<PAGE> 1
1999 ANNUAL
REPORT
----------
KEMPER
SELECT
Variable Universal Life Policies
------
Kemper Investors Life Insurance Company
------
Variable Separate Account
PERIOD ENDED DECEMBER 31, 1999 [KEMPER LOGO]
<PAGE> 2
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<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS OF
KEMPER INVESTORS LIFE INSURANCE COMPANY AND POLICY OWNERS
OF VARIABLE SEPARATE ACCOUNT
In our opinion, the accompanying combined statements of assets and liabilities
and policy owners' equity and the related combined statements of operations and
combined statements of changes in policy owners' equity present fairly, in all
material respects, the financial position of Kemper Investors Life Insurance
Company Variable Separate Account (the "Company") at December 31, 1999 and the
combined results of its operations for the year then ended and the combined
changes in its policy owners' equity for the years ended December 31, 1999 and
1998 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 audits 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
evaluations of the overall financial statement presentation. Our procedures
included confirmation of portfolio shares owned at December 31, 1999 by
correspondence with the fund. We believe that our audits provide a reasonable
basis for our opinion expressed above.
/S/ PRICEWATERHOUSECOOPERS LLP
February 24, 2000
<PAGE> 4
COMBINED FINANCIAL STATEMENTS
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE SEPARATE ACCOUNT
COMBINED STATEMENT OF ASSETS AND LIABILITIES
AND POLICY OWNERS' EQUITY
December 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
MONEY TOTAL HIGH GOVERNMENT
MARKET RETURN YIELD GROWTH SECURITIES
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------------------
Investment, at current value $14,813 1,937 3,468 973 4,128 4,307
- -------------------------------------------------------------------------------------------------------------------
Dividend and other receivables 6 5 -- -- 1 --
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 14,819 1,942 3,468 973 4,129 4,307
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND POLICY OWNERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Liabilities:
Mortality and expense risk charges 11 1 3 1 3 3
- -------------------------------------------------------------------------------------------------------------------
Other 12 10 -- -- 2 --
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 23 11 3 1 5 3
- -------------------------------------------------------------------------------------------------------------------
Policy owners' equity $14,796 1,931 3,465 972 4,124 4,304
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
ANALYSIS OF POLICY OWNERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Excess (deficiency) of proceeds
from units sold over payments
for units redeemed $ 4,117 1,274 254 (55) 845 1,799
- -------------------------------------------------------------------------------------------------------------------
Accumulated net investment income 7,093 657 1,998 1,015 1,377 2,046
- -------------------------------------------------------------------------------------------------------------------
Accumulated net realized gain on
sales of investments 2,596 -- 1,012 25 981 578
- -------------------------------------------------------------------------------------------------------------------
Unrealized appreciation
(depreciation) of investments 990 -- 201 (13) 921 (119)
- -------------------------------------------------------------------------------------------------------------------
Policy owners' equity $14,796 1,931 3,465 972 4,124 4,304
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
2
<PAGE> 5
COMBINED FINANCIAL STATEMENTS
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE SEPARATE ACCOUNT
COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
MONEY TOTAL HIGH GOVERNMENT
MARKET RETURN YIELD GROWTH SECURITIES
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Dividend and capital gain
distributions $ 733 63 326 125 -- 219
- -------------------------------------------------------------------------------------------------------------------------
Mortality and expense risk
charges 132 24 26 13 29 40
- -------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 601 39 300 112 (29) 179
- -------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments:
Net realized gain (loss)
on sales of investments 817 -- 196 (41) 662 --
- -------------------------------------------------------------------------------------------------------------------------
Change in unrealized
appreciation
(depreciation) of
investments 258 -- (16) (58) 521 (189)
- -------------------------------------------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investments 1,075 -- 180 (99) 1,183 (189)
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
POLICY OWNERS' EQUITY
RESULTING FROM OPERATIONS $1,676 39 480 13 1,154 (10)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
3
<PAGE> 6
COMBINED FINANCIAL STATEMENTS
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE SEPARATE ACCOUNT
COMBINED STATEMENTS OF CHANGES IN
POLICY OWNERS' EQUITY
For the years ended December 31, 1999 and 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
MONEY MARKET
COMBINED SUBACCOUNT
----------------- ----------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
OPERATIONS
- -----------------------------------------------------------------------------------------------------
Net investment income (loss) $ 601 1,289 39 66
Net realized gain (loss) on sales of investments 817 (113) -- --
Change in unrealized appreciation (depreciation) of
investments 258 (30) -- --
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in policy owners' equity
resulting from operations 1,676 1,146 39 66
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
ACCOUNT UNIT TRANSACTIONS
- -----------------------------------------------------------------------------------------------------
Proceeds from units sold 6,213 6,365 5,456 5,791
Net transfers (to) from affiliate or subaccounts (2,491) (2,005) (1,180) (2,163)
Payments for units redeemed (4,443) (5,039) (3,350) (3,694)
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in policy owners' equity from
account unit transactions (721) (679) 926 (66)
- -----------------------------------------------------------------------------------------------------
Total increase (decrease) in policy owners' equity 955 467 965 --
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
POLICY OWNERS' EQUITY
- -----------------------------------------------------------------------------------------------------
Beginning of period 13,841 13,374 966 966
- -----------------------------------------------------------------------------------------------------
End of period $14,796 13,841 1,931 966
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
4
<PAGE> 7
COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TOTAL RETURN HIGH YIELD GROWTH GOVERNMENT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SECURITIES SUBACCOUNT
- ------------- ------------- ------------- ---------------------
1999 1998 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
300 489 112 71 (29) 431 179 232
196 (67) (41) (42) 662 (288) -- 284
(16) (1) (58) (10) 521 234 (189) (253)
- ---------------------------------------------------------------------
480 421 13 19 1,154 377 (10) 263
- ---------------------------------------------------------------------
97 63 121 86 506 393 33 32
(358) 638 (341) (502) (568) 421 (44) (399)
(433) (479) (153) (205) (439) (461) (68) (200)
- ---------------------------------------------------------------------
(694) 222 (373) (621) (501) 353 (79) (567)
- ---------------------------------------------------------------------
(214) 643 (360) (602) 653 730 (89) (304)
- ---------------------------------------------------------------------
3,679 3,036 1,332 1,934 3,471 2,741 4,393 4,697
- ---------------------------------------------------------------------
3,465 3,679 972 1,332 4,124 3,471 4,304 4,393
- ---------------------------------------------------------------------
</TABLE>
5
<PAGE> 8
NOTES TO COMBINED FINANCIAL STATEMENTS
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
1 GENERAL INFORMATION
AND SIGNIFICANT
ACCOUNTING POLICIES ORGANIZATION. Kemper Investors Life Insurance
Company Variable 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 a
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) replacing
Zurich. Allied Zurich p.l.c is included in the
FTSE-100 Share Index in London.
The Separate Account is used to fund policies
("Policy") for Select variable universal life
policies, Power V flexible premium variable
universal life policies and Farmer's Power V
variable universal life policies. The Separate
Account is divided into five subaccounts and each
subaccount invests exclusively in the shares of a
corresponding portfolio of the Investors Fund
Series (the "Fund"), an open-end diversified
management investment company. The Fund has added
additional subaccounts, which are not reflected in
the accompanying financial statements, and which
are not available investment options to Select
Policy Owners of the Separate Account. The Power V
and Farmer's Power V Policy Owners also have
additional subaccounts which invest exclusively in
the shares of another fund, which are not reflected
in the accompanying financial statements.
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 accounted for on
the trade date (the date the order to buy or sell
is executed). Dividends and capital gains
distributions are recorded as income on the ex-
dividend date. Realized gains and losses from
security transactions are reported on a first in,
first out ("FIFO") cost basis.
ACCOUNT UNIT TRANSACTIONS. Proceeds from a Policy
are automatically allocated to the Money Market
subaccount on the trade date for a 15 day period.
At the end of this period, the Separate Account
value (cash value) may be allocated to other
subaccounts as designated by the owner of the
Policy.
ACCUMULATION UNIT VALUATION. On each day the New
York Stock Exchange (the "Exchange") is open for
trading, the accumulation unit value is determined
as of the earlier of 3:00 p.m. (Chicago time) or
the close of the Exchange by dividing the total
value of each subaccount's investments and other
assets, less liabilities, by the number of
accumulation units outstanding in the respective
subaccount.
6
<PAGE> 9
NOTES TO COMBINED FINANCIAL STATEMENTS
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 policy 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):
<TABLE>
<CAPTION>
SHARES
OWNED COST
---------------------------------------------------------------------------
<S> <C> <C>
Investors Fund Series Money Market Subaccount 1,937 $ 1,937
Investors Fund Series Total Return Subaccount 1,203 3,267
Investors Fund Series High Yield Subaccount 849 986
Investors Fund Series Growth Subaccount 1,018 3,207
Investors Fund Series Government Securities Subaccount 3,724 4,426
---------------------------------------------------------------------------
TOTAL INVESTMENTS $13,823
---------------------------------------------------------------------------
</TABLE>
The underlying investments are summarized below.
MONEY MARKET SUBACCOUNT: This subaccount invests
primarily in short-term obligations of major banks
and corporations.
TOTAL RETURN SUBACCOUNT: This subaccount's
investments will normally consist of fixed-income
and equity securities. Fixed-income securities will
include bonds and other debt securities and
preferred stocks. Equity investments normally will
consist of common stocks and securities convertible
into or exchangeable for common stocks, however,
the subaccount may also make private placement
investments (which are normally restricted
securities).
HIGH YIELD SUBACCOUNT: This subaccount invests in
fixed-income securities, a substantial portion of
which are high yielding fixed-income securities.
These securities ordinarily will be in the lower
rating categories of recognized rating agencies or
will be non-rated, and generally will involve more
risk than securities in the higher rating
categories.
GROWTH SUBACCOUNT: This subaccount's investments
normally will consist of common stocks and
securities convertible into or exchangeable for
common stocks, however, it may also make private
placement investments (which are normally
restricted securities).
GOVERNMENT SECURITIES SUBACCOUNT: This subaccount
invests primarily in U.S. Government Securities.
The subaccount may also invest in fixed-income
securities other than U.S. Government securities
and may engage in options and financial futures
transactions.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES KILICO provides a death benefit payment upon the
death of the Policy Owner under the terms of the
death benefit option selected by the Policy Owner
as further described in the Policy. KILICO assesses
a monthly charge to the subaccounts for the cost of
providing this insurance protection to the Policy
Owner. These cost of insurance charges vary with
the issue age, sex and rate class of the Policy
Owner, and are allocated among the subaccounts in
the proportion of each subaccount to the Separate
Account value. Cost of insurance charges totaled
approximately $101,366, $2,874,754 and $32,068 for
the Select, Power V and Farmer's Power V Variable
Universal Life products,
7
<PAGE> 10
NOTES TO COMBINED FINANCIAL STATEMENTS
respectively, for the year ended December 31, 1999.
Additionally, KILICO assesses a daily charge to the
subaccounts for mortality and expense risk assumed
by KILICO at an annual rate of .90% of assets.
Proceeds payable on the surrender of a Policy are
reduced by the amount of any applicable contingent
deferred sales charge.
A state and local premium tax charge of 2.5% is
deducted from each premium payment under the Power
V and Farmer's Power V policy's prior to allocation
of the net premium. This charge is to reimburse
KILICO for the payment of state premium taxes.
KILICO expects to pay an average state premium tax
rate of approximately 2.5% but the actual premium
tax attributable to a Policy may be more or less.
Under Section 848 of the Internal Revenue Code (the
"Code"), the receipt of premium income by a life
insurance company requires the deferral of a
portion of the acquisition costs over a maximum of
a 120 month period. The effect of Section 848 for
KILICO is an acceleration of income recognition
over a deferral of the associated deductions for
tax purposes; this is referred to as deferred
acquisition cost or, the "DAC tax". As compensation
for this accelerated liability, a DAC tax charge of
1.00% of each premium dollar is deducted from the
premium by KILICO before investment of a policy
owner's funds into the Separate Account.
Policy loans are also provided for under the terms
of the Policy. The minimum amount of the loan is
$500 and is limited to 90% of the Policy's
investment value, less applicable surrender
charges. Interest is assessed against the policy
loan under the terms of the Policy. Policy loans
are carried in KILICO's general account.
Scudder Kemper Investments, Inc., an affiliated
company, is the investment manager of the
portfolios of the Fund which serve as the
underlying investments of the Separate Account.
Investors Brokerage Services, Inc., a wholly-owned
subsidiary of KILICO, is the principal underwriter
for the Separate Account.
- --------------------------------------------------------------------------------
4 NET TRANSFERS (TO)
FROM AFFILIATE OR
SUBACCOUNTS Net transfers (to) from affiliate or subaccounts
include transfers of all or part of the Policy
Owner's interest to or from another subaccount or
to the general account of KILICO.
8
<PAGE> 11
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 POLICY OWNERS'
EQUITY Policy owners' equity at December 31, 1999, is as
follows (in thousands, except unit value;
differences are due to rounding):
<TABLE>
<CAPTION>
POLICY
NUMBER UNIT OWNERS'
SELECT POLICIES OF UNITS VALUE EQUITY
--------------- -------- ----- -------
<S> <C> <C> <C>
Money Market Subaccount 820 $1.771 $ 1,454
----------------------------------------------------------------------------
Total Return Subaccount 1,012 3.231 3,270
----------------------------------------------------------------------------
High Yield Subaccount 312 2.490 776
----------------------------------------------------------------------------
Growth Subaccount 565 5.199 2,939
----------------------------------------------------------------------------
Government Securities Subaccount 2,002 2.131 4,267
----------------------------------------------------------------------------
TOTAL SELECT POLICY OWNERS' EQUITY $12,706
----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
POLICY
NUMBER UNIT OWNERS'
POWER V POLICIES OF UNITS VALUE EQUITY
---------------- -------- ------ -------
<S> <C> <C> <C>
Money Market Subaccount 418 $1.141 $ 477
----------------------------------------------------------------------------
Total Return Subaccount 45 4.337 195
----------------------------------------------------------------------------
High Yield Subaccount 135 1.439 194
----------------------------------------------------------------------------
Growth Subaccount 189 6.271 1,185
----------------------------------------------------------------------------
Government Securities Subaccount 26 1.377 36
----------------------------------------------------------------------------
TOTAL POWER V POLICY OWNERS' EQUITY $2,087
----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
POLICY
NUMBER UNIT OWNERS'
FARMER'S POWER V POLICIES OF UNITS VALUE EQUITY
------------------------- -------- ------ -------
<S> <C> <C> <C>
High Yield Subaccount 2 $1.245 $2
----------------------------------------------------------------------------
Government Securities Subaccount 1 1.208 1
----------------------------------------------------------------------------
TOTAL FARMERS POWER V POLICY OWNERS' EQUITY $3
----------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
Distributed by
Investors Brokerage Services, Inc.
Kemper Investors Life Insurance Company
1 Kemper Drive
[KEMPER LOGO] Long Grove, IL 60049
Policy Form Series L-5672, L-5454 & L-5797
[RECYCLED LOGO] PRINTED ON RECYCLED PAPER.
L-5759 (2/00)1042
