<PAGE> 1
As filed with the Securities and Exchange Commission on April 30, 1999
Registration Nos. 333-25663
811-08178
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 2
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
[X] Amendment No. 3
AMERICAN FIDELITY SEPARATE ACCOUNT B
(Exact Name of Registrant)
AMERICAN FIDELITY ASSURANCE COMPANY
(Name of Depositor)
2000 N. CLASSEN BOULEVARD, OKLAHOMA CITY, OKLAHOMA 73106
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, Including Area Code (405) 523-2000
STEPHEN P. GARRETT Copies to:
SENIOR VICE PRESIDENT
LAW AND GOVERNMENT AFFAIRS CONNIE S. STAMETS, ESQ.
AMERICAN FIDELITY ASSURANCE COMPANY WINSTEAD SECHREST & MINICK P.C.
2000 N. CLASSEN BOULEVARD 5400 RENAISSANCE TOWER
OKLAHOMA CITY, OKLAHOMA 73106 1201 ELM STREET
(Name and Address of Agent for Service) DALLAS, TEXAS 75270-2199
Approximate Date of Proposed Public Offering: As soon as practicable after
effectiveness of the
Registration Statement
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, 1999 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) 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: Individual variable annuity contracts
================================================================================
<PAGE> 2
AMERICAN FIDELITY SEPARATE ACCOUNT B
Cross Reference Sheet
Pursuant to Rule 495
<TABLE>
<CAPTION>
Item
No. Item Location in Prospectus
- ---- ---- ----------------------
<S> <C> <C>
PART A
1 Cover Page........................................... Cover Page
2 Definitions ......................................... Glossary of Terms
3 Synopsis ............................................ Summary
4 Condensed Financial Information...................... Accumulation Unit Values
5 General Description of Registrant, Depositor,
and Portfolio Companies............................ Investment Options; Other Information--
American Fidelity and --The Separate
Account
6 Deductions and Expenses.............................. Expenses
7 General Description of Variable Annuity
Contracts......................................... The AFAdvantage Variable Annuity
8 Annuity Period ...................................... Annuity Provisions
9 Death Benefit ....................................... Death Benefit
10 Purchases and Contract Value......................... How to Purchase the AFAdvantage
Variable Annuity
11 Redemptions ......................................... Withdrawals
12 Taxes ............................................... Taxes
13 Legal Proceedings ................................... Legal Proceedings
14 Table of Contents of the Statement of
Additional Information .............................. Table of Contents of the Statement of
Additional Information
PART B
15 Cover page........................................... Cover Page
16 Table of Contents.................................... Table of Contents
17 General Information and History ..................... General Information and History of the
Company
18 Services............................................. Not Applicable
19 Purchase of Securities Being Offered................. Not Applicable
20 Underwriters......................................... Distributor
21 Calculation of Performance Data...................... Performance Information
22 Annuity Payments..................................... Annuity Provisions
23 Financial Statements................................. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item as numbered in Part C of this Registration Statement.
<PAGE> 3
AFADVANTAGE VARIABLE ANNUITY(R)
FROM
[AMERICAN FIDELITY LOGO]
A MEMBER OF THE AMERICAN FIDELITY GROUP
May 1, 1999
<PAGE> 4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AFADVANTAGE VARIABLE ANNUITY(R)
ISSUED BY
AMERICAN FIDELITY SEPARATE ACCOUNT B
AND
AMERICAN FIDELITY ASSURANCE COMPANY
PROSPECTUS
MAY 1, 1999
This prospectus describes the AFAdvantage Variable Annuity(R) offered by
American Fidelity Assurance Company (American Fidelity, our, us or we). Our home
office is 2000 N. Classen Boulevard, Oklahoma City, Oklahoma 73106.
The annuity is a fixed and variable deferred annuity policy which has 12
Investment Options -- the Guaranteed Interest Account Option and the following
Portfolios:
AMERICAN FIDELITY DUAL STRATEGY FUND, INC.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
DREYFUS STOCK INDEX FUND
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio
Small Company Stock Portfolio
International Value Portfolio
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Prime Bond Fund
Merrill Lynch American Balanced Fund
Merrill Lynch High Current Income Fund
Merrill Lynch Special Value Focus Fund
Merrill Lynch Basic Value Focus Fund
Please read this prospectus carefully before investing and keep it for
future reference. It contains important information about the AFAdvantage
Variable Annuity(R).
To learn more about the annuity offered by this prospectus, you can obtain
a copy of the Statement of Additional Information (SAI) dated May 1, 1999. The
SAI has been filed with the Securities and Exchange Commission (SEC). The SAI is
incorporated by reference into this prospectus and therefore is legally a part
of the prospectus. The SEC maintains a Web site (http://www.sec.gov) that
contains the SAI, material incorporated by reference, and other material
regarding companies that file electronically with the SEC. The Table of Contents
of the SAI is found on the last page of this prospectus. For a free copy of the
SAI, call us at (800) 662-1106 or write us at P.O. Box 25523, Oklahoma City,
Oklahoma 73125-0523 or e-mail us at [email protected].
Investment in a variable annuity is subject to risks, including the
possible loss of principal. The Policies are not deposits or obligations of any
bank. No bank has guaranteed or endorsed the Policies. The Policies are not
federally insured by the Federal Deposit Insurance Corporation or any other
agency.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GLOSSARY OF TERMS........................................... 1
SUMMARY..................................................... 2
FEE TABLE................................................... 4
ACCUMULATION UNIT VALUES.................................... 7
THE AFADVANTAGE VARIABLE ANNUITY(R)......................... 8
Policy Owner................................................ 8
Joint Owner................................................. 8
Beneficiary................................................. 8
Assignment of the Policy.................................... 9
ANNUITY PROVISIONS.......................................... 9
Annuity Date................................................ 9
Selection of an Annuity Option.............................. 9
Annuity Payments............................................ 9
Annuity Options............................................. 10
HOW TO PURCHASE THE AFADVANTAGE VARIABLE ANNUITY(R)......... 10
Purchase Payments........................................... 10
Allocation of Purchase Payments............................. 10
Right to Examine Policy..................................... 11
Accumulation Units.......................................... 11
INVESTMENT OPTIONS.......................................... 11
Portfolios.................................................. 11
Guaranteed Interest Account Option.......................... 12
Voting Rights............................................... 13
Substitution................................................ 13
Transfers................................................... 13
Transfers During the Accumulation Phase................... 13
Transfers During the Annuity Phase........................ 13
Automatic Dollar Cost Averaging............................. 13
Asset Rebalancing........................................... 13
PERFORMANCE................................................. 14
EXPENSES.................................................... 14
Insurance Charges........................................... 14
Mortality and Expense Risk Charge......................... 14
Administrative Charge..................................... 14
Distribution Expense Charge............................... 14
Policy Maintenance Charge................................... 15
Withdrawal Charge........................................... 15
Reduction or Elimination of the Withdrawal Charge........... 15
Transfer Fee................................................ 16
Premium Taxes............................................... 16
Income Taxes................................................ 16
Fund Expenses............................................... 16
TAXES....................................................... 16
Annuities in General........................................ 16
Qualified and Non-Qualified Policies........................ 17
Tax Treatment of Withdrawals -- Non-Qualified Policies...... 17
Tax Treatment of Withdrawals -- Qualified Policies.......... 17
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Tax Treatment of Withdrawals -- Tax-Deferred Annuities and
401(k) Plans.............................................. 18
Diversification............................................. 18
WITHDRAWALS................................................. 18
Systematic Withdrawal Program............................... 19
Suspension of Payments or Transfers......................... 19
LOANS....................................................... 19
DEATH BENEFIT............................................... 20
Death Benefit Amount........................................ 20
Death of Owner Before Annuity Date.......................... 20
Death of Annuitant Before the Annuity Date.................. 21
Death of Owner After the Annuity Date....................... 21
Death of Annuitant After the Annuity Date................... 21
OTHER INFORMATION........................................... 21
American Fidelity........................................... 21
The Separate Account........................................ 21
Legal Proceedings........................................... 21
Distribution................................................ 21
Administration.............................................. 22
Financial Statements........................................ 22
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL
INFORMATION............................................... 22
</TABLE>
ii
<PAGE> 7
GLOSSARY OF TERMS
Some of the terms used in this prospectus are technical. To help you
understand these terms, we have defined them below and have capitalized them
throughout the prospectus.
Accounts: The Guaranteed Interest Account and the Portfolios.
Account Value: The value of your Policy in the Investment Options during
the Accumulation Phase.
Accumulation Phase: Until you decide to begin receiving Annuity Payments,
your annuity is in the Accumulation Phase.
Accumulation Unit: The unit of measurement we use to keep track of the
value of your Policy invested in the Portfolios during the Accumulation Phase.
Annuitant: The natural person on whose life Annuity Payments are based.
Annuity Date: The date Annuity Payments begin. You can choose the month and
year in which Annuity Payments will begin.
Annuity Options: You can choose among available pay-out plans for your
Annuity Payments. These are referred to as Annuity Options.
Annuity Payments: You can receive regular income payments from your Policy.
These are referred to as Annuity Payments.
Annuity Phase: The period during which we make Annuity Payments.
Annuity Unit: The unit of measurement we use to calculate your Annuity
Payments during the Annuity Phase.
Beneficiary: The person or entity you name to receive any death benefits.
Funds: American Fidelity Dual Strategy Fund, Inc., The Dreyfus Socially
Responsible Growth Fund, Inc., Dreyfus Stock Index Fund, Dreyfus Variable
Investment Fund and Merrill Lynch Variable Series Funds, Inc.
Guaranteed Interest Account Option: An investment option within our general
account which earns interest credited by us.
Investment Options: The Portfolios and the Guaranteed Interest Account
Option.
Joint Owner: The Policy can be owned by you and your spouse (the Joint
Owner).
Non-Qualified: If you do not purchase the Policy under a Qualified plan,
your Policy is referred to as a Non-Qualified Policy.
Policy: The AFAdvantage Variable Annuity(R).
Policy Anniversary: The anniversary of the date your Policy was issued.
Policy Owner: The person or entity entitled to ownership rights under a
Policy.
Policy Year: The annual period which begins on the date your Policy was
issued and each anniversary of that date.
Portfolios: The variable Investment Options available under the Policy.
Each Portfolio has its own investment objective and is invested in a Fund or a
corresponding portfolio of a Fund.
Purchase Payment: The money you invest to buy the Policy.
Qualified: Policies purchased under special tax qualification rules
(examples: Individual Retirement Annuities, 403(b) Tax-Deferred Annuities, H.R.
10 and Corporate Pension and other qualified retirement plans).
Tax Deferral: Tax deferral means that you are not taxed on earnings or
appreciation on the assets in your Policy until you take money out of your
Policy.
1
<PAGE> 8
SUMMARY
The following information is a summary of some of the more important
features of your annuity Policy. More detailed information is contained in the
corresponding sections of this prospectus.
The AFAdvantage Variable Annuity(R). This prospectus describes the flexible
premium variable and fixed deferred annuity policy offered by American Fidelity
Assurance Company (American Fidelity). It is a contract between you, the Policy
Owner, and American Fidelity, an insurance company. The Policy provides a means
for investing on a Tax Deferred basis in the Portfolios and the Guaranteed
Interest Account Option. The AFAdvantage Variable Annuity(R) is designed for
people seeking long-term Tax Deferred accumulation of assets, generally for
retirement or other long-term purposes. The Tax Deferred feature is most
attractive to people in high federal and state tax brackets. You should not buy
the Policy if you are looking for a short-term investment or if you cannot
accept the risk of getting back less money than you put in.
Like all deferred annuities, your Policy has two phases: the Accumulation
Phase and the Annuity Phase. During the Accumulation Phase, you invest money in
your annuity and your earnings accumulate on a Tax Deferred basis. Your earnings
are based on the investment performance of the Portfolios you selected and/or
the interest rate earned on the money you have in the Guaranteed Interest
Account. You can withdraw money from your Policy during the Accumulation Phase.
During the Accumulation Phase, the earnings are taxed as income only when you
make a withdrawal. A federal tax penalty may apply if you make withdrawals
before age 59 1/2. The Annuity Phase occurs when you begin receiving regular
payments from your Policy. Among other factors, the amount of the payments you
may receive during the Annuity Phase will depend upon the amount of money you
are able to accumulate in your Policy during the Accumulation Phase.
Annuity Provisions. You can receive monthly Annuity Payments from your
Policy under an Annuity Option. During the Annuity Phase, payments can come from
the Portfolios and/or the Guaranteed Interest Account.
How to Purchase the AFAdvantage Variable Annuity(R). You may make Purchase
Payments at any time during the Accumulation Phase. Each payment must be at
least $25. You must complete an application and make your first Purchase Payment
to purchase the Policy.
Investment Options. You may allocate your money to the Guaranteed Interest
Account Option of American Fidelity or the following Portfolios:
<TABLE>
<S> <C>
AMERICAN FIDELITY DUAL STRATEGY FUND, INC.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
DREYFUS STOCK INDEX FUND
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio
Small Company Stock Portfolio
International Value Portfolio
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Prime Bond Fund
Merrill Lynch American Balanced Fund
Merrill Lynch High Current Income Fund
Merrill Lynch Special Value Focus Fund
Merrill Lynch Basic Value Focus Fund
</TABLE>
The Portfolios offer professionally managed investment choices and are
fully described in the attached prospectuses for the Funds. You can make or lose
money in the Portfolios, depending upon market conditions.
The Guaranteed Interest Account Option offers an interest rate that is
guaranteed by us. While your money is in the Guaranteed Interest Account Option,
the interest your money will earn (subject to a
2
<PAGE> 9
withdrawal charge on any withdrawals from the Guaranteed Interest Account) is
guaranteed by American Fidelity.
Expenses. The following are the annual insurance charges which are deducted
from the average daily value of your Policy allocated to the Portfolios every
year: Mortality and Expense Risk Charge -- 1.25%; Administrative Charge -- .15%;
and Distribution Expense Charge -- .10%. Each year we also deduct a $30 policy
maintenance charge from your Policy. There are also annual expenses of the
Portfolios which range from .26% to 1.29% of the average daily value of the
Portfolios, depending upon the Portfolio(s) you invest in.
You can transfer between accounts up to 12 times a Policy Year during the
Accumulation Phase. After that, the charge is the lesser of $25 or 2% of the
amount transferred. You may make one transfer a Policy Year during the Annuity
Phase. The one transfer is free.
During the first Policy Year, any withdrawals you make will have a
withdrawal charge. After the first Policy Year, you may make a withdrawal of up
to 10% of the value of your Policy once each Policy Year without incurring a
withdrawal charge (referred to as the "free withdrawal amount"). If you do not
use the free withdrawal amount in any year, it may not be carried forward and
used the next Policy Year.
The withdrawal charge is a percentage of the amount withdrawn in excess of
the free withdrawal amount as shown below:
<TABLE>
<CAPTION>
POLICY WITHDRAWAL
YEAR CHARGE %
------ ----------
<S> <C>
1.............................................. 8%
2.............................................. 7%
3.............................................. 6%
4.............................................. 5%
5.............................................. 4%
6.............................................. 3%
7.............................................. 2%
8.............................................. 1%
9+............................................. 0%
</TABLE>
American Fidelity may assess a state premium tax charge which ranges from
0% - 4.0% (depending upon the state).
Taxes. Your earnings are not taxed until you take them out. In most cases,
if you take money out, earnings come out first and are taxed as income. If you
are younger than 59 1/2 when you take money out, you may be charged a federal
tax penalty on the taxable amounts withdrawn, which in most cases is 10% on the
taxable amounts. Payments during the Annuity Phase are considered partly a
return of your original investment. That part of each payment is not taxable as
income. If the Policy is issued pursuant to a Qualified plan, the entire payment
may be taxable.
Withdrawals. You may make a withdrawal at any time during the Accumulation
Phase. There may be limits to the amount you can withdraw from a Qualified Plan.
Any partial withdrawal must be for at least $250 (there are exceptions for
withdrawals allowed under 403(b) and 401 hardship provisions), but a withdrawal
must not reduce the value of your Policy below $100. This requirement is waived
if the partial withdrawal is pursuant to the Systematic Withdrawal Program. You
may request a withdrawal or elect the Systematic Withdrawal Program. Of course,
you may also have to pay income tax and a tax penalty on any money you take out.
Death Benefit. If you or the Annuitant dies during the Accumulation Phase,
the person you have selected as your Beneficiary will receive a death benefit.
Free Look. If you cancel the Policy within 20 days after receiving it, we
will refund you the greater of the Purchase Payment paid or the value of your
Policy as of the earlier of the date we receive the Policy at our home office or
the date our agent receives the Policy.
3
<PAGE> 10
No Probate. In most cases, when you die, your Beneficiary will receive the
death benefit without going through probate.
Inquiries. If you have any questions about your AFAdvantage Variable
Annuity(R) or need more information, please contact us at:
American Fidelity Assurance Company
Annuity Services Department
P.O. Box 25523
Oklahoma City, OK 73125-0523
Telephone: (800) 662-1106
E-mail: [email protected]
FEE TABLE
OWNER TRANSACTION EXPENSES
Withdrawal Charge (as a percentage of the amount withdrawn in excess of the
free withdrawal amount) (see Note 2 below)
<TABLE>
<CAPTION>
POLICY WITHDRAWAL
YEAR CHARGE
------ ----------
<S> <C>
1.............................................. 8%
2.............................................. 7%
3.............................................. 6%
4.............................................. 5%
5.............................................. 4%
6.............................................. 3%
7.............................................. 2%
8.............................................. 1%
9+............................................. 0%
</TABLE>
Transfer Fee No charge for first 12 transfers in a Policy
Year during the Accumulation Phase and no
charge for one transfer allowed each Policy
Year during the Annuity Phase; thereafter the
fee is the lesser of $25 or 2% of the amount
transferred.
Policy Maintenance Charge $30 per Policy per Policy Year.
4
<PAGE> 11
SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
<TABLE>
<S> <C>
Mortality and Expense Risk Charge........................... 1.25%
Administrative Charge....................................... .15%
Distribution Expense Charge................................. .10%
-----
Total Separate Account Annual Expenses...................... 1.50%
</TABLE>
FUND ANNUAL EXPENSES
(AS A PERCENTAGE OF THE AVERAGE DAILY NET ASSETS OF A PORTFOLIO)
<TABLE>
<CAPTION>
OTHER EXPENSES
MANAGEMENT (AFTER EXPENSE TOTAL ANNUAL
FEES REIMBURSEMENT) EXPENSES
---------- -------------- ------------
<S> <C> <C> <C>
AMERICAN FIDELITY DUAL STRATEGY FUND, INC. .......... .50% .00% .50%
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.... .75% .05% .80%
DREYFUS STOCK INDEX FUND............................. .25% .01% .26%
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio........................ .75% .03% .78%
Small Company Stock Portfolio...................... .75% .23% .98%
International Value Portfolio...................... 1.00% .29% 1.29%
MERRILL LYNCH VARIABLE SERIES FUNDS, INC. (Class A
Shares)
Merrill Lynch Prime Bond Fund...................... .42% .06% .48%
Merrill Lynch American Balanced Fund............... .55% .07% .62%
Merrill Lynch High Current Income Fund............. .47% .06% .53%
Merrill Lynch Special Value Focus Fund............. .75% .06% .81%
Merrill Lynch Basic Value Focus Fund............... .60% .06% .66%
Merrill Lynch International Equity Focus Fund (see
Note 5 below)................................... .75% .14% .89%
</TABLE>
5
<PAGE> 12
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on your money if (a) you surrender your Policy at the end of each
time period; or (b) if you do not surrender your Policy or you annuitize:
<TABLE>
<CAPTION>
TIME PERIODS
----------------------------
1 YEAR 3 YEARS
------------- ------------
<S> <C> <C> <C> <C>
AMERICAN FIDELITY DUAL STRATEGY FUND, INC................. (a) $122.35 (a) $183.87
(b) $ 42.35 (b) $127.49
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC......... (a) $125.36 (a) $192.23
(b) $ 45.36 (b) $136.36
DREYFUS STOCK INDEX FUND.................................. (a) $119.94 (a) $177.13
(b) $ 39.94 (b) $120.33
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio............................... (a) $125.16 (a) $191.67
(b) $ 45.16 (b) $135.77
Small Company Stock Portfolio............................. (a) $127.16 (a) $197.21
(b) $ 47.16 (b) $141.65
International Value Portfolio............................. (a) $130.25 (a) $205.71
(b) $ 50.25 (b) $150.68
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Prime Bond Fund............................. (a) $122.15 (a) $183.31
(b) $ 42.15 (b) $126.89
Merrill Lynch American Balanced Fund...................... (a) $123.55 (a) $187.22
(b) $ 43.55 (b) $131.05
Merrill Lynch High Current Income Fund.................... (a) $122.65 (a) $184.71
(b) $ 42.65 (b) $128.38
Merrill Lynch Special Value Focus Fund.................... (a) $125.46 (a) $192.51
(b) $ 45.46 (b) $136.66
Merrill Lynch Basic Value Focus Fund...................... (a) $123.96 (a) $188.34
(b) $ 43.96 (b) $132.23
Merrill Lynch International Equity Focus Fund (see Note 5
below).................................................. (a) $126.26 (a) $194.72
(b) $ 46.26 (b) $139.01
</TABLE>
6
<PAGE> 13
THE ANNUAL EXPENSES OF THE PORTFOLIOS ARE BASED ON DATA PROVIDED BY THE
FUNDS FOR THE YEAR ENDED DECEMBER 31, 1998, AND FUTURE EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN. EXCEPT FOR AMERICAN FIDELITY DUAL STRATEGY FUND, INC.,
AMERICAN FIDELITY DID NOT INDEPENDENTLY VERIFY SUCH DATA. HOWEVER, WE DID
PREPARE THE EXAMPLES.
1. The purpose of the Fee Table is to show you the various expenses you can
expect to incur directly or indirectly with the Policy. The Fee Table reflects
expenses of the Separate Account as well as the Funds.
2. Under certain circumstances, you can make a withdrawal without incurring
the withdrawal charge. (See Expenses -- Withdrawal Charge.)
3. Premium taxes are not reflected. They may apply.
4. The assumed average Policy size is $1,360. The $30 policy maintenance
charge is reflected in the examples as $22.06.
5. Merrill Lynch International Equity Focus Fund ceased to be an Investment
Option on May 1, 1999. If you previously invested in this Portfolio, you are not
required to transfer to another Investment Option. If you do transfer, however,
you must transfer all of your Merrill Lynch International Equity Focus Fund
investment.
6. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
ACCUMULATION UNIT VALUES
The Separate Account began operations on January 1, 1998. An Accumulation
Unit is a unit of measure used to calculate a Policy Owner's share of an
Account. An explanation of how an Accumulation Unit value is calculated is
located on page 11 in this prospectus.
<TABLE>
<CAPTION>
UNIT VALUE AT UNIT VALUE AT NUMBER OF UNITS AT
JANUARY 1, 1998 DECEMBER 31, 1998 DECEMBER 31, 1998
--------------- ----------------- ------------------
<S> <C> <C> <C>
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. ..... $10.000 $13.216 45,112
DREYFUS STOCK INDEX FUND................................ $10.000 $12.881 132,663
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio............................. $10.000 $11.423 55,399
Small Company Stock Portfolio........................... $10.000 $ 9.733 38,646
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Prime Bond Fund........................... $10.000 $10.440 20,781
Merrill Lynch American Balanced Fund.................... $10.000 $11.325 31,096
Merrill Lynch High Current Income Fund.................. $10.000 $ 9.502 2,488
Merrill Lynch Special Value Focus Fund.................. $10.000 $ 9.379 8,913
Merrill Lynch International Equity Focus Fund........... $10.000 $11.151 7,349
</TABLE>
Merrill Lynch International Equity Focus Fund ceased to be an Investment
Option on May 1, 1999, and American Fidelity Dual Strategy Fund, Inc., the
International Value Portfolio of Dreyfus Variable Investment Fund and Merrill
Lynch Basic Value Focus Fund were first offered as Investment Options on that
date.
7
<PAGE> 14
THE AFADVANTAGE VARIABLE ANNUITY(R)
An annuity is a contract between you, the Policy Owner, and an insurance
company (in this case American Fidelity), where the insurance company promises
to pay you (or someone else you choose) an income in the form of Annuity
Payments beginning on a date chosen by you. Until you decide to begin receiving
Annuity Payments, your annuity is in the Accumulation Phase. Once you begin
receiving Annuity Payments, your Policy is in the Annuity Phase. If you or the
Annuitant dies during the Accumulation Phase, American Fidelity will pay a death
benefit to your Beneficiary.
The Policy benefits from Tax Deferral. Tax Deferral means that you are not
taxed on earnings or appreciation on the assets in your Policy until you take
money out of your Policy.
The Policy is called a variable annuity because you can choose among the
available Portfolios and, depending upon market conditions, you can make or lose
money in any of these Portfolios. If you select the variable annuity portion of
the Policy, the amount of money you are able to accumulate in your Policy during
the Accumulation Phase depends in part upon the investment performance of the
Portfolio(s) you select. The Annuity Payments you will receive during the
Annuity Phase can come from the Portfolios and/or the Guaranteed Interest
Account.
The Guaranteed Interest Account Option offers an interest rate that is
guaranteed by American Fidelity. If you select the Guaranteed Interest Account
Option, your money will be placed with our other general assets. If you select
the Guaranteed Interest Account Option, the amount of money you are able to
accumulate in your Policy during the Accumulation Phase depends upon the total
interest credited to your Policy.
POLICY OWNER
You, as the Policy Owner, have all the rights under the Policy. You can
name a new Policy Owner. A change of Owner will revoke any prior designation of
Owner. Any ownership changes must be sent to our home office on a form we
accept. The change will go into effect when it is signed, subject to any
payments we make or other actions we take before we record it. American Fidelity
will not be liable for any payment made or action taken before it records the
change. The Policy Owner is as designated at the time the Policy is issued,
unless changed. A CHANGE OF OWNERSHIP MAY BE A TAXABLE EVENT.
JOINT OWNER
The Policy can be owned by Joint Owners. If Joint Owners are named, any
Joint Owner must be the spouse of the other Owner. Upon the death of either
Owner, the surviving spouse will be the primary Beneficiary. Any other
Beneficiary designation will be treated as a contingent Beneficiary unless
otherwise indicated in a form we accept.
BENEFICIARY
The Beneficiary is the person(s) or entity you name to receive any death
benefit. The Beneficiary is named at the time the Policy is issued unless
changed at a later date. If the Beneficiary and the Policy Owner or Annuitant,
as applicable, die at the same time, we will assume that the Beneficiary died
first for purposes of payment of the death benefit. You can name any Beneficiary
to be an irrevocable Beneficiary. The interest of an irrevocable Beneficiary
cannot be changed without his or her consent.
You can change the Beneficiary at any time during the Annuitant's life. To
do so, you need to send a request to our home office. The request must be on a
form we accept. The change will go into effect when signed, subject to any
payments we make or actions we take before we record the change. A change
cancels all prior Beneficiaries, except a change will not cancel any irrevocable
Beneficiary without his or her consent. The interest of the Beneficiary will be
subject to any assignment of the Policy which is binding on us, and any Annuity
Option in effect at the Annuitant's death.
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<PAGE> 15
ASSIGNMENT OF THE POLICY
During the Annuitant's life, you can assign some or all of your rights
under the Policy to someone else. A signed copy of the assignment must be sent
to our home office on a form we accept. The assignment will go into effect when
it is signed, subject to any payments we make or other actions we take before we
record it. We are not responsible for the validity or effect of any assignment.
If there are irrevocable Beneficiaries, you need their consent before assigning
your ownership rights in the Policy. Any assignment made after the death benefit
has become payable will be valid only with our consent. If the Policy is
assigned, your rights may only be exercised with the consent of the assignee of
record. AN ASSIGNMENT MAY BE A TAXABLE EVENT.
If the Policy is issued pursuant to a Qualified plan, there may be
limitations on your ability to assign it.
ANNUITY PROVISIONS
ANNUITY DATE
You can receive regular monthly income payments (Annuity Payments) under
your Policy. You can choose the month and year in which those payments begin. We
call that date the Annuity Date. You can select an Annuity Date at any time
during the Accumulation Phase. You must notify us of this date at least 30 days
prior to the date you want your Annuity Payments to begin. Prior to the Annuity
Date, you may change the Annuity Date by written request. Any change must be
requested at least 30 days prior to the new Annuity Date. Your Annuity Date must
be the first day of a calendar month. The Annuity Date may not be later than the
earlier of the Annuitant's 85th birthday or the maximum date permitted under
state law. Your Annuity Date cannot be any earlier than 30 days after you buy
the Policy. If the Policy is issued pursuant to a Qualified plan, you are
generally required to select an Annuity Date that occurs by April 1 following
the later of the date you retire or the date you attain age 70 1/2 (or the
earlier of such dates if the Policy is issued pursuant to an Individual
Retirement Annuity (IRA)). In addition, the Annuity Date is subject to the
limitation described under "Tax Treatment of Withdrawals -- Tax-Deferred
Annuities and 401(k) Plans" if the Policy is issued pursuant to such an annuity
or plan.
SELECTION OF AN ANNUITY OPTION
You can choose among income plans. We call those Annuity Options. A
selection to receive Annuity Payments under an Annuity Option must be made at
least 30 days prior to the Annuity Date. If no option is selected, Option 2 with
120 monthly payments guaranteed will automatically be applied. Prior to the
Annuity Date, you may change the Annuity Option selected by written request. Any
change must be requested at least 30 days prior to the Annuity Date. If an
option is based on life expectancy, we will require proof of the payee's date of
birth. If a Policy is issued pursuant to a Qualified plan, you may be required
to obtain spousal consent to elect an Annuity Option other than a Joint and
Survivor Annuity.
ANNUITY PAYMENTS
Annuity Payments are paid in monthly installments. Annuity Payments can be
made on a variable basis (which means they will be based on the investment
performance of the Portfolios) and/or on a fixed basis (which means they will
come from the Guaranteed Interest Account). However, payments under Option 4 can
only come from the Guaranteed Interest Account (fixed annuity). Depending on
your election, the value of your Policy (adjusted for the policy maintenance
charge and any taxes) will be applied to provide the Annuity Payment. If no
election has been made 30 days prior to the Annuity Date, amounts in the
Guaranteed Interest Account will be used to provide a fixed annuity and amounts
in the Portfolios will be used to provide a variable annuity. If you choose to
have any portion of your Annuity Payments come from the Portfolio(s), the dollar
amount of your payment will depend upon 3 things: 1) the value of your Policy in
the Portfolio(s) on the Annuity Date, 2) the assumed investment rate used in the
annuity table for the Policy, and 3) the performance of the Portfolios you
selected. You can choose either a 3%, 4% or 5% assumed investment rate. If you
do not choose an assumed investment rate, the assumed investment rate will be
3%. If the actual
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<PAGE> 16
performance exceeds the 3% assumed rate (or whichever rate you choose), your
Annuity Payments will increase. Similarly, if the actual rate is less than 3%
(or whichever rate you choose), your Annuity Payments will decrease. If you
choose a higher assumed investment rate, your initial Annuity Payment will be
higher. Subsequent payments will be only slightly higher when actual performance
(less any deductions and expenses) is more than the assumed rate and will
decrease more rapidly when actual performance (less any deductions and expenses)
is less than the assumed rate. The amount of the first Annuity Payment will
depend on the Annuity Option elected and the age of the Annuitant at the time
the first payment is due.
ANNUITY OPTIONS
You can choose one of the following Annuity Options or any other Annuity
Option acceptable to us. After Annuity Payments begin, you cannot change the
Annuity Option.
OPTION 1. Lifetime Only Annuity: We will make monthly payments during the
life of the Annuitant. If this option is elected, payments will stop when the
Annuitant dies.
OPTION 2. Lifetime Annuity with Guaranteed Periods: We will make monthly
payments for the guaranteed period selected during the life of the Annuitant.
When the Annuitant dies, any amounts remaining under the guaranteed period
selected will be distributed to the Beneficiary at least as rapidly as they were
being paid as of the date of the Annuitant's death. The guaranteed period may be
10 years or 20 years.
OPTION 3. Joint and Survivor Annuity: We will make monthly payments during
the joint lifetime of the Annuitant and a joint Annuitant. Payments will
continue during the lifetime of the surviving Annuitant and will be computed on
the basis of 100%, 66 2/3% or 50% of the Annuity Payment in effect during the
joint lifetime.
OPTION 4. Period Certain: We will make monthly payments for a specified
period. The specified period must be at least five years and cannot be more than
30 years. This option is available as a fixed annuity only.
HOW TO PURCHASE THE AFADVANTAGE VARIABLE ANNUITY(R)
PURCHASE PAYMENTS
A Purchase Payment is the money you give us to buy the Policy. You may make
Purchase Payments at any time during the Accumulation Phase. You may increase,
decrease, or change the frequency of such payments. However, each Purchase
Payment must be for at least $25. If in any year no Purchase Payments are made,
the Policy will not lapse. We reserve the right to reject any application or
Purchase Payment. We may deduct amounts from Purchase Payments for premium
taxes, if any. At the time you buy the Policy, you and the Annuitant cannot be
older than 85 years old, or the maximum age permitted under state law.
ALLOCATION OF PURCHASE PAYMENTS
We will allocate the first net Purchase Payment to one or more Investment
Options according to your instructions. We will allocate subsequent Purchase
Payments in the same manner as the first unless you change your instructions.
You may change the allocations of Investment Options by using a form we accept.
We reserve the right to limit the available Investment Options from which you
may choose. All allocations must be in whole percentages, and must not be less
than $25.
Once we receive your Purchase Payment and application, we will issue your
Policy and allocate your first Purchase Payment within 2 business days. If you
do not give us all of the information we need, we will contact you to get it. If
for some reason we are unable to complete this process within 5 business days,
we will either send back your money or get your permission to keep it until we
get all of the necessary information. We will credit your subsequent Purchase
Payments to your Policy within one business day. Our business day closes when
the New York Stock Exchange closes, which is usually at 4:00 p.m. Eastern time.
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<PAGE> 17
RIGHT TO EXAMINE POLICY
If you change your mind about owning the Policy, you can cancel it within
20 days after receiving it. When you cancel the Policy within this time period,
we will not assess a withdrawal charge. If you return the Policy, it will be
void from the beginning and we will refund to you the greater of the Purchase
Payments paid, or the value of your Policy as of the earlier of the date we
receive the Policy at our home office, or the date our agent receives the
Policy.
ACCUMULATION UNITS
The value of the portion of your Policy allocated to the Portfolios will go
up or down depending upon the investment performance of the Portfolio(s) you
choose. The value of your Policy will also depend on the expenses of the Policy.
In order to keep track of the value of your Policy, we use a measurement called
an Accumulation Unit. During the Annuity Phase, we call the unit an Annuity
Unit.
Every business day we determine the value of an Accumulation Unit for a
share of a Portfolio by multiplying the Accumulation Unit value for the previous
period by a factor for each Portfolio for the current period. The factor for
each Portfolio is determined by:
1. dividing the value of the underlying Fund share at the end of the
current period, including the value of any dividends or gains per share for
the current period, by the value of an underlying Fund share for the
previous period; and
2. subtracting from that amount any mortality and expense risk,
administrative and distribution expense charges.
The value of an Accumulation Unit may go up or down from day to day.
When you make a Purchase Payment, we credit your Policy with Accumulation
Units. The number of Accumulation Units credited is determined by dividing the
amount of the Purchase Payment allocated to a Portfolio by the value of the
Accumulation Unit for that Portfolio.
We calculate the value of an Accumulation Unit for each Portfolio after the
New York Stock Exchange closes each day and then credit your Policy accordingly.
EXAMPLE:
On Thursday we receive an additional Purchase Payment of $100 from you. You
direct this to go to the Merrill Lynch Special Value Focus Fund. When the New
York Stock Exchange closes on that Thursday, we determine that the value of an
Accumulation Unit for the Merrill Lynch Special Value Focus Fund is $10.75. We
then divide $100 by $10.75 and credit your Policy on Thursday night with 9.30
Accumulation Units for the Merrill Lynch Special Value Focus Fund.
INVESTMENT OPTIONS
When you buy the Policy you can allocate your money to the Portfolios
listed below and/or the Guaranteed Interest Account.
PORTFOLIOS
AMERICAN FIDELITY DUAL STRATEGY FUND, INC.
American Fidelity Dual Strategy Fund, Inc. is an open-end diversified
management investment company. American Fidelity Assurance Company serves as the
investment adviser. Lawrence W. Kelley & Associates, Inc. and Todd Investment
Advisors, Inc. are sub-investment advisers and provide day-to-day management of
the Fund's investment portfolio.
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<PAGE> 18
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Dreyfus Socially Responsible Growth Fund, Inc. is an open-end,
diversified, management investment company. The Dreyfus Corporation serves as
the Fund's investment adviser. NCM Capital Management Group, Inc. serves as the
Fund's sub-investment adviser and provides day-to-day management of the Fund's
portfolio.
DREYFUS STOCK INDEX FUND
Dreyfus Stock Index Fund is an open-end, non-diversified, management
investment company. The Dreyfus Corporation serves as the Fund's manager.
Dreyfus has hired its affiliate, Mellon Equity Associates, to serve as the
Fund's index fund manager and provide day-to-day management of the Fund's
investments.
DREYFUS VARIABLE INVESTMENT FUND
Dreyfus Variable Investment Fund is an open-end, management investment
company with thirteen portfolios. The Dreyfus Corporation serves as the
investment adviser. The following are available under the Policy:
Growth and Income Portfolio
Small Company Stock Portfolio
International Value Portfolio
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Variable Series Funds, Inc. is an open-end management
investment company with eighteen separate funds. Merrill Lynch Asset Management,
L.P. is the investment adviser to the funds. The following funds are available
under the Policy:
Merrill Lynch Prime Bond Fund
Merrill Lynch American Balanced Fund
Merrill Lynch High Current Income Fund
Merrill Lynch Special Value Focus Fund
Merrill Lynch Basic Value Focus Fund
Additional Portfolios and/or Funds may be available in the future.
Shares of the Funds are issued and redeemed in connection with investments
in and payments under certain variable annuity contracts and variable life
insurance policies of various life insurance companies which may or may not be
affiliated. The Funds do not believe that offering their shares in this manner
will be disadvantageous to you. Nevertheless, the Board of Trustees or the Board
of Directors, as applicable, of each Fund intends to monitor events in order to
identify any material irreconcilable conflicts which may possibly arise and to
determine what action, if any, should be taken. If such a conflict were to
occur, one or more insurance company separate accounts might withdraw their
investments in a Fund. An irreconcilable conflict might result in the withdrawal
of a substantial amount of a Fund's assets which could adversely affect such
Fund's net asset value per share.
YOU SHOULD READ THE PROSPECTUSES FOR THE FUNDS CAREFULLY BEFORE INVESTING.
THEY CONTAIN DETAILED INFORMATION ABOUT THE FUNDS AND ARE ATTACHED TO THIS
PROSPECTUS. You can obtain a copy of the Statement of Additional Information for
the Funds by contacting American Fidelity's Annuity Services Department at P.O.
Box 25523, Oklahoma City, Oklahoma 73125-0523; (800) 662-1106; or
[email protected].
GUARANTEED INTEREST ACCOUNT OPTION
The Guaranteed Interest Account Option is an Investment Option within our
general account which earns interest credited by us.
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<PAGE> 19
Because of certain exemptive and exclusionary provisions, interests in the
Guaranteed Interest Account are not registered under the Securities Act of 1933
and the Guaranteed Interest Account is not registered as an investment company
under the Investment Company Act of 1940. Therefore, neither the Guaranteed
Interest Account nor any interests in it are subject to the provisions of these
Acts. American Fidelity has been advised that the staff of the Securities and
Exchange Commission has not reviewed the disclosure in this prospectus relating
to the Guaranteed Interest Account Option. Disclosures regarding the Guaranteed
Interest Account Option may, however, be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
VOTING RIGHTS
American Fidelity is the legal owner of the Fund shares. However, American
Fidelity believes that when a Fund solicits proxies in conjunction with a
shareholder vote, it is required to obtain from you and other Policy Owners
instructions as to how to vote those shares. When we receive those instructions,
we will vote all of the shares we own in proportion to those instructions.
Should we determine that we are no longer required to comply with the above, we
will vote the shares in our own right.
SUBSTITUTION
American Fidelity may substitute one of the Portfolios you have selected
with another Portfolio. We would not do this without the prior approval of the
Securities and Exchange Commission. We will give you notice of our intention to
do this.
TRANSFERS
You may direct us to make transfers between all Investment Options. A
transfer request must be in a form we accept. We reserve the right to limit the
number of transfers that may be made. If you elect to use this transfer
privilege, we will not be liable for transfers made as instructed by you. All
transfers must be in whole percentages. All transfers made on a given date count
as one transfer.
We reserve the right, at any time and without prior notice, to end, suspend
or change the transfer privilege.
Transfers During the Accumulation Phase. If you make more than 12 transfers
in a Policy Year, there is a transfer fee deducted. The fee is the lesser of $25
per transfer or 2% of the amount transferred. The minimum amount which you can
transfer is $500 from an Account or your entire value in the Account. All
transfers must be in whole percentages.
Transfers During the Annuity Phase. You may make transfers among the
Portfolios. You may also make transfers from the Portfolios to the Guaranteed
Interest Account Option to provide for a fixed annuity. You may only make one
transfer each Policy Year during the Annuity Phase. There is no transfer fee
charged for the one transfer. You cannot make a transfer from your fixed annuity
to a Portfolio.
AUTOMATIC DOLLAR COST AVERAGING
Automatic Dollar Cost Averaging allows you to systematically transfer a set
amount each quarter from any Investment Option (source account) to any of the
other Investment Option(s). By allocating amounts on a regular schedule as
opposed to allocating the total amount at one particular time, you may be less
susceptible to the impact of market fluctuations. Automatic Dollar Cost
Averaging is only available during the Accumulation Phase. The minimum amount
which can be transferred each quarter is $500 from each source account.
If you participate in Automatic Dollar Cost Averaging, the transfers made
under the program are taken into account in determining any transfer fee.
ASSET REBALANCING
Once your money has been allocated among the Investment Options, the
performance of the Investment Options may cause your allocation to shift. You
can direct us to automatically rebalance your Policy to return
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<PAGE> 20
to your original percentage allocations by selecting our Asset Rebalancing
service. The transfer date will be the 1st day after the end of the Policy Year.
Asset Rebalancing is only available during the Accumulation Phase. If you
participate in Asset Rebalancing, the transfers made under the program are taken
into account in determining any transfer fee.
PERFORMANCE
American Fidelity may periodically advertise performance based on the
historical performance of the various Portfolios. American Fidelity will
calculate cumulative total return performance by determining the percentage
change in the value of an Accumulation Unit for various time periods. This
performance number reflects the deduction of the insurance charges, policy
maintenance charge and expenses of the Portfolios. It will be presented with and
without the withdrawal charge. Results calculated without the withdrawal charge
will be higher. American Fidelity may also advertise compound average annual
total return information. Compound average annual total return is determined the
same way except that the results are annualized and the withdrawal charge will
not be included. Any advertisement will also include average annual total return
figures which reflect the deduction of the insurance charges, policy maintenance
charge, withdrawal charges and the expenses of the Fund.
For periods starting prior to the date the Policies were first offered, the
performance will be based on the historical performance of the corresponding
Portfolios, modified to reflect the charges and expenses of the AFAdvantage
Variable Annuity(R) as if the Policies had been in existence during the period
stated in the advertisement. These figures should not be interpreted to reflect
actual historic performance.
More detailed information regarding how performance is calculated is found
in the SAI.
Any past performance does not guarantee future results of the Portfolios.
EXPENSES
There are charges and other expenses associated with the Policy that will
reduce your investment return. These charges and expenses are:
INSURANCE CHARGES
We deduct insurance charges each day. We do this as part of the calculation
of the value of the Accumulation Units during the Accumulation Phase and the
Annuity Units during the Annuity Phase. The insurance charges are 1) the
mortality and expense risk charge; 2) the administrative charge; and 3) the
distribution expense charge.
Mortality and Expense Risk Charge. This charge is equal, on an annual
basis, to 1.25% of the average daily value of the Policy invested in a
Portfolio, after the deduction of expenses. This charge compensates us for all
the insurance benefits provided by your Policy (for example, the guarantee of
annuity rates, the death benefits, certain expenses related to the Policy), and
for assuming the risk (expense risk) that the current charges will be
insufficient in the future to cover the cost of administering the Policy.
Administrative Charge. This charge is equal, on an annual basis, to .15% of
the average daily value of the Policy invested in a Portfolio, after the
deduction of expenses. This charge may be increased but will never be more than
.25% of the average daily value of the Policy invested in a Portfolio. This
charge, together with the policy maintenance charge (which is explained below),
is for all the expenses associated with the administration of the Policy. Some
of these expenses include: preparation of the Policy, confirmations, annual
reports and statements, maintenance of Policy records, personnel costs, legal
and accounting fees, filing fees, and computer and systems costs.
Distribution Expense Charge. This charge is equal, on an annual basis, to
.10% of the average daily value of the Policy invested in a Portfolio, after the
deduction of expenses. This charge may be increased but will never be more than
.25% of the average daily value of the Policy invested in a Portfolio. This
charge compensates American Fidelity for the costs associated with the
distribution of the Policies.
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<PAGE> 21
POLICY MAINTENANCE CHARGE
Every Policy Year American Fidelity deducts $30 from your Policy as a
policy maintenance charge. American Fidelity reserves the right to change the
policy maintenance charge; however, it will never be more than $36 per year. The
charge will be deducted pro-rata from the Accounts. During the Accumulation
Phase, the policy maintenance charge will be deducted on each Policy
Anniversary. If you make a total withdrawal on other than a Policy Anniversary,
the full policy maintenance charge will be deducted at the time of the
withdrawal. During the Annuity Phase, the charge will be deducted pro-rata from
Annuity Payments.
WITHDRAWAL CHARGE
Withdrawals may be subject to a withdrawal charge. During the Accumulation
Phase, you can make withdrawals from your Policy (see the "Withdrawals"
section). During the first Policy Year, all withdrawals will have a withdrawal
charge. After the first Policy Year, you can make a withdrawal of up to 10% of
the value of your Policy (at the time you request the withdrawal) once each
Policy Year without incurring a withdrawal charge (free withdrawal amount). If
you do not use the free withdrawal amount in any year, it cannot be carried
forward to the next Policy Year.
The withdrawal charge is a percentage of the amount withdrawn in excess of
the free withdrawal amount as shown below:
<TABLE>
<CAPTION>
POLICY WITHDRAWAL
YEAR CHARGE %
------ ----------
<S> <C>
1.............................................. 8%
2.............................................. 7%
3.............................................. 6%
4.............................................. 5%
5.............................................. 4%
6.............................................. 3%
7.............................................. 2%
8.............................................. 1%
9+............................................. 0%
</TABLE>
The withdrawal charge is calculated at the time of each withdrawal and will
never exceed 8% of the total Purchase Payments. For partial withdrawals, the
charge will be deducted from the value of your Policy remaining. No withdrawal
charge will be applied when a death benefit is paid or payment is made under any
Annuity Option providing at least seven annual or 72 monthly payments.
The withdrawal charge compensates us for expenses associated with selling
the Policy.
NOTE: For tax purposes, withdrawals are considered to have come from the
last money you put into the Policy. Thus, for tax purposes, earnings are
considered to come out first. THERE ARE RESTRICTIONS ON WHEN YOU CAN WITHDRAW
FROM A QUALIFIED PLAN KNOWN AS A SECTION 403(b) TAX-DEFERRED ANNUITY OR A 401(k)
PLAN. See Taxes and the discussion in the SAI.
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE
American Fidelity may reduce or eliminate the amount of the withdrawal
charge when the Policy is sold under circumstances which reduce its sales
expenses. These circumstances might include a large group of individuals that
will be purchasing the Policy or a prospective purchaser who already has a
relationship with American Fidelity. American Fidelity will not deduct a
withdrawal charge under a Policy issued to an officer, director or employee of
American Fidelity or any of its affiliates. Any circumstance resulting in the
reduction or elimination of the withdrawal charge requires our prior approval.
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<PAGE> 22
TRANSFER FEE
There is no charge for the first 12 transfers in a Policy Year during the
Accumulation Phase. Thereafter, the fee is the lesser of $25 or 2% of the amount
transferred. During the Annuity Phase, there is no charge for the one transfer
allowed during each Policy Year.
The transfer fee is deducted from the Investment Option which is the source
of the transfer. If your entire interest in an Investment Option is being
transferred, the transfer fee will be deducted from the amount being
transferred. If you make transfers from multiple Investment Options, the
transfer fee will be deducted pro-rata from each source Investment Option.
PREMIUM TAXES
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. American Fidelity is responsible for the payment
of these taxes and will make a deduction from the value of your Policy for them.
Some of these taxes are due when the Policy is issued; others are due when
Annuity Payments begin. It is our current practice to pay any premium taxes when
they become payable to the states. Premium taxes generally range from 0% to
4.0%, depending on the state.
INCOME TAXES
American Fidelity will deduct from the Policy any income taxes which it may
incur because of the Policy. Currently, American Fidelity is not making any such
deductions.
FUND EXPENSES
There are deductions from and expenses paid out of the assets of the
various Funds which are described in the attached prospectuses for the Funds.
TAXES
NOTE: AMERICAN FIDELITY HAS PREPARED THE FOLLOWING INFORMATION ON TAXES AS
A GENERAL DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVICE. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT YOUR OWN CIRCUMSTANCES. WE HAVE
INCLUDED ADDITIONAL INFORMATION REGARDING TAXES IN THE STATEMENT OF ADDITIONAL
INFORMATION.
ANNUITIES IN GENERAL
Annuity contracts are a means of setting aside money for future
needs -- usually retirement. Congress recognized how important saving for
retirement was and provided special rules in the Internal Revenue Code (Code)
for annuities.
Basically, these rules provide that you will not be taxed on the earnings
on the money held in your annuity until you take the money out. This is referred
to as Tax Deferral. There are different rules regarding how you will be taxed
depending upon how you take the money out and the type of Policy -- Qualified or
Non-Qualified (see following sections).
You, as the Owner, will not be taxed on increases in the value of your
Policy until a distribution occurs -- either as a withdrawal or as Annuity
Payments. When you make a withdrawal you are taxed on the amount of the
withdrawal that is earnings. For Annuity Payments, different rules apply. A
portion of each Annuity Payment you receive will be treated as a partial return
of your Purchase Payments and will not be taxed (unless the Purchase Payments
were made on a pre-tax basis under a Qualified plan). The remaining portion of
the Annuity Payment will be treated as ordinary income. How the Annuity Payment
is divided between taxable and non-taxable portions depends upon the period over
which the Annuity Payments are expected to be made. Annuity Payments received
after you have received all of your Purchase Payments are fully includible in
income.
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<PAGE> 23
When a Non-Qualified Policy is owned by a non-natural person (e.g., a
corporation or certain other entities other than tax-qualified trusts), the
Policy will generally not be treated as an annuity for tax purposes. This means
that the Policy may not receive the benefits of Tax Deferral. Income may be
taxed as ordinary income every year.
QUALIFIED AND NON-QUALIFIED POLICIES
If you purchase the Policy under a Qualified plan, your Policy is referred
to as a Qualified Policy. Examples of Qualified plans are Individual Retirement
Annuities (IRAs), including Roth IRAs; Tax-Deferred Annuities (sometimes
referred to as 403(b) Policies); H.R. 10 Plans (sometimes referred to as Keogh
plans); and Corporate Pension and Profit-Sharing/401(k) Plans.
If you do not purchase the Policy under a Qualified plan, your Policy is
referred to as a Non-Qualified Policy.
TAX TREATMENT OF WITHDRAWALS -- NON-QUALIFIED POLICIES
If you make a withdrawal from your Policy, the Code treats such a
withdrawal as first coming from earnings and then from your Purchase Payments.
In most cases, such withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract
which is included in income may be subject to a tax penalty. The amount of the
penalty is equal to 10% of the amount that is includible in income. Some
withdrawals will be exempt from the penalty. They include any amounts (1) paid
on or after the taxpayer reaches age 59 1/2; (2) paid after the Owner dies; (3)
paid if the taxpayer becomes totally disabled (as that term is defined in the
Code); (4) paid in a series of substantially equal payments made annually (or
more frequently) for the life or life expectancy of the taxpayer or the joint
lives (or joint life expectancies) of the taxpayer and his or her beneficiary;
(5) paid under an immediate annuity; or (6) which come from Purchase Payments
made prior to August 14, 1982. Certain other exemptions may also be available.
The Policy provides that when the Annuitant dies prior to the Annuity Date,
a death benefit will be paid to the Beneficiary. If the Owner is not the
Annuitant, such payments made when the Annuitant dies do not qualify for the
death of Owner exception described above, and will be subject to the 10% tax
penalty unless the Beneficiary is 59 1/2 years old or one of the other
exceptions to the penalty applies.
TAX TREATMENT OF WITHDRAWALS -- QUALIFIED POLICIES
The above information describing the taxation of Non-Qualified Policies
does not apply to Qualified Policies. In the case of a withdrawal under a
Qualified Policy, a ratable portion of the amount received is taxable, generally
based on the ratio of your cost basis to your total accrued benefit under the
retirement plan. The Code imposes a 10% penalty tax on the taxable portion of
any distribution from qualified retirement plans, including Policies issued and
qualified under Code Sections 403(b) (Tax-Deferred Annuities), 408 and 408A
(Individual Retirement Annuities) and 401 (H.R. 10 and Corporate Pension and
Profit-Sharing/401(k) Plans). To the extent amounts are not includible in gross
income because they have been properly rolled over to an IRA or to another
eligible Qualified plan, no tax penalty will be imposed. The tax penalty will
not apply to the following distributions: (a) if distribution is made on or
after the date on which the Owner or Annuitant (as applicable) reaches age
59 1/2; (b) distributions following the death or disability of the Owner or
Annuitant (as applicable) (for this purpose disability is as defined in Section
72(m)(7) of the Code); (c) after separation from service, distributions that are
part of substantially equal periodic payments made not less frequently than
annually for the life (or life expectancy) of the Owner or Annuitant (as
applicable) or the joint lives (or joint life expectancies) of such Owner or
Annuitant (as applicable) and his designated beneficiary; (d) distributions to
an Owner or Annuitant (as applicable) who has separated from service after he
has attained age 55; (e) distributions made to the Owner or Annuitant (as
applicable) to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the Owner or Annuitant (as applicable)
for amounts paid during the taxable year for medical care; (f) distributions
made to an alternate payee pursuant to a qualified domestic relations order; (g)
distributions from an Individual
17
<PAGE> 24
Retirement Annuity for the purchase of medical insurance (as described in
Section 213(d)(1)(D) of the Code) for the Owner or Annuitant (as applicable) and
his or her spouse and dependents if the Owner or Annuitant (as applicable) has
received unemployment compensation for at least 12 weeks (this exception will no
longer apply after the Owner or Annuitant (as applicable) has been re-employed
for at least 60 days); (h) distributions from an Individual Retirement Annuity
made to the Owner or Annuitant (as applicable) to the extent such distributions
do not exceed the qualified higher education expenses (as defined in Section
72(t)(7) of the Code) of the Owner or Annuitant (as applicable) for the taxable
year; and (i) distributions from an Individual Retirement Annuity made to the
Owner or Annuitant (as applicable) which are qualified first-time home buyer
distributions (as defined in Section 72(t)(8) of the Code). The exceptions
stated in items (d) and (f) above do not apply in the case of an Individual
Retirement Annuity. The exception stated in item (c) applies to an Individual
Retirement Annuity without the requirement that there be a separation from
service.
A more complete discussion of withdrawals from Qualified Policies is
contained in the SAI.
TAX TREATMENT OF WITHDRAWALS -- TAX-DEFERRED ANNUITIES AND 401(k) PLANS
The Code limits the withdrawal of Purchase Payments made by Owners from
certain Tax-Deferred Annuities. Withdrawals can only be made when an Owner (1)
reaches age 59 1/2; (2) leaves his/her job; (3) dies; or (4) becomes disabled
(as that term is defined in the Code). A withdrawal may also be made in the case
of hardship; however, the Owner can only withdraw Purchase Payments and not any
earnings. Similar limitations apply to a Policy issued pursuant to a 401(k)
Plan.
DIVERSIFICATION
The Code provides that the underlying investments for a variable annuity
must satisfy certain diversification requirements in order to be treated as an
annuity contract. American Fidelity believes that the Portfolios are being
managed so as to comply with the requirements.
Neither the Code nor the Internal Revenue Service Regulations issued to
date provide guidance as to the circumstances under which you, because of the
degree of control you exercise over the underlying investments, and not American
Fidelity would be considered the owner of the shares of the Portfolios. If this
occurs, it will result in the loss of the favorable tax treatment for the
Policy. It is unknown to what extent under federal tax law Owners are permitted
to select Portfolios, to make transfers among the Portfolios or the number and
type of Portfolios Owners may select from. If any guidance is provided which is
considered a new position, then the guidance would generally be applied
prospectively. However, if such guidance is considered not to be a new position,
it may be applied retroactively. This would mean that you, as the Owner of the
Policy, could be treated as the owner of the Portfolios.
Due to the uncertainty in this area, American Fidelity reserves the right
to modify the Policy in an attempt to maintain favorable tax treatment.
WITHDRAWALS
You can have access to the money in your Policy (1) by making a withdrawal
(either a partial or a total withdrawal); (2) by receiving Annuity Payments; or
(3) when a death benefit is paid to your Beneficiary. Withdrawals can only be
made during the Accumulation Phase.
You may withdraw all or some of the value of your Policy, minus taxes due,
if any, minus the withdrawal charge and policy maintenance charge. You must
apply for a withdrawal using a form we accept. Any partial withdrawal amount
must be at least $250, with exceptions for hardship. This requirement is waived
if the partial withdrawal is pursuant to the Systematic Withdrawal Program (see
below). After a withdrawal, the value of your Policy cannot be less than $100.
Any amount withdrawn will be deducted pro-rata from the Investment Options. If
you want to withdraw amounts in any other proportion, you must tell us using a
form we accept.
18
<PAGE> 25
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY
WITHDRAWAL YOU MAKE.
There are restrictions on when you can withdraw from a Qualified plan
referred to as a 403(b) Tax-Deferred Annuity or 401(k) plan. For a more complete
explanation see -- Taxes and the discussion in the SAI.
SYSTEMATIC WITHDRAWAL PROGRAM
After the first Policy Year, you can participate in a Systematic Withdrawal
Program in lieu of the 10% free withdrawal option. If the total amount of
systematic withdrawals during a Policy Year exceeds the 10% free withdrawal
amount, a withdrawal charge will be incurred. During the Policy Year that
systematic withdrawals begin, the 10% free withdrawal amount will be based on
the value of your Policy on the business day before you request systematic
withdrawals. The request must be made on a form we accept. During subsequent
years, the free withdrawal amount will be based on the value of your Policy on
the last Policy Anniversary. Systematic withdrawals can be made monthly,
quarterly or semi-annually. We reserve the right to limit the terms and
conditions under which systematic withdrawals can be elected and to stop
offering any or all systematic withdrawals at any time.
INCOME TAXES AND TAX PENALTIES MAY APPLY TO SYSTEMATIC WITHDRAWALS.
SUSPENSION OF PAYMENTS OR TRANSFERS
American Fidelity may be required to suspend or postpone payments for
withdrawals or transfers for any period when:
1. the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of the Fund
shares is not reasonably practicable or American Fidelity cannot reasonably
value the Fund shares;
4. during any other period when the Securities and Exchange
Commission, by order, so permits for the protection of owners.
American Fidelity has reserved the right to defer payment for a withdrawal
or transfer from the Guaranteed Interest Account for the period permitted by law
but not for more than six months.
LOANS
If you purchased your Policy under a 403(b) Tax-Deferred Annuity Qualified
plan, we may make a loan to you at any time before Annuity Payments begin.
However, no loans will be made during the first Policy Year. The security for
the loan will be the value of your Policy in the Guaranteed Interest Account.
The loan cannot be more than the lesser of $50,000 or one-half of the value of
your Policy in the Guaranteed Interest Account. Under certain circumstances, the
$50,000 limit may be reduced. The minimum loan we will make is $2,500 (which can
be changed by us at our discretion).
If a loan payment is not made before the end of the calendar quarter
following the calendar quarter in which the payment was due, the outstanding
loan balance (principal plus interest) will become due and payable. If the loan
payment is not repaid within such time period, the loan balance plus interest
will be considered in default and will be treated as taxable income for the tax
year of the default. Satisfaction of any unpaid loan balance plus interest from
the Guaranteed Interest Account will only occur when you qualify for a plan
distribution under the federal tax guidelines. If the loan is in default and you
do not yet qualify for a distribution to satisfy the outstanding loan balance,
the loan will continue to accrue interest (but such interest accruals will not
result in additional deemed distributions). Any amounts which may become taxable
will be reported as plan distributions and will be subject to income tax and tax
penalties, if applicable.
19
<PAGE> 26
Upon your death, the Beneficiary will receive the death benefit reduced by
the loan balance. If Annuity Payments begin while there is an outstanding loan,
the value of the Guaranteed Interest Account will be reduced by the loan
balance.
DEATH BENEFIT
DEATH BENEFIT AMOUNT
The death benefit will be the greater of: (1) the Purchase Payments you
have made, less any money you have taken out and any applicable withdrawal
charges; or (2) the value of your Policy minus the policy maintenance charge and
taxes, if any, determined on the business day we receive proof of death and an
election for the payment period.
DEATH OF OWNER BEFORE ANNUITY DATE
If you or any Joint Owner dies before the Annuity Date, the death benefit
will be paid to your Beneficiary. When any Joint Owner dies, the surviving Joint
Owner, if any, will be treated as the primary Beneficiary. Any other person
chosen as a Beneficiary at the time of death will be treated as a contingent
Beneficiary. The death benefit will be paid under one of the following death
benefit options.
Death Benefit Options:
If you or any Joint Owner dies before the Annuity Date, a Beneficiary who
is not your spouse must elect the death benefit to be paid under one of the
following options:
1. lump sum payment;
2. payment of the entire death benefit within five years of the date
of your death or the death of any Joint Owner; or
3. payment of the death benefit under any Annuity Option. If this
option is chosen, the annuity must be distributed over the lifetime of the
Beneficiary or over a period not extending beyond the life expectancy of
the Beneficiary; and the distribution must begin within one year of the
date of your death or any Joint Owner's death.
Any portion of the death benefit not applied under an Annuity Option within
one year of the date of death must be distributed within five years of the date
of death.
If the Beneficiary is your spouse (spousal Beneficiary), he or she may:
1. choose to continue the Policy in his or her own name at the current
value of the Policy;
2. choose a lump sum payment of the death benefit; or
3. apply the death benefit to an Annuity Option.
If the deceased Owner was also the Annuitant and the spousal Beneficiary
continues the Policy or applies the death benefit to an Annuity Option, the
spousal Beneficiary will become the new Annuitant.
If a lump sum payment is requested, we will pay the amount within seven
days of receipt of proof of death and the election, unless the Suspension or
Deferral Payments Provision is in effect. Payment to the Beneficiary (other than
a lump sum payment) may only be elected during the 60 day period beginning with
the date we receive proof of death. If the Beneficiary does not select a payment
method during the 60 day period after we receive proof of death, the death
benefit will be paid in a lump sum.
20
<PAGE> 27
DEATH OF ANNUITANT BEFORE THE ANNUITY DATE
If you are not the Annuitant and the Annuitant dies before the Annuity
Date, the death benefit will be paid to the Beneficiary. The death benefit will
be paid in a lump sum and must be paid in full within five years of the date of
death. If the Owner is a non-individual (e.g., a corporation), the death of the
Annuitant will be treated as the death of the Owner.
DEATH OF OWNER AFTER THE ANNUITY DATE
If you, or any Joint Owner who is not the Annuitant, dies during the
Annuity Period, any remaining payments under the Annuity Option elected will
continue at least as rapidly as they were being paid at your death or such Joint
Owner's death. When any Owner dies during the Annuity Period, the Beneficiary
becomes the Owner. Upon the death of any Joint Owner during the Annuity Period,
the surviving Joint Owner, if any, will be treated as the primary Beneficiary.
Any other Beneficiary designation on record at the time of death will be treated
as a contingent Beneficiary.
DEATH OF ANNUITANT AFTER THE ANNUITY DATE
If the Annuitant dies on or after the Annuity Date, the death benefit, if
any, will be as set forth in the Annuity Option elected. Death benefits will be
paid at least as rapidly as they were being paid at the Annuitant's death.
OTHER INFORMATION
AMERICAN FIDELITY
American Fidelity Assurance Company (American Fidelity), 2000 N. Classen
Boulevard, Oklahoma City, Oklahoma 73106 is an Oklahoma stock life insurance
company organized in 1960. American Fidelity is licensed to conduct life,
annuity and accident and health insurance business in forty-nine states and the
District of Columbia. American Fidelity has been a wholly-owned subsidiary of
American Fidelity Corporation since 1974.
THE SEPARATE ACCOUNT
American Fidelity established a separate account, American Fidelity
Separate Account B (Separate Account), to hold the assets that underlie the
Policies. Our Board of Directors adopted a resolution to establish the Separate
Account under Oklahoma insurance law on September 20, 1996. American Fidelity
has registered the Separate Account with the Securities and Exchange Commission
as a unit investment trust under the Investment Company Act of 1940. The
Separate Account is divided into sub-accounts.
The assets of the Separate Account are held in American Fidelity's name on
behalf of the Separate Account and legally belong to American Fidelity. However,
those assets that underlie the Policies, are not chargeable with liabilities
arising out of any other business we may conduct. All the income, gains and
losses (realized or unrealized) resulting from these assets are credited to or
charged against the Policies and not against any other Policies we may issue.
LEGAL PROCEEDINGS
There are no pending material legal proceedings affecting the Separate
Account, American Fidelity or American Fidelity Securities, Inc.
DISTRIBUTION
American Fidelity Securities, Inc. (AFS, Inc.) acts as the distributor of
the Policies. AFS, Inc. is a wholly-owned subsidiary of American Fidelity.
21
<PAGE> 28
ADMINISTRATION
American Fidelity performs certain administrative services regarding the
Policies. The administrative services include issuance of the Policies and
maintenance of Policy Owners' records.
FINANCIAL STATEMENTS
The financial statements of American Fidelity and the Separate Account have
been included in the SAI.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information and History of the Company.............. 1
Experts..................................................... 1
Legal Opinions.............................................. 1
Distributor................................................. 1
Reduction or Elimination of the Withdrawal Charge........... 1
Calculation of Performance Information...................... 2
Federal Tax Status.......................................... 8
Annuity Provisions.......................................... 19
Financial Statements........................................ 20
</TABLE>
22
<PAGE> 29
American Fidelity Assurance Company
P.O. Box 25523
Oklahoma City, OK 73125-0523
Attention: Annuity Services Department
<PAGE> 30
Please send me the Statement of Additional Information for the following:
<TABLE>
<S> <C>
[ ] AFAdvantage Variable Annuity [ ] Dreyfus Stock Index Fund
[ ] American Fidelity Dual [ ] Dreyfus Variable Investment
Strategy Fund, Inc. Fund
[ ] The Dreyfus Socially [ ] Merrill Lynch Variable Series
Responsible Growth Fund, Inc. Fund, Inc.
</TABLE>
<TABLE>
<S> <C>
Name
------------------------------------------------------------
(please print)
Address
------------------------------------------------------------
(please print)
------------------------------------------------------------
(please print)
------------------------------------------------------------
(please print)
</TABLE>
<PAGE> 31
AFADVANTAGE VARIABLE ANNUITY
ISSUED BY
AMERICAN FIDELITY SEPARATE ACCOUNT B
AND
AMERICAN FIDELITY ASSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
This is not a prospectus. This Statement of Additional Information should be
read in conjunction with the Prospectus dated May 1, 1999 for the AFAdvantage
Variable Annuity.
The Prospectus concisely sets forth information that a prospective investor
should know before investing. For a copy of the Prospectus,
write to us at: call us at: e-mail us at:
P.O. Box 25523, (800) 662-1106 [email protected]
Oklahoma City, OK 73125-0523
<PAGE> 32
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION AND HISTORY OF THE COMPANY .................. 1
EXPERTS ......................................................... 1
LEGAL OPINIONS .................................................. 1
DISTRIBUTOR ..................................................... 1
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE ............... 1
CALCULATION OF PERFORMANCE INFORMATION .......................... 2
FEDERAL TAX STATUS .............................................. 8
ANNUITY PROVISIONS .............................................. 19
FINANCIAL STATEMENTS ............................................ 20
</TABLE>
<PAGE> 33
GENERAL INFORMATION AND HISTORY OF THE COMPANY
American Fidelity Assurance Company ("Company") was organized in the State of
Oklahoma in 1960 and during its existence has never changed its name. Neither
the sales of variable annuity contracts nor the sales of any other insurance
product by the Company have ever been suspended by any state where the Company
has done or is presently doing business.
The Company is a wholly-owned subsidiary of American Fidelity Corporation, an
insurance holding company. The stock of American Fidelity Corporation is
controlled by a family investment partnership, Cameron Enterprises, A Limited
Partnership, an Oklahoma limited partnership ("CELP"). In accordance with the
partnership agreement, management of the affairs of CELP is vested in five
managing general partners: William M. Cameron, William E. Durrett, Edward C.
Joullian, III, John W. Rex and Theodore M. Elam.
EXPERTS
The financial statements of the Separate Account as of and for the year ended
December 31, 1998 and the financial statements of the Company as of December 31,
1998 and 1997 and for each of the years in the three-year period ended December
31, 1998, included in this Statement of Additional Information, have been
audited by KPMG LLP.
LEGAL OPINIONS
Winstead, Sechrest & Minick P.C., Dallas, Texas, has provided advice on certain
matters relating to the federal securities and income tax laws in connection
with the Policies.
DISTRIBUTOR
American Fidelity Securities, Inc., a wholly-owned subsidiary of the Company,
acts as the distributor. The offering is on a continuous basis.
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE
The amount of the withdrawal charge on the Policies may be reduced or eliminated
when sales of the Policies are made to individuals or to a group of individuals
in a manner that results in savings of sales expenses. The entitlement to a
reduction of the withdrawal charge will be determined by the Company after
examination of the following factors: 1) the size of the group; 2) the total
amount of purchase payments expected to be received from the group; 3) the
nature of the group for which the Policies are purchased, and the persistency
expected in that group; 4) the purpose for which the Policies are purchased and
whether that purpose makes it likely that expenses will be reduced; and 5) any
other circumstances which the Company believes to be relevant to determining
whether reduced sales or administrative expenses may be expected. None of the
reductions in charges for sales is contractually guaranteed.
<PAGE> 34
The withdrawal charge will be eliminated when the Policies are issued to an
officer, director or employee of the Company or any of its affiliates. In no
event will any reduction or elimination of the withdrawal charge be permitted
where the reduction or elimination will be unfairly discriminatory to any
person.
CALCULATION OF PERFORMANCE INFORMATION
From time to time, the Company may advertise performance data as described in
the Prospectus. All performance advertising will include quotations of
standardized average annual total return, calculated in accordance with standard
methods prescribed by the rules of the Securities and Exchange Commission, to
facilitate comparison with standardized average annual total return advertised
by other variable annuity separate accounts. Standardized average annual total
return advertised for a specific period is found by first taking a hypothetical
$1,000 investment in a Portfolio on the first day of the period at the 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 average annual total return (T) is computed by
equating the redeemable value (ERV) with the initial hypothetical $1,000
investment (P) over a period of years (n) according to the following formula:
ERV = P (1+T)**n (where "**n" means to the nth power). Standardized average
annual total return reflects the expenses of the Portfolio, the deduction of a
policy maintenance charge, mortality and expense risk, distribution expense and
administrative charges. The redeemable value also reflects the effect of any
applicable withdrawal charge that may be imposed at the end of the period. No
deduction is made for premium taxes which may be assessed by certain states.
Cumulative total return may also be provided. Cumulative total return is
calculated the same way as average annual total return except the results are
not annualized.
Nonstandardized compound average annual return and nonstandardized cumulative
total return may also be advertised. Nonstandardized compound average annual
return and nonstandardized cumulative total return will not include the
withdrawal charge and may be for periods other than those required to be
presented or may otherwise differ from standardized average annual total return
and cumulative total return.
The standardized average annual total return quotations will be current to the
last day of the calendar quarter preceding the date on which an advertisement is
submitted for publication. The standardized average annual total return will be
based on calendar quarters and will cover at least periods of one, five, and ten
years, or a period covering the time the Portfolio has been in existence if it
has not been in existence for one of the prescribed periods. If Accumulation
Units for the Policies have not been in existence for as long as the
corresponding Portfolio, the standardized average annual total return and
nonstandardized total return quotations will show what the investment
performance of Accumulation Units would have been (reduced by the applicable
charges) had they been held in a Portfolio for the period quoted (see below).
Quotations of standardized average annual total return and nonstandardized total
returns are based upon historical earnings and will fluctuate. Past performance
does not guarantee future results.
-2-
<PAGE> 35
Factors affecting the performance of a Portfolio include general market
conditions, operating expenses and investment management. An Owner's value upon
a withdrawal of a Policy may be more or less than the original Purchase Payment.
PERFORMANCE INFORMATION
The Accumulation Units of the Separate Account have a limited performance
history. However, the corresponding Funds have been in existence for some time
and consequently have investment performance history. In order to demonstrate
how the historical investment experience of the Funds affects Accumulation Unit
values, the following performance information was developed. The information is
based upon the historical experience of the Funds and is for the periods shown.
ACTUAL PERFORMANCE WILL VARY AND THE HYPOTHETICAL RESULTS SHOWN ARE NOT
NECESSARILY REPRESENTATIVE OF FUTURE RESULTS. Performance for periods ending
after those shown may vary substantially from the examples shown below. Chart 1
shows the standardized average annual total return of the Accumulation Units
calculated for a specified period of time assuming an initial Purchase Payment
of $1,000 allocated to each Portfolio and a deduction of all charges and
deductions (see "Expenses" in the Prospectus). Chart 2 is identical to Chart 1
except that it does not reflect the deduction of the withdrawal charge. Chart 3
shows cumulative total return with the deduction of all charges. Chart 4 shows
cumulative total return without the deduction of the withdrawal charge. The
performance figures in all 4 charts also reflect the actual fees and expenses
paid by each Portfolio. All calculations do not reflect the deduction of any
premium taxes.
-3-
<PAGE> 36
HISTORICAL PERFORMANCE FOR PERIODS ENDED DECEMBER 31, 1998
CHART 1 - AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
10 YEARS
or Since INCEPTION
1 YEAR 5 YEARS Inception DATE
------ ------- --------- ---------
<S> <C> <C> <C> <C>
AMERICAN FIDELITY DUAL 13.62% 16.29% 14.48% 01/01/70
STRATEGY FUND, INC
THE DREYFUS SOCIALLY 16.46% 17.31% 17.61% 10/07/93
RESPONSIBLE GROWTH
FUND, INC
DREYFUS STOCK INDEX 15.30% 18.49% 12.67% 09/29/89
FUND
DREYFUS VARIABLE
INVESTMENT FUND
Growth and Income Portfolio -0.85% N/A 16.57% 05/02/94
Small Company Stock Portfolio -17.54% N/A 1.67% 04/30/96
International Value Portfolio -3.88% N/A 0.73% 04/30/96
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC
Prime Bond Fund -4.75% 1.18% 4.82% 04/20/82
American Balanced Fund 0.87% 5.77% 7.38% 06/01/88
High Current Income Fund -14.93% 1.03% 6.48% 04/20/82
Special Value Focus Fund -18.02% 3.81% 6.73% 04/20/82
Basic Value Focus Fund -3.19% 10.33% 10.76% 07/01/93
</TABLE>
-4-
<PAGE> 37
CHART 2 - COMPOUND AVERAGE ANNUAL RETURN (WITHOUT WITHDRAWAL CHARGES)
<TABLE>
<CAPTION>
10 YEARS
or Since INCEPTION
1 YEAR 5 YEARS Inception DATE
------ ------- --------- ---------
<S> <C> <C> <C> <C>
AMERICAN FIDELITY DUAL 21.62% 17.15% 14.48% 01/01/70
STRATEGY FUND, INC.
THE DREYFUS SOCIALLY 24.46% 18.14% 18.23% 10/07/93
RESPONSIBLE GROWTH
FUND, INC.
DREYFUS STOCK INDEX 23.30% 19.29% 12.67% 09/29/89
FUND
DREYFUS VARIABLE
INVESTMENT FUND
Growth and Income Portfolio 7.15% N/A 17.49% 05/02/94
Small Company Stock Portfolio -10.37% N/A 3.81% 04/30/96
International Value Portfolio 4.12% N/A 2.85% 04/30/96
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.
Prime Bond Fund 3.25% 1.92% 4.82% 04/20/82
American Balanced Fund 8.87% 6.55% 7.38% 06/01/88
High Current Income Fund -7.53% 1.77% 6.48% 04/20/82
Special Value Focus Fund -10.89% 4.57% 6.73% 04/20/82
Basic Value Focus Fund 4.81% 11.14% 11.31% 07/01/93
</TABLE>
-5-
<PAGE> 38
CHART 3 - CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
10 YEARS
or Since INCEPTION
1 YEAR 5 YEARS Inception DATE
------ ------- --------- ---------
<S> <C> <C> <C> <C>
AMERICAN FIDELITY DUAL 13.62% 112.67% 286.57% 01/01/70
STRATEGY FUND, INC.
THE DREYFUS SOCIALLY 16.46% 122.14% 133.80% 10/07/93
RESPONSIBLE GROWTH
FUND, INC.
DREYFUS STOCK INDEX 15.30% 133.58% 201.75% 09/29/89
FUND
DREYFUS VARIABLE
INVESTMENT FUND
Growth and Income Portfolio -0.85% N/A 104.56% 05/02/94
Small Company Stock Portfolio -17.54% N/A 4.53% 04/30/96
International Value Portfolio -3.88% N/A 1.97% 04/30/96
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.
Prime Bond Fund -4.75% 6.02% 60.09% 04/20/82
American Balanced Fund 0.87% 32.37% 103.77% 06/01/88
High Current Income Fund -14.93% 5.26% 87.34% 04/20/82
Special Value Focus Fund -18.02% 20.55% 91.77% 04/20/82
Basic Value Focus Fund -3.19% 63.46% 75.48% 07/01/93
</TABLE>
-6-
<PAGE> 39
CHART 4 - CUMULATIVE TOTAL RETURN WITHOUT WITHDRAWAL CHARGES
<TABLE>
<CAPTION>
10 YEARS
or Since INCEPTION
1 YEAR 5 YEARS Inception DATE
------ ------- --------- ---------
<S> <C> <C> <C> <C>
AMERICAN FIDELITY DUAL 21.62% 120.62% 286.57% 01/01/70
STRATEGY FUND, INC.
THE DREYFUS SOCIALLY 24.46% 130.14% 140.29% 10/07/93
RESPONSIBLE GROWTH
FUND, INC.
DREYFUS STOCK INDEX 23.30% 141.58% 201.75% 09/29/89
FUND
DREYFUS VARIABLE
INVESTMENT FUND
Growth and Income Portfolio 7.15% N/A 112.19% 05/02/94
Small Company Stock Portfolio -10.37% N/A 10.50% 04/30/96
International Value Portfolio 4.12% N/A 7.79% 04/30/96
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.
Prime Bond Fund 3.25% 9.98% 60.09% 04/20/82
American Balanced Fund 8.87% 37.31% 103.77% 06/01/88
High Current Income Fund -7.53% 9.19% 87.34% 04/20/82
Special Value Focus Fund -10.89% 25.05% 91.77% 04/20/82
Basic Value Focus Fund 4.81% 69.57% 80.35% 07/01/93
</TABLE>
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<PAGE> 40
FEDERAL TAX STATUS
NOTE: The following description is based upon the Company's understanding of
current federal income tax law applicable to annuities in general. The Company
cannot predict the probability that any changes in such laws will be made.
Purchasers are cautioned to seek competent tax advice regarding the possibility
of such changes. The Company does not guarantee the tax status of the policies.
Purchasers bear the complete risk that the policies may not be treated as
"annuity contracts" under federal income tax laws. It should be further
understood that the following discussion is not exhaustive and that special
rules not described herein may be applicable in certain situations. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended ("Code") governs
taxation of annuities in general. An Owner (other than a corporation or other
non-natural person) is not taxed on increases in the value of a Policy until
distribution occurs, either in the form of a lump sum payment or as annuity
payments under the Annuity Option elected. For a lump sum payment received as a
total surrender (total redemption) or death benefit, the recipient is taxed on
the portion of the payment that exceeds the cost basis of the Policy. For
Non-Qualified Policies, this cost basis is generally the Purchase Payments,
while for Qualified Policies there may be no cost basis. The taxable portion of
the lump sum payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includible in taxable income. The exclusion amount for payments based on a
fixed annuity option is determined by multiplying the payment by the ratio that
the cost basis of the Policy (adjusted for any period certain or refund feature)
bears to the expected return under the Policy. The exclusion amount for payments
based on a variable annuity option is determined by dividing the cost basis of
the Policy (adjusted for any period certain or refund feature) by the number of
years over which the annuity is expected to be paid. The exclusion amount for
payments made from a Policy issued pursuant to a Qualified Plan is generally
determined by dividing the cost-basis of the Policy by the anticipated number of
payments to be made under the Policy. Payments received after the investment in
the Policy has been recovered (i.e. when the total of the excludable amounts
equal the investment in the Policy) are fully taxable. The taxable portion is
taxed at ordinary income rates. For certain types of Qualified Plans there may
be no cost basis in the Policy within the meaning of Section 72 of the Code.
Owners, Annuitants and Beneficiaries under the Policies should seek competent
financial advice about the tax consequences of any distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
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<PAGE> 41
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the Policy as
an annuity contract would result in imposition of federal income tax to the
Policy Owner with respect to earnings allocable to the Policy prior to the
receipt of payments under the Policy. The Code contains a safe harbor provision
which provides that annuity contracts such as the Policies meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
1.817-5) which established diversification requirements for the investment
portfolios underlying variable contracts such as the Policies. The regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the regulations, an investment portfolio will be deemed adequately
diversified if: (1) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (2) no more than 70% of the
value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all Funds underlying the Policies will be managed by
the investment advisers in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which owner control of the
investments of the Separate Account will cause the owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Policy. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of Owner control which may be exercised under the Policy is different
in some respects from the situations addressed in published rulings issued by
the internal Revenue Service in which it was held that the policy owner was not
the owner of the assets of the separate account. It is unknown whether these
differences, such as the Owners ability to transfer among investment choices
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<PAGE> 42
or the number and type of investment choices available, would cause the Owner to
be considered as the owner of the assets of the Separate Account resulting in
the imposition of federal income tax to the Owner with respect to earnings
allocable to the Policy prior to receipt of payments under the Policy.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the Owner being
retroactively determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Policy in an attempt to maintain favorable tax treatment.
MULTIPLE POLICIES
The Code provides that multiple non-qualified annuity contracts which are issued
within a calendar year period to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences, including more rapid taxation of the distributed amounts from such
combination of contracts. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year
period.
POLICIES OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on purchase payments
for the Policies will be taxed currently to the Owner if the Owner is a
non-natural person, e.g., a corporation or certain other entities. Such Policies
generally will not be treated as annuities for federal income tax purposes.
However, this treatment is not applied to Policies held by a trust or other
entity as an agent for a natural person nor to Policies held by qualified plans.
Purchasers should consult their own tax counsel or other tax adviser before
purchasing a Policy to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Policy may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Policies.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross income
of the Owner are subject to federal income tax withholding. Generally, amounts
are withheld from periodic payments at the same rate as wages and at the rate of
10% from non-periodic payments. However, the Owner, in most cases, may elect not
to have taxes withheld or to have withholding done at a different rate.
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<PAGE> 43
Effective January 1, 1993, certain distributions from retirement plans qualified
under Section 401 or Section 403(b) of the Code, which are not directly rolled
over to another eligible retirement plan or individual retirement account or
individual retirement annuity, are subject to a mandatory 20% withholding for
federal income tax. The 20% withholding requirement generally does not apply to:
a) a series of substantially equal payments made at least annually for the life
or life expectancy of the participant or joint and last survivor expectancy of
the participant and a designated beneficiary, or for a specified period of 10
years or more; or b) distributions which are required minimum distributions; or
(c) the portion of the distributions not includible in gross income (i.e.
returns of after-tax contributions). Participants should consult their own tax
counsel or other tax adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED POLICIES
The following discussion in this section explains how the general principles of
tax-deferred investing apply to a non-qualified Policy when the Owner of such
Policy is a natural person. As described above, different rules may apply to an
Owner of a non-qualified Policy that is not a natural person, such as a
corporation. The discussion assumes at all times that the non-qualified Policy
will be treated as an "annuity policy" under the Code.
TAX TREATMENT OF WITHDRAWALS, SURRENDERS AND DISTRIBUTIONS
The cost basis of a non-qualified Policy is generally the sum of the purchase
payments for the Policy. The taxpayer will generally have to include in income
the portion of any payment from a non-qualified Policy that exceeds the portion
of the cost basis (or principal) of the Policy which is allocable to such
payment. The difference between the cost basis and the value of the
non-qualified Policy represents the increase in the value of the Policy. The
taxable portion of a payment from a non-qualified Policy is generally taxed at
the taxpayer's marginal income tax rate.
PARTIAL WITHDRAWALS. A partial withdrawal refers to a withdrawal from a
non-qualified Policy that is less than its total value and that is not paid in
the form of an annuity. Usually, a partial withdrawal of the value of a
non-qualified Policy will be treated as coming first from earnings (which
represent the increase in the value of the Policy). This portion of the
withdrawal will be included in the taxpayer's income. After the earnings portion
is exhausted, the remainder of the partial withdrawal will be treated as coming
from the taxpayer's principal in the Policy (generally the sum of the purchase
payments). This portion of the withdrawal will not be included in income. If the
non-qualified Policy contains investments made prior to August 14, 1982, a
partial withdrawal from the Policy will be treated, to the extent it is
allocable to such pre-August 14, 1982 investments, as coming first from
principal and then, only after the principal portion is exhausted, from
earnings.
SURRENDERS. If a taxpayer surrenders a non-qualified Policy and receives a lump
sum payment of its entire value, the portion of the payment that exceeds the
taxpayer's then remaining cost basis in the Policy will be included in income.
The taxpayer will not include in income the part of the payment that is equal to
the cost basis.
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<PAGE> 44
TAX TREATMENT OF ANNUITY PAYMENTS
If a taxpayer receives annuity payments from a non-qualified Policy, a fixed
portion of each payment is generally excludable from income as a tax-free
recovery of cost basis in the Policy and the balance is included in income. The
portion of the payment that is excludable from income is determined under
detailed rules provided in the Code (which in general terms determine such
excludable amount by dividing the cost basis in the Policy at the time the
annuity payments begin by the expected return under the Policy). If the annuity
payments continue after the cost basis has been recovered, the additional
payments will generally be included in full in income.
PENALTY TAX ON DISTRIBUTIONS
Generally, a penalty equal to 10% of the amount of any payment that is
includable in the taxpayer's income will apply to any distribution received from
a non-qualified Policy in addition to ordinary income tax. This 10% penalty will
not apply, however, if the distribution meets certain conditions. Some of the
distributions that are excepted from the 10% penalty are listed below:
o A distribution that is made on or after the date the taxpayer
reaches age 59 1/2.
o A distribution that is made on or after the death of the
Owner.
o A distribution that is made when the taxpayer is totally
disabled.
o A distribution that is made as part of a series of
substantially equal periodic payments which are made at least
annually for the taxpayer's life (or life expectancy) or the
joint lives (or joint life expectancies) of the taxpayer and
his joint Beneficiary.
o A part of a distribution that is attributable to investment in
the Policy prior to August 14, 1982.
o A distribution that is paid as an immediate annuity (within
the meaning of Section 72(u)(4) of the Code).
REQUIRED DISTRIBUTIONS
To qualify as an "annuity policy" under the Code, a non-qualified Policy must
meet certain distribution requirements. Generally, if the Owner/Annuitant dies
before annuity payments begin, the amounts accumulated under the non-qualified
Policy either must be distributed within 5 years of death or must begin to be
paid within one year of death under a method that will pay the entire value of
the Policy over the life (or life expectancy) of the Beneficiary under the
Policy. Special rules apply, however, if the Beneficiary under the Policy is the
surviving spouse of the Owner. If the Owner's spouse is the Beneficiary under
the Policy, these rules involving required distributions in the event of death
will be applied as if the surviving spouse had been the original Owner of the
Policy. If the Owner/Annuitant dies after annuity payments have begun, payments
generally must continue at least as rapidly as under the method in effect at
death (unless such method provides that payments stop at death). Payments made
upon the death of the Annuitant who is not the Owner of the Policy do not
qualify for the death of the Owner exception to the 10% penalty tax described
above, unless another exception applies.
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<PAGE> 45
The above information does not apply to Qualified Policies. However, separate
tax withdrawal penalties and restrictions apply to such Qualified Policies. (See
"Tax Treatment of Withdrawals - Qualified Policies.")
QUALIFIED PLANS
The Policies offered by the Prospectus are designed to be suitable for use under
various types of Qualified Plans. Because of the minimum Purchase Payment
requirements, the Policies may not be appropriate for some periodic payment
retirement plans. Taxation of participants in each Qualified Plan varies with
the type of plan and terms and conditions of each specific plan. Owners,
Annuitants and Beneficiaries are cautioned that benefits under a Qualified Plan
may be subject to the terms and conditions of the plan regardless of the terms
and conditions of the Policies issued pursuant to the plan. Some retirement
plans are subject to distribution and other requirements that are not
incorporated into the Company's administrative procedures. Owners, participants
and Beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Policies comply with
applicable law. Following are general descriptions of the types of Qualified
Plans with which the Policies may be used. Such descriptions are not exhaustive
and are for general informational purposes only. The tax rules regarding
Qualified Plans are very complex and will have differing applications, depending
on individual facts and circumstances. Each purchaser should obtain competent
tax advice prior to purchasing a Policy issued under a Qualified Plan.
Policies issued pursuant to Qualified Plans include special provisions
restricting Policy provisions that may otherwise be available and described in
this Statement of Additional Information. Generally, Policies issued pursuant to
Qualified Plans are not transferable except upon surrender or annuitization.
Various penalty and excise taxes may apply to contributions or distributions
made in violation of applicable limitations. Furthermore, certain withdrawal
penalties and restrictions may apply to surrenders from Qualified Policies. (See
"Tax Treatment of Withdrawals - Qualified Policies.")
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities" by
public schools and certain charitable, educational and scientific organizations
described in Section 501(c)(3) of the Code. These qualifying employers may make
contributions to the Policies for the benefit of their employees. Such
contributions are not includable in the gross income of the employee until the
employee receives distributions from the Policy. The amount of contributions to
the tax-sheltered annuity is limited to certain maximums imposed by the Code.
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions, nondiscrimination and withdrawals. (See "Tax
Treatment of Withdrawals - Qualified Policies" and "Tax-Sheltered Annuities and
401(k) Plans - Withdrawal Limitations.") Employee loans are allowed under these
Policies. Any employee should obtain competent tax advice as to the tax
treatment and suitability of such an investment and the tax consequences of
loans.
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<PAGE> 46
INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which may be deductible from the individual's gross income. These IRAs are
subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals - Qualified Policies.") Under
certain conditions, distributions from other IRAs and other Qualified Plans may
be rolled over or transferred on a tax-deferred basis into an IRA. Sales of
Policies for use with IRAs are subject to special requirements imposed by the
Code, including the requirement that certain informational disclosure be given
to persons desiring to establish an IRA. Purchasers of Policies to be qualified
as Individual Retirement Annuities should obtain competent tax advice as to the
tax treatment and suitability of such an investment.
Beginning in 1998, individuals may purchase a new type of non-deductible IRA,
known as a Roth IRA. Purchase payments for a Roth IRA are limited to a maximum
of $2,000 per year. Lower maximum limitations apply to individuals with adjusted
gross incomes between $95,000 and $110,000 in the case of single taxpayers,
between $150,000 and $160,000 in the case of married taxpayers filing joint
returns, and between $0 and $10,000 in the case of married taxpayers filing
separately. An overall $2,000 annual limitation continues to apply to all of a
taxpayer's IRA contributions, including Roth IRA and non-Roth IRAs.
Qualified distributions from Roth IRAs are free from federal income tax. A
qualified distribution requires that an individual has held the Roth IRA for at
least five years and, in addition, that the distribution is made either after
the individual reaches age 59 1/2; on the individual's death or disability; or
as a qualified first-time home purchase, subject to a $10,000 lifetime maximum,
for the individual, a spouse, child, grandchild, or ancestor. Any distribution
which is not a qualified distribution is taxable to the extent of earnings in
the distribution. Distributions are treated as made from contributions first and
therefore no distributions are taxable until distributions exceed the amount of
contributions to the Roth IRA. The 10% penalty tax and the regular IRA
exceptions to the 10% penalty tax apply to taxable distributions from a Roth
IRA.
Amounts may be rolled over from one Roth IRA to another Roth IRA. Furthermore,
an individual may make a rollover contribution from a non-Roth IRA to a Roth
IRA, unless the individual has adjusted gross income over $100,000 or the
individual is a married taxpayer filing a separate return. The individual must
pay tax on any portion of the IRA being rolled over that represents income or a
previously deductible IRA contribution. However, for rollovers in 1998, the
individual may pay that tax ratably over the four taxable year periods beginning
with tax year 1998.
Purchasers of Policies to be qualified as a Roth IRA should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
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<PAGE> 47
H.R. 10 PLANS
Section 401 of the Code permits self-employed individuals to establish Qualified
Plans for themselves and their employees, commonly referred to as "H.R. 10" or
"Keogh" plans. Contributions made to the Plan for the benefit of the employees
will not be included in the gross income of the employees until distributed from
the Plan. The tax consequences to participants may vary depending upon the
particular Plan design. However, the Code places limitations and restrictions on
all plans including on such items as: amount of allowable contributions; form,
manner and timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. (See "Tax Treatment of Withdrawals - Qualified Policies.")
Purchasers of Policies for use with an H.R. 10 Plan should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
CORPORATE PENSION AND PROFIT-SHARING/401(K) PLANS
Sections 401(a) and 401(k) of the Code permit corporate employers to establish
various types of retirement plans for employees. These retirement plans may
permit the purchase of the Policies to provide benefits under the plan.
Contributions to the plan for the benefit of employees will not be includible in
the gross income of the employees until distributed from the plan. The tax
consequences to participants may vary depending upon the particular plan design.
However, the Code places limitations and restrictions on all plans including on
such items as: amount of allowable contributions; form, manner and timing of
distributions; transferability of benefits; vesting and nonforfeitability of
interests; nondiscrimination in eligibility and participation; and the tax
treatment of distributions, withdrawals and surrenders. (See "Tax Treatment of
Withdrawals - Qualified Policies.") Purchasers of Policies for use with
Corporate Pension or Profit Sharing/401(k) Plans should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED POLICIES
The following discussion explains how the general principles of tax-deferred
investing apply to Policies issued pursuant to Qualified Plans.
SPECIAL TAX TREATMENT FOR LUMP SUM DISTRIBUTIONS FROM A CORPORATE PENSION OR
PROFIT-SHARING/401(k) OR H.R. 10 PLAN
If the taxpayer receives an amount from a Policy issued pursuant to a Corporate
Pension or Profit-Sharing/401(k) or H.R. 10 Plan and the distribution qualifies
as a lump sum distribution under the Code, the portion of the distribution that
is included in income may be eligible for special tax treatment. The plan
administrator should provide the taxpayer with information about the tax
treatment of a lump sum distribution at the time the distribution is made.
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<PAGE> 48
SPECIAL RULES FOR DISTRIBUTIONS THAT ARE ROLLED OVER
In addition, special rules apply to a distribution from a Policy that relates to
a Corporate Pension or Profit-Sharing/401(k) or H.R. 10 Plan or a Section 403(b)
Tax-Sheltered Annuity if the distribution is properly rolled over in accordance
with the provisions of the Code. These provisions contain various requirements,
including the requirement that the rollover be made directly from the
distributing plan or within 60 days of receipt:
o To a traditional individual retirement arrangement under Section
408 of the Code.
o To another Corporate Pension or Profit-Sharing/401(k) or H.R. 10
Plan or an annuity plan under Section 403(a) of the Code (if the
distribution is from such a plan).
o To a Section 403(b) Tax-Sheltered Annuity (if the distribution is
from a Section 403(b) Tax-Sheltered Annuity).
These special rules only apply to distributions that qualify as "eligible
rollover distributions" under the Code. In general, a distribution from a
Corporate Pension or Profit-Sharing/401(k) or H.R. 10 Plan or Section 403(b)
Tax-Sheltered Annuity will be an eligible rollover distribution EXCEPT to the
extent:
o It represents the return of "after-tax" contributions or is not
otherwise includable in income.
o It is part of a series of payments made for the taxpayer's life
(or life expectancy) or the joint lives (or joint life
expectancies) of the taxpayer and his Beneficiary under the plan
or for a period of more than ten years.
o It is a required minimum distribution under Section 401(a)(9) of
the Code as described below.
o It is made from a Corporate Pension or Profit-Sharing/401(k) or
H.R. 10 Plan by reason of a hardship.
Required minimum distributions under Section 401(a)(9) include the following
required payments:
o If the Plan is an Individual Retirement Annuity, required
payments for the calendar year in which the taxpayer reaches age
70 1/2 or any later calendar year.
o If the plan is a Corporate Pension or Profit-Sharing/401(k), H.R.
10, or Tax-Sheltered Annuity (and if the taxpayer does not own
more than 5% of the employer maintaining the applicable plan),
required payments for the later of the calendar year in which the
taxpayer reaches age 70 1/2 or the calendar year the taxpayer
terminates employment with the employer or for any later calendar
year. The above rule for IRAs applies to taxpayer who are more
than 5% owners.
The administrator of the applicable Qualified Plan should provide additional
information about these rollover tax rules when a distribution is made.
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<PAGE> 49
DISTRIBUTIONS IN THE FORM OF ANNUITY PAYMENTS
If any distribution is made from a Qualified Policy issued pursuant to a
Qualified Plan and is made in the form of annuity payments (and is not eligible
for rollover or is not in any event rolled over), a fixed portion of each
payment is generally excludable from income for federal income tax purposes to
the extent it is treated as allocable to the taxpayer's "after-tax"
contributions to the Policy (and any other cost basis in the Policy). To the
extent the payment exceeds such portion, it is includable in income. The portion
of the annuity payment that is excludable from income is determined under
detailed rules provided in the Code. In very general terms, these detailed rules
determine such excludable amount by dividing the "after-tax" contributions and
other cost basis in the Policy at the time the annuity payments begin by the
anticipated number of payments to be made under the Policy. If the annuity
payments continue after the number of anticipated payments has been made, such
additional payments will generally be included in full in income.
PENALTY TAX ON WITHDRAWALS
Generally, there is a penalty tax equal to 10% of the portion of any payment
from a Qualified Policy that is included in income. This 10% penalty will not
apply if the distribution meets certain conditions. Some of the distributions
that are excepted from the 10% penalty are listed below:
o A distribution that is made on or after the date the taxpayer
reaches age 59 1/2.
o A distribution that is properly rolled over to a traditional IRA
or to another eligible employer plan or account.
o A distribution that is made on or after the death of the Owner.
o A distribution that is made when the taxpayer is totally disabled
(as defined in Section 72(m)(7) of the Code).
o A distribution that is made as part of a series of substantially
equal periodic payments which are made at least annually for the
taxpayer's life (or life expectancy) or the joint lives (or joint
life expectancies) of the taxpayer and his joint Beneficiary
under the Qualified Policy (and, with respect to Qualified
Policies issued pursuant to Corporate Pension and
Profit-Sharing/401(k) or H.R. 10 Plans, which begin after the
taxpayer separates from service with the employer maintaining the
plan).
o A distribution that is made by reason of separation from service
with the employer maintaining the applicable plan during or after
the calendar year in which the taxpayer reaches age 55.
o A distribution that is made to the taxpayer to the extent it does
not exceed the amount allowable as a deduction for medical care
under Section 213 of the Code (determined without regard to
whether the taxpayer itemizes deductions).
o A distribution that is made to an alternate payee pursuant to a
qualified domestic relations order (that meets the conditions of
Section 414(p) of the Code) (not applicable to Individual
Retirement Annuities).
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<PAGE> 50
o Distributions from an Individual Retirement Annuity for the
purchase of medical insurance (as described in Section
213(d)(1)(D) of the Code) for the Owner or Annuitant (as
applicable) and his or her spouse and dependents if the Owner or
Annuitant (as applicable) has received unemployment compensation
for at least 12 weeks (this exception will no longer apply after
the Owner or Annuitant (as applicable) has been reemployed for at
least 60 days).
o Distributions from an Individual Retirement Annuity made to the
Owner or Annuitant (as applicable) to the extent such
distributions do not exceed the qualified higher education
expenses (as defined in Section 72(t)(7) of the Code) of the
Owner or Annuitant (as applicable) for the taxable year.
o Distributions from an Individual Retirement Annuity made to the
Owner or Annuitant (as applicable) which are qualified first-time
home buyer distributions (as defined in Section 72(t)(8) of the
Code).
REQUIRED DISTRIBUTIONS
Distributions from a Policy issued pursuant to a Qualified Plan (other than a
Roth IRA) must meet certain rules concerning required distributions that are set
forth in the Code. Such rules are summarized below:
o Required distributions generally must start by April 1 of the
calendar year following the calendar year in which the taxpayer
reaches age 70 1/2.
o If the Qualified Plan is a Corporate Pension or
Profit-Sharing/401(k), H.R. 10, or 403(b) Tax-Sheltered Annuity
Plan and the taxpayer does not own more than 5% of the employer
maintaining the plan, the required distributions generally do not
have to start until April 1 of the calendar year following the
later of the calendar year in which the taxpayer reaches age 70
1/2 or the calendar year in which the taxpayer terminates
employment with the employer.
o When distributions are required under the Code, a certain minimum
amount, determined under the Code, must be made each year.
In addition, other rules apply under the Code to determine when and how required
minimum distributions must be made in the event of the taxpayer's death. The
applicable plan documents will contain such rules.
TAX-SHELTERED ANNUITIES AND 401(k) PLANS - WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) or
401(k) of the Code) to circumstances only when the Owner: (1) attains age
59 1/2; (2) separates from service; (3) dies; (4) becomes disabled (within the
meaning of Section 72(m)(7) of the Code); or (5) in the case of hardship.
However, withdrawals for hardship are restricted to the portion of the Owner's
Policy value which represents contributions by the Owner and does not include
any investment results. The limitations on withdrawals apply only to salary
reduction contributions made after the end of the plan year
-18-
<PAGE> 51
beginning in 1988, and to income attributable to such contributions and to
income attributable to amounts held as of the end of the plan year beginning in
1988.
The limitations on withdrawals do not affect rollovers and transfers between
certain Qualified Plans. Owners should consult their own tax counsel or other
tax adviser regarding any distributions.
TAX-SHELTERED ANNUITIES/LOANS
If a Policy is issued pursuant to a 403(b) Tax-Sheltered Annuity, the Owner may
take a loan under the Policy at any time before Annuity Payments begin. However,
no loans will be made during the first Policy Year. The security for the loan
will be the value of the Policy invested in the Guaranteed Interest Account. The
loan cannot be more than the lesser of $50,000 or one-half of the value of the
Policy in the Guaranteed Interest Account. Under certain circumstances, the
$50,000 limit may be reduced. The minimum loan amount if $2,500 (which can be
changed at our discretion).
If a loan payment is not made before the end of the calendar quarter following
the calendar quarter in which the payment was due, the outstanding loan balance
(principal plus interest) will become due and payable. If the loan payment is
not repaid within such time period, the loan balance plus interest will be
considered in default and will be treated as taxable income for the tax year of
the default. Satisfaction of any unpaid loan balance plus interest from the
Guaranteed Interest Account will only occur when the taxpayer qualifies for a
plan distribution under the Code. If the loan is in default and the taxpayer
does not yet qualify for a distribution to satisfy the outstanding loan balance,
the loan will continue to accrue interest (but such interest accruals will not
result in additional deemed distributions). Any amounts which may become taxable
will be reported as plan distributions and will be subject to income tax and tax
penalties, if applicable.
ANNUITY PROVISIONS
VARIABLE ANNUITY PAYOUT
An Owner may elect a variable annuity payout. Variable annuity payments reflect
the investment performance of the Portfolios in accordance with the allocation
of the value of the Policy to the Portfolios during the Annuity Period. Variable
annuity payments are not guaranteed as to dollar amount.
The Company will determine the number of Annuity Units payable for each payment
by dividing the dollar amount of the first annuity payment by the Annuity Unit
value for each applicable Portfolio on the Annuity Date. This sets the number of
Annuity Units for each applicable Portfolio. The number of Annuity Units payable
remains the same unless an Owner transfers a portion of the annuity benefit to
another Portfolio or to a fixed annuity. The dollar amount is not fixed and will
change from month to month.
-19-
<PAGE> 52
The dollar amount of the variable annuity payments for each applicable Portfolio
after the first payment is determined by multiplying the fixed number of Annuity
Units per payment in each Portfolio by the Annuity Unit value for the last
valuation period of the month preceding the month for which the payment is due.
This result is the dollar amount of the payment for each applicable Portfolio.
The total dollar amount of each variable annuity payment is the sum of all
variable annuity payments reduced by the applicable portion of the policy
maintenance charge.
VARIABLE ANNUITY UNIT
The value of any annuity unit for each Portfolio was arbitrarily set initially
at $10. The Annuity Unit value at the end of any subsequent valuation period is
determined as follows:
1. The net investment factor for the current valuation period is
multiplied by the value of the Annuity Unit for the Fund for the immediately
preceding valuation period.
2. The result is then divided by the assumed investment rate
factor which equals 1.00 plus the assumed investment rate for the number of days
since the preceding valuation date.
An Owner can choose either a 3%, 4%, or 5% assumed investment rate. If one is
not chosen, the assumed investment rate will be 3%.
The assumed investment rate is the assumed rate of return used to determine the
first annuity payment for a variable annuity option. A higher assumed investment
rate will result in a higher first payment. Choice of a lower assumed investment
rate will result in a lower first payment. Payments will increase whenever the
actual return exceeds the chosen rate. Payments will decrease whenever the
actual return is less than the chosen rate.
FIXED ANNUITY PAYOUT
The dollar amount of each fixed annuity payment will be at least as great as
that determined in accordance with the 3% Annuity Table. The fixed annuity
provides a 3% annual guaranteed interest rate on all Annuity Options. The
Company may pay or credit excess interest on a fixed annuity at its discretion.
FINANCIAL STATEMENTS
Following are the financial statements of the Separate Account and the Company.
The financial statements of the Company included herein should be considered
only as bearing upon the ability of the Company to meet its obligations under
the Policies.
-20-
<PAGE> 53
[KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Fidelity Assurance Company
We have audited the accompanying statements of assets and liabilities of the
Socially Responsible Growth, Stock Index, Growth and Income, Small Company
Stock, Prime Bond, American Balanced, High Current Income, Special Value Focus,
and International Equity Focus Segregated Sub-Accounts of American Fidelity
Separate Account B (Account B) as of December 31, 1998, and the related
statements of operations, changes in net assets, and the financial highlights
for the year then ended. These financial statements and financial highlights are
the responsibility of Account B's management. Our responsibility is to express
an opinion on these financial statements and the financial highlights based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Investments owned at December 31, 1998 were verified by confirmation with the
underlying funds. An audit also includes assessing the accounting principles
used and significant estimates made by management as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Socially Responsible
Growth, Stock Index, Growth and Income, Small Company Stock, Prime Bond,
American Balanced, High Current Income, Special Value Focus, and International
Equity Focus Segregated Sub-Accounts of American Fidelity Separate Account B as
of December 31, 1998, and the results of their operations, changes in their net
assets and the financial highlights for the year then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
January 12, 1999
-21-
<PAGE> 54
AMERICAN FIDELITY SEPARATE ACCOUNT B
Statements of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------
SOCIALLY GROWTH SMALL
RESPONSIBLE STOCK AND COMPANY
GROWTH INDEX INCOME STOCK
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investments:
Dreyfus Socially Responsible Growth Fund, Inc.
(19,182 shares at net asset value of
$31.08 per share) (cost $535,415) $ 596,188 -- -- --
Dreyfus Stock Index Fund
(52,545 shares at net asset value of
$32.52 per share) (cost $1,530,140) -- 1,708,778 -- --
Dreyfus Variable Investment Fund:
Growth and Income Portfolio
(27,965 shares at net asset value of
$22.63 per share) (cost $590,202) -- -- 632,838 --
Small Company Stock Portfolio
(24,927 shares at net asset value of
$15.09 per share) (cost $357,472) -- -- -- 376,152
------------ ------------ ------------ ------------
Total assets 596,188 1,708,778 632,838 376,152
Total liabilities -- -- -- --
------------ ------------ ------------ ------------
Net assets $ 596,188 1,708,778 632,838 376,152
============ ============ ============ ============
Accumulation units outstanding 45,112 132,663 55,399 38,646
============ ============ ============ ============
Net asset value per unit $ 13.216 12.881 11.423 9.733
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
-22-
<PAGE> 55
AMERICAN FIDELITY SEPARATE ACCOUNT B
Statements of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------------------------
HIGH SPECIAL INTERNATIONAL
PRIME AMERICAN CURRENT VALUE EQUITY
BOND BALANCED INCOME FOCUS FOCUS
---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Investments:
Merrill Lynch Variable Series Funds, Inc.:
Merrill Lynch Prime Bond Fund
(17,710 shares at net asset
value of $12.25 per share)
(cost $216,019) $ 216,944 -- -- -- --
Merrill Lynch American Balanced Fund
(21,038 shares at net asset
value of $16.74 per share)
(cost $331,149) -- 352,175 -- -- --
Merrill Lynch High Current Income Fund
(2,338 shares at net asset
value of $ 10.11 per share)
(cost $25,118) -- -- 23,642 -- --
Merrill Lynch Special Value Focus Fund
(4,190 shares at net asset
value of $ 19.95 per share)
(cost $82,259) -- -- -- 83,593 --
Merrill Lynch International Equity
Focus Fund
(7,673 shares at net asset
value of $10.68 per share)
(cost $77,787) -- -- -- -- 81,952
---------- ---------- ---------- ---------- ----------
Total assets 216,944 352,175 23,642 83,593 81,952
Total liabilities -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net assets $ 216,944 352,175 23,642 83,593 81,952
========== ========== ========== ========== ==========
Accumulation units outstanding 20,781 31,096 2,488 8,913 7,349
========== ========== ========== ========== ==========
Net asset value per unit $ 10.440 11.325 9.502 9.379 11.151
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
-23-
<PAGE> 56
AMERICAN FIDELITY SEPARATE ACCOUNT B
Statements of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------------------
SOCIALLY GROWTH SMALL
RESPONSIBLE STOCK AND COMPANY
GROWTH INDEX INCOME STOCK
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment income (loss):
Investment income distributions
from underlying mutual fund $ 897 11,091 3,225 837
Mortality and expense charges (note 2) 2,929 9,774 3,851 1,646
------------ ------------ ------------ ------------
Net investment income (loss) (2,032) 1,317 (626) (809)
------------ ------------ ------------ ------------
Realized gains on investments:
Realized gains (losses) distributions
from underlying mutual fund 20,471 2,169 1,997 154
Proceeds from sales 24,255 161,181 26,053 3,531
Cost of investments sold (21,810) (158,993) (24,776) (4,354)
------------ ------------ ------------ ------------
Net realized gains (losses) 22,916 4,357 3,274 (669)
------------ ------------ ------------ ------------
Unrealized appreciation (depreciation)
on investments:
End of year 60,773 178,638 42,636 18,680
Beginning of year -- -- -- --
------------ ------------ ------------ ------------
Increase in unrealized
appreciation (depreciation) 60,773 178,638 42,636 18,680
------------ ------------ ------------ ------------
Net increase (decrease) in net
assets resulting from operations $ 81,657 184,312 45,284 17,202
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
-24-
<PAGE> 57
AMERICAN FIDELITY SEPARATE ACCOUNT B
Statements of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------------------
HIGH SPECIAL INTERNATIONAL
PRIME AMERICAN CURRENT VALUE EQUITY
BOND BALANCED INCOME FOCUS FOCUS
---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Investment income (loss):
Investment income distributions
from underlying mutual fund $ 4,034 -- 909 -- 1
Mortality and expense charges (note 2) 1,070 2,067 150 344 390
---------- ---------- ---------- ---------- ----------
Net investment income (loss) 2,964 (2,067) 759 (344) (389)
---------- ---------- ---------- ---------- ----------
Realized gains (losses) on investments:
Realized gain distributions
from underlying mutual fund -- -- 15 -- --
Proceeds from sales 2,112 56,231 1,477 3,906 490
Cost of investment sold (2,100) (58,272) (1,508) (4,641) (546)
---------- ---------- ---------- ---------- ----------
Net realized gains (losses) 12 (2,041) (16) (735) (56)
---------- ---------- ---------- ---------- ----------
Unrealized appreciation (depreciation)
on investments:
End of year 925 21,026 (1,476) 1,334 4,165
Beginning of year -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Increase in unrealized appreciation
(depreciation) 925 21,026 (1,476) 1,334 4,165
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
assets resulting from operations $ 3,901 16,918 (733) 255 3,720
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
-25-
<PAGE> 58
AMERICAN FIDELITY SEPARATE ACCOUNT B
Statements of Changes in Net Assets
Year ended December 31, 1998
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------------------
SOCIALLY GROWTH SMALL
RESPONSIBLE STOCK AND COMPANY
GROWTH INDEX INCOME STOCK
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Net investment income (loss) $ (2,032) 1,317 (626) (809)
Net realized gains (losses) on investments 22,916 4,357 3,274 (669)
Increase in unrealized appreciation
(depreciation) on investments 60,773 178,638 42,636 18,680
------------ ------------ ------------ ------------
Net increase (decrease) in net
assets resulting from operations 81,657 184,312 45,284 17,202
------------ ------------ ------------ ------------
Changes from principal transactions:
Net purchase payments received (note 3) 538,786 1,685,647 613,593 362,476
Withdrawal of funds (note 3) (24,255) (161,181) (26,039) (3,526)
------------ ------------ ------------ ------------
Increase in net assets derived from
principal transactions 514,531 1,524,466 587,554 358,950
------------ ------------ ------------ ------------
Increase in net assets 596,188 1,708,778 632,838 376,152
Net assets:
Beginning of year -- -- -- --
------------ ------------ ------------ ------------
End of year $ 596,188 1,708,778 632,838 376,152
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
-26-
<PAGE> 59
AMERICAN FIDELITY SEPARATE ACCOUNT B
Statements of Changes in Net Assets
Year ended December 31, 1998
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------------------------------------
HIGH SPECIAL INTERNATIONAL
PRIME AMERICAN CURRENT VALUE EQUITY
BOND BALANCED INCOME FOCUS FOCUS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Net investment income (loss) $ 2,964 (2,067) 759 (344) (389)
Net realized gains (losses) on investments 12 (2,041) (16) (735) (56)
Increase in unrealized appreciation
(depreciation) on investments 925 21,026 (1,476) 1,334 4,165
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net
assets resulting from operations 3,901 16,918 (733) 255 3,720
Changes from principal transactions:
Net purchase payments received (note 3) 215,155 391,488 25,852 87,244 78,722
Withdrawal of funds (note 3) (2,112) (56,231) (1,477) (3,906) (490)
------------ ------------ ------------ ------------ ------------
Increase in net assets derived from
principal transactions 213,043 335,257 24,375 83,338 78,232
------------ ------------ ------------ ------------ ------------
Increase in net assets 216,944 352,175 23,642 83,593 81,952
Net assets:
Beginning of year -- -- -- -- --
------------ ------------ ------------ ------------ ------------
End of year $ 216,944 352,175 23,642 83,593 81,952
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
-27-
<PAGE> 60
AMERICAN FIDELITY SEPARATE ACCOUNT B
Financial Highlights
Year ended December 31, 1998
<TABLE>
<CAPTION>
PER ACCUMULATION UNIT INCOME AND CAPITAL CHANGES
-----------------------------------------------------------
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------------
SOCIALLY GROWTH SMALL
RESPONSIBLE STOCK AND COMPANY
GROWTH INDEX INCOME STOCK
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment income (loss) and expenses:
Investment income (loss) $ 0.049 0.182 0.123 0.063
Operating expenses 0.160 0.161 0.147 0.124
------------ ------------ ------------ ------------
Net investment income (loss) (0.111) 0.021 (0.024) (0.061)
Capital changes:
Net realized and unrealized gains (losses)
from securities 3.327 2.860 1.447 (0.206)
------------ ------------ ------------ ------------
Net increase (decrease) in
accumulation unit value 3.216 2.881 1.423 (0.267)
Accumulation unit value, beginning of period 10.000 10.000 10.000 10.000
------------ ------------ ------------ ------------
Accumulation unit value, end of period $ 13.216 12.881 11.423 9.733
============ ============ ============ ============
Number of accumulation units outstanding,
end of period 45,112 132,663 55,399 38,646
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
-28-
<PAGE> 61
AMERICAN FIDELITY SEPARATE ACCOUNT B
Financial Highlights
Year ended December 31, 1998
<TABLE>
<CAPTION>
PER ACCUMULATION UNIT INCOME AND CAPITAL CHANGES
---------------------------------------------------------------------------
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------------------
HIGH SPECIAL INTERNATIONAL
PRIME AMERICAN CURRENT VALUE EQUITY
BOND BALANCED INCOME FOCUS FOCUS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment income (loss) and expenses:
Investment income (loss) $ 0.503 -- 0.821 -- 0.001
Operating expenses 0.133 0.149 0.136 0.123 0.145
------------ ------------ ------------ ------------ ------------
Net investment income (loss) 0.370 (0.149) 0.685 (0.123) (0.144)
Capital changes:
Net realized and unrealized gains (losses)
from securities 0.070 1.474 (1.183) (0.498) 1.295
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in accumulation
unit value 0.440 1.325 (0.498) 0.621 1.151
Accumulation unit value, beginning of period 10.000 10.000 10.000 10.000 10.000
------------ ------------ ------------ ------------ ------------
Accumulation unit value, end of period $ 10.440 11.325 9.502 9.379 11.151
============ ============ ============ ============ ============
Number of accumulation units outstanding,
end of period 20,781 31,096 2,488 8,913 7,349
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
-29-
<PAGE> 62
AMERICAN FIDELITY SEPARATE ACCOUNT B
Notes to Financial Statements
December 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
American Fidelity Separate Account B (Account B) is a separate
account of American Fidelity Assurance Company (AFA), and is
registered as a unit investment trust under the Investment
Company Act of 1940, as amended. The inception of Account B was
October 27, 1997; however, no purchases occurred until operations
commenced in January 1998.
The assets of each of the nine segregated sub-accounts are held
for the exclusive benefit of the variable annuity contract owners
and are not chargeable with liabilities arising out of the
business conducted by any other account or by AFA. Contract
owners allocate their variable annuity purchase payments to one
or more of the nine segregated sub-accounts. Such payments are
then invested in the various funds underlying the sub-accounts
(collectively referred to as the Funds).
(b) INVESTMENTS
Investments in shares of the Funds are stated at fair value,
which is the net asset value per share as determined daily by the
Funds. Transactions are recorded on a trade date basis by the
Funds. Income from dividends, and gains from realized gain
distributions, are recorded on the exdistribution date.
Realized gains and losses from investment transactions and
unrealized appreciation or depreciation of investments are
determined on the average cost basis.
(c) INCOME TAXES
Account B is not taxed separately because the operations of
Account B are part of the total operations of AFA. AFA files its
federal income tax returns under sections of the Internal Revenue
Code applicable to life insurance companies. Account B's net
increase in net assets from operations is not expected to result
in taxable income under present regulations. Account B will not
be taxed as a "regulated investment company" under subchapter "M"
of the Internal Revenue Code.
(d) ANNUITY RESERVES
Annuity reserves are computed for currently payable contracts
according to the Progressive Annuity Mortality Table. The assumed
interest rate is 3.5 percent unless the annuitant elects
otherwise, in which case the rate may vary from zero to 5 percent
as regulated by the laws of the respective states. Charges to
annuity reserves for mortality and expense risks experience are
reimbursed to AFA if the reserves required are less than
originally estimated.
(Continued)
-30-
<PAGE> 63
AMERICAN FIDELITY SEPARATE ACCOUNT B
Notes to Financial Statements
December 31, 1998
If additional reserves are required, AFA reimburses Account B. At
December 31, 1998, there were no contract owners who had elected
the variable annuity method of payout. Accordingly, Account B
held no annuity reserves at December 31, 1998.
(e) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of increase and decrease in net assets from
operations during the period. Actual results could differ from
those estimates.
(2) VARIABLE ANNUITY CONTRACTS
AFA manages the operations of Account B and assumes certain mortality
and expense risks under the variable annuity contracts. Administrative
fees are equal to .0004110 of the Funds' daily net assets (.15% per
annum). Policy maintenance charges are equal to $30 per policy per
year. Distribution fees are equal to .0002740 (.10% per annum).
Mortality and expense fees are equal to .0034247% of the Funds' daily
net assets (1.25% per annum). All such fees were paid to AFA.
During the accumulation period, contract owners may partially or
totally withdraw from Account B by surrendering a portion or all of
their accumulation units. The Internal Revenue Code may limit certain
withdrawals based upon age, disability, and other factors. When
contract owners withdraw, they receive the current value of their
accumulation units, less applicable withdrawal charges.
(3) UNIT ACTIVITY FROM CONTRACT TRANSACTIONS
Transactions in units for each segregated sub-account for the year
ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------------------------------------------
SOCIALLY GROWTH SMALL
RESPONSIBLE STOCK AND COMPANY
GROWTH INDEX INCOME STOCK
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Accumulation units:
Outstanding, beginning of year -- -- -- --
Increase for payments received 47,072 146,860 58,248 39,070
Decrease for withdrawal of funds (1,960) (14,197) (2,849) (424)
------------ ------------ ------------ ------------
Outstanding, end of year 45,112 132,663 55,399 38,646
============ ============ ============ ============
</TABLE>
(Continued)
-31-
<PAGE> 64
AMERICAN FIDELITY SEPARATE ACCOUNT B
Notes to Financial Statements
December 31, 1998
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------------------------------------
HIGH SPECIAL INTERNATIONAL
PRIME AMERICAN CURRENT VALUE EQUITY
BOND BALANCED INCOME FOCUS FOCUS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Accumulation units:
Outstanding, beginning
of year -- -- -- -- --
Increase for payments
received 20,993 36,529 2,637 9,387 7,400
Decrease for withdrawal
of funds (212) (5,433) (149) (474) (51)
------------ ------------ ------------ ------------ ------------
Outstanding, end of year 20,781 31,096 2,488 8,913 7,349
============ ============ ============ ============ ============
</TABLE>
(4) YEAR 2000 RISKS
Like other variable annuity funds, financial and business organizations
and individuals around the world, Account B could be adversely affected
if the computer systems used by AFA and Account B's other service
providers do not properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Problem." AFA has had a formal project team
(including 22 information systems professionals) working to correct the
problem since 1996. In the briefest terms, the correction is to change
all date related fields in AFA's computer systems to four digits
instead of two digits. At the same time, all relationships with systems
outside AFA must be checked for the same change and all must be tested
to determine that relationships continue to be compatible. Those
systems were tested on December 31, 1997 and went through year-end
processing without incident. The final test of all systems will be run
in 1999. Even though management of AFA is expending considerable
resources in a concerted effort to meet this technology-related threat,
there is no guarantee that there will be no adverse impact on the Fund
of some sort as January 1, 2000 passes.
-32-
<PAGE> 65
[LOGO] [KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors
American Fidelity Assurance Company:
We have audited the accompanying consolidated balance sheets of American
Fidelity Assurance Company and subsidiaries (the Company) as of December 31,
1998 and 1997, and the related consolidated statements of income, stockholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Fidelity
Assurance Company and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
March 15, 1999
-33-
<PAGE> 66
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS 1998 1997
---------- ----------
<S> <C> <C>
Investments:
Fixed maturities held-to-maturity, at amortized cost
(fair value $222,215 and $241,863 in 1998 and
1997, respectively) $ 211,622 234,799
Fixed maturities available-for-sale, at fair value
(amortized cost of $691,835 and $622,712
in 1998 and 1997, respectively) 720,221 642,577
Equity securities, at fair value:
Common stocks (cost $11,272 and $11,023 in
1998 and 1997, respectively) 13,317 11,736
Mortgage loans on real estate, net 133,440 135,122
Investment real estate, at cost (less accumulated
depreciation of $815 and $1,350 in 1998
and 1997, respectively) 10,160 9,070
Policy loans 11,147 8,668
Short-term and other investments 19,181 20,770
---------- ----------
1,119,088 1,062,742
---------- ----------
Cash 17,245 8,427
Accrued investment income 15,523 14,357
Accounts receivable:
Uncollected premiums 22,560 20,571
Reinsurance receivable 61,201 57,503
Other 8,372 15,248
---------- ----------
92,133 93,322
---------- ----------
Deferred policy acquisition costs 193,741 177,737
Other assets 8,497 5,761
Separate account assets 188,721 137,090
---------- ----------
Total assets $1,634,948 1,499,436
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-34-
<PAGE> 67
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
---------- ----------
<S> <C> <C>
Policy liabilities:
Reserves for future policy benefits:
Life and annuity $ 131,494 105,663
Accident and health 164,067 140,530
Unearned premiums 3,363 2,686
Benefits payable 36,830 35,347
Funds held under deposit administration contracts 577,301 580,499
Other policy liabilities 96,666 92,144
---------- ----------
1,009,721 956,869
---------- ----------
Other liabilities:
Net deferred income tax liability 63,155 59,198
General expenses, taxes, licenses and fees payable
and other liabilities 39,868 36,099
---------- ----------
103,023 95,297
---------- ----------
Notes payable 57,858 50,719
Separate account liabilities 188,721 137,090
---------- ----------
Total liabilities 1,359,323 1,239,975
---------- ----------
Stockholder's equity:
Common stock, par value $10 per share. 250,000
shares authorized, issued and outstanding 2,500 2,500
Additional paid-in capital 23,244 23,244
Accumulated other comprehensive income 19,775 13,371
Retained earnings 230,106 220,346
---------- ----------
Total stockholder's equity 275,625 259,461
Commitments and contingencies (notes 9, 11 and 14)
---------- ----------
Total liabilities and stockholder's equity $1,634,948 1,499,436
========== ==========
</TABLE>
-35-
<PAGE> 68
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums:
Life and annuity $ 26,901 25,282 24,187
Accident and health 206,821 181,944 166,057
---------- ---------- ----------
233,722 207,226 190,244
Net investment income 70,479 69,175 67,502
Other 14,757 13,190 11,250
---------- ---------- ----------
Total revenues 318,958 289,591 268,996
Benefits:
Benefits paid or provided:
Life and annuity 18,790 18,045 18,539
Accident and health 116,908 105,594 93,858
Interest credited to funded contracts 29,208 30,207 28,386
Increase in reserves for future policy benefits:
Life and annuity (net of increase (decrease) in
reinsurance reserves ceded of $1,362, $55,
and $(3) in 1998, 1997, and 1996, respectively) 1,179 2,788 4,336
Accident and health (net of increase) in
reinsurance reserves ceded $9,316, $9,838, and
$6,704, in 1998, 1997, and 1996, respectively) 13,588 10,250 13,259
---------- ---------- ----------
179,673 166,884 158,378
---------- ---------- ----------
Expenses:
Selling costs 64,931 56,835 47,105
Other operating, administrative and general expenses 49,258 43,241 44,942
Taxes, other than federal income taxes, and licenses
and fees 7,644 7,251 6,535
Increase in deferred policy acquisition costs (16,004) (15,240) (10,082)
---------- ---------- ----------
105,829 92,087 88,500
---------- ---------- ----------
Total benefits and expenses 285,502 258,971 246,878
---------- ---------- ----------
Income before income taxes 33,456 30,620 22,118
Income taxes:
Current 10,482 2,680 4,421
Deferred 508 5,802 4,650
---------- ---------- ----------
10,990 8,482 9,071
---------- ---------- ----------
Net income $ 22,466 22,138 13,047
========== ========== ==========
Basic net income per share $ 89.86 88.55 52.19
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-36-
<PAGE> 69
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
Years ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDER'S
STOCK CAPITAL EARNINGS INCOME EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 2,500 17,718 223,195 16,028 259,441
Comprehensive income:
Net income -- -- 13,047 -- 13,047
Net change in unrealized holding
gain on investments available-
for-sale, net of deferred taxes -- -- -- (9,776) (9,776)
------------
Comprehensive income 3,271
Dividends -- -- (4,200) -- (4,200)
Capital contribution -- 2,198 -- -- 2,198
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 2,500 19,916 232,042 6,252 260,710
Comprehensive income:
Net income -- -- 22,138 -- 22,138
Net change in unrealized holding
gain on investments available-
for-sale, net of deferred taxes -- -- -- 7,119 7,119
------------
Comprehensive income 29,257
Dividends -- -- (33,834) -- (33,834)
Capital contribution -- 3,328 -- -- 3,328
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 2,500 23,244 220,346 13,371 259,461
Comprehensive income:
Net income -- -- 22,466 -- 22,466
Net change in unrealized holding
gain on investments available-
for-sale, net of deferred taxes -- -- -- 6,404 6,404
------------
Comprehensive income 28,870
Dividends -- -- (12,706) -- (12,706)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 $ 2,500 23,244 230,106 19,775 275,625
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-37-
<PAGE> 70
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,466 22,138 13,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation on investment real estate 212 653 935
Accretion of discount on investments (793) (546) (469)
Realized gains on investments (2,053) (1,823) (1,793)
Increase in deferred policy acquisition costs (16,004) (15,240) (10,082)
Increase in accrued investment income (1,166) (218) (478)
(Increase) decrease in accounts receivable 1,189 (23,254) (15,006)
Increase in policy liabilities 32,450 27,694 18,017
Increase in interest credited on deposit and
other investment-type contracts 29,208 30,207 28,386
Charges on deposit and other investment-type contracts (3,255) (2,878) (2,812)
Increase in general expenses, taxes, licenses and
fees payable and other liabilities 3,769 2,656 4,257
Deferred income taxes 508 5,802 4,650
Other (2,737) 949 840
---------- ---------- ----------
Total adjustments 41,328 24,002 26,445
---------- ---------- ----------
Net cash provided by operating activities 63,794 46,140 39,492
---------- ---------- ----------
Cash flows from investing activities:
Sale, maturity or repayment of investments:
Fixed maturities held-to-maturity 24,305 20,940 26,867
Fixed maturities available-for-sale 122,675 133,727 166,678
Equity securities 160 11,673 5,708
Mortgage loans on real estate 29,244 20,200 15,736
Real estate 3,244 9,221 9,101
Net decrease (increase) in short-term and
other investments 1,589 (11,013) (3,416)
Purchase of investments:
Fixed maturities held-to-maturity (492) (4,349) (45,961)
Fixed maturities available-for-sale (191,017) (211,464) (171,753)
Equity securities (409) (19,489) (4,580)
Mortgage loans on real estate (27,415) (24,793) (24,671)
Real estate (3,263) (1,403) (907)
Policy loans, net (2,479) (309) (194)
Cash received upon assumption of reserves (note 12) 18,747 -- --
---------- ---------- ----------
Net cash used in investing activities (25,111) (77,059) (27,392)
---------- ---------- ----------
</TABLE>
(Continued)
-38-
<PAGE> 71
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Dividends paid to parent $ (12,706) (14,156) (4,200)
Capital contribution from parent -- 3,328 --
Proceeds from notes payable 25,000 109,775 9,075
Repayment of notes payable (17,861) (76,583) (8,278)
Deposits from deposit and other investment-type
contracts 60,269 87,709 67,478
Withdrawals from deposit and other investment-type
contracts (84,567) (86,689) (74,939)
---------- ---------- ----------
Net cash (used in) provided by financing activities (29,865) 23,384 (10,864)
---------- ---------- ----------
Net increase (decrease) in cash 8,818 (7,535) 1,236
Cash at beginning of year 8,427 15,962 14,726
---------- ---------- ----------
Cash at end of year $ 17,245 8,427 15,962
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on notes payable $ 3,073 2,076 1,340
========== ========== ==========
Federal income taxes $ 6,600 4,800 7,100
========== ========== ==========
Supplemental disclosure of noncash investing activities:
Change in unrealized holding gain on investments
available-for-sale, net of deferred tax expense (benefit)
of $3,449, $3,840, and $(6,289), in 1998, 1997, and
1996, respectively $ 6,404 7,119 (9,776)
========== ========== ==========
</TABLE>
(Continued)
-39-
<PAGE> 72
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Supplemental disclosure of noncash financing activities:
Capital contribution from parent through
forgiveness of deferred tax liability $ -- -- 2,198
=========== =========== ===========
Amounts transferred to Parent through dividend of
common stock of affiliated companies:
Fixed maturities $ -- 8,567 --
=========== =========== ===========
Real estate, net $ -- 2,632 --
=========== =========== ===========
Short-term and other investments $ -- 3,006 --
=========== =========== ===========
Accounts receivable $ -- 732 --
=========== =========== ===========
Accrued investment income $ -- 109 --
=========== =========== ===========
Other assets $ -- 241 --
=========== =========== ===========
Policy liabilities $ -- 378 --
=========== =========== ===========
Notes payable $ -- 2,312 --
=========== =========== ===========
Deferred tax liability $ -- 683 --
=========== =========== ===========
Other liabilities $ -- 682 --
=========== =========== ===========
Amounts transferred to Parent through dividend of
common stock of non-affiliated companies:
Common stock $ -- 6,485 --
=========== =========== ===========
Deferred tax liability assumed by the Company $ -- (1,961) --
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-40-
<PAGE> 73
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS
American Fidelity Assurance Company (AFA or the Company) and
subsidiaries provide a variety of financial services. AFA is a wholly
owned subsidiary of American Fidelity Corporation (AFC), a Nevada
insurance holding company. The principal subsidiary of AFA for the
year ended December 31, 1996, was Security General Life Insurance
Company (SGLI), a life insurance company. The Company and its
insurance subsidiaries are subject to state insurance regulations and
periodic examinations by state insurance departments.
AFA is licensed in 49 states and the District of Columbia with
approximately 38% of direct premiums written in Oklahoma, Texas, and
California. AFA is represented by approximately 240 salaried managers
and agents, and over 8,300 brokers. Activities of AFA are largely
concentrated in the group disability income, group and individual
annuity, and individual medical markets. In addition, individual and
group life business is also conducted. The main thrust of AFA's sales
is worksite marketing of voluntary products through the use of payroll
deduction. The Company sells these voluntary products through a
salaried sales force that is broken down into two divisions: the
Association Group Division (AGD) and American Fidelity Educational
Services (AFES). AGD specializes in voluntary disability income
insurance programs aimed at selected groups and associations whose
premiums are funded by employees through payroll deductions. AFES
focuses on marketing to public school employees with ancillary
insurance products such as disability income, tax sheltered annuities,
life insurance, dread disease, and accidental death and dismemberment.
These premiums are also funded by employees through payroll
deductions. The expertise gained by the Company in worksite marketing
of voluntary products is used by the Strategic Alliance Division in
developing products to meet special situations and focusing on
marketing to a broad range of employers through independent broker
agencies and agents interested in getting into or enhancing their
payroll deduction capability.
A significant portion of the Company's business consists of group and
individual annuities. The Company's earnings related to these products
are impacted by conditions in the overall interest rate environment.
(b) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles, which vary in some
respects from statutory accounting practices prescribed or permitted
by state insurance departments (see note 2). The consolidated
financial statements include the accounts and operations of AFA and
its wholly owned subsidiaries, except where control is expected to be
temporary. All significant
(Continued)
-41-
<PAGE> 74
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
(c) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates. Principal estimates that could change in the future are the
actuarial assumptions used in establishing deferred policy acquisition
costs and policy liabilities.
(d) INVESTMENTS
Management determines the appropriate classification of investments at
the time of purchase. If management has the intent and the Company has
the ability at the time of purchase to hold the investments until
maturity, they are classified as held-to-maturity and carried at
amortized cost. Investments to be held for indefinite periods of time
and not intended to be held-to-maturity are classified as
available-for-sale and carried at fair value. Fair values of
investments available-for-sale are based on quoted market prices.
The effects of any unrealized holding gains or losses on securities
available-for-sale are reported as accumulated other comprehensive
income, a separate component of stockholder's equity, net of deferred
taxes. Transfers of securities between categories are recorded at fair
value at the date of transfer.
Fixed maturities held-to-maturity and short-term investments (bonds,
notes, and redeemable preferred stocks) are reported at cost, adjusted
for amortization of premium or accretion of discount because it is
management's intent to hold these investments to maturity. Equity
securities (common and nonredeemable preferred stocks) are reported
at current fair value. Mortgage loans on real estate are reported at
the unpaid balance less an allowance for possible losses. Investment
in real estate is carried at cost less accumulated depreciation.
Investment in real estate, excluding land, is depreciated on a
straight-line basis using the estimated life of 39 years. Policy loans
are reported at the unpaid balance.
Realized gains or losses on disposal of investments are determined on
a specific-identification basis and are included in the accompanying
consolidated statements of income.
Because the Company's primary business is in the insurance industry,
the Company holds a significant amount of assets that are matched with
its liabilities in relation to maturity and interest margin. In order
to maximize earnings and minimize risk, the Company invests in a
diverse portfolio of investments. The portfolio is diversified by
geographic region, investment
(Continued)
-42-
<PAGE> 75
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
type, underlying collateral, maturity, and industry. Management does
not believe the Company has any significant concentrations of credit
risk in its investments.
The investment portfolio includes fixed maturities, equity securities,
mortgage loans, real estate, policy loans, and short-term investments.
The Company's portfolio does not include any fixed maturities that are
low investment-grade and have a high-yield ("junk bonds"). The Company
limits its risks by investing in fixed maturities and equity
securities of rated companies; mortgage loans adequately
collateralized by real estate; selective real estate supported by
appraisals; and policy loans collateralized by policy cash values. In
addition, the Company performs due diligence procedures prior to
making mortgage loans. These procedures include evaluations of the
creditworthiness of the mortgagees and/or tenants and independent
appraisals. Certain fixed maturities are guaranteed by the United
States government.
The Company periodically reviews its investment portfolio to determine
if allowances for possible losses are necessary. In connection with
this determination, management reviews published market values, credit
ratings, independent appraisals, and other valuation information.
While management believes that the allowances are adequate,
adjustments may be necessary in the future due to changes in economic
conditions. In addition, regulatory agencies periodically review
investment valuation as an integral part of their examination process.
Such agencies may require the Company to recognize adjustments to the
losses based upon available information and judgments of the
regulatory examiners at the time of their examination.
(e) RECOGNITION OF PREMIUM REVENUE AND COSTS
Revenues from life, payout annuity (with life contingencies), and
accident and health policies represent premiums recognized over the
premium-paying period and are included in life, annuity, and accident
and health premiums. Expenses are associated with earned premiums to
result in recognition of profits over the life of the policies.
Expenses include benefits paid to policyholders and the change in the
reserves for future policy benefits.
Revenues from accumulation policies, which are included in other
revenues, represent amounts assessed against policyholders. Such
assessments are principally surrender charges. Policyholder account
balances for accumulation annuities consist of premiums received, plus
credited interest, less accumulated policyholder assessments.
Policyholder account balances are reported in the consolidated balance
sheets as funds held under deposit administration contracts. Expenses
for accumulation annuities represent interest credited to policyholder
account balances.
Revenues from most universal life policies, which are included in
other revenues, represent amounts assessed against policyholders. Such
assessments are principally mortality charges,
(Continued)
-43-
<PAGE> 76
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
surrender charges, and policy service fees. Policyholder account
balances consist of premiums received plus credited interest, less
accumulated policyholder assessments. Policyholder account balances
are reported in the consolidated balance sheets as other policy
liabilities. Expenses include interest credited to policyholder
account balances and benefits in excess of account balances returned
to policyholders.
(f) POLICY ACQUISITION COSTS
The Company defers costs which vary with and are primarily related to
the production of new business. Deferred costs associated with life,
annuity, universal life, and accident and health insurance policies
consist principally of field sales compensation, direct response
costs, underwriting and issue costs, and related expenses. Deferred
costs associated with life policies are amortized (with interest) over
the anticipated premium paying period of the policies using
assumptions that are consistent with the assumptions used to calculate
policy reserves. Deferred costs associated with annuities and
universal life policies are amortized over the life of the policies at
a constant rate based on the present value of the estimated gross
profit to be realized. Deferred costs related to accident and health
insurance policies are amortized over the anticipated premium paying
period of the policies based on the Company's experience. Deferred
policy acquisition costs are subject to recoverability testing at the
time of policy issue and at the end of each accounting period, and are
written off if determined to be unrecoverable.
(g) POLICY LIABILITIES
Life and annuity and accident and health policy benefit reserves are
primarily calculated using the net level reserve method. The net level
reserve method includes assumptions as to future investment yields,
withdrawal rates, mortality rates, and other assumptions based on the
Company's experience. These assumptions are modified as necessary to
reflect anticipated trends and include provisions for possible
unfavorable deviation.
Reserves for benefits payable are determined using case-basis
evaluations and statistical analyses. These reserves represent the
estimate of all benefits incurred but unpaid. The estimates are
periodically reviewed and, as adjustments become necessary, they are
reflected in current operations. Although such estimates are the
Company's best estimate of the ultimate value, the actual results may
vary from these values in either direction.
(h) REINSURANCE
The Company accounts for reinsurance transactions as prescribed by
Statement of Financial Accounting Standards No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" (Statement 113). Statement 113 requires the reporting of
reinsurance transactions relating to the balance sheet on a gross
basis and precludes immediate gain recognition on reinsurance
contracts.
(Continued)
-44-
<PAGE> 77
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(i) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) EQUIPMENT
Equipment, which is included in other assets, is stated at cost and is
depreciated on a straight-line basis using estimated lives of 3 to 10
years. Additions, renewals, and betterments are capitalized.
Expenditures for purchased software, maintenance, and repairs
generally are expensed. The costs associated with internally developed
software are generally capitalized. Upon retirement or disposal of an
asset, the asset and related accumulated depreciation are eliminated
and any related gain or loss is included in income.
(k) SEPARATE ACCOUNTS
The Company maintains a separate account under Oklahoma insurance law
designated as American Fidelity Separate Account A (Account A).
Account A was formerly known as American Fidelity Variable Annuity
Fund A, and operated as an open-end diversified management investment
company from 1968 to December 31, 1998. Effective January 1, 1999, it
was converted to a unit investment trust separate account, and it
transferred its investment portfolio to the American Fidelity Dual
Strategy Fund (the Fund) in exchange for shares of the Fund. Under
Oklahoma law, the assets of Account A are segregated from the
Company's assets, are held for the exclusive benefit of the variable
annuity contract owners and are not chargeable with liabilities
arising out of the business conducted by any other account or by the
Company.
The Company also maintains a separate account under Oklahoma insurance
law designated as American Fidelity Separate Account B (Account B).
Account B is registered as a unit investment trust under the
Investment Company Act of 1940, as amended. Under Oklahoma law, the
assets of each of the nine segregated sub-accounts are held for the
exclusive benefit of the variable annuity contract owners and are not
chargeable with liabilities arising out of the business conducted by
any other account or by the Company.
(Continued)
-45-
<PAGE> 78
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(l) BASIC NET INCOME PER SHARE
Basic net income per share is based on the weighted average number of
shares outstanding. During the years ended December 31, 1998, 1997,
and 1996, the weighted average number of shares was 250,000. There are
no dilutive securities outstanding.
(m) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to be consistent
with the current year presentation.
(n) NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income," in 1998. SFAS No. 130
establishes standards for reporting and presentation of comprehensive
income and its components in a full set of financial statements.
Comprehensive income (loss) consists of net income (loss) and net
unrealized gains (losses) on securities available-for-sale and is
presented in the consolidated statements of stockholders' equity. SFAS
No. 130 requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial
position or results of operations. Prior year financial statements
have been reclassified to conform to the requirements of SFAS No. 130.
On January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pension and Other Postretirement Benefits." SFAS No.
132 revises employers' disclosures about pension and other
postretirement benefits plans. SFAS No. 132 does not change the method
of accounting for such plans. Prior year disclosures in the notes to
the financial statements have been revised to conform to the
requirements of SFAS No. 132.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting
standards for derivative instruments and hedging activities. It
requires that a company recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. This statement is required to be adopted by
the Company in 2000. Management does not anticipate this statement to
have a material adverse impact on the consolidated financial position
or the future results of operations of the Company.
In December 1997, the AICPA issued Statement of Position No. 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3). This statement provides: (1) guidance for
determining when an entity should recognize a liability for
guaranty-fund and other insurance-related assessments, (2) guidance on
how to measure the
(Continued)
-46-
<PAGE> 79
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
liability, (3) guidance on when an asset may be recognized for a
portion of all of the assessment liability or paid assessment that can
be recovered through premium tax offsets or policy surcharges, and (4)
requirements for disclosures of certain information. SOP 97-3 is
effective for financial statements for fiscal years beginning after
December 15, 1998. The Company does not anticipate this statement to
have a material impact on the consolidated financial position or the
future results of the operations of the Company.
In March 1998, the AICPA issued Statement of Position No. 98-1 (SOP
98-1), "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This statement provides guidance for
determining whether costs of software developed or obtained for
internal use should be capitalized or expensed as incurred. The
guidance provided by SOP 98-1 applies only to such costs incurred
prospectively and is no retroactive to prior periods. In the past, the
Company has capitalized certain costs related to internally-developed
software, in a manner consistent with the guidance provided by SOP
98-1. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. The Company does not anticipate this statement to have a
material impact on the consolidated financial position or the future
results of the operations of the Company.
In October 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts that do
not Transfer Insurance Risk" (SOP 98-7). This statement provides that
insurance and reinsurance contracts for which the deposit method is
appropriate should be classified and accounted for as one of the
following, those that (1) transfer only significant timing risk, (2)
transfer only significant underwriting risk, (3) transfer neither
significant timing nor underwriting risk, or (4) have an indeterminate
risk. SOP 98-7 does not address when deposit accounting should be
applied. SOP 98-7 is effective for fiscal years beginning after June
15, 1999. The Company is currently completing its evaluation of the
financial impact of this statement, as well as the changes to its
related disclosures.
(2) STATUTORY FINANCIAL INFORMATION
The Company is required to file statutory financial statements with
state insurance regulatory authorities. Accounting principles used to
prepare these statutory financial statements differ from financial
statements prepared on the basis of generally accepted accounting
principles. The Company reported statutory net income for the years
ended December 31, 1998, 1997, and 1996, of approximately $12,577,000,
$16,276,000, and $13,227,000, respectively. The Company reported
statutory capital and surplus at December 31, 1998 and 1997, of
approximately $126,277,000 and $119,523,000, respectively.
(Continued)
-47-
<PAGE> 80
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
Retained earnings of the Company and its insurance subsidiaries are
restricted as to payment of dividends by statutory limitations
applicable to insurance companies. Without prior approval of the state
insurance department, dividends that can be paid by the Company or an
insurance subsidiary are generally limited to the greater of (a) 10%
of statutory capital and surplus, or (b) the statutory net gain from
operations. These limitations are based on the amounts reported for
the previous calendar year.
The Oklahoma Insurance Department has adopted risk based capital (RBC)
requirements for life insurance companies. These requirements are
applicable to the Company. The RBC calculation serves as a benchmark
for the regulation of life insurance companies by state insurance
regulators. RBC provides for surplus formulas similar to target
surplus formulas used by commercial rating agencies. The formulas
specify various weighting factors that are applied to statutory
financial balances or various levels of activity based on the
perceived degree of risk, and are set forth in the RBC requirements.
The amount determined under such formulas is called the authorized
control level RBC (ACLC).
The RBC guidelines define specific capital levels based on a company's
ACLC that are determined by the ratio of the company's total adjusted
capital (TAC) to its ACLC. TAC is equal to statutory capital, plus the
Asset Valuation Reserve and any voluntary investment reserves, 50% of
dividend liability, and certain other specified adjustments. Companies
where TAC is less than or equal to 2.0 times ACLC are subject to
certain corrective actions, as set forth in the RBC requirements.
At December 31, 1998 and 1997, the statutory TAC of the Company
significantly exceeds the level requiring corrective action.
On March 16, 1998, the NAIC approved the codification of statutory
accounting practices. The codification will constitute the only source
of "prescribed" statutory accounting practices and is subject to
adoption by the Oklahoma Insurance Department. The Statements of
Statutory Accounting Principles established under the codification are
generally effective January 1, 2001. The Company has not determined
the impact the adoption of the codification will have on statutory
surplus.
(Continued)
-48-
<PAGE> 81
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(3) INVESTMENTS
Investment income for the years ended December 31 is summarized below
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest on fixed maturities $ 64,207 61,556 58,271
Dividends on equity securities 7 25 44
Interest on mortgage loans 11,890 12,091 11,747
Investment real estate income 1,208 2,285 3,295
Interest on policy loans 1,468 1,411 1,281
Interest on short-term investments 267 244 120
Net realized gains on investments 2,053 1,823 1,793
Other 647 787 1,186
-------- -------- --------
81,747 80,222 77,737
Less investment expenses (11,268) (11,047) (10,235)
-------- -------- --------
Net investment income $ 70,479 69,175 67,502
======== ======== ========
</TABLE>
Net realized gains (losses) and the changes in unrealized gains
(losses) on investments for the years ended December 31 are as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
REALIZED UNREALIZED REALIZED UNREALIZED REALIZED UNREALIZED
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities
held-to-maturity $ 90 -- 173 -- (1,127) --
Fixed maturities
available-for-sale 534 8,521 449 12,600 573 (19,051)
Equity securities -- 1,332 -- (1,641) 27 2,986
Real estate 1,283 -- 1,219 -- 2,398 --
Mortgage loans 147 -- (15) -- (68) --
Other (1) -- (3) -- (10) --
---------- ---------- ---------- ---------- ---------- ----------
$ 2,053 9,853 1,823 10,959 1,793 (16,065)
========== ========== ========== ========== ========== ==========
</TABLE>
Included in the above realized gains (losses) is the increase
(decrease) in the allowance for possible losses on mortgage loans of
$(147,000), $16,000, and $(790,000), in 1998, 1997, and 1996,
respectively, and the increase in the allowance for losses on
investment real estate of $117,000 in 1996. In addition, the Company
realized net gains of approximately $554,000 and $1,000 during 1998,
and 1996, respectively, on investments in fixed maturities that were
called or prepaid.
(Continued)
-49-
<PAGE> 82
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(a) HELD-TO-MATURITY
The amortized cost and estimated fair value of investments in fixed
maturities held-to-maturity are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 9,011 992 -- 10,003
Corporate securities 118,417 7,445 -- 125,862
Mortgage-backed securities 84,194 2,181 (25) 86,350
-------- -------- -------- --------
Totals $211,622 10,618 (25) 222,215
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 9,001 659 -- 9,660
Corporate securities 131,251 4,826 (354) 135,723
Mortgage-backed securities 94,547 2,037 (104) 96,480
-------- -------- -------- --------
Totals $234,799 7,522 (458) 241,863
======== ======== ======== ========
</TABLE>
The amortized cost and estimated fair value of investments in fixed
maturities held-to-maturity at December 31, 1998 are shown below (in
thousands) by contractual maturity. Expected maturities will differ
from contractual maturities because the issuers of such securities may
have the right to call or prepay obligations with or without call or
prepayment penalties.
(Continued)
-50-
<PAGE> 83
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less $ 2,999 3,031
Due after one year through five years 18,530 19,141
Due after five years through ten years 48,716 52,084
Due after ten years 57,183 61,609
---------- ----------
127,428 135,865
Mortgage-backed securities 84,194 86,350
---------- ----------
$ 211,622 222,215
========== ==========
</TABLE>
Proceeds from sales of investments in fixed maturities
held-to-maturity during 1998, 1997, and 1996 were approximately
$5,887,000, $9,006,000, and $7,948,000, respectively. Gross gains of
approximately $173,000, and $33,000, in 1997 and 1996, respectively,
were realized on those sales. In 1998 and 1996 gross losses of
approximately $124,000 and $1,161,000, respectively were realized on
those sales. In 1998, 1997, and 1996, significant deterioration in the
issuers' creditworthiness caused the Company to change its intent to
hold these securities to maturity.
(b) AVAILABLE-FOR-SALE
The gross unrealized holding gains on equity securities
available-for-sale were approximately $2,108,000 and $779,000 in 1998
and 1997, respectively. Gross unrealized holding losses on equity
securities available-for-sale were approximately $63,000 and $66,000
in 1998 and 1997, respectively.
(Continued)
-51-
<PAGE> 84
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
The amortized cost and estimated fair value of investments in fixed
maturities available-for-sale are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 89,249 3,230 (25) 92,454
Corporate securities 439,030 21,958 (290) 460,698
Mortgage-backed securities 163,556 3,652 (139) 167,069
-------- ------- ----- --------
Totals $691,835 28,840 (454) 720,221
======== ======= ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 89,182 2,249 (65) 91,366
Corporate securities 382,599 14,128 (195) 396,532
Mortgage-backed securities 150,931 3,909 (161) 154,679
-------- ------- ----- --------
Totals $622,712 20,286 (421) 642,577
======== ======= ===== ========
</TABLE>
The amortized cost and estimated fair value of investments in fixed
maturities available-for-sale at December 31, 1998 are shown below (in
thousands) by contractual maturity. Expected maturities will differ from
contractual maturities because the issuers of such securities may have the
right to call or prepay obligations with or without call or prepayment
penalties.
(Continued)
-52-
<PAGE> 85
AMERICAN FlDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------- ---------
<S> <C> <C>
Due in one year or less $ 46,395 46,830
Due after one year through five years 199,552 207,039
Due after five years through ten years 182,320 191,083
Due after ten years 100,012 108,200
-------- --------
528,279 553,152
Mortgage-backed securities 163,556 167,069
-------- --------
$691,835 720,221
======== ========
</TABLE>
Proceeds from sales of investments in fixed maturities available-for-sale
were approximately $37,058,000, $102,958,000, and $136,577,000, in 1998,
1997, and 1996, respectively. Gross gains of approximately $206,000,
$1,152,000, and $1,257,000 and gross losses of approximately $12,000,
$703,000, and $684,000 were realized on those sales in 1998, 1997, and
1996, respectively.
At December 31, 1998 and 1997, investments with carrying values of
approximately $2,662,000 and $2,497,000, respectively, were on deposit with
state insurance departments as required by statute.
(Continued)
-53-
<PAGE> 86
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of the Company's financial instruments (in thousands) and the
fair value estimates, methods, and assumptions are set forth below:
<TABLE>
<CAPTION>
1998 1997
--------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------------- ----------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 17,245 17,245 8,427 8,427
Short-term and other investments 19,181 19,181 20,770 20,770
Accounts receivable 30,932 30,932 35,819 35,819
Accrued investment income 15,523 15,523 14,357 14,357
Reinsurance receivables on paid
and unpaid benefits 61,201 61,201 57,503 57,503
Policy loans 11,147 11,147 8,668 8,668
Fixed maturities held-to-maturity 211,622 222,215 234,799 241,863
Fixed maturities available-for-sale 720,221 720,221 642,577 642,577
Equity securities 13,317 13,317 11,736 11,736
Mortgage loans 133,440 142,600 135,122 145,763
Financial liabilities:
Certain policy liabilities 637,618 620,611 639,272 620,976
Other liabilities 39,868 39,868 36,099 36,099
Notes payable 57,858 58,250 50,719 51,247
</TABLE>
CASH, SHORT-TERM AND OTHER INVESTMENTS, ACCOUNTS RECEIVABLE, ACCRUED
INVESTMENT INCOME, REINSURANCE RECEIVABLES ON PAID AND UNPAID BENEFITS, AND
OTHER LIABILITIES
The carrying amount of these financial instruments approximates fair value
because they mature within a relatively short period of time and do not
present unanticipated credit concerns.
POLICY LOANS
Policy loans have average interest rates of 6.75% and 6.95% as of December
31, 1998 and 1997, respectively, and have no specified maturity dates. The
aggregate fair value of policy loans approximates the carrying value
reflected on the consolidated balance sheets. These loans typically carry
an interest rate that is tied to the crediting rate applied to the related
policy and contract reserves. Policy loans are an integral part of the life
insurance policies which the Company has in force and cannot be valued
separately.
(Continued)
-54-
<PAGE> 87
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
FIXED MATURITY INVESTMENTS
The fair value of fixed maturity investments is estimated based on bid
prices published in financial newspapers or bid quotations received from
securities dealers. The fair value of certain securities is not readily
available through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar instruments,
adjusted for the differences between the quoted instruments and the
instruments being valued.
EQUITY SECURITIES
The fair value of equity securities investments of the Company is based on
bid prices published in financial newspapers or bid quotations received
from securities dealers.
MORTGAGE LOANS
Fair values are estimated for portfolios of loans with similar
characteristics. Mortgage loans are segregated into either commercial or
residential categories, and have average net yield rates of 8.27% and 8.70%
for December 31, 1998 and 1997, respectively. The fair value of mortgage
loans was calculated by discounting scheduled cash flows to maturity using
estimated market discount rates of 7.15% and 7.29% for December 31, 1998
and 1997, respectively. These rates reflect the credit and interest rate
risk inherent in the loans. Assumptions regarding credit risk, cash flows,
and discount rates are judgmentally determined using available market
information and specific borrower information. The fair value of certain
residential loans is based on the approximate fair value of the underlying
real estate securing the mortgages.
CERTAIN POLICY LIABILITIES
Certain policies sold by the Company are investment-type contracts. These
liabilities are segregated into two categories: deposit administration
funds and immediate annuities which do not have life contingencies. The
fair value of the deposit administration funds is estimated as the cash
surrender value of each policy less applicable surrender charges. The fair
value of the immediate annuities without life contingencies is estimated as
the discounted cash flows of expected future benefits less the discounted
cash flows of expected future premiums, using the current pricing
assumptions. The carrying amount of all other policy liabilities
approximates fair value.
(Continued)
-55-
<PAGE> 88
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Funds held under deposit
administration contracts $577,301 560,650 580,499 562,961
Annuities 60,317 59,961 58,773 58,015
</TABLE>
NOTES PAYABLE
The fair value of the Company's notes payable is estimated by discounting
the scheduled cash flows of each instrument through the scheduled maturity.
The discount rates used are similar to those used for the valuation of the
Company's commercial mortgage loan portfolio, except for the Company's
notes payable to the Federal Home Loan Bank of Topeka, which are valued
using discount rates at or near the carried rates because the notes have
relatively short lives or carry the option of conversion to an adjustable
rate.
LIMITATIONS
Fair value estimates are made at a specific point 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, nor do they reflect income taxes on
differences between fair value and tax basis of the assets. Because no
established exchange exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
(Continued)
-56-
<PAGE> 89
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(5) DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs principally represent field sales
compensation, direct response costs, underwriting and issue costs, and
related expenses. Information relating to the increase in deferred policy
acquisition costs, is summarized as follows (in thousands):
<TABLE>
<CAPTION>
LIFE ACCIDENT
AND ANNUITY AND HEALTH TOTAL
----------- ---------- -----
<S> <C> <C> <C>
Year ended December 31, 1998:
Deferred costs $ 7,260 33,371 40,631
Amortization (4,669) (19,958) (24,627)
------- ------- -------
Net increase $ 2,591 13,413 16,004
======= ======= =======
Year ended December 31, 1997:
Deferred costs $ 8,600 28,734 37,334
Amortization (5,581) (16,513) (22,094)
------- ------- -------
Net increase $ 3,019 12,221 15,240
======= ======= =======
Year ended December 31, 1996:
Deferred costs $ 7,088 22,145 29,233
Amortization (6,437) (12,714) (19,151)
------- ------- -------
Net increase $ 651 9,431 10,082
======= ======= =======
</TABLE>
(Continued)
-57-
<PAGE> 90
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(6) RESERVES FOR FUTURE POLICY BENEFITS
Reserves for life and annuity future policy benefits as of December 31 are
principally based on the interest assumptions set forth below (in
thousands):
<TABLE>
<CAPTION>
INTEREST
1998 1997 ASSUMPTIONS
-------- ------- ---------------
<S> <C> <C> <C>
Life and annuity reserves:
Issued prior to 1970 $ 3,218 3,308 4.75%
Issued 1970 through 1980 28,458 28,796 6.75% to 5.25%
Issued after 1982 (indeterminate
premium products) 593 559 10.00% to 8.50%
Issued through 1987 (SGLI acquisition) 1,336 1,360 11.00%
Issued 1981 - 1994 (all other) 28,875 28,018 8.50% to 7.00%
Issued after 1994 (all other) 4,195 2,892 7.00%
Life contingent annuities 32,825 30,894 Various*
Group term life waiver of premium
disabled lives 5,287 5,311 6.00%
Reserves acquired through assumption
reinsurance agreement (see note 12) 21,971 -- 5.50% to 2.25%
All other life reserves 4,736 4,525 Various
-------- -------
$131,494 105,663
======== =======
</TABLE>
* These reserves are revalued as limited-pay contracts. As a result, the
reserve is somewhat greater than the present value of future benefits
and expenses at the assumed interest rates, i.e., the actual interest
rates required to support the reserves are somewhat lower than the
rates assumed.
Assumptions as to mortality are based on the Company's prior experience.
This experience approximates the 1955-60 Select and Ultimate Table
(individual life issued prior to 1981), the 1965-70 Select and Ultimate
Table (individual life issued in 1981 and after) and the 1960 Basic Group
Table (all group issues). Assumptions for withdrawals are based on the
Company's prior experience. All assumptions used are adjusted to provide
for possible adverse deviations.
(7) LIABILITY FOR BENEFITS PAYABLE
The provision for benefits pertaining to prior years did not change
significantly in 1998 or 1997.
(Continued)
-58-
<PAGE> 91
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
(8) NOTES PAYABLE
Notes payable as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
5.49% line of credit, due in 1999, interest due monthly $ 3,500 --
5.49% line of credit, due in 1999, interest due monthly 5,000 --
5.07% line of credit, due in 1999, interest due monthly 3,000 3,000
5.52% line of credit, due in 1999, interest due monthly 10,000 10,000
6.84% line of credit, due in 2000, interest due monthly 4,000 4,000
5.81% line of credit, due in 2002, interest due monthly 10,000 10,000
5.78% line of credit, due in 2002, interest due monthly 3,000 3,000
5.05% line of credit, due in 2005, interest due monthly 5,000 --
5.55% line of credit, due in 2008, interest due monthly 6,500 --
5.03% line of credit, due in 2008, interest due monthly 5,000 --
8.4% mortgage loan, due in monthly installments of
$22,000 (including interest) to 2027 2,858 2,881
Various notes payable, paid in 1998 -- 17,838
------- -------
$57,858 50,719
======= =======
</TABLE>
The promissory notes are guaranteed by AFC. The mortgage loan is secured by
a mortgage on other investment real estate. The mortgage loan is also
secured by an assignment of the leases on investment real estate.
AFA has a $55,000,000 line of credit with the Federal Home Loan Bank of
Topeka. The line of credit is secured by investment securities pledged as
collateral by AFA with a carrying value of approximately $71,230,000 at
December 31, 1998. The collateral required for this line of credit at
December 31, 1998, was $63,250,000. The pledged securities are held in the
Company's name in a custodial account at InvesTrust, N.A., to secure
current and future borrowings. To participate in this available credit, AFA
has purchased 126,202 shares of Federal Home Loan Bank of Topeka common
stock with a total carrying value of approximately $13,061,000 at December
31, 1998.
(Continued)
-59-
<PAGE> 92
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
Interest expense for the years ended December 31, 1998, 1997, and 1996,
totaled approximately $3,336,000, $2,076,000, and $1,319,000, respectively.
Scheduled maturities (excluding interest) of the above indebtedness at
December 31, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 21,525
2000 4,027
2001 30
2002 13,032
2003 35
Thereafter 19,209
----------
$ 57,858
==========
</TABLE>
(9) INCOME TAXES
Total income tax expense in the accompanying consolidated statements of
income differs from the federal statutory rate of 35% of income before
income taxes principally due to the recapture of certain tax reserve
benefits on reinsurance recaptured by the ceding company in 1997, loss on
the disposition of a subsidiary in 1997, payments made to AFC in 1998 and
1997 treated as management fees for tax purposes, and the correction of
prior year estimates of deferred taxes in 1998 and 1997.
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at December 31, are presented below
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Deferred tax assets:
Other investments 450 522
Life and health reserves 17,906 12,783
Other liabilities -- --
-------- -------
Total gross deferred tax assets 18,356 13,305
-------- -------
Deferred tax liabilities:
Fixed maturities (10,795) (7,602)
Equity securities (715) (250)
Deferred policy acquisition costs (62,378) (57,151)
Other assets (6,803) (6,902)
Other liabilities (820) (598)
-------- -------
Total gross deferred tax liabilities (81,511) (72,503)
-------- -------
Net deferred tax liability $(63,155) (59,198)
======== =======
</TABLE>
(Continued)
-60-
<PAGE> 93
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
Management believes that it is more likely than not that the results of
operations will generate sufficient taxable income to realize the deferred
tax assets reported on the consolidated balance sheets.
The Company and its subsidiaries are included in AFC's consolidated federal
income tax return. Income taxes are reflected in the accompanying
consolidated financial statements as if the Company and its subsidiaries
were separate tax paying entities. At December 31, 1998 and 1997, other
accounts receivable (payable) includes income taxes receivable (payable)
from (to) AFC and other members of the consolidated group of approximately
$(687,000) and $6,550,000, respectively.
Prior to 1984, life insurance companies were taxed under the 1959 Tax Act
on the lesser of taxable income or gain from operations plus one-half of
any excess of gain from operations over taxable investment income. The
one-half of the excess of the gain from operations was accumulated in a
special memorandum tax account known as the "policyholders surplus account"
(PSA). Accumulations at December 31, 1998 were approximately $8,161,000 for
AFA. Pursuant to the Tax Reform Act of 1984, the PSA was "frozen" at the
December 31, 1983 amount and, accordingly, no further additions to the PSA
will be made. These excess amounts in the PSA will become taxable at the
regular corporate tax rate, if distributions to stockholders exceed certain
stated amounts or if certain criteria are not met. No provision for
deferred federal income taxes applicable to the PSA has been made because
management is of the opinion that no distribution of the PSA will be made
in the foreseeable future.
(10) OTHER COMPREHENSIVE INCOME (LOSS)
The change in the components of other comprehensive income (loss) are
reported net of income taxes for the periods indicated, as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------- ------ ------
<S> <C> <C> <C>
Unrealized holding gain on investments:
Unrealized holding gain arising
during the period $ 10,387 (3,635) 6,752
Less: reclassification adjustment for
gains included in net income (534) 186 (348)
-------- ------ -----
Other comprehensive income $ 9,853 (3,449) 6,404
======== ====== =====
</TABLE>
(Continued)
-61-
<PAGE> 94
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------- ------ ------
<S> <C> <C> <C>
Unrealized holding gain on investments:
Unrealized holding gain arising
during the period $ 11,408 (3,993) 7,415
Less: reclassification adjustment for
gains included in net income (449) 153 (296)
-------- ------ -----
Other comprehensive income $ 10,959 (3,840) 7,119
======== ====== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------- ------ ------
<S> <C> <C> <C>
Unrealized holding loss on investments:
Unrealized holding loss arising
during the period $ (15,465) 5,413 (10,052)
Less: reclassification adjustment for
gains included in net income (600) 876 (276)
--------- ----- ------
Other comprehensive loss $ (16,065) 6,289 (9,776)
========= ===== ======
</TABLE>
(11) REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to significant
losses from reinsurer insolvencies. Management believes that all reinsurers
presently used are financially sound and will be able to meet their
contractual obligations; therefore, no allowance for uncollectible amounts
has been included in the financial statements. At December 31, 1998 and
1997, reinsurance receivables with a carrying value of approximately
$13,597,000 and $22,844,000, respectively were associated with two
reinsurers.
Reinsurance agreements in effect for life insurance policies vary according
to the age of the insured and the type of risk. Retention amounts for life
insurance range from $500,000 on group life to $250,000 on individual life
coverages, with slightly lower limits on accidental death benefits. At
December 31, 1998 and 1997, the face amounts of life insurance in force
that are reinsured amounted
(Continued)
-62-
<PAGE> 95
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
to approximately $846,000,000 (approximately 12.6% of total life insurance
in force) and $307,000,000 (approximately 4.6% of total life insurance in
force), respectively.
Reinsurance agreements in effect for accident and health insurance policies
vary with the type of coverage. Retention limits range from $50,000 for
individual cancer coverage to $250,000 for major medical coverage.
The effects of reinsurance agreements on earned and written premiums, prior
to deductions for benefits and commission allowances, were approximately
$(114,225,000), $(92,731,000), and $(83,947,000) for life and accident and
health reinsurance ceded, and $14,220,000, $416,000, and $2,897,000, for
life and accident and health reinsurance assumed, for the years ended
December 31, 1998, 1997 and 1996, respectively.
Reinsurance agreements reduced benefits paid for life and accident and
health policies by approximately $88,999,000, $72,522,000, and $61,730,000,
for the years ended December 31, 1998, 1997, and 1996, respectively.
(12) ACQUIRED BUSINESS
Effective July 1, 1998, the Company entered into an assumption reinsurance
agreement with American Standard Life and Accident Insurance Company (ASL)
of Enid, Oklahoma, the National Organization of Life and Health Guaranty
Associations (NOLHGA) and the guaranty associations in the states where ASL
originally conducted its business. Under this agreement, the Company has
assumed the majority of ASL's policies inforce, with the exception of those
policies issued in states where a guaranty association does not exist.
Effective July 1, 1998, the Company assumed approximately $24 million in
life, annuity and health reserves under this agreement, of which
approximately $5 million were subsequently ceded to a third-party
reinsurer. ASL is an Oklahoma domiciled company in receivership under the
oversight of the Oklahoma Insurance Department and NOLHGA.
The Company recorded an asset for the value of the business acquired based
on the present value of the estimated future profits on the business (PVP),
at a 6.75% discount rate. The PVP was estimated to be $4,313,000 at July 1,
1998. Approximately $311,000 of amortization was recorded in 1998, and is
included in operating expenses in the accompanying consolidated statement
of income. The December 31, 1998 balance of the PVP asset approximates
$4,002,000 and is included in other assets in the accompanying consolidated
balance sheet.
(Continued)
-63-
<PAGE> 96
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
An estimate of the amortization of the PVP for the next five years is as
follows:
1999 $ 579,000
2000 504,000
2001 437,000
2002 379,000
2003 328,000
(13) EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries participate in a pension plan (the Plan)
covering all employees who have satisfied longevity and age requirements.
The Company's funding policy is to contribute annually the maximum amount
that can be deducted for federal income tax purposes. Contributions are
intended to provide not only for benefits attributed to service to date but
also for those expected to be earned in the future.
The Plan's funded status as of December 31, is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Actuarial present value of benefit obligation
Vested benefits $ 16,182 14,455
Nonvested benefits 1,947 1,850
-------- ------
Total accumulated benefit obligation $ 18,129 16,305
======== ======
Change in benefit obligation:
Benefit obligation at beginning of period $ 19,466 15,278
Service cost 1,662 1,284
Interest cost 1,391 1,193
Actuarial loss 1,342 2,598
Benefits paid (1,604) (887)
-------- ------
Benefit obligation at end of period $ 22,257 19,466
======== ======
Change in plan assets:
Fair value of plan assets at beginning of period $ 21,839 17,587
Actual return on plan assets 3,970 4,340
Employer contributions -- 799
Benefits paid (1,604) (887)
-------- ------
Fair value of plan assets at end of period $ 24,205 21,839
======== ======
</TABLE>
(Continued)
-64-
<PAGE> 97
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
Funded status at end of year (Plan assets in
excess of projected benefit obligation): $ 1,948 2,373
Unrecognized transition asset (161) (298)
Unrecognized net actuarial (gain) loss (461) 205
Unrecognized prior service cost due to plan
amendment 385 449
------- -----
Prepaid benefit cost $ 1,711 2,729
======= =====
</TABLE>
In determining the projected benefit obligation, the weighted average
assumed discount rates used were 6.75% and 7.0% in 1998 and 1997,
respectively. The rate of increase in future salary levels was 5.0% in 1998
and 1997. The expected long-term rate of return on assets used in
determining net periodic pension cost was 9.5% in 1998 and 1997. Plan
assets are invested in fixed maturities, equity securities and in
short-term investments.
Net periodic pension cost for the years ended December 31, included the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ----- -----
<S> <C> <C> <C>
Service costs - benefits earned during period $ 1,662 1,284 1,237
Interest costs 1,391 1,193 1,054
Expected return on plan assets (1,962) (4,065) (3,711)
Net amortization and deferral (73) 2,332 2,421
------- ------ ------
Net periodic pension cost $ 1,018 744 1,001
======= ====== ======
</TABLE>
The Company participates in a defined contribution thrift and profit
sharing plan as provided under section 401(a) of the Internal Revenue Code,
which includes the tax deferral feature for employee contributions provided
by section 401(k) of the Internal Revenue Code. The Company contributed
approximately $1,023,000, $881,000, and $822,000, to this plan during the
years ended December 31, 1998, 1997, and 1996, respectively.
(14) COMMITMENTS AND CONTINGENCIES
Rent expense for office space and equipment for the years ended December
31, 1998, 1997, and 1996, was approximately $8,573,000, $6,163,000, and
$5,674,000, respectively. A portion of rent expense relates to leases that
expire or are cancelable within one year. The aggregate minimum annual
rental commitments as of December 31, 1998, under noncancellable long-term
leases for office space are as follows (in thousands):
(Continued)
-65-
<PAGE> 98
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
<TABLE>
<S> <C>
1999 $ 1,520
2000 1,320
2001 862
2002 690
2003 163
Thereafter 199
</TABLE>
The Company has pledged approximately $20,249,000 of its treasury notes as
collateral on lines of credit held by affiliated companies.
The Company has outstanding mortgage loan commitments of approximately
$10,595,000 and $8,165,000 at December 31, 1998 and 1997, respectively.
In the normal course of business, there are various legal actions and
proceedings pending against the Company and its subsidiaries. In
management's opinion, the ultimate liability, if any, resulting from these
legal actions will not have a material adverse effect on the Company's
financial position.
Like other financial and business organizations and individuals around the
world, the Company could be adversely affected if the computer systems used
by the Company and the Company's other service providers do not properly
process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The
Company has had a formal project team (including 22 information systems
professionals) working to correct the problem since 1996. In the briefest
terms, the correction is to change all date related fields in the Company's
computer systems to four digits instead of two digits. At the same time,
all relationships with systems outside the Company must be checked for the
same change and all must be tested to determine that relationships continue
to be compatible. Those systems were tested on December 31, 1997 and went
through year-end processing without incident. The final test of all systems
will be run in 1999. Management is expending considerable resources in a
concerted effort to meet this technology-related threat. Although there is
no guarantee that there will be no adverse impact on the Company of some
sort as January 1, 2000 passes, the Company is hopeful that any adverse
impact will be minimal.
(15) RELATED PARTY TRANSACTIONS
The Company and its subsidiaries lease automobiles, furniture, and
equipment from a partnership that owns a controlling interest in AFC. These
operating leases are cancelable upon one month's notice. During the years
ended December 31, 1998, 1997, and 1996, rentals paid under these leases
were approximately $3,989,000, $3,577,000, and $2,966,000, respectively.
(Continued)
-66-
<PAGE> 99
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, and 1997, and 1996
During the years ended December 31, 1998 and 1997, the Company paid
investment advisory fees to a partnership that owns a controlling interest
in AFC totaling approximately $3,190,000 and $3,232,000, respectively.
During the years ended December 31, 1998, 1997, and 1996, the Company and
its subsidiaries paid management fees and investment advisory fees to AFC
totaling approximately $4,523,000, $2,848,000, and $16,536,000,
respectively.
The Company and its subsidiaries lease office space from a subsidiary of
AFC. The rent payments associated with the lease will be approximately
$2,100,000 per year for the next 14 years.
During 1998, the Company paid a cash dividend of approximately $12,706,000
to AFC.
During 1997, the Company paid a dividend of approximately $33,834,000 to
AFC. This dividend was in the form of cash payments of approximately
$8,800,000, common stock in affiliated companies (including SGLI) of
approximately $16,588,000 (including deferred tax liabilities assumed by
AFC of $683,000), and common stock in non-affiliated companies of
approximately $8,446,000 (including a deferred tax liability retained by
the Company of $1,961,000). This transaction was approved by the Oklahoma
Insurance Department.
During 1998 and 1997, the Company entered into a three-year software lease
agreement with AFC. Lease expense related to this agreement was
approximately $1,344,000 and $616,000 for the years ended December 31, 1998
and 1997, respectively, and is included in selling costs and other
operating, administrative and general expenses.
Short-term and other investments at December 31, 1997 includes a note
receivable from AFC of approximately $3,328,000, which was repaid in 1998.
Short-term and other investments at December 31, 1995 include notes
receivable from AFC totaling approximately $6,485,000 which were repaid in
1996. During the year ended December 31, 1996, the Company recorded
investment income on the notes from AFC of approximately $481,000.
AFC and several of its subsidiaries rented office space in the home office
building from the Company until the home office building was sold in 1997.
During the years ended December 31, 1997, and 1996, the Company received
rental income from AFC and several of its subsidiaries of approximately
$299,000, and $1,280,000, respectively.
During 1996, AFC contributed capital of approximately $2,198,000 through
forgiveness of a deferred tax liability owed by AFA to AFC.
An officer of AFC serves on the board of directors of a financial
institution in which the Company maintains cash balances.
-67-
<PAGE> 100
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Schedule III - Business Segment Information
Years Ended December 31, 1998, 1997 and 1996
(In Thousands)
The Company's reportable segments are its strategic business units. The
components of operations for the years ended December 31, 1998, 1997, and
1996 are included in the table below.
Assets and related investment income are allocated based upon related
insurance reserves which are backed by such assets. Other operating
expenses are allocated in relation to the mix of related revenues.
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
TOTAL REVENUES:
American Fidelity Education Services Division $ 158,707 152,021 142,493
Association Group Division 113,519 105,784 99,979
Strategic Alliance Division 45,987 32,290 24,558
Non insurance operations 745 (504) 1,966
---------- --------- ---------
$ 318,958 289,591 268,996
========== ========= =========
PRETAX EARNINGS:
American Fidelity Education Services Division $ 16,407 24,621 14,275
Association Group Division 6,242 10,683 9,349
Strategic Alliance Division 10,727 (2,344) (1,903)
Non insurance operations 80 (2,340) 397
---------- --------- ---------
$ 33,456 30,620 22,118
========== ========= =========
TOTAL ASSETS:
American Fidelity Education Services Division $1,156,565 1,029,976 922,671
Association Group Division 201,115 192,507 197,225
Strategic Alliance Division 274,732 274,818 239,986
Non insurance operations 2,536 2,135 3,170
---------- --------- ---------
$1,634,948 1,499,436 1,363,052
========== ========= =========
</TABLE>
-68-
<PAGE> 101
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Schedule IV - Reinsurance
Years ended December 31, 1998, 1997 and 1996
(In Thousands)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED ASSUMED OF AMOUNT
GROSS TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Life insurance in force $7,565,337 846,113 10 6,719,234 --
========== ======== ======== ==========
Premiums:
Life insurance $ 18,034 3,154 12,021 26,901 44.69 %
Accident and health insurance 315,693 111,071 2,199 206,821 1.06 %
---------- -------- -------- ----------
Total premiums 333,727 114,225 14,220 233,722 6.08 %
========== ======== ======== ==========
Year ended December 31, 1997
Life insurance in force $6,872,047 306,917 10 6,565,140 --
========== ======== ======== ==========
Premiums:
Life insurance $ 26,756 1,474 -- 25,282 --
Accident and health insurance 272,785 91,257 416 181,944 --
---------- -------- -------- ----------
Total premiums 299,541 92,731 416 207,226 --
========== ======== ======== ==========
Year ended December 31, 1996
Life insurance in force $6,276,241 403,148 125,101 5,998,194 2.09 %
========== ======== ======== ==========
Premiums:
Life insurance $ 23,240 1,907 2,854 24,187 11.80 %
Accident and health insurance 248,054 82,040 43 166,057 --
---------- -------- -------- ----------
Total premiums $ 271,294 83,947 2,897 190,244 1.52 %
========== ======== ======== ==========
</TABLE>
See accompanying independent auditors' report.
-69-
<PAGE> 102
PART C
OTHER INFORMATION
ITEM 24 -- FINANCIAL STATEMENTS AND EXHIBITS
A. FINANCIAL STATEMENTS
The following financial statements are included in Part B hereof:
American Fidelity Separate Account B
Independent Auditors' Report
Statements of Assets and Liabilities as of December 31, 1998
Statements of Operations for the Year Ended December 31, 1998
Statements of Changes in Net Assets for the Year Ended
December 31, 1998
Financial Highlights for the Year Ended December 31, 1998
Notes to Financial Statements
American Fidelity Assurance Company
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Schedule III - Business Segment Information
Schedule IV - Reinsurance
B. EXHIBITS
1. Resolution adopted by the Board of the Company authorizing the
establishment of the Separate Account. Incorporated herein by reference
to Exhibit 99.B1 to the Registrant's registration statement on Form N-4
filed on April 23, 1997 (No. 333-25663).
2. Not applicable.
<PAGE> 103
3. Principal Underwriters Agreement dated July 14, 1997 between the
Company and American Fidelity Securities, Inc. Incorporated herein by
reference to Exhibit 99B.3 to Pre-Effective Amendment No. 1 to
Registrant's registration statement on Form N-4 filed on October 10,
1997 (No. 333-25663).
4.1 Individual Variable and Fixed Deferred Annuity. Incorporated herein by
reference to Exhibit 99.B4(i) to Registrant's registration statement on
Form N-4 filed on April 23, 1997 (No. 333-25663).
4.2 Loan Rider. Incorporated herein by reference to Exhibit 99.B4(ii) to
Registrant's registration statement on Form N-4 filed on April 23, 1997
(No. 333-25663).
4.3 403(b) Annuity Rider. Incorporated herein by reference to Exhibit
99B.4(iii) to Registrant's registration statement on Form N-4 filed on
April 23, 1997 (No. 333-25663).
4.4 Individual Retirement Annuity Rider. Incorporated herein by reference
to Exhibit 99.B4(iv) to Registrant's registration statement on Form N-4
filed on April 23, 1997 (No. 333-25663).
5. Application Form. Incorporated herein by reference to Exhibit 99.B5 to
Registrant's registration statement on Form N-4 filed on April 23, 1997
(No. 333-25663).
6.1 Articles of Incorporation of the Company. Incorporated herein by
reference to Exhibit 99.B6(i) to Pre-Effective Amendment No. 1 to
Registrant's registration statement on Form N-4 filed on October 10,
1997 (No. 333-25663).
6.2 Amended and Restated Bylaws of the Company. Incorporated herein by
reference to Exhibit 99.B6(ii) to Post-Effective Amendment No. 1 to
Registrant's registration statement on Form N-4 filed on April 24, 1998
(No. 333-25663).
7. Not applicable.
8.1* Fund Participation Agreement dated April 18, 1997 between the Company
and Merrill Lynch Variable Series Funds, Inc., as amended by Exhibit 4
thereto dated January 20, 1999.
8.2* Fund Participation Agreement dated May 13, 1997 between the Company and
each of Dreyfus Variable Investment Fund, The Dreyfus Socially
Responsible Growth Fund, Inc. and Dreyfus Life and Annuity Index Fund,
Inc. (d/b/a Dreyfus Stock Index Fund.), as amended by Amendment thereto
effective January 1, 1999.
9.* Opinion and Consent of Counsel.
10.* Consent of Independent Auditors.
11. Not Applicable.
12. Not Applicable.
13.* Calculation of Performance Information.
14. Not Applicable.
15.* Company Organizational Chart.
- -------------
* Filed herewith
C-2
<PAGE> 104
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The following are the executive officers and directors of the Company:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address with Depositor
- ------------------ ---------------------
<S> <C>
Lynda L. Cameron Director
2000 N. Classen Boulevard
Oklahoma City, OK 73106
William M. Cameron Chairman of the Board and Chief
2000 N. Classen Boulevard Executive Officer, Director
Oklahoma City, OK 73106
David R. Carpenter Senior Vice President, Treasurer
2000 N. Classen Boulevard
Oklahoma City, OK 73106
William E. Durrett Senior Chairman of the Board, Director
2000 N. Classen Boulevard
Oklahoma City, OK 73106
Stephen P. Garrett Senior Vice President, Secretary
2000 N. Classen Boulevard
Oklahoma City, OK 73106
William A. Hagstrom Director
800 Research Parkway
Oklahoma City, OK 73104
Edward C. Joullian, III Director
2000 N. Classen Boulevard
Oklahoma City, OK 73106
Kenneth D. Klehm Senior Vice President
2000 N. Classen Boulevard
Oklahoma City, OK 73106
Alfred L. Litchenburg Senior Vice President
2000 N. Classen Boulevard
Oklahoma City, OK 73106
David R. Lopez Director
175 East Houston
Room 4-A-60
San Antonio, TX 78205
Paula Marshall-Chapman Director
2745 East 11th Street
Tulsa, OK 74104
</TABLE>
C-3
<PAGE> 105
<TABLE>
<S> <C>
John W. Rex President, Chief Operating Officer,
2000 N. Classen Boulevard Director
Oklahoma City, OK 73106
Galen P. Robbins, M.D. Director
11901 Quail Creek Road
Oklahoma City, OK 73120
John D. Smith Director
P. O. Box 18832
Atlanta, GA
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR
OR REGISTRANT
The Company organizational chart is included as Exhibit 15.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of April 15, 1999, there were 130 non-qualified contract owners and 3,500
qualified contract owners.
ITEM 28. INDEMNIFICATION
The Bylaws of the Company (Article VIII, Section 3) provide, in part,
that:
(a) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses (including attorneys' fees), amounts paid in settlement
(whether with or without court approval), judgments, fines actually and
reasonably incurred by him in connection with such action, suit, or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
(b) The Corporation shall indemnify every person who is or was a
party or is or was threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee, or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee, or agent or in any
other capacity of or in another corporation, or a partnership, joint venture,
trust, or other enterprise, or by reason of any action alleged to have been
taken or not taken by him while acting in such capacity, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such threatened, pending, or
completed action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation. The
termination of any such threatened or actual action or suit by a settlement or
by an adverse judgment or order shall not of itself create a presumption that
the person did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation. The termination
of any such threatened or actual action or suit by a settlement or by an adverse
judgment or order shall not of itself create a presumption that the person 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 the Corporation. Nevertheless, there shall
be no indemnification with respect to expenses incurred in connection with any
claim, issue, or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
Corporation, unless, and only to the extent that the
C-4
<PAGE> 106
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses as such court shall deem proper.
(c) To the extent that a director, officer, employee, or agent of
a corporation has been successful on the merits or otherwise in defense of any
action, suit, or proceeding referred to in Subsections (a) and (b) hereof, or in
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with such defense.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted directors and officers or controlling persons of the
Company pursuant to the foregoing, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling persons of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company 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 it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) American Fidelity Securities, Inc. is the principal
underwriter for the following investment companies (other than Registrant):
American Fidelity Dual Strategy Fund, Inc.
(b) American Fidelity Securities, Inc. ("AFS, Inc.") is the
principal underwriter for the Policies. The following persons are the officers
and directors of AFS, Inc. The principal business address for each officer and
director of AFS, Inc. is 2000 N. Classen Boulevard, Oklahoma City, Oklahoma
73106.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address with Underwriter
- ------------------ ---------------------
<S> <C>
David R. Carpenter Director, Chairman, President, Chief Executive
P. O. Box 25523 Officer, Treasurer, Chief Financial Officer
Oklahoma City, OK 73125
Marvin R. Ewy Director, Vice President, Secretary, Chief
P. O. Box 25523 Operations Officer
Oklahoma City, OK 73125
Nancy K. Steeber Director, Vice President, Operations Officer
P. O. Box 25523
Oklahoma City, OK 73125
</TABLE>
(c) Not Applicable.
C-5
<PAGE> 107
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
David R. Carpenter, Senior Vice President and Treasurer, whose address is 2000
N. Classen Boulevard, Oklahoma City, Oklahoma 73106, maintains physical
possession of the accounts, books or documents of the Separate Account required
to be maintained by Section 31(a) of the Investment Company Act of 1940 and the
rules promulgated thereunder.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
a. Registrant hereby undertakes to file a post-effective
amendment to this registration statement as frequently as is necessary to ensure
that the audited financial statements in the registration statement are never
more than sixteen (16) months old for so long as payments under the variable
annuity contracts may be accepted.
b. Registrant hereby undertakes to include either (1) as part of
any application to purchase a contract offered by the Prospectus, a space that
an applicant can check to request a Statement of Additional Information, or (2)
a postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
c. Registrant hereby undertakes to deliver any Statement of
Additional Information and any financial statements required to be made
available under this Form promptly upon written or oral request.
d. The Company hereby represents that the fees and charges
deducted under the Policies described in the Prospectus, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the Company.
REPRESENTATIONS
The Company hereby represents that it is relying upon a No-Action
Letter issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption
restrictions imposed by Section 403(b)(11) in each registration statement,
including the prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption
restrictions imposed by Section 403(b)(11) in any sales literature used in
connection with the offer of the contract;
3. Instruct sales representatives who solicit participants to
purchase the contract specifically to bring the redemption restrictions imposed
by Section 403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section
403(b) annuity contract, prior to or at the time of such purchase, a signed
statement acknowledging the participant's understanding of (1) the restrictions
on redemption imposed by Section 403(b)(11), and (2) other investment
alternatives available under the employer's Section 403(b) arrangement to which
the participant may elect to transfer his contract value.
C-6
<PAGE> 108
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485 for effectiveness of this Registration Statement and has caused this
Registration Statement to be signed on its behalf, in the City of Oklahoma City
and State of Oklahoma on this 30th day of April, 1999.
AMERICAN FIDELITY SEPARATE ACCOUNT B
(Registrant)
By: American Fidelity Assurance Company
(Depositor)
By /s/ John W. Rex
----------------------------------------
John W. Rex, President
AMERICAN FIDELITY ASSURANCE COMPANY
(Depositor)
By /s/ John W. Rex
----------------------------------------
John W. Rex, President
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities indicated on April 30, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ William M. Cameron Chairman, Chief Executive Officer and Director
- --------------------------- (Principal Executive Officer)
William M. Cameron
/s/ William E. Durrett Senior Chairman and Director
- ---------------------------
William E. Durrett
/s/ Lynda L. Cameron Director
- ---------------------------
Lynda L. Cameron
/s/ John W. Rex Director, President and Chief Operating Officer
- ---------------------------
John W. Rex
/s/ Edward C. Joullian, III Director
- ---------------------------
Edward C. Joullian, III
/s/ Galen P. Robbins Director
- ---------------------------
Galen P. Robbins, M.D.
</TABLE>
C-7
<PAGE> 109
<TABLE>
<S> <C>
/s/ John D. Smith Director
- ---------------------------
John D. Smith
/s/ William A. Hagstrom Director
- ---------------------------
William A. Hagstrom
/s/ David R. Lopez Director
- ---------------------------
David R. Lopez
/s/ Paula Marshall-Chapman Director
- ---------------------------
Paula Marshall-Chapman
/s/ David R. Carpenter Senior Vice President, Controller and Treasurer
- --------------------------- (Principal Financial and Accounting Officer)
David R. Carpenter
</TABLE>
C-8
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
8.1 Fund Participation Agreement dated April 18, 1997 between the Company
and Merrill Lynch Variable Series Funds, Inc., as amended by Exhibit 4
thereto dated January 20, 1999.
8.2 Fund Participation Agreement dated May 13, 1997 between the Company and
each of Dreyfus Variable Investment Fund, The Dreyfus Socially
Responsible Growth Fund, Inc. and Dreyfus Life and Annuity Index Fund,
Inc. (d/b/a Dreyfus Stock Index Fund.), as amended by Amendment thereto
effective January 1, 1999.
9 Opinion and Consent of Counsel.
10 Consent of Independent Auditors.
13 Calculation of Performance Information.
15 Company Organizational Chart.
</TABLE>
<PAGE> 1
EXHIBIT 8.1
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of the 18th day of April, 1997, between
MERRILL LYNCH VARIABLE SERIES FUNDS, INC., an open-end management investment
company organized as a Maryland corporation (the "Fund"), and AMERICAN FIDELITY
ASSURANCE COMPANY, a life insurance company organized and domiciled under the
laws of the state of Oklahoma (the "Company"), on its own behalf and on behalf
of each segregated asset account of the Company set forth on Schedule A as
attached hereto, as such schedule may be amended from time to time (the
"Accounts").
W I T N E S S E T H:
WHEREAS, the Fund has filed a registration statement with the
Securities and Exchange Commission to register itself as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), and to register the offer and sale of its shares under the
Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Fund desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Fund (the "Participating Insurance
Companies"); and
WHEREAS, Merrill Lynch Funds Distributors, Inc. (the "Underwriter") is
registered as a broker-dealer with the Securities and Exchange Commission (the
"SEC") under the Securities Exchange Act of 1934, as amended (the "1934 Act"),
is a member in good standing of The National Association of Securities Dealers,
Inc. (the "NASD") and acts as principal underwriter of the shares of the Fund;
and
WHEREAS, the capital stock of the Fund is divided into several series
of shares, each series representing an interest in a particular managed
portfolio of securities and other assets; and
WHEREAS, each series of shares of Fund is divided into Class A Shares
and Class B Shares, which represent identical ownership rights with respect to a
particular portfolio of securities and other assets except that the Class B
Shares exclusively bear certain expenses relating to distribution-related
services incurred in connection with such shares; and
WHEREAS, the several series of shares of the Fund offered by the Fund
to the Company and the Accounts are set forth on Schedule B attached hereto
(each, a "Portfolio," and, collectively, the "Portfolios"), together with the
applicable share class; and
WHEREAS, the Fund has received an order from the SEC granting
Participating Insurance Companies and their separate accounts exemptions from
the provisions of sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and
rules 6e-2(b)(15) and 6e-3(T)(b)(15)
1
<PAGE> 2
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Shared Fund Exemptive Order");
WHEREAS, Merrill Lynch Asset Management, L.P. ("MLAM") is duly
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended, and any applicable state securities law, and acts as the Fund's
investment adviser; and
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies and/or variable annuity contracts
funded or to be funded through one or more of the Accounts (the "Contracts");
and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios (the "Shares") on behalf of the Accounts to fund the Contracts, and
the Fund intends to sell such Shares to the relevant Accounts at such Shares'
net asset value.
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE 1
SALE OF THE FUND SHARES
1.1 Subject to Section 1.3 of this Agreement, the Fund shall cause
the Underwriter to make Shares of the Portfolios available to the Accounts at
such Shares' most recent net asset value provided to the Company prior to
receipt of such purchase order by the Fund (or the Underwriter as its agent), in
accordance with the operational procedures mutually agreed to by the Underwriter
and the Company from time to time and the provisions of the then-current
prospectus of the Fund. Shares of a particular Portfolio of the Fund shall be
ordered in such quantities and at such times as determined by the Company to be
necessary to meet the requirements of the Contracts. The Directors of the Fund
(the "Directors") may refuse to sell Shares of any Portfolio to any person
(including the Company and the Accounts), or suspend or terminate the offering
of Shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Directors
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.2 Subject to Section 1.3 of this Agreement, the Fund will redeem
any full or fractional Shares of any Portfolio when requested by the Company on
behalf of an Account at such Shares' most recent net asset value provided to the
Company prior to receipt by the Fund (or the Underwriter as its agent) of the
request for redemption, as established in accordance with
2
<PAGE> 3
the operational procedures mutually agreed to by the Underwriter and the Company
from time to time and the provisions of the then current-prospectus of the Fund.
The Fund shall make payment for such Shares in the manner established from time
to time by the Fund, but in no event shall payment be delayed for a greater
period than is permitted by the 1940 Act (including any Rule or order of the SEC
thereunder).
1.3 The Fund shall accept purchase and redemption orders resulting
from investment in and payments under the Contracts on each Business Day,
provided that such orders are received prior to 9:00 a.m. on such Business Day
and reflect instructions received by the Company from Contract holders in good
order prior to the time the net asset value of each Portfolio is priced in
accordance with its prospectus (such Portfolio's "valuation time") on the prior
Business Day. Any purchase or redemption order for Shares of any Portfolio
received, on any Business Day, after such Portfolio's valuation time on such
Business Day shall be deemed received prior to 9:00 a.m. on the next succeeding
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the SEC. Purchase and redemption orders shall be
provided by the Company to the Underwriter as agent for the Fund in such written
or electronic form (including facsimile) as may be mutually acceptable to the
Company and the Underwriter. The Underwriter may reject purchase and redemption
orders that are not in proper form. In the event that the Company and the
Underwriter agree to use a form of written or electronic communication which is
not capable of recording the time, date and recipient of any communication and
confirming good transmission, the Company agrees that it shall be responsible
(i) for confirming with the Underwriter that any communication sent by the
Company was in fact received by the Underwriter in proper form, and (ii) for the
effect of any delay in the Underwriter's receipt of such communication in proper
form. The Fund and its agents shall be entitled to rely, and shall be fully
protected from all liability in acting, upon the instructions of the persons
named in the list of authorized individuals attached hereto as Schedule C, or
any subsequent list of authorized individuals provided to the Fund or its agents
by the Company in such form, without being required to determine the
authenticity of the authorization or the authority of the persons named therein.
1.4 Purchase orders that are transmitted to the Fund in accordance
with Section 1.3 of this Agreement shall be paid for no later than 12:00 noon on
the same Business Day that the Fund receives notice of the order. Payments shall
be made in federal funds transmitted by wire. In the event that the Company
shall fail to pay in a timely manner for any purchase order validly received by
the Underwriter on behalf of the Fund pursuant to Section 1.3 of this Agreement
(whether or not such failure is the fault of the Company), the Company shall
hold the Fund harmless from any losses reasonably sustained by the Fund as the
result of acting in reliance on such purchase order.
1.5 Issuance and transfer of the Fund's Shares will be by book
entry only. Stock certificates will not be issued to the Company or to any
Account. Shares ordered from the Fund will be recorded in the appropriate title
for each Account.
3
<PAGE> 4
1.6 The Fund shall furnish prompt notice to the Company of any
income, dividends or capital gain distribution payable on Shares of any
Portfolio. The Company hereby elects to receive all such income dividends and
capital gain distributions as are payable on a Portfolio's Shares in additional
Shares of that Portfolio. The Fund shall notify the Company of the number of
Shares so issued as payment of such dividends and distributions.
1.7 The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after such net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 6:30 p.m., New
York time.
1.8 The Company agrees that it will not take any action to operate
any Account as a management investment company under the 1940 Act without the
Fund's and the Underwriter's prior written consent.
1.9 The Fund agrees that its Shares will be sold only to
Participating Insurance Companies and their separate accounts. No Shares of any
Portfolio will be sold directly to the general public. The Company agrees that
Fund Shares will be used only for the purposes of funding the Contracts and
Accounts listed in Schedule A, as such schedule may be amended from time to
time.
1.10 The Fund agrees that all Participating Insurance Companies
shall have the obligations and responsibilities regarding pass-through voting
and conflicts of interest corresponding to those contained in Section 2.10 and
Article 4 of this Agreement.
1.11 So long as it shall be the intention of the Fund to maintain
the net asset value per share of any Portfolio at $1.00, on any day on which (a)
the net asset value per share of the Shares is determined, (b) MLAM determines,
in the manner described in the then- current prospectus of the Fund, that the
net income of such Portfolio on such day is negative, and (c) MLAM delivers a
certificate to the Company setting forth the reduction in the number of
outstanding Shares to be effected as described in the then-current prospectus of
the Fund in connection with such determination, the Company, on behalf of itself
and the Accounts, agrees to return to the Fund its pro rata share of the number
of Shares to be reduced and agrees that, upon delivery by MLAM to the Company of
such certificate, (a) the Company's ownership interest in the Shares so to be
returned shall immediately cease, (b) such Shares shall be deemed to have been
canceled and to be no longer outstanding, and (c) all rights in respect of such
Shares shall cease.
ARTICLE 2
OBLIGATION OF THE PARTIES
2.1 The Fund shall prepare and be responsible for filing with the
SEC and any state securities regulators requiring such filing, all shareholder
reports, notices, proxy materials (or similar materials such as voting
instruction solicitation materials), prospectuses and statements of additional
information of the Fund. The Fund shall bear the costs or registration and
4
<PAGE> 5
qualification of its Shares, preparation and filing of the documents listed in
this Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its shares.
2.2 At least annually, the Fund or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios ) for the Shares as the Company may reasonably
request for distribution to existing Contract owners whose Contracts are funded
by such Shares. The Fund or its designee shall provide the Company, at the
Company's expense, with as many copies of the current prospectus for the Shares
as the Company may reasonably request for distribution to prospective purchasers
of Contracts. If requested by the Company in lieu thereof, the Fund or its
designee shall provide such documentation (including a "camera ready" copy of
the new prospectus as set in type) and other assistance as is reasonably
necessary in order for the parties hereto once each year (or more frequently if
the prospectus for the Shares is supplemented or amended) to have the prospectus
for the Contracts and the prospectus for the Shares printed together in one
document; the expenses of such printing to be borne by the Company. In the event
that the Company requests that the Fund or its designee provide the Fund's
prospectus in a "camera ready" format, the Fund shall be responsible solely for
providing the prospectus in the format in which it is accustomed to formatting
prospectuses and shall bear the expense of providing the prospectus in such
format (e.g., typesetting expenses), and the Company shall bear the expense of
adjusting or changing the format to conform with any of its prospectuses.
2.3 The prospectus for the Shares shall state that the statement
of additional information for the Shares is available from the Fund or its
designee. The Fund or its designee, at its expense, shall print and provide such
statement of additional information to the Company (or a master of such
statement suitable for duplication by the Company) for distribution to any owner
of a Contract funded by the Shares. The Fund or its designee, at the Company's
expense, shall print and provide such statement to the Company (or a master of
such statement suitable for duplication by the Company) for distribution to a
prospective purchaser who requests such statement.
2.4 The Fund or its designee shall provide the Company free of
charge copies, if and to the extent applicable to the Shares, of the Fund's
proxy materials, reports to Shareholders and other communications to
Shareholders in such quantity as the Company shall reasonably require for
distribution to Contract owners.
2.5 The Company shall furnish, or cause to be furnished, to the
Fund or its designee, a copy of each prospectus for the Contracts or statement
of additional information for the Contracts in which the Fund or its investment
adviser is named prior to the filing of such document with the SEC. The Company
shall furnish, or shall cause to be furnished, to the Fund or its designee, each
piece of sales literature or other promotional material in which the Fund or its
investment adviser is named, at least five Business Days prior to its use. No
such prospectus, statement of additional information or material shall be used
if the Fund or its designee reasonably objects to such use within five Business
Days after receipt of such material.
5
<PAGE> 6
2.6 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund or
its investment adviser in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from the
registration statement or prospectus for the Fund Shares (as such registration
statement and prospectus may be amended or supplemented from time to time),
reports of the Fund, Fund-sponsored proxy statement, or in sales literature or
other promotional material approved by the Fund or its designee, except with the
written permission of the Fund or its designee.
2.7 The Fund shall not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, the Accounts or the Contracts other than information or representations
contained in and accurately derived from the registration statement or
prospectus for the Contracts (as such registration statement and prospectus may
by amended or supplemented from time to time), or in materials approved by the
Company for distribution including sales literature or other promotional
materials, except with the written permission of the Company.
2.8 The Company shall amend the registration statement of the
Contracts under the 1933 Act and registration statement for each Account under
the 1940 Act from time to time as required in order to effect the continuous
offering of the Contracts or as may otherwise be required by applicable law. The
Company shall register and qualify the Contracts for sale to the extent required
by applicable securities laws and insurance laws of the various states.
2.9 The Company shall be responsible for assuring that any
prospectus offering a Contract that is a life insurance contract where it is
reasonably probable that such Contract would be a "modified endowment contract,"
as that term is defined in Section 7702A of the Internal Revenue Code of 1986,
as amended (the "Code"), will identify such Contract as a modified endowment
contract (or policy).
2.10 Solely with respect to Contracts and Accounts that are subject
to the 1940 Act, so long as, and to the extent that, the SEC interprets the 1940
Act to require pass-through voting privileges for variable policyowners: (a) the
Company will provide pass-through voting privileges to owners of Contracts - or
policies whose cash values are invested, through the Accounts, in Shares of the
Fund; (b) the Fund shall require all Participating Insurance Companies to
calculate voting privileges in the same manner and the Company shall be
responsible for assuring that the Accounts calculate voting privileges in the
manner established by the Fund; (c) with respect to each Account, the Company
will vote Shares of the Fund held by the Account and for which no timely voting
instructions from Contract owners are received, as well as Shares held by the
Account that are owned by the Company for its general account, in the same
proportion as the Company votes Shares held by the Account for which timely
voting instructions are received from Contract owners; and (d) the Company and
its agents will in no way recommend or oppose or interfere with the solicitation
of proxies for Fund Shares held by Contract owners without the prior written
consent of the Fund, which consent may be withheld in the Fund's sole
discretion.
6
<PAGE> 7
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance
company duly organized and in good standing under the laws of the State of
Oklahoma and has established each Account as a segregated asset account under
such law on the date set forth in Schedule A.
3.2 The Company represents and warrants that it has registered or,
prior to any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act to serve
as a segregated investment account for the Contracts.
3.3 The Company represents and warrants that the issuance of the
Contracts will be registered under the 1933 Act prior to any issuance or sale of
the Contracts; the Contracts will be issued and sold in compliance in all
material respects will all applicable federal and state laws; and the sale of
the Contracts shall comply in all material respects with state insurance
suitability requirements.
3.4 The Company represents and warrants that the Contracts are
currently and at the time of issuance will be treated as annuity contracts or
life insurance policies, whichever is appropriate, under applicable provisions
of the Code. The Company shall make every effort to maintain such treatment and
shall notify the Fund and the Underwriter 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.
3.5 The Fund represents and warrants that it is duly organized and
validly existing under the laws of the State of Maryland.
3.6 The Fund represents and warrants that the sale of the Fund
Shares offered and sold pursuant to this Agreement will be registered under the
1933 Act and that the Fund is registered under the 1940 Act. The Fund shall use
its best efforts to amend its registration statement under the 1933 Act and the
1940 Act from time to time as required in order to affect the continuous
offering of its shares. The Company shall advise the Fund of any state
requirements to register Shares for sale in such states. If the Fund determines
registration is appropriate, the Fund shall use its best efforts to register and
qualify its Shares for sale in accordance with the laws of all fifty states, the
District of Columbia, Virgin Islands and Puerto Rico and such other
jurisdictions reasonably requested by the Company.
3.7 The Fund represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in section
817(h) of the Code and the rules and regulations thereunder.
7
<PAGE> 8
ARTICLE 4
POTENTIAL CONFLICTS
4.1 The parties acknowledge that the Fund's Shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Directors will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material conflict may arise
for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities decision in any relevant proceeding; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Directors shall promptly inform the Company
if they determine that an irreconcilable material conflict exists and the
implications thereof.
4.2 The Company agrees to promptly report any potential or
existing conflicts of which it is aware to the Directors. The Company will
assist the Directors in carrying out their responsibilities under the Shared
Fund Exemptive Order by providing the Directors with all information reasonably
necessary for the Directors to consider any issues raised including, but not
limited to, information as to a decision by the Company to disregard Contract
owner voting instructions.
4.3 If it is determined by a majority of the Directors, or a
majority of the Fund's Directors who are not affiliated with Merrill Lynch Asset
Management, L.P. or the Underwriter (the "Disinterested Directors"), that a
material irreconcilable conflict exists that affects the interests of Contract
owners, the Company shall, in cooperation with other Participating Insurance
Companies whose contract owners are also affected, at its expense and to the
extent reasonably practicable (as determined by the Directors) take whatever
steps are necessary to remedy or eliminate the irreconcilable material conflict,
which steps could include: (a) withdrawing the assets allocable to some or all
of the Accounts from the Fund or any Portfolio and reinvesting such assets in a
different investment medium, including (but not limited to) another Portfolio of
the Fund, or submitting the question of whether or not such segregation should
be implemented to a vote of all affected Contracts owners and, as appropriate,
segregating the assets of any appropriate group (i.e., annuity contract owners,
life insurance contract owners, or variable contract owners of one or more
Participating Insurance Companies) that votes in favor of such segregation, or
offering to the affected Contract owners the option of making such a change; and
(b) establishing a new registered management investment company or managed
separate account.
4.4 If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to
8
<PAGE> 9
withdraw the affected Account's or Accounts' investment in the Fund and
terminate this Agreement with respect to such Account(s); provided, however,
that such withdrawal and termination shall be limited to the extent required by
the foregoing material irreconcilable conflict as determined by a majority of
the Disinterested Directors. Any such withdrawal and termination must take place
within 30 days after the Fund gives written notice that this provision is being
implemented. Until the end of such 30-day period, the Fund shall continue to
accept and implement orders by the Company for the purchase and redemption of
Shares of the Fund.
4.5 If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the affected Account's (or Accounts') investment in the Fund and
terminate this Agreement with respect to such Account(s) within 30 days after
the Fund informs the Company in writing that it has determined that such
decision has created an irreconcilable material conflict; provided, however,
that such withdrawal and termination shall be limited to the extent required by
the foregoing material irreconcilable conflict as determined by a majority of
the Disinterested Directors. Until the end of such 30-day period, the Fund
shall continue to accept and implement orders by the Company for the purchase
and redemption of Shares of the Fund.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the Disinterested Directors shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Company be required to establish a new funding medium for the Contracts
if an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Directors determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s) within 30 days after the Directors
inform the Company in writing of the foregoing determination; provided, however,
that such withdrawal and termination shall be limited to the extent required by
any such material irreconcilable conflict as determined by a majority of the
Disinterested Directors.
4.7 The Company shall at least annually submit to the Directors
such reports, materials or data as the Directors may reasonably request so that
the Directors may fully carry out the duties imposed upon them by the Shared
Fund Exemptive Order, and said reports, materials and data shall be submitted
more frequently if deemed appropriate by the Directors.
4.8 If and to the extent that (a) Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the application for the Shared Fund Exemptive
Order) on terms and conditions materially different from those contained in the
application for the Shared Fund Exemptive Order, or (b) the Shared Fund
Exemptive Order is granted on terms and conditions that differ from those set
forth in this Article 4, then the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary (a) to
comply with Rules 6e-2 and 6e-3(T), as amended,
9
<PAGE> 10
and Rule 6e-3, as adopted, to the extent such rules are applicable, or (b) to
conform this Article 4 to the terms and conditions contained in the Shared Fund
Exemptive Order, as the case may be.
ARTICLE 5
INDEMNIFICATION
5.1 Indemnification by the Company. The Company agrees to
indemnify and hold harmless the Fund and each of its Directors, officers,
employees and agents and each person, if any, who controls the Fund within the
meaning of Section 15 of the 1933 Act (collectively the "Indemnified Parties"
for purposes of this Article 5) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Company) or expenses (including the reasonable costs of investigating or
defending any alleged loss, claim, damage, liability or expense and reasonable
legal counsel fees incurred in connection therewith) (collectively, "Losses"),
to which such Indemnified Parties may become subject under any statute or
regulation, or common law or otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements
or alleged untrue statements of any material fact contained in a
registration statement or prospectus for the Contracts or in the
Contracts themselves or in sales literature generated or approved by
the Company on behalf of the Contracts or Accounts (or any amendment or
supplement to any of the foregoing) (collectively, "Company Documents"
for the purposes of this Article 5), 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, provided that this indemnity shall not apply as
to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and was accurately
derived from written information furnished to the Company by or on
behalf of the Fund for use in Company Documents or otherwise for use in
connection with the sale of the Contracts or Shares; or
(b) arise out of or result from statements or
representations (other than statements or representations contained in
and accurately derived from Fund Documents (as defined in Section
5.2(a) below) or wrongful conduct of the Company or persons under its
control, with respect to the sale or acquisition of the Contracts or
Shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Fund Documents
or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished
to the Fund by or on behalf of the Company; or
10
<PAGE> 11
(d) arise out of or result from any failure by the
Company to provide the services or furnish the materials required under
the terms of this Agreement; or
(e) arise out of or result from any material breach of
any representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Company.
5.2 Indemnification by the Fund. The Fund agrees to indemnify and
hold harmless the Company and each of its directors, officers, employees and
agents and each person, if any, who controls the Company within the meaning of
Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes
of this Article 5) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Fund) or
expenses (including the reasonable costs of investigating or defending any
alleged loss, claim, damage liability or expense and reasonable legal counsel
fees incurred in connection therewith) (collectively, "Losses"), to which such
Indemnified Parties may become subject under any statute or regulation, or at
common law or otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements
or alleged untrue statement of any material fact contained in the
registration statement or prospectus for the Fund (or any amendment or
supplement thereto) or in sales literature approved by the Fund (but
solely with respect to statements regarding the Fund), (collectively,
"Fund Documents" for the purposes of this Article 5), 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, provided that this indemnity shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Fund by or
on behalf of the Company for use in Fund Documents or otherwise for use
in connection with the sale of the Contracts or Shares; or
(b) arise out of or result from statement or
representations (other than statements or representations contained in
and accurately derived from Company Documents) or wrongful conduct of
the Fund or persons under its control, with respect to the sale or
acquisition of the Contracts or Shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Company
Documents or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was
made in reliance upon and accurately derived from written information
furnished to the Company by or on behalf of the Fund; or
11
<PAGE> 12
(d) arise out of or result from any failure by the Fund
to provide the services or furnish the materials required under the
terms of this Agreement; or
(e) arise out of or result from any material breach of
any representation and/or warranty made by the Fund in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Fund.
5.3 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any Losses incurred or assessed against any Indemnified Party to the extent such
Losses arise out of or result from such Indemnified Party's willful misfeasance,
bad faith or negligence in the performance of such Indemnified Party's duties or
by reason of such Indemnified Party's reckless disregard of obligations or
duties under this Agreement.
5.4 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any claim made against an Indemnified Party unless such Indemnified Party shall
have notified the party against whom indemnification is sought in writing within
five business days after the summons, or other first written notification,
giving information of the nature of the claim shall have been served upon or
otherwise received by such Indemnified Party (or after such Indemnified Party
shall have received notice of service upon or other notification to any
designated agent), but failure to notify the party against whom indemnification
is sought of any such claim or shall not relieve that party from any liability
that it may have to the Indemnified Party in the absence of Sections 5.1 and
5.2.
5.5 In case any such action is brought against the Indemnified
Parties, the indemnifying party shall be entitled to participate, at its own
expense, in the defense of such action. The indemnifying party also shall be
entitled to assume the defense thereof, with counsel reasonably satisfactory to
the party named in the action. After notice from the indemnifying party to the
Indemnified Party of an election to assume such defense, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such
Indemnified Party independently in connection with the defense thereof other
than reasonable costs of investigation.
12
<PAGE> 13
ARTICLE 6
TERMINATION
6.1 This Agreement may be terminated by either party for any
reason by six (6) months' advance written notice to the other party, and may be
terminated by the Fund pursuant to Sections 6.2 through 6.4 below upon written
notice to the Company.
6.2 This Agreement may be terminated at the option of the Fund
upon any finding or ruling against the Company by a court or the NASD, the SEC,
the insurance department of any state, or any other regulatory body regarding
the Company's duties under this Agreement or related to the sale of the
Contracts, the operation of the Account, the administration of the Contracts or
the purchase of the Shares, or any settlement of any proceedings or undertaking
to any regulatory body that would, in the Fund's reasonable judgment, materially
impair the Company's ability to meet and perform the Company's obligations and
duties hereunder.
6.3 This Agreement may be terminated 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.
6.4 This Agreement may be terminated by the Fund, at its option,
if the Fund shall reasonably determine, in its sole judgment exercised in good
faith, that either (1) the Company shall have suffered a material adverse change
in its business or financial condition or (2) the Company shall have been the
subject of material adverse publicity that is likely to have a material adverse
impact upon the business and operations of either the Fund or the Underwriter.
6.5 This Agreement may be terminated at the option of the Company
if (A) the Internal Revenue Service determines that any Portfolio fails to
qualify as a "Regulated Investment Company" under the Code or fails to comply
with the diversification requirements of Section 817(h) of the Code, or (B) the
Company shall reasonably determine, in its sole judgment exercised in good
faith, that either (1) the Fund or the Underwriter shall have been the subject
of material adverse publicity which is likely to have a material adverse impact
upon the business and operations of the Company, or (2) the Fund breaches any
obligation under this Agreement in a material respect and such breach shall
continue unremedied for thirty (30) days after receipt of notice from the
Company of such breach.
6.6 Notwithstanding any termination of this Agreement pursuant to
this Article 6, the Fund and the Underwriter may, at the option of the Fund,
continue to make available additional Fund Shares for so long after the
termination of this Agreement as the Fund desires pursuant to the terms and
conditions of this Agreement as provided in Section 6.7 below, for all Contracts
in effect on the effective date of termination of this Agreement (hereinafter
referred to as "Existing Contracts"). Specifically, without limitation, if the
Fund or Underwriter so elects to make additional Shares available, the owners of
the Existing Contracts or the Company, whichever shall have legal authority to
do so, shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts.
13
<PAGE> 14
6.7 In the event of a termination of this Agreement pursuant to
this Article 6, the Fund and the Underwriter shall promptly notify the Company
whether the Underwriter and the Fund will continue to make Shares available
after such termination; if the Underwriter and the Fund will continue to make
Shares so available, the provisions of this Agreement shall remain in effect
except for Section 6.1 hereof and thereafter either the Fund or the Company may
terminate the Agreement, as so continued pursuant to this Section 6.7, 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
greater than six months.
6.8 The provisions of Article 5 shall survive the termination of
this Agreement, and the provisions of Article 4 and Sections 2.4 and 2.10 shall
survive the termination of this Agreement so long as Shares of the Fund are held
on behalf of Contract owners in accordance with Section 6.6.
ARTICLE 7
NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Merrill Lynch Variable Series Funds, Inc.
c/o Merrill Lynch Asset Management, L.P.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: General Counsel
If to the Company:
American Fidelity Assurance Company
2000 Classen Boulevard, 5 North
Oklahoma City, Oklahoma 73106-6092
Attention: Marketing Director
American Fidelity Educational Services Division
14
<PAGE> 15
ARTICLE 8
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York,
shall be subject to the provisions of the 1933, 1934, and 1940 Acts, and the
rules, regulations and rulings thereunder, including such exemptions from those
statutes, rules and regulations as the SEC may grant and the terms hereof shall
be interpreted and construed in accordance therewith.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Fund arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Fund and that no Director, officer, agent, or holder of shares of
beneficial interest of the Fund shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Each party shall use its best efforts to provide the other party with reasonable
notice of any governmental investigation or inquiry relating to this Agreement
or the transactions contemplated hereby of which it has knowledge.
8.7 The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
8.8 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder
may be assigned by either party without the prior written approval of the other
party.
8.10 No provisions of this Agreement may be amended or modified in
any manner except by a written agreement properly authorized and executed by
both parties.
8.11 No failure or delay by a party in exercising any right or
remedy under this Agreement will operate as a waiver thereof and no single or
partial exercise of rights shall preclude a further or subsequent exercise. The
rights and remedies provided in this Agreement are cumulative and not exclusive
of any rights or remedies provided by law.
15
<PAGE> 16
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first above written.
AMERICAN FIDELITY ASSURANCE COMPANY
By: /s/ JOHN W. REX
--------------------------------------
Name: John W. Rex
------------------------------------
Title: President
-----------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
By: /s/ TERRY K. GLENN
--------------------------------------
Name: Terry K. Glenn
------------------------------------
Title: Executive Vice President
-----------------------------------
16
<PAGE> 17
SCHEDULE A
Segregated Accounts of American Fidelity Assurance Company
Participating in Portfolios of Merrill Lynch Variable Series Funds, Inc.
<TABLE>
<CAPTION>
Name of Separate Account Date Established
- ------------------------ ----------------
<S> <C>
Separate Account B September 20, 1996
</TABLE>
1
<PAGE> 18
SCHEDULE B
Share Classes and Portfolios of Merrill Lynch Variable Series Funds, Inc.
Offered to Segregated Accounts of American Fidelity Assurance Company
Share Classes
- -------------
Class A Shares
Portfolios
- ----------
High Current Income Fund
Domestic Money Market Fund
Basic Value Focus Fund
Global Strategy Focus Fund
Equity Growth Fund
Prime Bond Fund
Natural Resources Focus Fund
Quality Equity Fund
American Balanced Fund
International Equity Focus Fund
Developing Capital Markets Focus Fund
Global Utility Focus Fund
1
<PAGE> 19
SCHEDULE C
Persons Authorized to Act on Behalf of American Fidelity Assurance Company
The Fund, the Underwriter and their respective agents are authorized to
rely on instructions from the following individuals on behalf of American
Fidelity Assurance Company on its own behalf and on behalf of each Account:
Name Signature
---- ---------
------------------------------
------------------------------
------------------------------
1
<PAGE> 20
EXHIBIT 4
MERRILL LYNCH VARIABLE SERIES FUND, INC.
Application Form
AMERICAN FIDELITY ASSURANCE COMPANY
Share Purchase Application:
- ---------------------------
This application form should be completed and returned, with all necessary
documentation to Financial Data Services, Transfer Agent:
Financial Data Services
Att: New Accounts Team
Transfer Agency Customer Service
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
1. I/we, wish to purchase, the following Portfolios:
(Cross out those funds that do not apply)
XXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXX Prime Bond
Special Value Focus Basic Value Focus XXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXX High Current Income American Balanced
XXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXX
of the Merrill Lynch Variable Series Funds, Inc. and establish investment
accounts as described in the Fund Participation Agreement between Merrill Lynch
Variable Series Funds, Inc. and American Fidelity Assurance Company dated April
18, 1997 (the "Agreement"). This Application is subject to, and incorporates the
terms of the Agreement.
2. I/we have received and read the current Prospectus of the Merrill Lynch
Variable Series Funds, Inc. and the report(s) referred to in the Prospectus.
- --------------------------------------------------------------------------------
3. TAXPAYER IDENTIFICATION NUMBER.
Please provide Taxpayer Identification # 73-0714500
Under penalty of perjury, I certify (1) that the number set above is my
correct Taxpayer Identification Number and (2) that I am not subject to
backup withholding as discussed in the Prospectus either because I have not
been notified that I am subject thereto as a result of a failure to report
all interest of dividends, or the Internal Revenue Services ("IRS") has
notified me that I am no longer subject thereto.
INSTRUCTIONS: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE
BEEN NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO
UNDERREPORTING AND IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT
BACKUP WITHHOLDING HAS BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE
FURNISHING OF THIS CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL
FUNDS.
Authorizing Signature /s/ JOHN W. REX
---------------------------------
John W. Rex
<PAGE> 21
4. ACCOUNT REGISTRATION
Name of Participating Separate Account American Fidelity Assurance Company
-----------------------------------------
Address 2000 N. Classen Blvd
---------------------------
Oklahoma City, OK 73106
- ------------------------------------
5. I/we hereby represent that I/we will be purchasing the shares directly
through the Fund and I/will instruct my/our bank to wire federal funds in
accordance with the following wiring instructions on Trade date +1.
First Union National Bank of Florida
ABA#063000021
DDA#2112600060116
Beneficiary: Financial Data Services, Inc.
6. I/we understand that all dividends and capital gain distributions as are
payable on a Portfolio will be reinvested into additional shares in that
Portfolio.
7. I/we understand that stock certificates will not be issued to the Company or
the Account. Shares ordered from the Fund will be recorded in the appropriate
title for each Account.
I/we have executed this application on, (date) January 20, 1999
---------------------------------
SIGNATURE(S) OF APPLICANT(S)
American Fidelity Separate Account B (Registrant) by American Fidelity
Assurance Company
1. /s/ JOHN W. REX
--------------------------------------------
John W. Rex
American Fidelity Assurance Company (Depositor)
2. /s/ JOHN W. REX
--------------------------------------------
John W. Rex
<PAGE> 1
EXHIBIT 8.2
FUND PARTICIPATION AGREEMENT
This Agreement is entered into as of the 13 day of May, 1997, between AMERICAN
FIDELITY ASSURANCE COMPANY, a life insurance company organized under the laws of
the State of Oklahoma ("Insurance Company"), and each of DREYFUS VARIABLE
INVESTMENT FUND, THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. and DREYFUS
LIFE AND ANNUITY INDEX FUND, INC. (d/b/a DREYFUS STOCK INDEX FUND) (each a
"Fund").
ARTICLE I
DEFINITIONS
1.1 "Act" shall mean the Investment Company Act of 1940, as amended.
1.2 "Board" shall mean the Board of Directors or Trustees, as the case may
be, of a Fund, which has the responsibility for management and control
of the Fund.
1.3 "Business Day" shall mean any day for which a 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 life insurance contract that
uses any Participating Fund (as defined below) 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 a Participating Company (as defined below).
1.7 "Disinterested Board Members" shall mean those members of the Board of a
Fund that are not deemed to be "interested persons" of the Fund, as
defined by the Act.
1.8 "Dreyfus" shall mean The Dreyfus Corporation and its affiliates,
including Dreyfus Service Corporation.
1.9 "Participating Companies" shall mean any insurance company (including
Insurance Company) that offers variable annuity and/or variable life
insurance contracts to the public and that has entered into an agreement
with one or more of the Funds.
1.10 "Participating Fund" shall mean each Fund, including, as applicable, any
series thereof, specified in Exhibit A, as such Exhibit may be amended
from time to time by agreement of the parties hereto, the shares of
which are available to serve as the underlying investment medium for the
aforesaid Contracts.
<PAGE> 2
1.11 "Prospectus" shall mean the current prospectus and statement
of additional information of a Fund, as most recently filed with the
Commission.
1.12 "Separate Account" shall mean American Fidelity Separate Account B, a
separate account established by Insurance Company in accordance with the
laws of the State of Oklahoma.
1.13 "Software Program" shall mean the software program used by a Fund for
providing Fund and account balance information including net asset value
per share. Such Program may include the Lion System. In situations where
the Lion System or any other Software Program used by a Fund is not
available, such information may be provided by telephone. The Lion
System shall be provided to Insurance Company at no charge.
1.14 "Insurance Company's General Account(s)" shall mean the general
account(s) of Insurance Company and its affiliates that invest in a
Fund.
ARTICLE II
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
Oklahoma Insurance Code for the purpose of offering to the public
certain individual and group variable annuity and life insurance
contracts; (c) it has registered the Separate Account as a unit
investment trust under the Act to serve as the segregated investment
account for the Contracts; and (d) the Separate Account is eligible to
invest in shares of each Participating Fund without such investment
disqualifying any Participating Fund as an investment medium for
insurance company separate accounts supporting variable annuity
contracts or variable life insurance contracts.
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 notify each Participating Fund promptly of any
investment restrictions imposed by state insurance law and applicable to
the Participating Fund.
-2-
<PAGE> 3
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 Each Participating Fund represents that its shares are registered with
the Commission under the Securities Act of 1933, that it is registered
with the Commission under the Act as an open-end, management investment
company and that it possesses, and shall maintain, all legal and
regulatory licenses, approvals, consents and/or exemptions required for
the Participating Fund to operate and offer its shares as an underlying
investment medium for Participating Companies.
2.5 Each Participating 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 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 each Participating Fund
and Dreyfus 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 Each Participating Fund agrees that its assets shall be managed and
invested in a manner that complies with the requirements of Section
817(h) of the Code and the Regulations thereunder. In the event a
Participating Fund becomes aware that it has failed to so comply, it
will take reasonable steps (a) to notify Insurance Company of such
-3-
<PAGE> 4
failure and (b) to adequately diversify the Participating Fund so as to
achieve compliance.
2.8 Insurance Company agrees that each Participating Fund shall be permitted
(subject to the other terms of this Agreement) to make its shares
available to other Participating Companies and Contractholders.
2.9 Each Participating Fund represents and warrants that any of its
directors, trustees, officers, employees, investment advisers, and other
individuals/entities who deal with the money and/or securities of the
Participating Fund are and shall continue to be at all times covered by
a blanket fidelity bond or similar coverage for the benefit of the
Participating 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 each Participating
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 or appropriate for purposes of its operations under
applicable law. 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 Dreyfus shall be deemed a third party
beneficiary under this Agreement and may enforce any and all rights
conferred by virtue of this Agreement.
ARTICLE III
FUND SHARES
3.1 The Contracts funded through the Separate Account will provide for the
investment of certain amounts in shares of each Participating Fund.
3.2 Each Participating Fund agrees to make its shares 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, each Participating Fund may
refuse to sell its shares to any person, or suspend or terminate the
offering of its shares, if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion
of its 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 Participating Fund's shareholders.
-4-
<PAGE> 5
3.3 Each Participating Fund agrees that shares of the Participating Fund
will be sold only to (a) Participating Companies and their separate
accounts or (b) "qualified pension or retirement plans" as determined
under Section 817(h)(4) of the Code. Except as otherwise set forth in
this Section 3.3, no shares of any Participating Fund will be sold to
the general public.
3.4 Each Participating Fund shall use its best efforts to provide closing
net asset value, dividend and capital gain information on a per-share
basis to Insurance Company by 6:00 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.
In the event of a material error in the net asset value per share, the
Participating Fund shall take the following steps. Any such error shall
be reported promptly upon discovery to the Insurance Company.
Notification can be made orally or by direct or indirect systems access
but must be confirmed in writing. The letter must state for each day for
which an error occurred the incorrect price, the correct price and the
reason for the price change. If an adjustment is necessary to correct
an error that has caused the Separate Account to receive less than that
to which it is entitled, the Participating Fund shall make all necessary
adjustments to the number of shares owned in the Separate Account and
distribute to the Insurance Company any and all amounts of the
underpayment. The Insurance Company will credit the appropriate amount
of such payment to the Separate Account. When making adjustments for an
error, the Participating Fund shall not net same day transactions in the
Separate Account. No adjustment for an error shall be taken in any
Separate Account until such time as the parties hereto have agreed to a
resolution of the error, but the parties shall use all reasonable
efforts to reach such agreement within two business days after discovery
of the error.
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 unit
values of the Separate Account 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 each Participating Fund's shares that will be purchased
or redeemed at that day's closing net asset value per share. The net
purchase or redemption orders will be transmitted to each Participating
Fund by Insurance Company by 11:00 a.m. Eastern time on the Business
-5-
<PAGE> 6
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 each Participating Fund next calculated after receipt
of the order by the Participating Fund or its Transfer Agent.
3.6 Each Participating Fund appoints Insurance Company as its agent for the
limited purpose of accepting orders for the purchase and redemption of
Participating Fund shares for the Separate Account. Each Participating
Fund will execute orders 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 Participating Fund receives notice of such orders by
11:00 a.m. Eastern time on the next following Business Day and, if such
orders request the purchase of Participating Fund shares, the conditions
specified in Section 3.8, as applicable, are satisfied. A redemption or
purchase request that does not satisfy the conditions specified above
and in Section 3.8, as applicable, will be effected at the net asset
value per share computed on the Business Day immediately preceding the
next following Business Day upon which such conditions have been
satisfied in accordance with the requirements of this Section and
Section 3.8.
3.7 Insurance Company will make its best efforts to notify each applicable
Participating Fund in advance of any unusually large purchase or
redemption orders.
3.8 If Insurance Company's order requests the purchase of a Participating
Fund's shares, Insurance Company will pay for such purchases by wiring
Federal Funds to the Participating Fund or its designated custodial
account on the day the order is transmitted. Insurance Company shall
make all reasonable efforts to transmit to the applicable Participating
Fund payment in Federal Funds by 12:00 noon Eastern time on the Business
Day the Participating Fund receives the notice of the order pursuant to
Section 3.5. Each applicable Participating 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 the Participating Fund
receives payment in Federal Funds by 12:00 midnight Eastern time on the
Business Day the Participating Fund receives the notice of the order
pursuant to Section 3.5. If payment in Federal Funds for any purchase is
not received or is received by a Participating Fund after 12:00 noon
Eastern time on such Business Day, Insurance Company shall promptly,
upon each applicable Participating Fund's request, reimburse the
respective Participating Fund for any charges, costs, fees, interest or
other expenses incurred by the Participating Fund in connection with any
advances to, or borrowings or overdrafts
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by, the Participating Fund, or any similar expenses incurred by the
Participating Fund, as a result of portfolio transactions effected by
the Participating Fund based upon such purchase request. If Insurance
Company's order requests the redemption of any Participating Fund's
shares valued at or greater than $1 million dollars, the Participating
Fund will wire such amount to Insurance Company within seven days of the
order.
3.9 Each Participating Fund has the obligation to ensure that its shares are
registered with applicable federal agencies at all times. Each
Participating Fund will register and qualify its shares for sale in
accordance with the laws of the various states if required by applicable
law.
3.10 Each Participating Fund will confirm each purchase or redemption order
made by Insurance Company. Transfer of Participating Fund shares will be
by book entry only. No share certificates will be issued to Insurance
Company. Insurance Company will record shares ordered from a
Participating Fund in an appropriate title for the corresponding
account.
3.11 Each Participating Fund shall credit Insurance Company with the
appropriate number of shares.
3.12 On each ex-dividend date of a Participating Fund or, if not a Business
Day, on the first Business Day thereafter, each Participating Fund shall
communicate to Insurance Company the amount of dividend and capital
gain, if any, per share. All dividends and capital gains shall be
automatically reinvested in additional shares of the applicable
Participating Fund at the net asset value per share on the ex-dividend
date. Each Participating Fund shall, on the day after the ex-dividend
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
STATEMENTS AND REPORTS
4.1 Each Participating 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 Each Participating Fund shall distribute to Insurance Company copies of
the Participating Fund's Prospectuses, proxy materials, notices,
periodic reports and other printed materials (which the Participating
Fund customarily provides to its shareholders) in quantities as
Insurance Company may reasonably request for distribution to each
Contractholder and Participant. If requested by Insurance Company, each
Participating Fund will provide documentation (including the
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<PAGE> 8
Participating Fund's prospectus as set in type, on diskette or in
camera-ready copy) and other reasonable assistance as is reasonably
necessary for Insurance Company to print together in one document the
current prospectus for the variable contracts issued by Insurance
Company, the current prospectus for each Participating Fund and the
current prospectus of each other fund in which the assets of the
variable contracts are invested. In such case, each Participating Fund
will bear that portion of the reasonable expenses allocable to the
Participating Fund portion of the combined printed prospectuses.
Insurance Company shall submit the invoices for such printing and
duplicating to each Participating Fund and shall employ all reasonable
efforts to monitor and control such costs.
4.3 Each Participating 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 Participating 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 each Participating 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
EXPENSES
5.1 The charge to each Participating Fund for all expenses and costs of the
Participating Fund, including but not limited to management fees,
administrative expenses and legal and regulatory costs, will be made in
the determination of the Participating Fund's daily net asset value per
share so as to accumulate to an annual charge at the rate set forth in
the Participating Fund's Prospectus. Excluded from the expense
limitation described herein shall be brokerage commissions and
transaction fees and extraordinary expenses.
5.2 Each Participating Fund shall bear the costs of registration and
qualification of its shares, the preparation and filing of required
documents and all taxes to which an issuer is subject on issuance and
transfer of its shares. 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 any Participating Fund or expenses
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<PAGE> 9
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 Participating Fund
materials, including the cost of printing a Participating Fund's
Prospectus, or marketing materials for prospective Insurance
Company Contractholders and Participants as Dreyfus and Insurance
Company shall agree from time to time.
b. Distribution expenses of any Participating Fund materials or
marketing materials for prospective Insurance Company
Contractholders and Participants.
c. Distribution expenses of any Participating Fund materials or
marketing materials for Insurance Company Contractholders and
Participants.
Except as provided herein, all other expenses of each Participating Fund
shall not be borne by Insurance Company.
ARTICLE VI
EXEMPTIVE RELIEF
6.1 Insurance Company has reviewed a copy of the order dated December 23,
1987 of the Securities and Exchange Commission under Section 6(c) of the
Act with respect to Dreyfus Variable Investment Fund and a copy of the
order dated August 23, 1989 of the Securities and Exchange Commission
under Section 6(c) of the Act with respect to Dreyfus Life and Annuity
Index Fund, Inc. and, in particular, has reviewed the conditions to the
relief set forth in each related Notice. As set forth therein, if
Dreyfus Variable Investment Fund or Dreyfus Life and Annuity Index Fund,
Inc. is a Participating Fund, Insurance Company agrees, as applicable,
to report any potential or existing conflicts, to which it is reasonably
aware, promptly to the respective Board of Dreyfus Variable Investment
Fund and/or Dreyfus Life and Annuity Index Fund, Inc. and, in
particular, whenever contract voting instructions are disregarded, and
recognizes that it will be responsible for assisting each applicable
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.
The Dreyfus Socially Responsible Growth Fund, Inc., if it is a
Participating Fund, shall furnish Insurance Company with a copy of its
application for an order of the Securities and Exchange Commission under
Section 6(c) of the Act for mixed and shared funding relief, and the
notice of such application and order when issued by the SEC. Insurance
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<PAGE> 10
Company agrees to comply with the conditions on which such order is
issued, including reporting any potential or existing conflicts
promptly to the Board of The Dreyfus Socially Responsible Growth Fund,
Inc., and in particular whenever Contractholder voting instructions are
disregarded, to the extent such conditions are not materially different
from the conditions of the mixed and shared funding relief obtained by
Dreyfus Variable Investment Fund and Dreyfus Life and Annuity Index
Fund, Inc., respectively; and recognizes that it shall be responsible
for assisting the Board of The Dreyfus Socially Responsible Growth Fund,
Inc. in carrying out its responsibilities in connection with such order.
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 (as
contemplated in the order of the Securities and Exchange Commission, and
related application, referenced in Section 6.1) exists with regard to
Contractholder investments in a Participating Fund, the Board shall give
prompt notice to all Participating Companies and any other Participating
Fund. 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
Participating Fund and reinvesting such assets in another
Participating Fund (if applicable) or 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 a
Participating Fund, Insurance Company may be required, at the Board's
election, to withdraw the investments of the Separate Account in that
Participating Fund.
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<PAGE> 11
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 any
Participating 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 any Participating 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.
ARTICLE VII
VOTING OF PARTICIPATING FUND SHARES
7.1 Each Participating Fund shall provide Insurance Company with copies, at
no cost to Insurance Company, of the Participating 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.
Insurance Company shall:
(a) solicit voting instructions from Contractholders or Participants
on a timely basis and in accordance with applicable law;
(b) vote the Participating Fund shares in accordance with instructions
received from Contractholders or Participants; and
(c) vote the Participating Fund shares for which no instructions have
been received in the same proportion as Participating Fund shares
for which instructions have been received.
Insurance Company agrees at all times to vote its General Account shares
in the same proportion as the Participating Fund shares for which
instructions have been received from Contractholders or Participants.
Insurance Company further agrees to be responsible for assuring that
voting the Participating Fund shares for the Separate Account is
conducted in a manner consistent with other Participating Companies.
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<PAGE> 12
7.2 Insurance Company agrees that it shall not, without the prior written
consent of each applicable Participating Fund and Dreyfus, solicit,
induce or encourage Contractholders to change or supplement the
Participating Fund's current investment adviser.
ARTICLE VIII
MARKETING AND REPRESENTATIONS
8.1 Each Participating 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; and
b. Other marketing materials.
Expenses for the production of such documents shall be borne in
accordance with Sections 4.2 and 5.2 of this Agreement.
8.2 Insurance Company shall designate certain persons or entities that 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 each
applicable Participating Fund or its designee, each piece of sales
literature or other promotional material in which the Participating
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 Participating Fund or its designee 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. Each applicable Participating Fund or its designee, as the
case may be, 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 a Participating Fund or
concerning a Participating Fund in connection with the sale of the
Contracts other than the information or representations contained in the
registration statement or Prospectus of, as may be amended or
supplemented from time to time, or in reports or proxy statements for,
the
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<PAGE> 13
applicable Participating Fund, or in sales literature or other
promotional material approved by the applicable Participating Fund.
8.5 Each Participating Fund shall furnish, or shall cause to be furnished,
to Insurance Company, each piece of the Participating 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 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 Each Participating Fund shall not, in connection with the sale of
Participating Fund 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 that 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.
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<PAGE> 14
ARTICLE IX
INDEMNIFICATION
9.1 Insurance Company agrees to indemnify and hold harmless each
Participating Fund, Dreyfus, each respective Participating Fund's
investment adviser and sub-investment adviser (if applicable), each
respective Participating Fund's distributor, and their respective
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 respective Participating 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 respective Participating Fund) of Insurance Company or its agents,
with respect to the sale and distribution of Contracts for which the
respective Participating Fund's 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 the respective Participating Fund's 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
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<PAGE> 15
based upon any 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 respective Participating Fund specifically for
use therein. This indemnity agreement will be in addition to any
liability which Insurance Company may otherwise have.
9.2 Each Participating Fund severally agrees to indemnify and hold harmless
Insurance Company and each of its directors, officers, employees, agents
and each person, if any, who controls Insurance Company within the
meaning of the 1933 Act against any losses, claims, damages or
liabilities, 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, to
which Insurance Company or any such director, officer, employee, agent
or controlling person may become subject, under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) (1) 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 respective Participating Fund; (2)
arise out of or are based upon the omission to state in the registration
statement or Prospectus or sales literature or advertisements of the
respective Participating Fund any material fact required to be stated
therein or necessary to make the statements therein not misleading; (3)
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 respective
Participating Fund; or (4) arise out of any breach by a Participating
Fund of a material term of this Agreement or as a result of any failure
by a Participating Fund to provide the services and furnish the
materials or to make any payments in conformity with and as provided for
in this Agreement; and the respective Participating Fund will reimburse
any legal or other expenses reasonably incurred by Insurance Company or
any such director, officer, employee, agent or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the respective
Participating 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 an untrue statement or omission or alleged omission made in such
registration statement, Prospectus, sales literature or advertisements
in conformity with written information
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<PAGE> 16
furnished to the respective Participating Fund by Insurance Company
specifically for use therein. This indemnity agreement will be in
addition to any liability which the respective Participating Fund may
otherwise have.
9.3 Each Participating Fund severally shall indemnify and hold Insurance
Company and each of its directors, officers, employees, agents, and each
person, if any, who controls Insurance Company within the meaning of the
1933 Act harmless against any and all liability, loss, damages, costs or
expenses (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)
which Insurance Company may incur, suffer or be required to pay due to
the respective Participating Fund's (1) incorrect calculation of the
daily net asset value, dividend rate or capital gain distribution rate;
(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 respective Participating Fund shall have no obligation to
indemnify and hold harmless Insurance Company 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. This
indemnity agreement will be in addition to any liability that the
Participating Fund otherwise may have.
9.4 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
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
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<PAGE> 17
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.
A successor by law of the parties to this Agreement shall be entitled to
the benefits of the indemnification contained in this Article IX. The
provisions of this Article IX shall survive termination of this
Agreement.
9.5 Insurance Company shall indemnify and hold each respective Participating
Fund, Dreyfus and sub-investment adviser of the Participating Fund
harmless against any tax liability incurred by the Participating Fund
under Section 851 of the Code arising from purchases or redemptions by
Insurance Company's General Accounts or the general account of its
affiliates, but only if the Participating Fund provides prior notice to
Insurance Company that any such purchase or redemption might cause the
Participating Fund to incur tax liability under Section 851.
ARTICLE X
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:
a. As to any Participating Fund, at the option of Insurance Company
or the Participating Fund at any time from the date hereof upon
180 days' notice, unless a shorter time is agreed to by the
respective Participating Fund and Insurance Company;
b. As to any Participating Fund, at the option of Insurance Company,
if shares of that Participating Fund are not reasonably available
to meet the requirements of the Contracts as determined by
Insurance Company. Prompt notice of election to terminate shall be
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furnished by Insurance Company, said termination to be effective
ten days after receipt of notice unless the Participating Fund
makes available a sufficient number of shares to meet the
requirements of the Contracts within said ten-day period;
c. As to a Participating Fund, at the option of Insurance Company,
upon the institution of formal proceedings against that
Participating 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 that
Participating Fund's ability to meet and perform the Participating
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. As to a Participating Fund, at the option of each Participating
Fund, following the issuance of any ruling, judgment or outcome in
connection with the institution of formal proceedings against
Insurance Company by the Commission, National Association of
Securities Dealers or any other regulatory body, the result of
which would, in the Participating 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 such
Participating Fund with said termination to be effective upon
receipt of notice;
e. As to a Participating Fund, at the option of that Participating
Fund, if the Participating 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 that Participating Fund or Dreyfus; such
Participating 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 Participating 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. As to a Participating Fund, upon termination of the Investment
Advisory Agreement between that
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Participating Fund and Dreyfus or its successors unless Insurance
Company specifically approves the selection of a new Participating
Fund investment adviser. Such Participating Fund shall promptly
furnish notice of such termination to Insurance Company;
g. As to a Participating Fund, in the event that Participating 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 as to that Participating Fund only upon such
occurrence without notice;
h. At the option of a Participating Fund upon a determination by its
Board in good faith that it is no longer advisable and in the best
interests of shareholders of that Participating Fund to continue
to operate pursuant to this Agreement. Termination pursuant to
this Subsection (h) shall be effective upon 60 days' notice by
such Participating Fund to Insurance Company of such termination;
i. At the option of a Participating Fund if the Contracts cease to
qualify as annuity contracts or life insurance policies, as
applicable, under the Code, or if such Participating Fund
reasonably believes that the Contracts may fail to so qualify;
j. At the option of any party to this Agreement, upon another party's
breach of any material provision of this Agreement;
k. At the option of a Participating Fund, if the Contracts are not
registered, issued or sold in accordance with applicable federal
and/or state law;
l. Upon assignment of this Agreement, unless made with the written
consent of every other non-assigning party; or
m. As to a Participating Fund, at the option of Insurance Company, if
the Insurance Company shall determine, in its sole judgment
reasonably exercised in good faith, that the Participating Fund is
the subject of material adverse publicity and such material
adverse publicity is likely to have a material adverse impact upon
the sale of the variable contracts and/or the operations or
business reputation of Insurance Company; Insurance Company shall
notify the Participating Fund in writing of such determination and
its intent to terminate this Agreement as to that Participating
Fund, and after considering the actions taken by Participating
Fund and any other changes in circumstances since the giving of
such notice, such determination of Insurance Company
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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.
n. As to a Participating Fund, at the option of Insurance Company,
following the issuance of any ruling, judgment or outcome in
connection with the institution of formal proceedings against the
Participating Fund by the Commission, National Association of
Securities Dealers or any other regulatory body, the result of
which would, in Insurance Company's reasonable judgment,
materially impair the Participating Fund's ability to meet and
perform its 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;
Any such termination pursuant to Section 10.2a, 10.2d, 10.2e, 10.2f or
10.2k 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, Insurance Company, at its option, may continue to purchase
additional shares of that Participating Fund, as provided below,
pursuant to the terms and conditions of this Agreement for all Contracts
in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Under such
circumstances, only the owners of the Existing Contracts or Insurance
Company, whichever shall have legal authority to do so, shall be
permitted to reallocate investments in that Participating Fund, redeem
investments in that Participating Fund and/or invest in that
Participating Fund upon the making of additional purchase payments under
the Existing Contracts. Furthermore, the provisions of this Agreement
shall remain in effect and thereafter either that Participating Fund or
Insurance Company may terminate the Agreement as to that Participating
Fund, 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 Participating
Fund, need not be for longer than the greater of (i) six months or (ii)
the period required by Insurance Company to obtain any necessary
approval from the Commission or any state insurance regulatory authority
provided that Insurance Company makes a reasonable good faith effort to
obtain such approvals in a reasonable period of time.
-20-
<PAGE> 21
10.4 Termination of this Agreement as to any one Participating Fund shall not
be deemed a termination as to any other Participating Fund unless
Insurance Company or such other Participating Fund, as the case may be,
terminates this Agreement as to such other Participating Fund in
accordance with this Article X.
ARTICLE XI
AMENDMENTS
11.1 Any other changes in the terms of this Agreement, except for the
addition or deletion of any Participating Fund as specified in Exhibit
A, shall be made by agreement in writing between Insurance Company and
each respective Participating Fund.
ARTICLE XII
NOTICE
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: American Fidelity Assurance Company
2000 Classen Boulevard
Oklahoma City, Oklahoma 73125
Attn: Stephen P. Garrett, Senior
Vice President and General
Counsel
Participating Funds: [Name of Fund]
c/o Premier Mutual Fund Services, Inc.
200 Park Avenue, 6th Floor West
New York, New York 10166
Attn: Elizabeth A. Keeley, Esq.
with copies to: [Name of Fund]
c/o The Dreyfus Corporation
200 Park Avenue
New York, New York 10166
Attn: Mark N. Jacobs, Esq.
Lawrence B. Stoller, Esq.
Stroock & Stroock & Lavan
7 Hanover Square
New York, New York 10004-2696
Attn: Lewis G. Cole, Esq.
Stuart H. Coleman, Esq.
Notice shall be deemed to be given on the date of receipt by the
addresses as evidenced by the return receipt.
-21-
<PAGE> 22
ARTICLE XIII
MISCELLANEOUS
13.1 This Agreement has been executed on behalf of each 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
director, trustee, officer or shareholder of the Fund individually. It
is agreed that the obligations of the Funds are several and not joint,
that no Fund shall be liable for any amount owing by another Fund and
that the Funds have executed one instrument for convenience only.
13.2 Each party shall cooperate with each other party in connection with
inquiries by appropriate governmental authorities (including without
limitation the Commission, the National Association of Securities
Dealers and state insurance regulators) relating to this Agreement or
the transactions contemplated by this Agreement.
13.3 The parties to this Agreement acknowledge and agree that this Agreement
shall not be exclusive in any respect.
13.4 If any provision of this Agreement shall be held invalid by a court
decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected.
13.5 No failure or delay by a party in exercising any right or remedy under
this Agreement will operate as a waiver thereof and no single or partial
exercise of rights shall preclude a further or subsequent exercise. The
rights and remedies provided in this Agreement are cumulative and not
exclusive of any rights or remedies provided by law.
ARTICLE XIV
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.
-22-
<PAGE> 23
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be duly
executed and attested as of the date first above written.
AMERICAN FIDELITY ASSURANCE COMPANY
By: /s/ [ILLEGIBLE]
----------------------------------
Its: PRESIDENT
---------------------------------
Attest: /s/ PATSY L. WEBB
-------------------------
DREYFUS LIFE AND ANNUITY INDEX FUND,
INC. (d/b/a DREYFUS STOCK INDEX FUND)
By: /s/ ELIZABETH KEELEY
----------------------------------
Its: VICE PRESIDENT
---------------------------------
Attest: /s/ [ILLEGIBLE]
-------------------------
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH
FUND, INC.
By: /s/ ELIZABETH KEELEY
----------------------------------
Its: VICE PRESIDENT
---------------------------------
Attest: /s/ [ILLEGIBLE]
-------------------------
DREYFUS VARIABLE INVESTMENT FUND
By: /s/ ELIZABETH KEELEY
----------------------------------
Its: VICE PRESIDENT
---------------------------------
Attest: /s/ [ILLEGIBLE]
-------------------------
-23-
<PAGE> 24
EXHIBIT A
LIST OF PARTICIPATING FUNDS
Dreyfus Variable Investment Fund:
Growth and Income Portfolio
Small Company Stock Portfolio
Dreyfus Stock Index Fund
The Dreyfus Socially Responsible Growth Fund, Inc.
-24-
<PAGE> 25
AMENDMENT TO FUND PARTICIPATION AGREEMENT
The Fund Participation Agreement, dated as of May 13, 1997, between
American Fidelity Assurance Company, and each of Dreyfus Variable Investment
Fund, The Dreyfus Socially Responsible Growth Fund, Inc. and Dreyfus Life and
Annuity Index Fund, Inc. (d/b/a Dreyfus Stock Index Fund) (the "Agreement") is
hereby amended as follows:
Exhibit A is hereby amended to read in its entirety as follows:
EXHIBIT A
LIST OF PARTICIPATING FUNDS
Dreyfus Variable Investment Fund
Growth and Income Portfolio
Small Company Stock Portfolio
International Value Portfolio
Dreyfus Stock Index Fund
The Dreyfus Socially Responsible Growth Fund, Inc."
All other terms and provisions of the Agreement not amended hereby shall
remain in full force and effect.
Effective Date: January 1, 1999
AMERICAN FIDELITY ASSURANCE COMPANY
By: /s/ JOHN W. REX
-------------------------------------
Name: John W. Rex
-----------------------------------
Title: President
----------------------------------
DREYFUS VARIABLE INVESTMENT FUND
By: /s/ STEPHANIE PIERCE
-------------------------------------
Name: Stephanie Pierce
-----------------------------------
Title: Vice President
----------------------------------
<PAGE> 1
EXHIBIT 9
April 30, 1999
American Fidelity Assurance Company
2000 N. Classen Boulevard
Oklahoma City, Oklahoma 73106
Re: American Fidelity Separate Account B - Post-Effective Amendment
No. 2 to Form N-4 Registration Statement (Nos. 333-25663 and
811-08178)
Ladies and Gentlemen:
You have requested our opinion in connection with the filing with the
Securities and Exchange Commission of Post-Effective Amendment No. 2 to the
above-referenced Registration Statement on Form N-4 for the AFAdvantage Variable
Annuity policy (the "Policy") to be issued by American Fidelity Assurance
Company ("AFA") and its separate account, American Fidelity Separate Account B.
We have made such examination of the law and have examined such records
and documents as in our judgment are necessary or appropriate to enable us to
render the opinions expressed below. Based upon the foregoing, we are of the
opinion that:
(1) American Fidelity Separate Account B is a separate account as the
term is defined in Section 2(a)(37) of the Investment Company Act of 1940 (the
"Act"), and is currently registered with the Securities and Exchange Commission
pursuant to Section 8(a) of the Act.
(2) The Policies will be legally issued when issued in accordance with
the Prospectus contained in the Registration Statement and in compliance with
applicable state insurance law and will represent binding obligations of AFA,
provided that the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally.
You may use this opinion letter as an exhibit to the Registration
Statement. We consent to the reference to our firm under the caption "Legal
Opinions" contained in the Statement of Additional Information which forms a
part of the Registration Statement.
Very truly yours,
/s/ WINSTEAD SECHREST & MINICK P.C.
CSS/jij
<PAGE> 1
EXHIBIT 10
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
American Fidelity Assurance Company:
We consent to the use of our reports included herein and the reference to our
name under the heading "Experts" in the Statement of Additional Information.
KMPG LLP
Oklahoma City, Oklahoma
April 30, 1999
<PAGE> 1
EXHIBIT 13
AMERICAN FIDELITY SEPARATE ACCOUNT B
AMERICAN FIDELITY DUAL STRATEGY FUND, INC.
CUMULATIVE TOTAL RETURN WITH NO WITHDRAWAL CHARGE:
T = [ ERV/P ] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
1 YEAR:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 6.80370284
------------------
EQUALS ORIGINAL UNITS PURCHASED 146.97878850
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 0.00000000
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES -3.53839160
------------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 143.44039690
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 8.47842840
------------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT(ERV) $ 1,216.15
DIVIDED BY ORIGINAL $1,000 INVESTMENT(P) 1.2162
SUBTRACT 1.0 0.2162
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD(T) 21.62%
==================
5 YEARS:
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 3.44774553
------------------
EQUALS ORIGINAL UNITS PURCHASED 290.04460770
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 0.00000000
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES -29.83659230
------------------
EQUALS UNITS HELD AT END OF 5 YEARS ON 31-Dec-98 260.20801540
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 8.47842840
------------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT(ERV) $ 2,206.16
DIVIDED BY ORIGINAL $1,000 INVESTMENT(P) 2.2062
SUBTRACT 1.0 1.2062
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD(T) 120.62%
==================
10 YEARS:
INITIAL INVESTMENT ON 31-Dec-88 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-88 1.85902270
------------------
EQUALS ORIGINAL UNITS PURCHASED 537.91704600
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 0.00000000
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES -81.96931450
------------------
EQUALS UNITS HELD AT END OF 10 YEARS ON 31-Dec-98 455.94773150
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 8.47842840
------------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT(ERV) $ 3,865.72
DIVIDED BY ORIGINAL $1,000 INVESTMENT(P) 3.8657
SUBTRACT 1.0 2.8657
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD(T) 286.57%
==================
</TABLE>
Page 1
<PAGE> 2
AMERICAN FIDELITY DUAL STRATEGY FUND, INC.
COMPOUND AVERAGE ANNUAL RETURN WITH NO WITHDRAWAL CHARGE:
P [ 1 + T ]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of ** = to the power of
ERV = ending value of $1,000 investment
THUS:
<TABLE>
<CAPTION>
ONE YEAR FIVE YEAR TEN YEAR
COMPOUND AVERAGE COMPOUND AVERAGE COMPOUND AVERAGE
ANNUAL RETURN ANNUAL RETURN ANNUAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $1,216.15 $1,000 (1 + T)**5 $2,206.16 $1,000 (1 + T)**10 = $3,865.72
T = 21.62% T = 17.15% T = 14.48%
===================== ================== ================
</TABLE>
Page 2
<PAGE> 3
AMERICAN FIDELITY DUAL STRATEGY FUND, INC.
CUMULATIVE TOTAL RETURN WITH WITHDRAWAL CHARGE:
T = [ ERV / P ] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
1 YEAR:
<TABLE>
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE O31-Dec-97 6.80370284
--------------------
EQUALS ORIGINAL UNITS PURCHASED 146.97878850
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 0.00000000
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (3.53839160)
--------------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 143.44039690
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 8.47842840
--------------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,216.15
LESS WITHDRAWAL CHARGE @ 8.00% (8% MAX ON PURCHASES) 80.00
--------------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,136.15
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.1362
SUBTRACT 1.0 0.1362
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 13.62%
====================
5 YEARS:
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE O31-Dec-93 3.44774553
--------------------
EQUALS ORIGINAL UNITS PURCHASED 290.04460770
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 0.00000000
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (29.83659230)
--------------------
EQUALS UNITS HELD AT END OF 5 YEARS ON 31-Dec-98 260.20801540
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 8.47842840
--------------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 2,206.16
LESS WITHDRAWAL CHARGE @ 4.00% 0N 90% (8% MAX ON PURCHASES) 79.42
--------------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 2,126.74
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 2.1267
SUBTRACT 1.0 1.1267
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 112.67%
====================
10 YEARS:
INITIAL INVESTMENT ON 31-Dec-88 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE O31-Dec-88 1.85902270
--------------------
EQUALS ORIGINAL UNITS PURCHASED 537.91704600
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 0.00000000
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (81.96931450)
--------------------
EQUALS UNITS HELD AT END OF 10 YEARS ON 31-Dec-98 455.94773150
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 8.47842840
--------------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 3,865.72
LESS WITHDRAWAL CHARGE @ 0.00% 0N 90% (8% MAX ON PURCHASES) 0.00
--------------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 3,865.72
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 3.8657
SUBTRACT 1.0 2.8657
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 286.57%
====================
</TABLE>
Page 1
<PAGE> 4
AMERICAN FIDELITY DUAL STRATEGY FUND, INC.
AVERAGE ANNUAL TOTAL RETURN (SEC STANDARDIZED RETURN):
P [ 1 + T ]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
ONE YEAR AVERAGE FIVE YEAR AVERAGE TEN YEAR AVERAGE
ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $1,136.15 $1,000 (1 + T)**5 = $2,126.74 $1,000 (1 + T)**10 = $3,865.72
T = 13.62% T = 16.29% T = 14.48%
============== ============== ===============
</TABLE>
Page 2
<PAGE> 5
EXHIBIT 13
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
CUMULATIVE TOTAL RETURN WITH NO WITHDRAWAL CHARGE:
T = [ ERV / P ] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
<S> <C> <C>
1 YEAR:
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 23.43349187
---------------
EQUALS ORIGINAL UNITS PURCHASED 42.67396450
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 1.68380220
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (1.04407780)
---------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 43.31368890
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 28.73349022
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,244.55
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.2446
SUBTRACT 1.0 0.2446
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 24.46%
===============
5 YEAR:
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 13.33337899
---------------
EQUALS ORIGINAL UNITS PURCHASED 74.99974320
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 13.08710540
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (7.99381700)
---------------
EQUALS UNITS HELD ON 31-Dec-98 80.09303160
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 28.73349022
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 2,301.35
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 2.3014
SUBTRACT 1.0 1.3014
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 130.14%
===============
SINCE INCEPTION:
INITIAL INVESTMENT ON 07-Oct-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 07-Oct-93 12.50000000
---------------
EQUALS ORIGINAL UNITS PURCHASED 80.00000000
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 13.87033960
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (10.24380930)
---------------
EQUALS UNITS HELD ON 31-Dec-98 83.62653030
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 28.73349022
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 2,402.88
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 2.4029
SUBTRACT 1.0 1.4029
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 140.29%
===============
</TABLE>
Page 1
<PAGE> 6
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
COMPOUND AVERAGE ANNUAL RETURN WITH NO WITHDRAWAL CHARGE:
P [ 1 + T ]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
THUS:
ONE YEAR FIVE YEAR SINCE INCEPTION
COMPOUND AVERAGE COMPOUND AVERAGE COMPOUND AVERAGE
ANNUAL RETURN ANNUAL RETURN ANNUAL RETURN
<S> <C> <C> <C> <C>
$1,000 (1 + T)**1= $1,244.55 $1,000 (1 + T)**5= $2,301.35 $1,000 (1 + T)** 5.2356 = $2,402.88
T = 24.46% T = 18.14% T = 18.23%
========= ========= =========
</TABLE>
Page 2
<PAGE> 7
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
CUMULATIVE TOTAL RETURN WITH WITHDRAWAL CHARGE:
T = [ ERV / P ] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
<S> <C> <C>
1 YEAR:
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 23.43349187
---------------
EQUALS ORIGINAL UNITS PURCHASED 42.67396450
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 1.68380220
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (1.04407780)
---------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 43.31368890
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 28.73349022
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,244.55
LESS WITHDRAWAL CHARGE @ 8.00% (8% MAX ON PURCHASES) 80.00
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,164.55
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.1646
SUBTRACT 1.0 0.1646
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 16.46%
===============
5 YEAR:
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 13.33337899
---------------
EQUALS ORIGINAL UNITS PURCHASED 74.99974320
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 13.08710540
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (7.99381700)
---------------
EQUALS UNITS HELD ON 31-Dec-98 80.09303160
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 28.73349022
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 2,301.35
LESS WITHDRAWAL CHARGE @ 4.00% ON 90% (8% MAX ON PURCHASES) 80.00
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 2,221.35
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 2.2214
SUBTRACT 1.0 1.2214
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 122.14%
===============
SINCE INCEPTION:
INITIAL INVESTMENT ON 07-Oct-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 07-Oct-93 12.50000000
---------------
EQUALS ORIGINAL UNITS PURCHASED 80.00000000
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 13.87033960
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (10.24380930)
---------------
EQUALS UNITS HELD ON 31-Dec-98 83.62653030
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 28.73349022
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 2,402.88
LESS WITHDRAWAL CHARGE @ 3.00% ON 90% (8% MAX ON PURCHASES) 64.88
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 2,338.00
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 2.3380
SUBTRACT 1.0 1.3380
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 133.80%
================
</TABLE>
Page 1
<PAGE> 8
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC
AVERAGE ANNUAL TOTAL RETURN (SEC STANDARDIZED RETURN):
P [ 1 + T ]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
SINCE INCEPTION
ONE YEAR AVERAGE FIVE YEAR AVERAGE AVERAGE
ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN
<S> <C> <C> <C>
$1,000 (1 + T)**1 = $1,164.55 $1,000 (1 + T)**5 = $2,221.35 $1,000 (1 + T)** 5.2356 = $2,338.00
T = 16.46% T = 17.31% T = 17.61%
========= ========= =========
</TABLE>
Page 2
<PAGE> 9
EXHIBIT 13
DREYFUS STOCK INDEX FUND
CUMULATIVE TOTAL RETURN WITH NO WITHDRAWAL CHARGE:
T = [ERV/P] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
1 YEAR:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 22.74971599
------------
EQUALS ORIGINAL UNITS PURCHASED 43.95659270
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 0.66831920
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (1.05994360)
------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 43.56496830
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 28.30339339
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,233.04
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.2330
SUBTRACT 1.0 0.2330
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 23.30%
============
</TABLE>
<TABLE>
<CAPTION>
5 YEARS:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 12.38333086
------------
EQUALS ORIGINAL UNITS PURCHASED 80.75371730
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 13.05233520
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (8.45256630)
------------
EQUALS UNITS HELD AT END OF 5 YEARS ON 31-Dec-98 85.35348620
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 28.30339339
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 2,415.79
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 2.4158
SUBTRACT 1.0 1.4158
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 141.58%
============
</TABLE>
<TABLE>
<CAPTION>
SINCE INCEPTION:
<S> <C> <C>
INITIAL INVESTMENT ON 29-Sep-89 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 29-Sep-89 12.50000000
------------
EQUALS ORIGINAL UNITS PURCHASED 80.00000000
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 46.59673000
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (19.98403800)
------------
EQUALS UNITS HELD ON: 31-Dec-98 106.61269200
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 28.30339339
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 3,017.50
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 3.0175
SUBTRACT 1.0 2.0175
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 201.75%
============
</TABLE>
Page 1
<PAGE> 10
DREYFUS STOCK INDEX FUND
COMPOUND AVERAGE ANNUAL RETURN WITH NO WITHDRAWAL CHARGE:
P [1 + T]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
THUS:
<TABLE>
<CAPTION>
ONE YEAR FIVE YEAR SINCE INCEPTION
COMPOUND AVERAGE COMPOUND AVERAGE COMPOUND AVERAGE
ANNUAL RETURN ANNUAL RETURN ANNUAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $1,233.04 $1,000 (1 + T)**5 = $2,415.79 $1,000 (1 + T)**9.2603 = $3,017.50
T = 23.30% T = 19.29% T = 12.67%
========== ========== ==========
</TABLE>
Page 2
<PAGE> 11
DREYFUS STOCK INDEX FUND
CUMULATIVE TOTAL RETURN WITH WITHDRAWAL CHARGE:
T = [ERV/P] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
1 YEAR:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 22.74971599
------------
EQUALS ORIGINAL UNITS PURCHASED 43.95659270
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 0.66831920
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (1.05994360)
------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 43.56496830
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 28.30339339
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,233.04
LESS WITHDRAWAL CHARGE @ 8.00% (8% MAX ON PURCHASES) 80.00
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,153.04
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.1530
SUBTRACT 1.0 0.1530
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 15.30%
============
</TABLE>
<TABLE>
<CAPTION>
5 YEARS:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 12.38333086
------------
EQUALS ORIGINAL UNITS PURCHASED 80.75371730
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 13.05233520
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (8.45256630)
------------
EQUALS UNITS HELD AT END OF 5 YEARS ON 31-Dec-98 85.35348620
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 28.30339339
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 2,415.79
LESS WITHDRAWAL CHARGE @ 4.00% ON 90% (8% MAX ON PURCHASES) 80.00
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 2,335.79
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 2.3358
SUBTRACT 1.0 1.3358
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 133.58%
============
</TABLE>
<TABLE>
<CAPTION>
SINCE INCEPTION:
<S> <C> <C>
INITIAL INVESTMENT ON 29-Sep-89 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 29-Sep-89 12.50000000
------------
EQUALS ORIGINAL UNITS PURCHASED 80.00000000
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 46.59673000
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (19.98403800)
------------
EQUALS UNITS HELD ON 31-Dec-98 106.61269200
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 28.30339339
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 3,017.50
LESS WITHDRAWAL CHARGE @ 0.00% ON 90% (8% MAX ON PURCHASES) 0.00
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 3,017.50
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 3.0175
SUBTRACT 1.0 2.0175
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 201.75%
============
</TABLE>
Page 1
<PAGE> 12
DREYFUS STOCK INDEX FUND
AVERAGE ANNUAL TOTAL RETURN (SEC STANDARDIZED RETURN):
P [1 + T]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
SINCE INCEPTION
ONE YEAR AVERAGE FIVE YEAR AVERAGE AVERAGE
ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $1,153.04 $1,000 (1 + T)**5 = $2,335.79 $1,000 (1 + T)**9.2603 = $3,017.50
T = 15.30% T = 18.49% T = 12.67%
========== =========== ===========
</TABLE>
Page 2
<PAGE> 13
EXHIBIT 13
DREYFUS VARIABLE INVESTMENT FUND - GROWTH AND INCOME PORTFOLIO
CUMULATIVE TOTAL RETURN WITH NO WITHDRAWAL CHARGE:
T = [ERV/P]-1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
1 YEAR:
<TABLE>
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 19.66777691
------------
EQUALS ORIGINAL UNITS PURCHASED 50.84458730
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 1.35884970
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (1.42180590)
------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 50.78163110
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 21.09992634
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,071.49
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0715
SUBTRACT 1.0 0.0715
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 7.15%
============
SINCE INCEPTION:
INITIAL INVESTMENT ON 02-May-94 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 02-May-94 12.50000000
------------
EQUALS ORIGINAL UNITS PURCHASED 80.00000000
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 29.31790640
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (8.75166980)
------------
EQUALS UNITS HELD ON 31-Dec-98 100.56623660
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 21.09992634
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 2,121.94
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 2.1219
SUBTRACT 1.0 1.1219
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 112.19%
============
</TABLE>
DREYFUS VARIABLE INVESTMENT FUND - GROWTH AND INCOME PORTFOLIO
COMPOUND AVERAGE ANNUAL RETURN WITH NO WITHDRAWAL CHARGE:
P [ 1 + T]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
THUS:
<TABLE>
<CAPTION>
ONE YEAR SINCE INCEPTION
COMPOUND AVERAGE COMPOUND AVERAGE
ANNUAL RETURN ANNUAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $1,071.49 $1,000 (1 + T)** 4.6685 ) = $2,121.94
T = 7.15% T = 17.49%
========= =========
</TABLE>
Page 1
<PAGE> 14
DREYFUS VARIABLE INVESTMENT FUND - GROWTH AND INCOME PORTFOLIO
CUMULATIVE TOTAL RETURN WITH WITHDRAWAL CHARGE:
T = [ERV/P]-1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
1 YEAR:
<TABLE>
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 19.66777691
-------------
EQUALS ORIGINAL UNITS PURCHASED 50.84458730
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 1.35884970
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (1.42180590)
-------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 50.78163110
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 21.09992634
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,071.49
LESS WITHDRAWAL CHARGE @ 8.00% (8% MAX ON PURCHASES) 80.00
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 991.49
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 0.9915
SUBTRACT 1.0 (0.0085)
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) (0.85)%
=============
SINCE INCEPTION:
INITIAL INVESTMENT ON 02-May-94 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 02-May-94 12.50000000
-------------
EQUALS ORIGINAL UNITS PURCHASED 80.00000000
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 29.31790640
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (8.75166980)
-------------
EQUALS UNITS HELD ON 31-Dec-98 100.56623660
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 21.09992634
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 2,121.94
LESS WITHDRAWAL CHARGE @ 4.00% ON 90% (8% MAX ON PURCHASES) 76.39
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 2,045.55
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 2.0456
SUBTRACT 1.0 1.0456
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 104.56%
=============
</TABLE>
DREYFUS VARIABLE INVESTMENT FUND - GROWTH AND INCOME PORTFOLIO
AVERAGE ANNUAL TOTAL RETURN (SEC STANDARDIZED RETURN):
P [ 1 + T]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
SINCE INCEPTION
ONE YEAR AVERAGE AVERAGE
ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $ 991.49 $1,000 (1 + T)** 4.6685 = $2,045.55
T = (0.85)% T = 16.57%
========= =========
</TABLE>
Page 1
<PAGE> 15
EXHIBIT 13
DREYFUS VARIABLE INVESTMENT FUND - SMALL COMPANY STOCK PORTFOLIO
CUMULATIVE TOTAL RETURN WITH NO WITHDRAWAL CHARGE:
T = [ERV/P]-1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
ONE YEAR:
<TABLE>
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 15.73145328
------------
EQUALS ORIGINAL UNITS PURCHASED 63.56691790
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 0.32476190
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (2.06925340)
------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 61.82242640
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 14.49798282
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 896.30
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 0.8963
SUBTRACT 1.0 (0.1037)
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) (10.37)%
============
SINCE INCEPTION:
INITIAL INVESTMENT ON 01-May-96 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 01-May-96 12.50000000
------------
EQUALS ORIGINAL UNITS PURCHASED 80.00000000
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 2.43017710
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (6.21589490)
------------
EQUALS UNITS HELD ON 31-Dec-98 76.21428220
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 14.49798282
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,104.95
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.1050
SUBTRACT 1.0 0.1050
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 10.50%
============
</TABLE>
DREYFUS VARIABLE INVESTMENT FUND - SMALL COMPANY STOCK PORTFOLIO
COMPOUND AVERAGE ANNUAL RETURN WITH NO WITHDRAWAL CHARGE:
P [ 1 + T]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
THUS:
<TABLE>
<CAPTION>
ONE YEAR SINCE INCEPTION
COMPOUND AVERAGE COMPOUND AVERAGE
ANNUAL RETURN ANNUAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $ 896.30 $1,000 (1 + T)** 2.67 = $1,104.95
T = (10.37)% T = 3.81%
========= =========
</TABLE>
Page 1
<PAGE> 16
DREYFUS VARIABLE INVESTMENT FUND - SMALL COMPANY STOCK PORTFOLIO
CUMULATIVE TOTAL RETURN WITH WITHDRAWAL CHARGE:
T = [ERV/P]-1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
ONE YEAR:
<TABLE>
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 15.73145328
------------
EQUALS ORIGINAL UNITS PURCHASED 63.56691790
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 0.32476190
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (2.06925340)
------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 61.82242640
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 14.49798282
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 896.30
LESS WITHDRAWAL CHARGE @ 8.00% (8% MAX ON PURCHASES) 71.70
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 824.60
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 0.8246
SUBTRACT 1.0 (0.1754)
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) (17.54)%
============
SINCE INCEPTION:
INITIAL INVESTMENT ON 01-May-96 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 01-May-96 12.50000000
------------
EQUALS ORIGINAL UNITS PURCHASED 80.00000000
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 2.43017710
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (6.21589490)
------------
EQUALS UNITS HELD ON 31-Dec-98 76.21428220
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 14.49798282
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,104.95
LESS WITHDRAWAL CHARGE @ 6.00% ON 90% (8% MAX ON PURCHASES) 59.67
-----------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,045.28
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0453
SUBTRACT 1.0 0.0453
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 4.53%
===========
</TABLE>
DREYFUS VARIABLE INVESTMENT FUND - SMALL COMPANY STOCK PORTFOLIO
AVERAGE ANNUAL TOTAL RETURN (SEC STANDARDIZED RETURN):
P [ 1 + T]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
SINCE INCEPTION
ONE YEAR AVERAGE AVERAGE
ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $ 824.60 $1,000 (1 + T)** 2.67 = $1,045.28
T = (17.54)% T = 1.67%
========= =========
</TABLE>
Page 1
<PAGE> 17
EXHIBIT 13
DREYFUS VARIABLE INVESTMENT FUND - INTERNATIONAL VALUE PORTFOLIO
CUMULATIVE TOTAL RETURN WITH NO WITHDRAWAL CHARGE:
T = [ERV/P] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
ONE YEAR:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 13.11758582
---------------
EQUALS ORIGINAL UNITS PURCHASED 76.23353980
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 6.66362900
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (2.32157230)
---------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 80.57559650
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 12.92227698
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,041.22
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0412
SUBTRACT 1.0 0.0412
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 4.12%
===============
</TABLE>
<TABLE>
SINCE INCEPTION:
<S> <C> <C>
INITIAL INVESTMENT ON 01-May-96 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 01-May-96 12.50000000
---------------
EQUALS ORIGINAL UNITS PURCHASED 80.00000000
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 10.38658530
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES -6.97594680
---------------
EQUALS UNITS HELD ON 31-Dec-98 83.41063850
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 12.92227698
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,077.86
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0779
SUBTRACT 1.0 0.0779
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 7.79%
===============
</TABLE>
DREYFUS VARIABLE INVESTMENT FUND - INTERNATIONAL VALUE PORTFOLIO
COMPOUND AVERAGE ANNUAL RETURN WITH NO WITHDRAWAL CHARGE:
P [1+T]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
THUS:
ONE YEAR SINCE INCEPTION
COMPOUND AVERAGE COMPOUND AVERAGE
ANNUAL RETURN ANNUAL RETURN
<S> <C> <C> <C> <C>
$1,000 (1 + T)**1 = $1,041.22 $1,000 (1 + T)** 2.67 = $1,077.86
T = 4.12% T = 2.85%
========= =========
</TABLE>
Page 1
<PAGE> 18
DREYFUS VARIABLE INVESTMENT FUND - INTERNATIONAL VALUE PORTFOLIO
CUMULATIVE TOTAL RETURN WITH WITHDRAWAL CHARGE:
T = [ERV/P] - 1
w here: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
ONE YEAR:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 13.11758582
---------------
EQUALS ORIGINAL UNITS PURCHASED 76.23353980
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 6.66362900
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (2.32157230)
---------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 80.57559650
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 12.92227698
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,041.22
LESS WITHDRAWAL CHARGE @ 8.00% (8% MAX ON PURCHASES) 80.00
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 961.22
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 0.9612
SUBTRACT 1.0 (0.0388)
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) (3.88)%
===============
</TABLE>
<TABLE>
SINCE INCEPTION:
<S> <C> <C>
INITIAL INVESTMENT ON 01-May-96 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 01-May-96 12.50000000
---------------
EQUALS ORIGINAL UNITS PURCHASED 80.00000000
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 10.38658530
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (6.97594680)
---------------
EQUALS UNITS HELD ON 31-Dec-98 83.41063850
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 12.92227698
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,077.86
LESS WITHDRAWAL CHARGE @ 6.00% ON 90% (8% MAX ON PURCHASES) 58.20
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,019.66
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0197
SUBTRACT 1.0 0.0197
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 1.97%
===============
</TABLE>
DREYFUS VARIABLE INVESTMENT FUND - INTERNATIONAL VALUE PORTFOLIO
AVERAGE ANNUAL TOTAL RETURN (SEC STANDARDIZED RETURN):
P [ 1 + T ]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
THUS:
SINCE INCEPTION
ONE YEAR AVERAGE AVERAGE
ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN
<S> <C> <C> <C>
$1,000 (1 + T)**1 = $961.22 $1,000 (1 + T)** 2.67 = $1,019.66
T = (3.88)% T = 0.73%
======= =========
</TABLE>
Page 1
<PAGE> 19
EXHIBIT 13
MERRILL LYNCH PRIME BOND FUND
CUMULATIVE TOTAL RETURN WITH NO WITHDRAWAL CHARGE:
T = [ ERV / P ] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
<S> <C> <C>
1 YEAR:
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 10.26668181
---------------
EQUALS ORIGINAL UNITS PURCHASED 97.40245380
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 6.44906540
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (2.93233510)
---------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 100.91918410
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 10.23075441
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,032.48
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0325
SUBTRACT 1.0 0.0325
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 3.25%
===============
5 YEARS:
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 11.37915498
---------------
EQUALS ORIGINAL UNITS PURCHASED 87.87998770
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 34.19705330
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (14.58154990)
---------------
EQUALS UNITS HELD AT END OF 5 YEARS ON 31-Dec-98 107.49549110
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 10.23075441
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,099.76
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0998
SUBTRACT 1.0 0.0998
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 9.98%
===============
10 YEARS:
INITIAL INVESTMENT ON 31-Dec-88 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-88 10.49003030
---------------
EQUALS ORIGINAL UNITS PURCHASED 95.32860930
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 89.41366200
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (28.26394700)
---------------
EQUALS UNITS HELD AT END OF 10 YEARS ON 31-Dec-98 156.47832430
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 10.23075441
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,600.89
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.6009
SUBTRACT 1.0 0.6009
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 60.09%
===============
</TABLE>
Page 1
<PAGE> 20
MERRILL LYNCH PRIME BOND FUND
COMPOUND AVERAGE ANNUAL RETURN WITH NO WITHDRAWAL CHARGE:
P [ 1 + T ]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
THUS:
ONE YEAR FIVE YEAR TEN YEAR
COMPOUND AVERAGE COMPOUND AVERAGE COMPOUND AVERAGE
ANNUAL RETURN ANNUAL RETURN ANNUAL RETURN
<S> <C> <C> <C>
$1,000 (1 + T)**1 = $1,032.48 $1,000 (1 + T)**5 = $1,099.76 $1,000 (1 + T)**10 = $1,600.89
T = 3.25% T = 1.92% T = 4.82%
========= ========= =========
</TABLE>
Page 2
<PAGE> 21
MERRILL LYNCH PRIME BOND FUND
CUMULATIVE TOTAL RETURN WITH WITHDRAWAL CHARGE:
T = [ ERV / P ] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
<S> <C> <C>
1 YEAR:
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 10.26668181
---------------
EQUALS ORIGINAL UNITS PURCHASED 97.40245380
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 6.44906540
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (2.93233510)
---------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 100.91918410
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 10.23075441
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,032.48
LESS WITHDRAWAL CHARGE @ 8.00% (8% MAX ON PURCHASES) 80.00
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 952.48
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 0.9525
SUBTRACT 1.0 (0.0475)
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) (4.75)%
===============
5 YEARS:
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 11.37915498
---------------
EQUALS ORIGINAL UNITS PURCHASED 87.87998770
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 34.19705330
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (14.58154990)
---------------
EQUALS UNITS HELD AT END OF 5 YEARS ON 31-Dec-98 107.49549110
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 10.23075441
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,099.76
LESS WITHDRAWAL CHARGE @ 4.00% 0N 90% (8% MAX ON PURCHASES) 39.59
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,060.17
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0602
SUBTRACT 1.0 0.0602
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 6.02%
===============
10 YEARS:
INITIAL INVESTMENT ON 31-Dec-88 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-88 10.49003030
---------------
EQUALS ORIGINAL UNITS PURCHASED 95.32860930
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 89.41366200
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (28.26394700)
---------------
EQUALS UNITS HELD AT END OF 10 YEARS ON 31-Dec-98 156.47832430
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 10.23075441
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,600.89
LESS WITHDRAWAL CHARGE @ 0.00% 0N 90% (8% MAX ON PURCHASES) 0.00
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,600.89
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.6009
SUBTRACT 1.0 0.6009
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 60.09%
===============
</TABLE>
Page 1
<PAGE> 22
MERRILL LYNCH PRIME BOND FUND
AVERAGE ANNUAL TOTAL RETURN (SEC STANDARDIZED RETURN):
P [ 1 + T ]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
ONE YEAR AVERAGE FIVE YEAR AVERAGE TEN YEAR AVERAGE
ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN
<S> <C> <C> <C>
$1,000 (1 + T)**1 = $952.48 $1,000 (1 + T)**5 = $1,060.17 $1,000 (1 + T)**10 = $1,600.89
T = (4.75)% T = 1.18% T = 4.82%
======= ========= =========
</TABLE>
Page 2
<PAGE> 23
EXHIBIT 13
MERRILL LYNCH AMERICAN BALANCED FUND
CUMULATIVE TOTAL RETURN WITH NO WITHDRAWAL CHARGE:
T = [ ERV / P ] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
<S> <C> <C>
1 YEAR:
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 14.36766248
---------------
EQUALS ORIGINAL UNITS PURCHASED 69.60074410
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 8.73054800
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (2.10058720)
---------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 76.23070490
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 14.28172080
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,088.71
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0887
SUBTRACT 1.0 0.0887
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 8.87%
===============
5 YEARS:
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 12.94839733
---------------
EQUALS ORIGINAL UNITS PURCHASED 77.22963500
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 29.98398610
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (11.06768600)
---------------
EQUALS UNITS HELD AT END OF 5 YEARS ON 31-Dec-98 96.14593510
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 14.28172080
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,373.13
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.3731
SUBTRACT 1.0 0.3731
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 37.31%
===============
10 YEARS:
INITIAL INVESTMENT ON 31-Dec-88 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-88 10.31928815
---------------
EQUALS ORIGINAL UNITS PURCHASED 96.90590920
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 69.51120500
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (23.74109570)
---------------
EQUALS UNITS HELD ON 31-Dec-98 142.67601850
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 14.28172080
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 2,037.66
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 2.0377
SUBTRACT 1.0 1.0377
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 103.77%
===============
</TABLE>
Page 1
<PAGE> 24
MERRILL LYNCH AMERICAN BALANCED FUND
COMPOUND AVERAGE ANNUAL RETURN WITH NO WITHDRAWAL CHARGE:
P [ 1 + T ]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
THUS:
ONE YEAR FIVE YEAR TEN YEAR
COMPOUND AVERAGE COMPOUND AVERAGE COMPOUND AVERAGE
ANNUAL RETURN ANNUAL RETURN ANNUAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $1,088.71 $1,000 (1 + T)**5 = $1,373.13 $1,000(1+T)**10 = $2,037.66
T = 8.87% T = 6.55% T = 7.38%
========= ========= =========
</TABLE>
Page 2
<PAGE> 25
MERRILL LYNCH AMERICAN BALANCED FUND
CUMULATIVE TOTAL RETURN WITH WITHDRAWAL CHARGE:
T = [ ERV / P ] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
<S> <C> <C>
1 YEAR:
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 14.36766248
---------------
EQUALS ORIGINAL UNITS PURCHASED 69.60074410
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 8.73054800
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (2.10058720)
---------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 76.23070490
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 14.28172080
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,088.71
LESS WITHDRAWAL CHARGE @ 8.00% (8% MAX ON PURCHASES) 80.00
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,008.71
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0087
SUBTRACT 1.0 0.0087
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 0.87%
===============
5 YEARS:
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 12.94839733
---------------
EQUALS ORIGINAL UNITS PURCHASED 77.22963500
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 29.98398610
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (11.06768600)
---------------
EQUALS UNITS HELD AT END OF 5 YEARS ON 31-Dec-98 96.14593510
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 14.28172080
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,373.13
LESS WITHDRAWAL CHARGE @ 4.00% ON 90% (8% MAX ON PURCHASES) 49.43
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,323.70
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.3237
SUBTRACT 1.0 0.3237
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 32.37%
===============
10 YEARS:
INITIAL INVESTMENT ON 31-Dec-88 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-88 10.31928815
---------------
EQUALS ORIGINAL UNITS PURCHASED 96.90590920
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 69.51120500
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (23.74109570)
---------------
EQUALS UNITS HELD ON 31-Dec-98 142.67601850
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 14.28172080
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 2,037.66
LESS WITHDRAWAL CHARGE @ 0.00% ON 90% 0.00
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 2,037.66
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 2.0377
SUBTRACT 1.0 1.0377
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 103.77%
===============
</TABLE>
Page 1
<PAGE> 26
MERRILL LYNCH AMERICAN BALANCED FUND
AVERAGE ANNUAL TOTAL RETURN (SEC STANDARDIZED RETURN):
P [ 1 + T ]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
ONE YEAR AVERAGE FIVE YEAR AVERAGE TEN YEAR AVERAGE
ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $1,008.71 $1,000 (1 + T)**5 = $1,323.70 $1,000 (1+T)**10 = $2,037.66
T = 0.87% T = 5.77% T = 7.38%
========= ========= =========
</TABLE>
Page 2
<PAGE> 27
EXHIBIT 13
MERRILL LYNCH HIGH CURRENT INCOME FUND
CUMULATIVE TOTAL RETURN WITH NO WITHDRAWAL CHARGE:
T = [ ERV / P ] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
1 YEAR:
<TABLE>
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 9.76649331
---------------
EQUALS ORIGINAL UNITS PURCHASED 102.39089590
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 10.67864280
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (3.55304610)
---------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 109.51649260
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 8.44345926
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 924.70
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 0.9247
SUBTRACT 1.0 (0.0753)
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) (7.53)%
===============
5 YEARS:
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 10.85701583
---------------
EQUALS ORIGINAL UNITS PURCHASED 92.10634080
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 53.13685490
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (15.92596980)
---------------
EQUALS UNITS HELD AT END OF 5 YEARS ON 31-Dec-98 129.31722590
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 8.44345926
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,091.88
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0919
SUBTRACT 1.0 0.0919
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 9.19%
===============
10 YEARS:
INITIAL INVESTMENT ON 31-Dec-88 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-88 10.52887089
---------------
EQUALS ORIGINAL UNITS PURCHASED 94.97694580
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 158.68374800
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (31.78707780)
---------------
EQUALS UNITS HELD AT END OF 10 YEARS ON 31-Dec-98 221.87361600
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 8.44345926
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,873.38
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.8734
SUBTRACT 1.0 0.8734
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 87.34%
===============
</TABLE>
Page 1
<PAGE> 28
MERRILL LYNCH HIGH CURRENT INCOME FUND
COMPOUND AVERAGE ANNUAL RETURN WITH NO WITHDRAWAL CHARGE:
P [ 1 + T ]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
THUS:
<TABLE>
<CAPTION>
ONE YEAR FIVE YEAR TEN YEAR
COMPOUND AVERAGE COMPOUND COMPOUND AVERAGE
ANNUAL RETURN ANNUAL RETURN ANNUAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $924.70 $1,000(1 + T)**5 = $1,091.88 $1,000 (1 + T)**10 = $1,873.38
T = (7.53)% T = 1.77% T = 6.48%
======= ========= =========
</TABLE>
Page 2
<PAGE> 29
MERRILL LYNCH HIGH CURRENT INCOME FUND
CUMULATIVE TOTAL RETURN WITH WITHDRAWAL CHARGE:
T = [ ERV / P ] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
1 YEAR:
<TABLE>
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 9.76649331
---------------
EQUALS ORIGINAL UNITS PURCHASED 102.39089590
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 10.67864280
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (3.55304610)
---------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 109.51649260
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 8.44345926
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 924.70
LESS WITHDRAWAL CHARGE @ 8.00%(8% MAX ON PURCHASES) 73.98
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 850.72
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 0.8507
SUBTRACT 1.0 (0.1493)
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) (14.93)%
===============
5 YEARS:
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 10.85701583
---------------
EQUALS ORIGINAL UNITS PURCHASED 92.10634080
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 53.13685490
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (15.92596980)
---------------
EQUALS UNITS HELD AT END OF 5 YEARS ON 31-Dec-98 129.31722590
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 8.44345926
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,091.88
LESS WITHDRAWAL CHARGE @ 4.00%ON 90% (8% MAX ON PURCHASES) 39.31
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,052.57
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0526
SUBTRACT 1.0 0.0526
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 5.26%
===============
10 YEARS:
INITIAL INVESTMENT ON 31-Dec-88 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-88 10.52887089
---------------
EQUALS ORIGINAL UNITS PURCHASED 94.97694580
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 158.68374800
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (31.78707780)
---------------
EQUALS UNITS HELD AT END OF 10 YEARS ON 31-Dec-98 221.87361600
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 8.44345926
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,873.38
LESS WITHDRAWAL CHARGE @ 0.00%ON 90% (8% MAX ON PURCHASES) 0.00
---------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,873.38
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.8734
SUBTRACT 1.0 0.8734
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 87.34%
===============
</TABLE>
Page 1
<PAGE> 30
MERRILL LYNCH HIGH CURRENT INCOME FUND
AVERAGE ANNUAL TOTAL RETURN (SEC STANDARDIZED RETURN):
P [ 1 + T ]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
ONE YEAR AVERAGE FIVE YEAR AVERAGE TEN YEAR AVERAGE
ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $850.72 $1,000 (1 + T)**5 = $1,052.57 $1,000 (1 + T)**10 = $1,873.38
T = (14.93)% T = 1.03% T = 6.48%
======= ========= =========
</TABLE>
Page 2
<PAGE> 31
EXHIBIT 13
MERRILL LYNCH SPECIAL VALUE FOCUS FUND
CUMULATIVE TOTAL RETURN WITH NO WITHDRAWAL CHARGE:
T = [ERV/P] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
1 YEAR:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 23.52627873
------------
EQUALS ORIGINAL UNITS PURCHASED 42.50565980
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 12.77532520
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (1.80056850)
------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 53.48041650
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 16.66140400
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 891.06
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 0.8911
SUBTRACT 1.0 (0.1089)
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) (10.89)%
============
</TABLE>
<TABLE>
<CAPTION>
5 YEARS:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 18.86919469
------------
EQUALS ORIGINAL UNITS PURCHASED 52.99643240
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 29.44834440
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (7.38886630)
------------
EQUALS UNITS HELD AT END OF 5 YEARS ON 31-Dec-98 75.05591050
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 16.66140400
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,250.54
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.2505
SUBTRACT 1.0 0.2505
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 25.05%
============
</TABLE>
<TABLE>
<CAPTION>
10 YEARS:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-88 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-88 11.40200250
------------
EQUALS ORIGINAL UNITS PURCHASED 87.70389240
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 44.96786910
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (17.57350780)
------------
EQUALS UNITS HELD AT END OF 10 YEARS ON 31-Dec-98 115.09825370
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 16.66140400
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,917.70
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.9177
SUBTRACT 1.0 0.9177
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 91.77%
============
</TABLE>
Page 1
<PAGE> 32
MERRILL LYNCH SPECIAL VALUE FOCUS FUND
COMPOUND AVERAGE ANNUAL RETURN WITH NO WITHDRAWAL CHARGE:
P [1 + T]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
THUS:
<TABLE>
<CAPTION>
ONE YEAR FIVE YEAR TEN YEAR
COMPOUND AVERAGE COMPOUND AVERAGE COMPOUND AVERAGE
ANNUAL RETURN ANNUAL RETURN ANNUAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $891.06 $1,000 (1 + T)**5 = $1,250.54 $1,000 (1 + T)**10 = $1,917.70
T = (10.89)% T = 4.57% T = 6.73%
======== ========== ==========
</TABLE>
Page 2
<PAGE> 33
MERRILL LYNCH SPECIAL VALUE FOCUS FUND
CUMULATIVE TOTAL RETURN WITH WITHDRAWAL CHARGE:
T = [ERV/P] - 1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
1 YEAR:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 23.52627873
------------
EQUALS ORIGINAL UNITS PURCHASED 42.50565980
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 12.77532520
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (1.80056850)
------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 53.48041650
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 16.66140400
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 891.06
LESS WITHDRAWAL CHARGE @ 8.00% (8% MAX ON PURCHASES): 71.28
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 819.78
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 0.8198
SUBTRACT 1.0 (0.1802)
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) (18.02)%
============
</TABLE>
<TABLE>
<CAPTION>
5 YEARS:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 18.86919469
------------
EQUALS ORIGINAL UNITS PURCHASED 52.99643240
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 29.44834440
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (7.38886630)
------------
EQUALS UNITS HELD AT END OF 5 YEARS ON 31-Dec-98 75.05591050
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 16.66140400
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,250.54
LESS WITHDRAWAL CHARGE @ 4.00% ON 90% (8% MAX ON PURCHASES): 45.02
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,205.52
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.2055
SUBTRACT 1.0 0.2055
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 20.55%
============
</TABLE>
<TABLE>
<CAPTION>
10 YEARS:
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-88 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-88 11.40200250
------------
EQUALS ORIGINAL UNITS PURCHASED 87.70389240
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 44.96786910
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (17.57350780)
------------
EQUALS UNITS HELD AT END OF 10 YEARS ON 31-Dec-98 115.09825370
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 16.66140400
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,917.70
LESS WITHDRAWAL CHARGE @ 0.00% ON 90% (8% MAX ON PURCHASES): 0.00
------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,917.70
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.9177
SUBTRACT 1.0 0.9177
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 91.77%
============
</TABLE>
Page 1
<PAGE> 34
MERRILL LYNCH SPECIAL VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN (SEC STANDARDIZED RETURN):
P [1 + T]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
<TABLE>
<CAPTION>
ONE YEAR AVERAGE FIVE YEAR AVERAGE TEN YEAR AVERAGE
ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $819.78 $1,000 (1 + T)**5 = $1,205.52 $1,000 (1 + T)**10 = $1,917.70
T = (18.02)% T = 3.81% T = 6.73%
======== ========== ==========
</TABLE>
Page 2
<PAGE> 35
EXHIBIT 13
MERRILL LYNCH BASIC VALUE FOCUS FUND
CUMULATIVE TOTAL RETURN WITH NO WITHDRAWAL CHARGE:
T = [ERV/P]-1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
1 YEAR:
<TABLE>
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 14.80540989
-------------
EQUALS ORIGINAL UNITS PURCHASED 67.54287840
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 12.27362410
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (2.22096820)
-------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 77.59553430
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 13.50762240
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,048.13
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.0481
SUBTRACT 1.0 0.0481
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 4.81%
=============
5 YEAR:
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 10.86799714
-------------
EQUALS ORIGINAL UNITS PURCHASED 92.01327410
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 45.05381760
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (11.53420180)
-------------
EQUALS UNITS HELD ON 31-Dec-98 125.53288990
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 13.50762240
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,695.65
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.6957
SUBTRACT 1.0 0.6957
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 69.57%
=============
SINCE INCEPTION:
INITIAL INVESTMENT ON 01-Jul-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 01-Jul-93 10.00000000
-------------
EQUALS ORIGINAL UNITS PURCHASED 100.00000000
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 47.81114560
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (14.29460000)
-------------
EQUALS UNITS HELD ON 31-Dec-98 133.51654560
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 13.50762240
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,803.49
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.8035
SUBTRACT 1.0 0.8035
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 80.35%
=============
</TABLE>
Page 1
<PAGE> 36
MERRILL LYNCH BASIC VALUE FOCUS FUND
COMPOUND AVERAGE ANNUAL RETURN WITH NO WITHDRAWAL CHARGE:
P [ 1 + T]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
THUS:
<TABLE>
<CAPTION>
ONE YEAR FIVE YEAR SINCE INCEPTION
COMPOUND AVERAGE COMPOUND AVERAGE COMPOUND AVERAGE
ANNUAL RETURN ANNUAL RETURN ANNUAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $1,048.13 $1,000 (1 + T)**5 = $1,695.65 $1,000 (1 + T)** 5.5041 = $1,803.49
T = 4.81% T = 11.14% T = 11.31%
========= ========= =========
</TABLE>
Page 2
<PAGE> 37
MERRILL LYNCH BASIC VALUE FOCUS FUND
CUMULATIVE TOTAL RETURN WITH WITHDRAWAL CHARGE:
T = [ERV/P]-1
where: T = total return
P = initial $1,000 investment
ERV = ending value of $1,000 investment
1 YEAR:
<TABLE>
<S> <C> <C>
INITIAL INVESTMENT ON 31-Dec-97 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-97 14.80540989
-------------
EQUALS ORIGINAL UNITS PURCHASED 67.54287840
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 12.27362410
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (2.22096820)
-------------
EQUALS UNITS HELD AT END OF 1 YEAR ON 31-Dec-98 77.59553430
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 13.50762240
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,048.13
LESS WITHDRAWAL CHARGE @ 8.00% (8% MAX ON PURCHASES) 80.00
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 968.13
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 0.9681
SUBTRACT 1.0 (0.0319)
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) (3.19%)
=============
5 YEAR:
INITIAL INVESTMENT ON 31-Dec-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-93 10.86799714
-------------
EQUALS ORIGINAL UNITS PURCHASED 92.01327410
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 45.05381760
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (11.53420180)
-------------
EQUALS UNITS HELD ON 31-Dec-98 125.53288990
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 13.50762240
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,695.65
LESS WITHDRAWAL CHARGE @ 4.00% ON 90% (8% MAX ON PURCHASES) 61.04
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,634.61
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.6346
SUBTRACT 1.0 0.6346
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 63.46%
=============
SINCE INCEPTION:
INITIAL INVESTMENT ON 01-Jul-93 $ 1,000.00
DIVIDED BY FEE ADJUSTED NET ASSET VALUE ON 01-Jul-93 10.00000000
-------------
EQUALS ORIGINAL UNITS PURCHASED 100.00000000
PLUS UNITS ACQUIRED THROUGH DIVIDEND REINVESTMENT 47.81114560
LESS UNITS USED TO PAY FOR POLICY MAINTENANCE CHARGES (14.29460000)
-------------
EQUALS UNITS HELD ON 31-Dec-98 133.51654560
MULTIPLIED BY FEE ADJUSTED NET ASSET VALUE ON 31-Dec-98 13.50762240
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT
BEFORE WITHDRAWAL CHARGE ON 31-Dec-98 $ 1,803.49
LESS WITHDRAWAL CHARGE @ 3.00% ON 90% (8% MAX ON PURCHASES) 48.69
-------------
EQUALS ENDING REDEEMABLE VALUE OF $1,000 INVESTMENT (ERV) $ 1,754.80
DIVIDED BY ORIGINAL $1,000 INVESTMENT (P) 1.7548
SUBTRACT 1.0 0.7548
EXPRESSED AS A PERCENTAGE EQUALS THE TOTAL RETURN FOR THE PERIOD (T) 75.48%
=============
</TABLE>
Page 1
<PAGE> 38
MERRILL LYNCH BASIC VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN (SEC STANDARDIZED RETURN):
P [ 1 + T]**n = ERV
where: T = average annual total return
P = initial $1,000 investment
n = number of years
** = to the power of
ERV = ending value of $1,000 investment
THUS:
<TABLE>
<CAPTION>
SINCE INCEPTION
ONE YEAR AVERAGE FIVE YEAR AVERAGE AVERAGE
ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN
<S> <C> <C>
$1,000 (1 + T)**1 = $ 968.13 $1,000 (1 + T)**5 = $1,634.61 $1,000 (1 + T)** 5.5041 = $1,754.80
T = (3.19%) T = 10.33% T = 10.76%
========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 15
CAMERON ENTERPRISES, A LIMITED PARTNERSHIP (CELP) - OK
73-1267299
<TABLE>
<S> <C> <C> <C>
CELP Ltd. Agency, Inc.
100% - OK
73-1369092
North American
Ins. Agency, Inc.
(NAIA)
91.5% - OK
73-0687265
Shade Works, LLC Agar Ins. Agency, Inc. North American Ins.
33.33% - OK 95.4% - OK Agency of
73-1475654 73-0675989 Colorado, Inc.
100% - CO
84-0599059
N.A.I.A. of North American North American
Louisiana, Inc. Insurance Agency of Ins. Agency of
100% - LA New Mexico, Inc. Tulsa, Inc.
72-0761691 100% - NM 100% - OK
85-0441542 73-0778755
North American N.A.I.A. Ins. Agency,
Ltd. Agency, Inc. Inc.
100% - OK 100% - OK
73-1356772 73-1527682
National Ins.
Marketers Agency,
Inc.
100% - OK
73-1437538
American Fidelity Corp.
(AFC)
94.0% - NV
73-0966202
Market Place Realty American Mortgage Security General Cimarron
Corp. (MPRC) & Investment Co. Life Ins. Co. Investment
100% - OK (AMICO) (SGL) Co., Inc.
73-1160212 98.7% - OK 100% - OK 100% - KS
73-1232134 73-0741925 48-0759023
NAIC #68691
Holliday Mortgage Corp.
100% - OK
73-1284635
Shade Works, LLC Concourse C, Inc.
16.67% - OK 100% - OK
73-1475634 73-1505641
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
American Fidelity
Property Co. (AFPC)
100% - OK
73-1290496
Home Rentals, Inc. Western Partners, L.L.C.
100% - OK 100% - OK
73-1364226 73-1544275
American Fidelity
Assurance Co.
(AFA)
100% - OK
73-0714500
NAIC #60410
AF Apartments, Inc. American Fidelity American Fidelity
100% - OK Securities, Inc. Ltd. Agency, Inc.
73-1512985 (AFS) (AFLA)
100% - OK 100% - OK
73-0783902 73-1352430
American
Fidelity
General
Agency, Inc.
(AFGA)
100% - OK
73-1352431
Balliet's, L.L.C. Apple Creek Senior Partners, LLC
75% - OK Apartments, Inc. 50% - OK
73-1529608 100% - OK 73-1559624
73-1408485
ASC Holding, L.L.C.
75% - OK
73-1528120
InvesTrust, N.A. Asset Services Co.,
100% - OK L.L.C.
73-1546867 100% - OK
73-1547246
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
American Fidelity
International
Holdings, Inc.
100% - OK
73-1421879
American Fidelity American Fidelity
Care, LLC Offshore
33% - OK Investments, Ltd.
73-1424864 100% - Bermuda
NAIC #20400
Reg. #EC20754
American Fidelity American Fidelity
(Cypress) Ltd. (China), Ltd.
99% - Republic of 93% - Bermuda
Cypress
Soyuznik Insurance Co.
34% - Russian Federation
Covenant
Mari El Development Pacific World Underwriters
Corporation Limited Holdings, Ltd. (Bermuda) Ltd.
51.3% - Republic of 55% - Labuan 33.33% - Bermuda
Cyprus
Reg. #7035
</TABLE>
- ----------------------
Insurance Company
A Limited Partnership
No tax or registration numbers
NOTE: All of the above organizations are corporations that have the word
Company, Inc., or Corp. The above organizations which have the
letters L.L.C. or L.C. are limited liability companies.
