.
(US - NY)
Zurich Holding Company of America owns 100% of Universal Underwriters Services
Corp. (US - MO)
Zurich Holding Company of America owns 99.5% of UUBVI, Limited (BVI)
Universal Underwriters Services Corp. owns .50% of UUBVI, Limited
Zurich Holding Company of America owns 36.6% of Scudder Kemper Investments, Inc.
(US - DE)
Individual Shareholders own 20.86% of Scudder Kemper Investments, Inc.
SKI Exec. Defined Cont. Plan owns 9.66% of Scudder Kemper Investments, Inc.
</TABLE>
<PAGE> 2
<TABLE>
<S><C>
Zurich Holding Company of America owns 100% of ZKI Holding Corp. (US - DE)
ZKI Holding Corp. owns 32.85% of Scudder Kemper Investments, Inc.
ZKI Holding Corp. owns 8.33% of Kemper Corporation (US - DE)
Scudder Kemper Investments, Inc. owns 100% of Zurich Kemper Investments, Inc.
(US - DE)
Zurich Holding Company of America owns 71.67% of Kemper Corporation
Zurich Holding Company of America owns 100% of Zurich Finance (USA), Inc.
(US - DE)
Zurich Insurance Company owns 99% of Zurich Life Insurance Company
(Zurich, Switzerland)
Zurich Insurance Company owns 20% of Kemper Corporation
Zurich Insurance Company owns 100% of Zurich Towers, Inc. (US - IL)
Zurich American Insurance Company owns 100% of Empire Fire and Marine Insurance
Company (US - NE)
Empire Fire and Marine Insurance Company owns 100% of Empire Indemnity Insurance
Company (US - OK)
Empire Fire and Marine Insurance Company owns 100% of Douglas Street Premium
Finance Company of California (US - CA)
Empire Fire and Marine Insurance Company owns 100% of Douglas Street Premium
Finance Company (US - NE)
Empire Fire and Marine Insurance Company owns 100% of Minnesota Marketing Center,
Inc. (US - MN)
Empire Fire and Marine Insurance Company owns 51% of Truckwriters, Inc. (US - NE)
Empire Fire and Marine Insurance Company owns 100% of Empire Management
Services, Inc. (US - NE)
Zurich American Insurance Company owns 100% of American Guarantee and Liability
Insurance Company (US - NY)
American Guarantee and Liability Insurance Company owns 100% of Diversified
Specialty Risk, Inc. (US - TX)
American Guarantee and Liability Insurance Company owns 70% of Specialty Producer
Group, Inc. (US - DE)
Ken Redfern owns the remaining 21% of Specialty Producer Group, Inc.
Specialty Producer Group, Inc. owns 100% of Daniels-Head Insurance Agency, Inc.
(US - TX)
Daniels-Head Insurance Agency, Inc. (TX) owns 100% of Daniels-Head Insurance
Agency, Inc. (US - KY)
Daniels-Head Insurance Agency, Inc. (TX) owns 100% of Daniels-Head Insurance
Agency, Inc. (US - CA)
Daniels-Head Insurance Agency, Inc. (TX) owns 100% of Daniels-Head Insurance
Agency, Inc. (US - NV)
Daniels-Head Insurance Agency, Inc. (TX) owns 100% of O'Connor West Insurance
Agency, Inc.
Daniels-Head Insurance Agency, Inc. (TX) owns 100% of Head Insurance Agency, Inc.
(US - OH)
Zurich American Insurance Company owns 100% of Steadfast Insurance Company
(US - DE)
Steadfast Insurance Company owns 100% of American Zurich Insurance Company
(US - IL)
American Zurich Insurance Company owns 100% of Zurich American Insurance
Company of Illinois (US - IL)
Zurich American Insurance Company owns 85% of Maryland Casualty Company
(US - MD)
Zurich Holding Company of America (US - DE) owns 15% of Maryland Casualty
Company
</TABLE>
<PAGE> 3
<TABLE>
<S><C>
Maryland Casualty Company owns 100% of Robert Hampson, Inc. (Canada)
Maryland Casualty Company owns 100% of Assurance Company of America (US - NY)
Maryland Casualty Company owns 100% of Maine Bonding & Casualty Company
(US - ME)
Maryland Casualty Company owns 100% of Maryland Insurance Company (US - TX)
Maryland Casualty Company owns 100% of Zurich Insurance Agency (US - MD)
Maryland Casualty Company owns 100% of Maryland Management Corporation
(US - TX)
Maryland Casualty Company owns 100% of Trust Agreements - Maryland Lloyds
(US - TX)
Maryland Casualty Company owns 100% of Zurich Agency Services, Inc. (US - TX)
Maryland Casualty Company owns 100% of National Standard Insurance Company
(US - TX)
Maryland Casualty Company owns 100% of Northern Insurance Company of New York
(US - NY)
Maryland Casualty Company owns 100% of Steadfast Reinsurance Company, Ltd. (Bda)
Maryland Casualty Company owns 100% of Valiant Insurance Company (US - IA)
Zurich American Insurance Company owns 100% of Fidelity and Deposit Company of
Maryland (US - MD)
Fidelity and Deposit Company of Maryland owns 100% of Colonial American Casualty
& Surety Company (US - MD)
Fidelity and Deposit Company of Maryland owns 100% of 300 St. Paul Corporation
(US - MD)
Fidelity and Deposit Company of Maryland owns 51% of Maryland Netherlands Credit
Insurance Company (US - MD)
Fidelity and Deposit Company of Maryland owns 94% of Mountbatten Holding, Inc.
(US - PA)
Mountbatten Holding, Inc. owns 100% of The Mountbatten Surety Company, Inc.
(US - PA)
Mountbatten Holding, Inc. owns 100% of HMS Dreadnought, Inc. (US - DE)
Zurich American Insurance Company owns 100% of Universal Underwriters Insurance
Company (US - KS)
Universal Underwriters Insurance Company owns 100% of Universal Underwriters of
Texas Insurance Company (US - TX)
Universal Underwriters Insurance Company owns 100% of Mountain Insurance Agency
(US - MA)
Universal Underwriters Insurance Company owns 100% of Universal Underwriters Life
Insurance Company (US - KS)
Kemper Corporation owns 100% of KFC Portfolio Corp. (US - DE)
KFC Portfolio Corp. owns 100% of Kemper Real Estate, Inc. (US - DE)
KFC Portfolio Corp. owns 100% of KR CBDV (US - DE)
KFC Portfolio Corp. owns 100% of Kemper/Cymrot, Inc. (US - DE)
Kemper/Cymrot, Inc. owns 100% of Kemper/Cymrot Management, Inc. (US - GA)
KFC Portfolio Corp. owns 100% of KILICO Realty Corporation (US - IL)
KFC Portfolio Corp. owns 100% of Maunalua Associates, Inc. (US - HI)
Maunalua Associates, Inc. owns 100% of Pacific Homes, Inc. (US - HI)
Kemper Corporation owns 66.67% of ZKS Real Estate Partners, L.L.C. (US - DE)
Kemper Corporation owns 100% of Zurich Direct, Inc. (US - IL)
Zurich Direct owns 100% of Zurich Direct, Inc. of Texas (US - TX)
(Note: Zurich Direct, Inc. of Texas is 100% owned by a Texas resident under
contract with Zurich Direct, Inc. of Texas.)
Kemper Corporation owns 100% of Federal Kemper Life Assurance Company
(US - IL)
Federal Kemper Life Assurance Company owns 66.7% of KI/FKLA Ardenwood, L.L.C.
(US - DE)
</TABLE>
<PAGE> 4
<TABLE>
<S><C>
Federal Kemper Life Assurance Company owns 30% of KL-75, L.L.C. (US - DE)
Federal Kemper Life Assurance Company owns 50% of KI/FKLA Rancho Realty, L.L.C.
(US - DE)
Kemper Corporation owns 100% of Kemper Portfolio Corp. (US - DE) Kemper
Portfolio Corp. owns 100% of FKLA Realty Corporation (US - IL)
Kemper Corporation owns 50% of Kemper Real Estate Management Company
(US - DE)
Kemper Corporation owns 75% of KLMLP, L.P. (US - DE)
(Note: KLMLP, L.P. is a Delaware limited partnership. Kemper Corporation's
indirect ownership of KLMLP, L.P. is as follows: 29.7% KILICO Realty
Corporation; 20.85% FKLA Realty Corporation; 1.5% Kemper Portfolio
Corp.; 22.5% KFC Portfolio Corp.; 0.3% Kemper investors Life Insurance Company;
and 0.15% Federal Kemper Life Assurance Company.)
KLMLP, L.P. owns 100% of Butterfield Financial Corporation (US - CA)
KLMLP, L.P. owns 100% of Kemper/Lumbermens Properties, Inc. (US - DE)
KLMLP, L.P. owns 100% of Ardenwood Financial Corporation (US - CA)
KLMLP, L.P. owns 100% of KRDC, Inc. (US - CA)
Kemper Corporation owns 100% of Zurich Life Insurance Company of America
(US - IL)
Kemper Corporation owns 33% of 20th Century Asset Management Corporation Limited
(India)
Zurich Insurance Company (Zurich, Switzerland) owns 33% of 20th Century Asset
Management Corporation Limited
Kemper Corporation owns 100% of Kemper Investors Life Insurance Company
(US - IL)
Kemper Investors Life Insurance Company owns 100% of Investors Brokerage Services,
Inc. (US - DE)
Kemper Investors Life Insurance Company owns 100% of Investors Brokerage Services
Insurance Agency, Inc. (US - DE)
Kemper Investors Life Insurance Company owns 100% of Investors Brokerage Services
Insurance Agency, Inc. of Texas (US - TX)
(Note: Investors Brokerage Services Insurance Agency, Inc. of Texas is 100%
owned by a Texas resident under contract with Investors Brokerage Services
Insurance Agency, Inc. of Texas.)
Kemper Investors Life Insurance Company owns 100% of IBS Insurance Agency, Inc. of
Ohio (US - OH) (Note: IBS Insurance Agency, Inc. of Ohio is 100%
owned by an Ohio resident under contract with IBS Insurance Agency, Inc. of
Ohio.)
Kemper Investors Life Insurance Company owns 30% of KL-75 L.L.C.
Kemper Investors Life Insurance Company owns 33.3% of KI/FKLA Ardenwood L.L.C.
Kemper Investors Life Insurance Company owns 50% of KI/FKLA Rancho Realty,
L.L.C.
Kemper Investors Life Insurance Company owns 100% of IBS Insurance Agency, Inc. of
Ohio (US - OH)
(Note: IBS Insurance Agency, Inc. of Ohio is 100% owned by an Ohio resident
under contract with IBS Insurance Agency, Inc. of Ohio.)
Fidelity Life Association, A Mutual Legal Reserve Company (US - DE) is 100%
owned by its policyholders
Scudder Kemper Investments, Inc. owns 100% of Scudder Investments Japan, Inc.
Scudder Kemper Investments, Inc. owns 100% of Scudder, Stevens & Clark Asia
Limited
Scudder Kemper Investments, Inc. owns 100% of Scudder Canada Investor Services
Limited
Scudder Kemper Investments, Inc. owns 100% of Scudder, Stevens & Clark of Canada,
Ltd.
</TABLE>
<PAGE> 5
<TABLE>
<S><C>
Scudder Kemper Investments, Inc. owns 100% of Scudder, Stevens & Clark
(Luxembourg) S.A.
Scudder Kemper Investments, Inc. owns 100% of Scudder Trust (Cayman), Ltd.
Scudder Kemper Investments, Inc. owns 100% of Scudder Trust Cayman Ltd.
Scudder Kemper Investments, Inc. owns 100% of Scudder, Stevens & Clark Australia
Limited
Scudder Kemper Investments, Inc. owns 100% of Scudder, Stevens & Clark Corporation
(US - DE)
Scudder Kemper Investments, Inc. owns 100% of Scudder, Stevens & Clark Overseas
Corporation (US - DE)
Scudder Kemper Investments, Inc. owns 50% of AARP/Scudder Financial Management
Company
Scudder Kemper Investments, Inc. owns 100% of Korea Bond Fund Management Co.
Limited
Scudder Kemper Investments, Inc. owns 100% of Scudder Cayman L.A. Power II-P Ltd.
Scudder Kemper Investments, Inc. owns 100% of Scudder Cayman L.A. Power II-C Ltd.
Scudder Kemper Investments, Inc. owns 100% of SFA, Inc. (US - DE)
Scudder Kemper Investments, Inc. owns 100% of Scudder Kemper Investments AG
Scudder Kemper Investments, Inc. owns 49.75% of Scudder Trust Company (US - NH)
Scudder Kemper Investments, Inc. owns 50% of Scudder Defined Contributions
Services, Inc. (US - DE)
Scudder Kemper Investments, Inc. owns 50% of Scudder Capital Stock Corporation
(US - DE)
Scudder Capital Asset Corporation (US - DE) owns 48.75% of Scudder Trust Company
Scudder Capital Asset Corporation owns 50% of Scudder Defined Contributions
Services, Inc.
Scudder Capital Asset Corporation owns 50% of Scudder Capital Stock Corporation
Scudder Kemper Investments, Inc. owns 50% of Kemper Distributors, Inc. (US - DE)
Scudder Kemper Investments, Inc. owns 50% of Scudder Capital Planning Corporation
(US - DE)
Scudder Kemper Investments, Inc. owns 50% of Scudder Capital Asset Corporation
(US - DE)
Scudder Kemper Investments, Inc. owns 50% of Scudder Brokerage Services, Inc.
(US - DE)
Scudder Kemper Investments, Inc. owns 50% of Scudder Investor Services, Inc.
(US - MA)
Scudder Kemper Investments, Inc. owns 50% of Scudder Service Corporation
(US - MA)
Scudder Kemper Investments, Inc. owns 99% of Scudder Realty Holdings (II) L.L.C.
(US - DE)
Scudder Capital Stock Corporation owns 50% of Kemper Distributors, Inc.
Scudder Capital Stock Corporation owns 50% of Scudder Capital Planning Corporation
Scudder Capital Planning Corporation owns 50% of Scudder Capital Asset Corporation
Scudder Capital Planning Corporation owns 50% of Scudder Fund Accounting
Corporation (US - DE)
Scudder Capital Planning Corporation owns 50% of SS&C Investment Corp. (US - DE)
Scudder Capital Planning Corporation owns 50% of Kemper Service Company
(US - DE)
Scudder Capital Stock Corporation owns 50% of Scudder Brokerage Services, Inc.
Scudder Capital Stock Corporation owns 50% of Scudder Investor Services, Inc.
Scudder Investor Services, Inc. owns 100% of Scudder Insurance Agency, Inc.
(US - MA)
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Scudder Investor Services, Inc. owns 100% of Scudder Insurance Agency of New York,
Inc. (US - NY)
Scudder Investor Services, Inc. owns 100% of SIS Investment Corporation (US - DE)
Scudder Investor Services, Inc. owns 100% of Scudder Insurance Agency, Inc. (CA)
(US - CA)
Scudder Capital Stock Corporation owns 50% of Scudder Service Corporation
Scudder Service Corporation owns 1% of Scudder Realty Holdings (II) L.L.C.
Scudder Service Corporation owns 100% of SRV Investment Corporation (US - DE)
Scudder Service Corporation owns 99.5% of Scudder Realty Holdings Corporation
(US - DE)
107 Individual Shareholders own 0.5% of Scudder Realty Holdings Corporation
Scudder Kemper Investments, Inc. owns 50% of Scudder Fund Accounting Corporation
Scudder Kemper Investments, Inc. owns 50% of SS&C Investment Corp.
Scudder Kemper Investments, Inc. owns 50% of Kemper Service Company
Scudder Kemper Investments, Inc. owns 100% of Zurich Investment Management, Inc.
(US - DE)
Scudder Kemper Investments, Inc. owns 100% of ZKI Agency, Inc. (US - DE)
ZKI Agency, Inc. owns 100% of ZKI Agency of Alabama, Inc. (US - AL)
Scudder Kemper Investments, Inc. owns 100% of Scudder Kemper Holdings (U.K.)
Limited
Scudder Kemper Holdings (U.K.) Limited owns 100% of Scudder, Stevens & Clark
Limited
Scudder Kemper Holdings (U.K.) Limited owns 100% of Scudder Investments (U.K.)
Ltd.
Scudder Investments (U.K.) Ltd. owns 100% of Zurich Investment Management (C.I.)
Ltd.
Scudder Investments (U.K.) Ltd. owns 100% of Zurich Investment Management (Dublin)
Ltd.
Farmers Group, Inc. owns 100% of Farmers New World Life Insurance Company
Farmers Group, Inc. owns 95.2% of FIG Leasing Co., Inc.
Farmers Group, Inc. owns 100% of Farmers Services Corp.
Farmers Group, Inc. owns 100% of Farmers Financial Services Corp.
Farmers Group, Inc. owns 100% of Farmers Investment Research & Management, Inc.
Farmers Group, Inc. owns 100% of Farmers Reinsurance Company
Farmers Group, Inc. owns 100% of FIG Travel
Farmers Group, Inc. owns 38% of Prematic Service Corp. (CA)
Prematic Service Corp. (CA) owns 100% of Prematic Service Corp. (NV)
Farmers Group, Inc. owns 100% of Fire Underwriters Association
Fire Underwriters Association owns 70% of F.I.G. Holding Company
Fire Underwriters Association owns 1.7% of FIG Leasing Co., Inc.
Fire Underwriters Association owns 9% of Prematic Service Corp. (CA)
Farmers Group, Inc. owns 100% of Truck Underwriters Association
Truck Underwriters Association owns 30% of F.I.G. Holding Company
Truck Underwriters Association owns 3.1% of FIG Leasing Co., Inc.
Truck Underwriters Association owns 53% of Prematic Service Corp. (CA)
Farmers Insurance Exchange is 100% owned by its policyholders (Note: Managed by
Farmers Group, Inc. dba Farmers Underwriters Association)
Farmers Insurance Exchange owns 70% of Farmers Insurance Co., Inc.
Farmers Insurance Exchange owns 86.3% of Texas Farmers Insurance Co.
Farmers Insurance Exchange owns 70% of Farmers Insurance Co. of Arizona
Farmers Insurance Exchange owns 80% of Farmers Insurance Co. of Idaho
Farmers Insurance Exchange owns 100% of Illinois Farmers Insurance Co.
Illinois Farmers Insurance Co. owns 100% of Farmers New Century Insurance Company
Farmers Insurance Exchange owns 80% of Mid Century Insurance Co.
Mid Century Insurance Co. owns 13.7% of Texas Farmers Insurance Co.
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Farmers Insurance Exchange owns 100% of Mid Century Insurance Co. of Texas
Farmers Insurance Exchange owns 80% of Farmers Insurance Co. of Oregon
Farmers Insurance Exchange owns 100% of Farmers Insurance of Columbus, Inc.
Farmers Insurance Exchange owns 80% of Civic Property & Casualty Co.
Farmers Insurance Exchange owns 80% of Exact Property & Casualty Co.
Farmers Insurance Exchange owns 80% of Neighborhood Spirit Property & Casualty Co.
Fire Insurance Exchange is owned 100% by its policyholders (Note: Managed by Fire
Underwriters Association)
Fire Insurance Exchange owns 80% of Farmers Insurance Co. of Washington
Fire Insurance Exchange owns 10% of Farmers Insurance Co., Inc.
Fire Insurance Exchange owns 10% of Farmers Insurance Co. of Arizona
Fire Insurance Exchange owns 6.7% of Farmers Insurance Co. of Idaho
Fire Insurance Exchange owns 10% of Mid Century Insurance Co.
Fire Insurance Exchange owns 10% of Civic Property & Casualty Co.
Fire Insurance Exchange owns 10% of Exact Property & Casualty Co.
Fire Insurance Exchange owns 10% of Neighborhood Spirit Property & Casualty Co.
Truck Insurance Exchange is owned 100% by its policyholders (Note: Managed by
Truck Underwriters Association)
Truck Insurance Exchange owns 80% of Farmers Insurance Co. of Washington
Truck Insurance Exchange owns 20% of Farmers Insurance Co., Inc.
Truck Insurance Exchange owns 20% of Farmers Insurance Co. of Arizona
Truck Insurance Exchange owns 13.3% of Farmers Insurance Co. of Idaho
Truck Insurance Exchange owns 100% of Farmers Security Co.
Truck Insurance Exchange owns 20% of Farmers Insurance Co. of Oregon
Truck Insurance Exchange owns 10% of Mid Century Insurance Co.
Truck Insurance Exchange owns 10% of Civic Property & Casualty Co.
Truck Insurance Exchange owns 10% of Exact Property & Casualty Co.
Truck Insurance Exchange owns 10% of Neighborhood Spirit Property & Casualty Co.
Farmers Texas County Mutual is owned 100% by its policyholders (Note: Managed by
Farmers Group, Inc. dba Farmers Underwriters Association)
Zurich Insurance Company owns 43% of Zurich International (Bermuda) Ltd. (Bda)
Zurich Insurance Company owns 65% of Zurich Centre Group Holdings Limited (Bda)
Zurich International (Bermuda) Ltd. owns 35% of Zurich Centre Group Holdings Limited
Other Zurich Subsidiaries own 57% of Zurich International (Bermuda) Ltd.
Other Zurich Subsidiaries own 100% of Series B Preferred Stock of Zurich Centre Group
Holdings Limited
ZC Advisers International (Bda) have an advisery contract with Zurich Centre Group
Holdings Limited
ZC Advisers (US - NY) have an advisory contract with Zurich Centre Group
Holdings Limited
Zurich Centre Group Holdings Limited owns 100% of Centre Reinsurance Services
(Bermuda) Limited (Bda)
Centre Reinsurance Services (Bermuda) Limited owns 44% of Insurance GenPar
(Bermuda), LP (Bda)
Others own 45% of Insurance GenPar (Bermuda), LP
Insurance Partners Offshore (Bermuda), LP is a 1% General Partner of Insurance GenPar
(Bermuda), LP
Zurich Centre Group Holdings Limited owns 100% of Zurich Home Investments Limited
(Bda)
Zurich Centre Group Holdings Limited owns 100% of ZC Sterling Holdings Limited
(US - DE)
ZC Sterling Holdings Limited owns 81% of ZC Sterling Insurance Agency (US - CA)
Zurich Centre Group Holdings Limited owns 100% Preferred Stock of CentreLine
Reinsurance Limited (Bda)
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CentreLine Reinsurance Limited owns 100% of Mendip Insurance & Reinsurance
Company Limited (Bda)
Zurich Centre Group Holdings Limited owns 100% of Strategic Services Centre Limited
(Bda)
Zurich Centre Group Holdings Limited owns 100% of ZC Life Reinsurance Limited
(Bda)
Zurich Centre Group Holdings Limited owns 100% of Centre Life Holdings (Delaware)
Limited (US - DE)
Centre Life Holdings (Delaware) Limited owns 100% of Centre Life Reinsurance
Limited (Bda)
Zurich Centre Group Holdings Limited owns 100% of Centre Reinsurance Holdings
Limited (Bda)
Zurich Centre Group Holdings Limited owns 72% Preferred Stock of Centre Reinsurance
Holdings Limited
Others own 28% Preferred Stock of Centre Reinsurance Holdings Limited
Centre Reinsurance Holdings Limited owns 100% of Centre Solutions (Bermuda)
Limited (Bda)
Others own Preferred Stock of Centre Solutions (Bermuda) Limited
Centre Solutions (Bermuda) Limited owns non-voting common stock of Mendip
Insurance & Reinsurance Company Limited (Bda)
Centre Solutions (Bermuda) Limited owns 39.6% of Florida Select Insurance Holdings,
Inc. (US - DE)
Florida Select Insurance Holdings, Inc. owns 100% of Florida Select Insurance Co.
(US - FL)
Florida Select Insurance Holdings, Inc. owns 100% of Florida Select Insurance Agency
(US - FL)
Centre Solutions (Bermuda) Limited owns 50% of Advance Travel Holdings (Bermuda)
Limited (Bda)
Centre Solutions (Bermuda) Limited owns 51% of Strategic Risk Management Holdings
Limited (Bda)
Strategic Risk Management Holdings Limited owns 100% of SRM Brokers Limited
(Bda)
Strategic Risk Management Holdings Limited owns 100% of SRM Managers Limited
(Bda)
Strategic Risk Management Holdings Limited owns 100% of SRM Consultants Limited
(Bda)
SRM Consultants Limited owns 100% of Strategic Risk Management (Propriety) Limited
(South Africa)
SRM Consultants Limited owns 100% of Strategic Risk Management Limited (UK)
Centre Solutions (Bermuda) Limited owns 100% of Centre Solutions (Asia) Limited
(Bda)
Centre Solutions (Bermuda) Limited owns 100% of CRSIII Limited (Bda)
CRSIII Limited owns 100% of Centre Representatives (Asia) Limited (Hong Kong)
CRSIII Limited owns $20 million of Superior National Capital, L.P. (Bda)
CRSIII Limited owns 100% of Centre Solutions (Australia) Limited (Australia)
CRSIII Limited owns 100% of Centre Reinsurance Services (Bermuda) IV Limited (Bda)
Centre Solutions (Bermuda) Limited owns 100% of Finwas Financing (Bermuda)
Limited (Bda)
Centre Solutions (Bermuda) Limited owns 100% of Centre Reinsurance Limited (Bda)
Centre Reinsurance Limited owns 33% non-voting stock of International Insurance
Advisers, Inc. (US)
Others own 67% of International Insurance Advisers, Inc.
Centre Reinsurance Limited owns 54% of Insurance Partners Offshore (Bermuda), LP
(Bda)
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Centre Reinsurance Limited owns 30% of International Insurance Investors, L.P. (Bda)
Others own 60% of International Insurance Investors, L.P. (Bda)
Centre Reinsurance Limited owns 100% of Centre Solutions Holdings II (Delaware)
Limited (US - DE)
Centre Solutions Holdings II (Delaware) Limited owns 100% of Centre Solutions (US)
Limited (Bda)
Centre Solutions Holdings II (Delaware) Limited owns 100% of ZC Group LLC
(US - DE) (Note: ZC Group LLC was incorporated in December 1998 to be the
employer of ZCG NY personnel. The name of this company was changed to
Zurich Centre Group LLC effective 1/1/99, immediately after the
original Zurich Centre Group LLC was merged in ZC Resource.)
Centre Solutions Holdings II (Delaware) Limited owns 100% of Centre Risk Advisers,
Inc. (US - DE)
Centre Solutions (US) Limited owns 100% of ZC Specialty Insurance Company (US
- TX)
Centre Solutions (US) Limited owns 100% of Centre Solutions Holdings (Delaware)
Limited (US - DE)
Centre Solutions Holdings (Delaware) Limited owns 100% of Centre Insurance Company
(US - DE)
Centre Reinsurance Limited owns 100% of Bridge Re (Lux)
Centre Reinsurance Limited owns 100% of Centre Insurance International Company
(Ireland)
Centre Reinsurance Limited owns 100% of Centre Reinsurance International Company
(Ireland)
Centre Reinsurance Limited owns 100% of Anglo American Insurance Group Limited
(Bda)
Centre Solutions (Bermuda) Limited owns 100% of CP Holding Limited (BVI)
Centre Solutions (Bermuda) Limited owns 100% of Centre Reinsurance Representatives
Limited (England)
Centre Solutions (Bermuda) Limited owns 40% of Pacific Select Insurance Holding, Inc.
(US - DE)
Pacific Select Insurance Holding, Inc. owns 100% of Pacific Select Insurance Co.
(US - CA)
Centre Solutions (Bermuda) Limited owns 100% of Centre Investors I Limited (Bda)
Centre Solutions (Bermuda) Limited owns 100% of Centre Investors II Limited (Bda)
Centre Solutions (Bermuda) Limited owns 100% of Centre Investors III Limited (Bda)
Centre Solutions (Bermuda) Limited owns 33% of Golden Gate Reinsurance Company
Limited (Bda)
Zurich Centre Group Holdings Limited owns 100% of Zurich Payroll Solutions Limited
(US - DE)
Zurich Centre Group Holdings Limited owns 100% of Zurich S.F. Holdings, Inc.
(US - DE)
Zurich S.F. Holdings, Inc. owns 100% of Sterling Forest LLC (US)
Zurich S.F. Holdings, Inc. owns 3 other subsidiaries (Note: Home Holdings Inc. became
a wholly owned subsidiary of Zurich Centre Group Holdings Limited in July
1998. Home Holdings Inc. has 4 wholly owned subsidiaries: Maiden Lane
Realty, Inc., Home Group Financial Services, Inc., Home Group Funding
Corporation and Sterling Forest LLC. Only Sterling Forest LLC is shown on the
chart because it is the only one of Home's 4 subsidiaries with which the ZCG
group has dealings.
Zurich Centre Group Holdings Limited owns 94% common and 94% preferred stock of
Cedar Hill Holdings, Inc. (US - DE)
Cedar Hill Holdings, Inc. owns 100% of Cedar Hill Assurance (US - TX)
Zurich Centre Group Holdings Limited owns 100% of Centre Re Holdings Dublin
(Ireland)
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Centre Re Holdings Dublin owns 100% of Centre Finance Dublin International (Ireland)
Centre Re Holdings Dublin owns 100% of Centre Investments Dublin (Ireland)
Centre Re Holdings Dublin owns 100% of Centre Reinsurance Holdings (Delaware II)
Limited (US - DE)
Centre Reinsurance Holdings (Delaware II) Limited owns 100% of Centre Reinsurance
Dublin (Ireland)
Centre Reinsurance Dublin owns 100% of Centre Reinsurance Holdings (Delaware)
Limited (US - DE)
Centre Reinsurance Holdings (Delaware) Limited owns 100% of Centre Reinsurance
(US) Limited (Bda)
Centre Reinsurance (US) Limited owns 100% of Zurich Reinsurance Centre Holdings,
Inc. (US - DE)
Zurich Reinsurance Centre Holdings, Inc. owns 100% of Zurich Reinsurance (North
America) Inc. (US - CT)
Zurich Reinsurance (North America) Inc. owns 100% of ZC Insurance Company
(US - NJ)
Zurich Reinsurance (North America) Inc. owns 24% of Insurance Partners Advisers, LP
(US - DE)
Service GenPar, LP (US - DE) owns 1% Insurance Partners Advisers, LP
Others own 80% of Insurance Partners Advisers, LP
Centre Reinsurance Holdings (Delaware) Limited owns 100% of Constellation
Reinsurance Company (US - NY)
Centre Reinsurance Holdings (Delaware) Limited owns 100% of Centre Re Services, Inc.
(US - NY)
Centre Reinsurance Holdings (Delaware) Limited owns 100% of BDA/US Services
Limited (US - DE)
Centre Reinsurance Holdings (Delaware) Limited owns 100% of Zurich Centre
Group LLC (US - DE) (Note: This company was merged into ZC Resource
effective 1/1/99 with ZC Resource being the surviving entity. The name
of this company was then recycled.)
Centre Reinsurance Holdings (Delaware) Limited owns 100% of Zurich Centre
Properties, Inc. (US - CT)
Centre Reinsurance Holdings (Delaware) Limited owns 50% of Advance Travel
Holdings (Delaware) Limited (US - DE)
Advance Travel Holdings (Delaware) Limited owns 100% of Advance Travel Limited
(US - DE)
Centre Reinsurance Holdings (Delaware) Limited owns 100% of ZC Resource LLC
(US - DE)
ZC Resource LLC owns 50% of Life Insurance Solutions, LLC (US - DE)
Centre Reinsurance Holdings (Delaware) Limited owns 49% of Claims Solutions Group
(US - DE)
Others own 51% of Claims Solutions Group (US - DE)
Claims Solutions Group owns 100% of Claims Management Group (UK)
Zurich Centre Group Holdings Limited owns 100% of Anglo American Insurance Group
(UK) PLC (England)
Anglo American Insurance Group (UK) PLC owns 100% of Anglo American Insurance
Holdings Limited (England)
Anglo American Insurance Holdings Limited owns 100% of Anglo American
Underwriting Management Limited (England)
Anglo American Underwriting Management Limited owns 100% of Anglo American
Insurance Management Services Limited (England)
Anglo American Insurance Holdings Limited owns 100% of Anglo American Insurance
Company (Bermuda) Limited (Bda)
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Anglo American Insurance Holdings Limited owns 100% of Anglo American Insurance
Company Limited (England)
Anglo American Insurance Company Limited owns 100% of Mercantile Indemnity
Limited (England)
Zurich Centre Group Holdings Limited owns 100% of ZCM Holdings (Bermuda)
Limited (Bda)
ZCM Holdings (Bermuda) Limited owns 100% of Zurich Capital Markets (UK) Limited
(England)
ZCM Holdings (Bermuda) Limited owns 100% of ZCM Asset Holding Company
(Bermuda) Limited (Bda)
ZCM Holdings (Bermuda) Limited owns 100% of ZCM Matched Funding (Bermuda)
Limited (Bda)
ZCM Holdings (Bermuda) Limited owns 100% of Zurich Capital Markets, Inc.
(US - DE)
Zurich Capital Markets, Inc. owns 100% of Zurich Capital Markets Securities, Inc.
(US - DE)
Zurich Capital Markets, Inc. owns 100% of ZCM Matched Funding Corp. (US - DE)
Zurich Centre Group Holdings Limited owns 100% of Zurich Capital Markets Company
(Ireland)
Zurich Centre Group Holdings Limited owns 100% of Centre Financial Services
Holdings Limited (Bda)
Centre Financial Services Holdings Limited owns 100% of Zurich Structured Finance,
Inc. (US - DE)
Zurich Structured Finance, Inc. owns 47.125% of CentRe Mortgage Capital LLC
(US - DE)
CentRe Mortgage Capital LLC owns 100% of National Mortgage Capital, LLC
(US - MD)
Zurich Structured Finance, Inc. owns 47.375% of CMC TEJV-1, LLC (US - DE)
Zurich Structured Finance, Inc. owns 100% of Centre Kate, Inc. 1 (US - DE)
Zurich Structured Finance, Inc. owns 100% of Centre Kate, Inc. 2 (US - DE)
Zurich Structured Finance, Inc. owns 100% of CTH Affordable Housing Corporation
(US - DE)
CTH Affordable Housing Corporation owns 100% of CTH Affordable Housing Investor,
Inc. (US - DE)
CTH Affordable Housing Investor, Inc. owns 100% of CTH MHP, LLC (US - DE)
CTH Affordable Housing Corporation owns 100% of CTH Special General Partner, Inc.
(US - DE)
CTH Affordable Housing Corporation owns 100% of CTH AHP Corporation (US - DE)
CTH Affordable Housing Corporation owns 100% of CTH WNC, Inc. (US - IL)
CTH Affordable Housing Corporation owns 100% of CTH Special General Partner II,
Inc. (US - IL)
CTH Affordable Housing Corporation owns 100% of CTH MHP II, Inc. (US - IL)
CTH Affordable Housing Corporation owns 100% of ZSF Appollo Corporation
(US - IL)
CTH Affordable Housing Corporation owns 100% of CTH/Landmark SLP, Inc.
(US - DE)
CTH Affordable Housing Corporation owns 100% of ZSF Landmark Corporation
(US - IL)
Zurich Structured Finance, Inc. is a 1% General Partner and 98% Limited Partner of
JFS/ZSF 1997, LP (US - VA)
Zurich Structured Finance, Inc. is a 1% General Partner and 98% Limited Partner of
JFS/ZSF 1998, LP (US - VA)
Zurich Structured Finance, Inc. owns 34.5% common stock and 100% preferred stock of
Centre Trading Partners LP (US - DE)
Centre Financial Services Holdings Limited owns 47.125% of CMB Limited (Bda)
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Centre Financial Services Holdings Limited owns 45% of Centre Trading Corporation
(US - DE)
Centre Trading Corporation owns 1% of Centre Trading Partners LP
Zurich Centre Group Holdings Limited owns 100% of Centre Reinsurance Services
(Bermuda) II Limited (Bda)
Centre Reinsurance Services (Bermuda) II Limited owns 44% of Insurance GenPar,
LP (US - DE)
Insurance GenPar, LP is a 1% General Partner of Insurance Partners, LP (US - DE)
Others, Inc. (Centre Re employees) owns 99% of Insurance Partners, LP
Centre Reinsurance Services (Bermuda) II Limited owns 43% of IPC GenPar (Bermuda)
LP (Bda)
Others own 57% of IPC GenPar (Bermuda) LP
IPC GenPar (Bermuda) LP is a 1% General Partner of Insurance Partners Charman
(Bermuda) LP (Bda)
Others own 99% General Partner of Insurance Partners Charman (Bermuda) LP
Zurich Centre Group Holdings Limited owns 100% of Centre Reinsurance Services
(Delaware) Limited (US - DE)
Centre Reinsurance Services (Delaware) Limited owns 44% of Service GenPar, LP
(US - DE)
Others own 56% of Service GenPar, LP
Zurich Centre Group Holdings Limited owns 50% of THIC Holdings Management
Corporation (US - DE)
</TABLE>
