Schwab Select Annuity(TM)
A flexible premium deferred variable and fixed annuity
Distributed by
Charles Schwab & Co., Inc.
Issued by
First Great-West Life & Annuity Insurance Company
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Overview
This Prospectus describes the Schwab Select Annuity--a flexible premium deferred
annuity contract (the "Contract") which allows you to accumulate assets on a
tax-deferred basis for retirement or other long-term purposes. This Contract is
issued on a group basis by First Great-West Life & Annuity Insurance Company
(we, us, First Great-West or First GWL&A).
How to Invest
The minimum initial investment (a "Contribution") is:
o $5,000
o $2,000 if an IRA
o $1,000 if subsequent Contributions are made via Automatic Contribution Plan
The minimum subsequent Contribution is: o $500 per Contribution o $100 per
Contribution if made via Automatic Contribution Plan Allocating Your Money
When you contribute money to the Schwab Select Annuity, you can allocate it
among the Sub-Accounts of the Variable Annuity-1 Series Account which invest in
the following Portfolios:
o Alger American Growth Portfolio
o American Century VP International Fund
o Baron Capital Asset Fund; Insurance Shares
o Berger IPT-Small Company Growth Fund
o Deutsche Asset Management VIT EAFE(R) Equity
Index Fund (formerly the BT Insurance Funds Trust EAFE(R) Equity
Index Fund)
o Deutsche Asset Management VIT Small Cap Index Fund (formerly the
BT Insurance Funds Trust Small Cap Index Fund)
o Dreyfus Variable Investment Fund Appreciation Portfolio
o Dreyfus Variable Investment Fund Growth and Income Portfolio
o Federated American Leaders Fund II
o Federated Fund for U.S. Government Securities II
o Federated Utility Fund II
o INVESCO VIF-Equity Income Fund
o INVESCO VIF-High Yield Fund
o INVESCO VIF-Technology Fund
o Janus Aspen Series Growth Portfolio
o Janus Aspen Series Worldwide Growth Portfolio
o Janus Aspen Series Flexible Income Portfolio
o Janus Aspen Series International Growth Portfolio
o Montgomery Variable Series: Growth Fund
o Prudential Series Fund Equity Class
II Portfolio
o SAFECO Resource Series Trust Equity Portfolio
o SAFECO Resource Series Trust Growth Opportunities Portfolio
o Schwab MarketTrack Growth Portfolio II
o Schwab Money Market Portfolio
o Schwab S&P 500 Portfolio
o Scudder Variable Life Investment Fund
Capital Growth Portfolio
o Scudder Variable Life Investment Fund
Growth and Income Portfolio
o Strong Schafer Value Fund II
o Van Kampen Life Investment Trust-Morgan Stanley Real Estate Securities
Portfolio
You can also allocate some or all of the money you contribute to the
Guarantee Period Fund. The Guarantee Period Fund allows you to select one or
more Guarantee Periods that offer specific interest rates for a specific period.
Sales and Surrender Charges
There are no sales, redemption, surrender or withdrawal charges under the Schwab
Select Annuity.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense. No person is authorized by
First Great-West to give information or to make any representation, other than
those contained in this Prospectus, in connection with the offers contained in
this Prospectus. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not lawfully be made. Please read this
Prospectus and keep it for future reference.
The date of this Prospectus is May 1, 2000.
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Free Look Period
After you receive your Contract, you can look it over free of obligation for at
least 10 days (up to 35 days for replacement policies), during which you may
cancel your Contract. Payout Options The Schwab Select Annuity offers a variety
of annuity payout and periodic withdrawal options. Depending on the option you
select, income can be guaranteed for your lifetime, your spouse's and/or
beneficiaries' lifetime or for a specified period of time.
The Contracts are not deposits of, or guaranteed or endorsed by any bank, nor
are the Contracts federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency. The
Contracts involve certain investment risks, including possible loss of
principal. For account information, please contact:
Annuity Administration Department
P.O. Box 173920
Denver, Colorado 80217-3920
800-838-0649
This Prospectus presents important information you should review before
purchasing the Schwab Select Annuity. Please read it carefully and keep it for
future reference. You can find more detailed information pertaining to the
Contract in the Statement of Additional Information dated May 1, 2000 (as may be
amended from time to time), and filed with the Securities and Exchange
Commission. The Statement of Additional Information is incorporated by reference
into this Prospectus and is legally a part of this Prospectus. A listing of the
contents of the Statement of Additional Information may be found on page 43 of
this Prospectus. You may obtain a copy without charge by contacting the Annuity
Administration Department at the above address or phone number. Or, you can
obtain it by visiting the Securities and Exchange Commission's web site at
www.sec.gov. This web site also contains other information about us that has
been filed electronically.
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Table of Contents
Definitions....................................4
Summary........................................6
How to contact Schwab........................6
Variable Annuity Fee Table.....................7
Portfolio Annual Expenses......................8
Fee Examples...................................9
Condensed Financial Information...............10
First Great-West Life & Annuity
Insurance Company.............................10
The Series Account............................10
The Portfolios................................10
Meeting Investment Objectives...............13
Where to Find More Information
About the Portfolios........................13
Addition, Deletion or Substitution..........13
The Guarantee Period Fund.....................14
Investments of the Guarantee Period Fund....14
Subsequent Guarantee Periods................15
Breaking a Guarantee Period.................15
Interest Rates..............................15
Market Value Adjustment.....................15
Application and Initial Contributions.........15
Free Look Period..............................16
Subsequent Contributions......................16
Annuity Account Value.........................16
Transfers.....................................17
Possible Restrictions.......................17
Automatic Custom Transfers..................17
Cash Withdrawals..............................19
Withdrawals to Pay Investment Manager or
Financial Advisor Fees......................19
Tax Consequences of Withdrawals.............19
Telephone Transactions........................20
Death Benefit.................................20
Beneficiary.................................20
Distribution of Death Benefit...............21
Charges and Deductions........................22
Mortality and Expense Risk Charge...........22
Contract Maintenance Charge.................22
Transfer Fees...............................22
Expenses of the Portfolios..................22
Premium Tax.................................23
Other Taxes.................................23
Payout Options................................23
Periodic Withdrawals........................23
Annuity Payouts.............................24
Seek Tax Advice...............................25
Federal Tax Matters...........................26
Taxation of Annuities.......................26
Individual Retirement Annuities.............28
Assignments or Pledges........................28
Performance Data..............................29
Money Market Yield..........................29
Average Annual Total Return.................29
Distribution of the Contracts.................31
Selected Financial Data.......................32
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations....................................32
Voting Rights.................................42
Rights Reserved by First Great-West...........42
Legal Proceedings.............................42
Legal Matters.................................43
Experts.......................................43
Available Information.........................43
Appendix A--Condensed Financial Data..........44
Appendix B--Market Value Adjustments..........47
Appendix C--Net Investment Factor.............49
Financial Statements and Independent
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Auditors' Report..............................50
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54
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Definitions
1035 Exchange--A provision of the Internal Revenue Code of 1986, as amended (the
"Code"), that allows for the tax-free exchange of certain types of insurance
contracts. Accumulation Period--The time period between the Effective Date and
the Annuity Commencement Date. During this period, you're contributing to the
annuity.
Annuitant--The person named in the application upon whose life the payout of an
annuity is based and who will receive annuity payouts. If a Contingent Annuitant
is named, the Annuitant will be considered the Primary Annuitant.
Annuity Account--An account established by us in your name that reflects all
account activity under your Contract. Annuity Account Value--The sum of all the
investment options credited to your Annuity Account--less partial withdrawals,
amounts applied to an annuity payout option, periodic withdrawals, charges
deducted under the Contract, and Premium Tax, if any.
Annuity Commencement Date--The date annuity payouts begin.
Annuity Individual Retirement Account (or Annuity IRA)--An annuity contract used
in a retirement savings program that is intended to satisfy the requirements of
Section 408 of the Code. Annuity Payout Period--The period beginning on the
Annuity Commencement Date and continuing until all annuity payouts have been
made under the Contract. During this period, the Annuitant receives payouts from
the annuity.
Annuity Unit--An accounting measure we use to determine the amount of any
variable annuity payout after the first annuity payout is made. Automatic
Contribution Plan--A feature which allows you to make automatic periodic
Contributions. Contributions will be withdrawn from an account you specify and
automatically credited to your Annuity Account.
Beneficiary--The person(s) designated to receive any Death Benefit under the
terms of the Contract. Contingent Annuitant--The person you may name in the
application who becomes the Annuitant when the Primary Annuitant dies. The
Contingent Annuitant must be designated before the death of the Primary
Annuitant.
Contractual Guarantee of a Minimum Rate of Interest--This is the minimum rate of
interest allowed by law and is applicable to the fixed options only. It is
subject to change in accordance with changes in applicable law. The minimum
interest rate is equal to an annual effective rate in effect at the time the
Contribution is made. This rate will be reflected in written confirmation of the
Contribution. Currently, under New York law, the minimum rate is 3%.
Contributions--The amount of money you invest or deposit into your annuity.
Death Benefit--The amount payable to the Beneficiary when the Owner or the
Annuitant dies. Distribution Period--The period starting with your Payout
Commencement Date.
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Effective Date--The date on which the first Contribution is credited to your
Annuity Account. Fixed Account Value--The value of the fixed investment option
credited to you under the Annuity Account. Guarantee Period--The number of years
available in the Guarantee Period Fund during which we will credit a stated rate
of interest. We may discontinue offering a period at any time for new
Contributions. Amounts allocated to one or more guaranteed periods may be
subject to a Market Value Adjustment.
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5
Guarantee Period Fund--A fixed investment option which pays a stated rate of
interest for a specified time period. Guarantee Period Maturity Date--The last
day of any Guarantee Period.
Market Value Adjustment (or MVA)--An amount added to or subtracted from certain
transactions involving the Guarantee Period Fund to reflect the impact of
changing interest rates. Non-Qualified Annuity Contract--An annuity contract
funded with money outside a tax qualified retirement plan. Owner (Joint Owner)
or You--The person(s) named in the application who is entitled to exercise all
rights and privileges under the Contract, while the Annuitant is living. Joint
Owners must be husband and wife as of the date the Contract is issued. The
Annuitant will be the Owner unless otherwise indicated in the application. If a
Contract is purchased in connection with an IRA, the Owner and the Annuitant
must be the same individual and a Joint Owner is not allowed.
Payout Commencement Date--The date on which annuity payouts or periodic
withdrawals begin under a payout option. The Payout Commencement Date must be at
least one year after the Effective Date of the Contract. If you do not indicate
a Payout Commencement Date on your application, annuity payouts will begin on
the first day of the month of the Annuitant's 91st birthday.
Portfolio--A registered management investment company, or portfolio thereof, in
which the assets of the Annuity Account may be invested. Premium Tax--A tax
charged by a state or other governmental authority. Varying by state, the
current range of Premium Taxes is 0% to 3.5% and may be assessed at the time you
make a Contribution or when annuity payments begin.
Request--Any written, telephoned, or computerized instruction in a form
satisfactory to First GWL&A and Schwab received at the Annuity Administration
Department at First GWL&A (or other annuity service center subsequently named)
from you, your designee (as specified in a form acceptable to First GWL&A and
Schwab) or the Beneficiary (as applicable) as required by any provision of the
Contract.
Series Account--The segregated asset account established by First GWL&A under
New York law and registered as a unit investment trust under the Investment
Company Act of 1940, as amended. Sub-Account--A division of the Series Account
containing the shares of a Portfolio. There is a Sub-Account for each Portfolio.
Surrender Value--The value of your annuity account with any applicable Market
Value Adjustment on the Effective Date of the surrender, less Premium Tax, if
any. Transaction Date--The date on which any Contribution or Request from you
will be processed. Contributions and Requests received after 4:00 p.m. EST/EDT
will be deemed to have been received on the next business day. Requests will be
processed and the Variable Account Value will be determined on each day that the
New York Stock Exchange is open for trading.
Transfer--Moving money from and among the Sub-Account(s) and the Guarantee
Period Fund. Variable Account Value--The value of the Sub-Accounts credited to
you under the Annuity Account.
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Summary
The Schwab Select Annuity allows you to accumulate assets on a tax-deferred
basis by investing in a variety of variable investment options (Sub-Accounts)
and a fixed investment option (the Guarantee Period Fund). The performance of
your Annuity Account Value will vary with the investment performance of the
Portfolios corresponding to the Sub-Accounts you select. You bear the entire
investment risk for all amounts invested in them. Depending on the performance
of the Sub-Accounts you select, your Annuity Account Value could be less than
the total amount of your Contributions.
The Schwab Select Annuity can be purchased on a non-qualified basis or purchased
and used in connection with an IRA. You can also purchase it through a 1035
Exchange from another insurance contract. Tax deferral under IRAs arises under
the Code. Tax deferral under non-qualified Contracts arises under the Contract.
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How to contact Schwab:
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Schwab Insurance & Annuity Service Center
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101 Montgomery Street
San Francisco, CA 94120-9327
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Attention: Insurance & Annuities Department
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800-838-0649
Your initial Contribution must be at least $5,000; $2,000 if an IRA; $1,000 if
you are setting up an Automatic Contribution Plan. Subsequent Contributions must
be either $500; or $100 if made through an Automatic Contribution Plan.
The money you contribute to the Contract will be invested at your direction,
except during your "free look period." The duration of your free look period
depends on your state law and is generally 10 days after you receive your
Contract. During this period, amounts specified for allocation to the various
Sub-Accounts will be allocated to the Schwab Money Market Sub-Account. Free look
allocations are described in more detail on page 16 of this Prospectus.
Prior to the Payout Commencement Date, you can withdraw all or a part of your
Annuity Account Value. There are no surrender or withdrawal charges. Certain
withdrawals may be subject to federal income tax as well as a federal penalty
tax.
When you're ready to start taking money out of your Contract, you can select
from a variety of payout options, including variable and fixed annuity payouts
as well as periodic payouts. If the Annuitant dies before the Annuity
Commencement Date, we will pay the Death Benefit to the Beneficiary you select.
If the Owner dies before the entire value of the Contract is distributed, the
remaining value will be distributed according to the rules outlined in the
"Death Benefit" section on page 20. For accounts under $50,000, we deduct a $25
annual Contract Maintenance Charge from the Annuity Account Value on each
Contract anniversary date. There is no annual Contract Maintenance Charge for
accounts of $50,000 or more. We also deduct a Mortality and Expense Risk Charge
from your Sub-Accounts at the end of each daily valuation period equal to an
effective annual rate of 0.85% of the value of the net assets in your
Sub-Accounts. Each Portfolio assesses a charge for management fees and other
expenses. These fees and expenses are detailed in this Prospectus.
You may cancel your Contract during the free look period by sending it to the
Annuity Administration Department at First GWL&A. If you are replacing an
existing insurance contract with the Contract, the free look period may be
extended based on your state of residence. Free look allocations are described
in more detail on page 16 of this Prospectus.
This summary highlights some of the more significant aspects of the Schwab
Select Annuity. You'll find more detailed information about these topics
throughout the Prospectus and in your Contract. Please keep them both for future
reference.
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Variable Annuity Fee Table
The purpose of the tables and the examples that follow is to help you understand
the various costs and expenses that you will bear directly or indirectly when
investing in the Contract. The tables and examples reflect expenses related to
the Sub-Accounts as well as of the Portfolios. In addition to the expenses
listed below, Premium Tax, if applicable, may be imposed.
Contract Owner Transaction Expenses1
Sales load None
Surrender fee None
Annual Contract Maintenance Charge2 $25.00
Transfer fee $10.00
(no transfer fee is charged for the first
12 transfers in any calendar year)
Separate Account Annual Expenses1 (as a percentage of average Variable Account
Value) Mortality and expense risk charge 0.85% Administrative expense charge
0.00% Other fees and expenses of the Variable Account 0.00% Total Separate
Account Annual Expenses 0.85%
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1 The Contract Owner Transaction Expenses apply to each Contract, regardless of
how the Annuity Account Value is allocated. The Annual Expenses do not apply to
the Guarantee Period Fund. 2 The Contract Maintenance Charge is currently waived
for Contracts with an Annuity Account Value of at least $50,000. If your Annuity
Account Value falls below $50,000 due to a withdrawal, the Contract Maintenance
Charge will be reinstated until such time as your Annuity Account Value is equal
to or greater than $50,000.
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Portfolio Annual Expenses
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Portfolio Annual Expenses
(as a percentage of Portfolio average net assets, before and
after fee waivers and expense reimbursements for the
period ended December 31, 1999)
Portfolio Management Other 12b-1 Total Total Total
fees expenses fees Portfolio Fee Portfolio
expenses Waivers3 expenses
before after
fee fee
waivers waivers
Alger American Growth 0.75% 0.04% 0.00% 0.79% 0.00% 0.79%
American Century VP International3 1.34% 0.00% 0.00% 1.34% 0.00% 1.34%
Baron Capital Asset3 1.00% 0.63% 0.25% 1.88% 0.38% 1.50%
Berger IPT-Small Company Growth 0.85% 0.64% 0.00% 1.49% 0.34% 1.15%
Deutsche Asset Management VIT 0.45% 0.70% 0.00% 1.15% 0.50% 0.65%
EAFE(R)Equity Index (formerly the
BT Insurance Funds Trust EAFE(R)
Equity Index)
Deutsche Asset Management VIT 0.35% 0.83% 0.00% 1.18% 0.73% 0.45%
Small Cap Index (formerly the BT
Insurance Funds Trust Small Cap
Index)
Dreyfus Variable Investment Fund 0.75% 0.03% 0.00% 0.78% 0.00% 0.78%
Appreciation
Dreyfus Variable Investment Fund 0.75% 0.04% 0.00% 0.79% 0.00% 0.79%
Growth and Income
Federated American Leaders II3 0.75% 0.13% 0.00% 0.88% 0.00% 0.88%
Federated U.S. Government 0.60% 0.24% 0.00% 0.84% 0.00% 0.84%
Securities II3
Federated Utility II3 0.75% 0.19% 0.00% 0.94% 0.00% 0.94%
INVESCO VIF-High Yield3 0.60% 0.48% 0.00% 1.08% 0.00% 1.08%
INVESCO VIF-Equity Income3 0.75% 0.44% 0.00% 1.19% 0.00% 1.19%
INVESCO VIF-Technology3 0.75% 0.78% 0.00% 1.53% 0.21% 1.32%
Janus Aspen Growth 0.65% 0.02% 0.00% 0.67% 0.00% 0.67%
Janus Aspen Worldwide Growth 0.65% 0.05% 0.00% 0.70% 0.00% 0.70%
Janus Aspen Flexible Income 0.65% 0.07% 0.00% 0.72% 0.00% 0.72%
Janus Aspen International Growth 0.65% 0.11% 0.00% 0.76% 0.00% 0.76%
Montgomery Variable Series: Growth 1.52% 0.40% 0.00% 1.92% 0.67% 1.25%
Prudential Series Fund Equity 0.45% 0.17% 0.25% 0.87% 0.00% 0.87%
Class II
SAFECO RST Equity 0.74% 0.02% 0.00% 0.76% 0.00% 0.76%
SAFECO RST Growth Opportunities 0.74% 0.04% 0.00% 0.78% 0.00% 0.78%
Schwab MarketTrack Growth II3 0.54% 0.59% 0.00% 1.13% 0.53% 0.60%
Schwab Money Market3 0.38% 0.15% 0.00% 0.53% 0.03% 0.50%
Schwab S&P 5003 0.20% 0.14% 0.00% 0.34% 0.06% 0.28%
Scudder Variable Life Investment 0.46% 0.03% 0.00% 0.49% 0.00% 0.49%
Fund Capital Growth
Scudder Variable Life Investment 0.47% 0.08% 0.00% 0.55% 0.00% 0.55%
Fund
Growth & Income
Strong Schafer Value II 1.00% 0.57% 0.00% 1.57% 0.37% 1.20%
Van Kampen Life Investment Trust -
Morgan Stanley Real Estate 1.00% 0.13% 0.00% 1.13% 0.03% 1.10%
Securities
</TABLE>
3 For the American Century VP International Fund, there is a stepped fee
schedule, which means that the Fund's management fee rate generally decreases as
the Fund assets increase. For the Baron Capital Asset Fund, the Fund's advisor
is contractually obligated to reduce its fee to the extent required to limit the
Fund's total operating expenses to 1.50% for the first $250 million of assets in
the Fund, 1.35% for Fund assets over $250 million and 1.25% for fund assets over
$500 million. Without expense limitations, total operating expenses for the Fund
for the period January 1, 1999 through December 31, 1999, would have been 1.88%.
For the Federated American Leaders Fund II, Federated U.S. Government Securities
Fund II and the Federated Utility Fund II, the maximum shareholder services fee
is 0.25%. The Funds did not pay or accrue the shareholder services fee during
the fiscal year ended December 31, 1999. The Funds have no present intention of
paying or accruing the shareholder services fee during the fiscal year ending
December 31, 2000. For the INVESCO VIF-High Yield, INVESCO VIF-Equity Income and
INVESCO VIF-Technology Funds, Other Expenses were lower than the figures shown,
because their custodian fees were reduced under an expense offset arrangement.
For the INVESCO VIF-High Yield and INVESCO VIF-Equity Income Funds, the Other
Expenses information presented in this table has been restated from the
financials for these Funds to reflect a change in the administrative services
fee. For the INVESCO VIF-Technology Fund, certain expenses were absorbed
voluntarily by INVESCO in order to ensure that expenses for the Fund did not
exceed 1.25% of the Fund's average net assets pursuant to an agreement between
the Fund and INVESCO. This commitment may be changed at any time following
consultation with the board of directors. After absorption, the INVESCO
VIF-Technology Fund's Other Expenses for the fiscal year ended December 31, 1999
were 0.57% of the Fund's average net assets. For the Schwab MarketTrack Growth
II, Schwab Money Market and Schwab S&P 500 Portfolios, the Total Portfolio
expenses after fee waivers is guaranteed by Schwab and the investment adviser
through April 30, 2001.
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4 The Portfolio Annual Expenses and these examples are based on data provided by
the Portfolios. First Great-West has no reason to doubt the accuracy or
completeness of that data, but First Great-West has not verified the Portfolios'
figures. In preparing the Portfolio Expense table and the Examples above, First
Great-West has relied on the figures provided by the Portfolios.
5 These examples are based on total Portfolio expenses after taking fee waivers
and reimbursements into account.
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Fee Examples4
If you retain, annuitize or surrender the Contract at the end of the applicable
time period, you would pay the following fees and expenses on a $1,000
investment, assuming a 5% annual return on assets. These examples assume that no
Premium Taxes have been assessed.5
<TABLE>
<S> <C> <C> <C> <C>
PORTFOLIO 1 year 3 years 5 years 10 years
Alger American Growth $17 $56 $101 $248
American Century VP International $23 $74 $133 $322
Baron Capital Asset $24 $79 $142 $342
Berger IPT-Small Company Growth $21 $68 $122 $297
Deutsche Asset Management VIT EAFE(R)Equity Index $16 $51 $93 $228
Deutsche Asset Management VIT Small Cap Index $14 $45 $81 $200
Dreyfus Variable Investment Fund Appreciation $17 $56 $100 $246
Dreyfus Variable Investment Fund Growth and $17 $56 $101 $248
Income
Federated American Leaders II $18 $59 $106 $260
Federated U.S. Government Securities II $18 $58 $104 $255
Federated Utility II $19 $61 $110 $268
INVESCO VIF-High Yield $20 $65 $118 $287
INVESCO VIF-Equity Income $21 $69 $124 $302
INVESCO VIF-Technology $23 $73 $132 $319
Janus Aspen Growth $16 $52 $94 $231
Janus Aspen Worldwide Growth $16 $53 $96 $235
Janus Aspen Flexible Income $16 $54 $97 $238
Janus Aspen International Growth $17 $55 $99 $244
Montgomery Variable Series: Growth $22 $71 $128 $310
Prudential Series Fund Equity Class II $18 $59 $106 $259
SAFECO RST Equity $17 $55 $99 $244
SAFECO RST Growth Opportunities $17 $56 $100 $246
Schwab MarketTrack Growth II $15 $50 $90 $221
Schwab Money Market $14 $46 $84 $207
Schwab S&P 500 $12 $39 $71 $175
Scudder Variable Life Investment Fund $14 $46 $83 $206
Capital Growth
Scudder Variable Life Investment Fund $15 $48 $87 $214
Growth and Income
Strong Schafer Value II $21 $69 $125 $303
Van Kampen Life Investment Trust-Morgan Stanley $20 $66 $119 $290
Real Estate Securities
</TABLE>
These examples, including the assumed rate of return, should not be considered
representations of future performance or past or future expenses. Actual
expenses paid or performance achieved may be greater or less than those shown,
subject to the guarantees in the Contract.
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Condensed Financial Information
Attached as Appendix A is a table showing selected information concerning
accumulation units for each Sub-Account for 1997, 1998 and 1999. An accumulation
unit is the unit of measure that we use to calculate the value of your interest
in a Sub-Account. The accumulation unit values do not reflect the deduction of
certain charges that are subtracted from your Annuity Account Value, such as the
Contract Maintenance Charge. The information in the table is included in the
Series Account's financial statements, which have been audited by Deloitte &
Touche LLP, independent auditors. To obtain a more complete picture of each
Sub-Account's finances and performance, you should also review the Series
Account's financial statements, which are in the Series Account's Annual Report
dated December 31,1999 and contained in the Statement of Additional Information.
First Great-West Life & Annuity Insurance Company First GWL&A is a stock life
insurance company organized under the laws of the state of New York. We are
admitted to do business in New York and Iowa.
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The Series Account
We established the Variable Annuity-1 Series Account in accordance with New York
laws on January 15, 1997. The Series Account is registered with the Securities
and Exchange Commission (the "SEC") under the Investment Company Act of 1940
(the "1940 Act"), as a unit investment trust. Registration under the 1940 Act
does not involve supervision by the SEC of the management or investment
practices or policies of the Series Account. We own the assets of the Series
Account. The income, gains or losses, realized or unrealized, from assets
allocated to the Series Account are credited to or charged against the Series
Account without regard to our other income gains or losses.
We will at all times maintain assets in the Series Account with a total market
value at least equal to the reserves and other liabilities relating to the
variable benefits under all Contracts participating in the Series Account. Those
assets may not be charged with our liabilities from our other business. Our
obligations under those Contracts are, however, our general corporate
obligations.
The Series Account is divided into 29 Sub-Accounts. Each Sub-Account invests
exclusively in shares of a corresponding investment Portfolio of a registered
investment company (commonly known as a mutual fund). We may in the future add
new or delete existing Sub-Accounts. The income, gains or losses, realized or
unrealized, from assets allocated to each Sub-Account are credited to or charged
against that Sub-Account without regard to the other income, gains or losses of
the other Sub-Accounts. All amounts allocated to a Sub-Account will be fully
invested in Portfolio shares.
We hold the assets of the Series Account. We keep those assets physically
segregated and held separate and apart from our general account assets. We
maintain records of all purchases and redemptions of shares of the Portfolios.
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The Portfolios
The Contract offers a number of Portfolios, corresponding to the Sub-Accounts.
Each Sub-Account invests in a single Portfolio. Each Portfolio is a separate
mutual fund registered under the 1940 Act. More comprehensive information,
including a discussion of potential risks, is found in the current prospectuses
for the Portfolios (the "Portfolio Prospectuses"). The Portfolio Prospectuses
should be read in connection with this Prospectus. You may obtain a copy of the
Portfolio Prospectuses without charge by request. Each Portfolio:
o holds its assets separate from the assets of the other Portfolios, o has its
own distinct investment objective and policy, and o operates as a separate
investment fund
The income, gains and losses of one Portfolio generally have no effect on the
investment performance of any other Portfolio. The Portfolios are not available
to the general public directly. The Portfolios are only available as investment
options in variable annuity contracts or variable life insurance policies issued
by life insurance companies or, in some cases, through participation in certain
qualified pension or retirement plans. Some of the Portfolios have been
established by investment advisers which manage publicly available mutual funds
having similar names and investment objectives. While some of the Portfolios may
be similar to, and may in fact be modeled after publicly available mutual funds,
you should understand that the Portfolios are not otherwise directly related to
any publicly available mutual fund. Consequently, the investment performance of
publicly available mutual funds and any corresponding Portfolios may differ
substantially.
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11
The investment objectives of the Portfolios are briefly described below: The
Alger American Fund--advised by Fred Alger Management, Inc. of New York, New
York. Alger American Growth Portfolio seeks long-term capital appreciation. It
focuses on growing companies that generally have broad product lines, markets,
financial resources and depth of management. Under normal circumstances, the
Portfolio invests primarily in equity securities of large companies. The
Portfolio considers a large company to have a market capitalization of $1
billion or greater. American Century Variable Portfolios, Inc.--advised by
American Century Investment Management, Inc. of Kansas City, Missouri, advisers
to the American Century family of mutual funds. American Century VP
International seeks capital growth by investing primarily in equity securities
of foreign companies. The Fund invests primarily in securities of issuers in
developed countries. Baron Capital Asset Fund--advised by BAMCO, Inc. of New
York, New York. Baron Capital Asset Fund: Insurance Series seeks capital
appreciation through investments in small and medium sized companies with
undervalued assets or favorable growth prospects. The Fund invests primarily in
small sized companies with market capitalizations of approximately $100 million
to $1.5 billion and medium sized companies with market values of $1.5 billion to
$5 billion.
Berger Institutional Products Trust--advised by Berger LLC of Denver, Colorado.
Berger IPT-Small Company Growth Fund seeks capital appreciation by investing
primarily in the common stocks of small companies with the potential for rapid
earnings growth. Under normal circumstances, the Fund invests at least 65% of
its assets in equity securities whose market capitalization, at the time of
initial purchase, is less than the 12-month average of the maximum market
capitalization for companies included in the Russell 2000 Index. This average is
updated monthly.
The Deutsche Asset Management VIT Funds (formerly BT Insurance Funds
Trust)--advised by Bankers Trust Company of New York, New York. Deutsche Asset
Management VIT EAFE(R) Equity Index Fund (formerly the BT Insurance Funds Trust
EAFE(R) Equity Index Fund) seeks to match, as closely as possible, before
expenses, the performance of the Morgan Stanley Capital International EAFE(R)
Index. The EAFE Index emphasizes stocks of companies in major markets in Europe,
Australia, and the Far East and is a widely accepted benchmark of international
stock performance.
Deutsche Asset Management VIT Small Cap Index Fund (formerly the BT Insurance
Funds Trust Small Cap Index Fund) seeks to match, as closely as possible, before
expenses, the performance of the Russell 2000 Small Stock Index. The Russell
2000 Index emphasizes stocks of small U.S. companies and is a widely accepted
benchmark of small-company stock performance.
Dreyfus Variable Investment Fund--advised by The Dreyfus Corporation of New
York, New York. Dreyfus Variable Investment Fund Appreciation Portfolio seeks
long-term capital growth consistent with the preservation of capital; current
income is its secondary goal. To pursue these goals, the Portfolio invests in
common stocks focusing on "blue-chip" companies with total market values of more
than $5 billion at the time of purchase.
Dreyfus Variable Investment Fund Growth and Income Portfolio seeks long-term
capital growth, current income and growth of income consistent with reasonable
investment risk. To pursue this goal, it invests in stocks, bonds and money
market instruments of domestic and foreign issuers.
Federated Insurance Series--advised by Federated Advisers of Pittsburgh,
Pennsylvania. Federated American Leaders Fund II seeks to achieve long-term
growth of capital as a primary objective and seeks to provide income as a
secondary objective through investment of at least 65% of its total assets
(under normal circumstances) in common stocks of "blue chip" companies.
Federated Fund for U.S. Government Securities II seeks to provide current income
through investment of at least 65% of its total assets in securities which are
primary or direct obligations of the U.S. government or its agencies or
instrumentalities or which are guaranteed as to principal and interest by the
U.S. government, its agencies, or instrumentalities and in certain
collateralized mortgage obligations, and repurchase agreements.
Federated Utility Fund II seeks to provide high current income and moderate
capital appreciation by investing in a professionally-managed, diversified
portfolio of utility company equity and debt securities. INVESCO Variable
Investment Funds, Inc.--advised by INVESCO Funds Group, Denver, Colorado.
INVESCO Trust Company is the sub-adviser for the INVESCO VIF-Equity Income
Portfolio.
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12
INVESCO VIF-Equity Income Fund is a diversified fund that seeks the highest
possible current income, with the added potential for capital appreciation. The
Fund normally invests at least 65% of its total assets in dividend paying common
stocks. The Fund's equity investments are limited to stocks that can be easily
traded in the U.S.; it may, however, invest in foreign securities in the form of
American Depository Receipts. The rest of the Fund's assets are invested in debt
securities, generally corporate bonds that are rated investment grade or better.
The Fund may also invest up to 15% of its assets in lower-grade debt securities
commonly known as "junk bonds," which generally offer higher interest rates, but
are riskier investments than investment grade securities.
INVESCO VIF-High Yield Fund seeks a high level of current income. It invests
substantially all of its assets in lower-rated debt securities, commonly called
"junk bonds," and preferred stock, including securities issued by foreign
companies. Although these securities carry with them higher risks, they
generally provide higher yields - and therefore higher income - than
higher-rated debt securities. INVESCO VIF-Technology Fund seeks capital
appreciation and normally invests at least 80% of its total assets in equity
securities of companies engaged in technology-related industries. These include,
but are not limited to, communications, computers, video, electronics,
oceanography, office and factory automation, and robotics. Many of these
products and services are subject to rapid obsolescence, which may lower the
market value of the securities of the companies in this sector. The Fund's
investments are diversified across the technology sector. However, because the
investments are limited to a comparatively narrow segment of the economy, the
Fund's investments are not as diversified as most mutual funds, and far less
diversified than the broad securities markets. This means that the Fund tends to
be more volatile than other mutual funds, and the value of its portfolio
investments tends to go up and down more rapidly. As a result, the value of a
Fund share may rise or fall rapidly.
Janus Aspen Series--advised by Janus Capital Corporation of Denver, Colorado.
Janus Aspen Growth Portfolio seeks long-term growth of capital in a manner
consistent with the preservation of capital. The Portfolio invests primarily in
common stocks selected for their growth potential. Janus Aspen Worldwide Growth
Portfolio seeks long-term growth of capital in a manner consistent with the
preservation of capital. The Portfolio invests primarily in common stocks of any
size throughout the world. The Portfolio normally invests in issuers from at
least five different countries, including the U.S.
Janus Aspen Flexible Income Portfolio seeks to obtain maximum total return,
consistent with preservation of capital. The Portfolio invests in a wide variety
of income-producing securities such as corporate bonds and notes, government
securities and preferred stock. The Portfolio will invest at least 80% of its
assets in income-producing securities and may own an unlimited amount of
high-yield/high-risk fixed income securities and these securities may be a big
part of the Portfolio.
Janus Aspen International Growth Portfolio seeks long-term growth of capital.
The Portfolio normally invests at least 65% of its total assets in securities of
issuers from at least five different countries, excluding the U.S.
Montgomery Variable Series--advised by Montgomery Asset Management, LLC of San
Francisco, California.
Montgomery Variable Series: Growth Fund seeks long-term capital appreciation by
investing in growth-oriented U.S. companies. The Fund may invest in U.S.
companies of any size, but invests at least 65% of its total assets in those
companies whose shares have a total stock market value (market capitalization)
of at least $1 billion. The Fund's strategy is to identify well-managed U.S.
companies whose share prices appear to be undervalued relative to the firm's
growth potential. Prudential Series Fund--advised by the Prudential Insurance
Company of America of Newark, New Jersey.
Prudential Series Fund Equity Class II Portfolio seeks capital appreciation
through investment primarily in common stocks of companies, including major
established corporations as well as smaller capitalization companies, that
appear to offer attractive prospects of price appreciation that is superior to
broadly-based stock indexes. Current income, if any, is incidental.
SAFECO Resource Series Trust--advised by SAFECO Asset Management Company of
Seattle, Washington.
SAFECO RST Equity Portfolio seeks growth of capital and the increased income
that ordinarily follows from such growth. The Portfolio invests primarily in
common stocks selected for appreciation potential. SAFECO RST Growth
Opportunities Portfolio seeks growth of capital and the increased income that
ordinarily follows from such growth. The Portfolio invests primarily in common
stocks selected for appreciation potential.
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13
Schwab Annuity Portfolios--advised by Charles Schwab Investment Management, Inc.
of San Francisco, California.
Schwab MarketTrack Growth Portfolio II seeks to provide high capital growth with
less volatility than an all stock portfolio by investing in a mix of stocks,
bonds, and cash equivalents either directly or through investment in other
mutual funds.
Schwab Money Market Portfolio seeks the highest current income consistent with
liquidity and stability of capital. This Portfolio is neither insurance nor
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. There can be no assurance that it will be able to maintain a stable net
asset value of $1.00 per share.
Schwab S&P 500 Portfolio seeks to track the price and dividend performance
(total return) of common stocks of U.S. companies, as represented in the
Standard & Poor's Composite Index of 500 stocks. Scudder Variable Life
Investment Fund--advised by Scudder Kemper Investments, Inc. of New York, New
York.
Scudder Variable Life Investment Fund Capital Growth Portfolio seeks to maximize
long-term capital growth through a broad and flexible investment program. The
Portfolio invests principally in common stocks and preferred stocks in all
sectors of the market, including companies that generate or apply new
technologies, companies that own or develop natural resources, companies that
may benefit from changing consumer demands and lifestyles and foreign companies.
Scudder Variable Life Investment Fund Growth and Income Portfolio seeks
long-term growth of capital, current income and growth of income. The Portfolio
pursues its goal by investing primarily in common stocks, preferred stocks and
securities convertible into common stocks of companies which offer the prospect
for growth of earnings while paying higher than average current dividends. The
Portfolio may also purchase such securities which do not pay current dividends
but which offer prospects for growth of capital and future income.
The Strong Schafer Value Fund II--advised by Strong Schafer Capital Management,
L.L.C. (SSCM) of Princeton, New Jersey
The Strong Schafer Value Fund II seeks long-term capital appreciation. Current
income is a secondary objective. The Fund invests primarily in common stocks of
medium- and large-size companies.
Van Kampen Life Investment Trust--advised by Van Kampen Asset Management Inc. of
Oakbrook Terrace, Illinois. Van Kampen LITMorgan Stanley Real Estate Securities
Portfolio seeks as a primary objective, long-term growth of capital by investing
in securities of companies operating in the real estate industry, primarily
equity securities of real estate investment trusts. Current income is a
secondary investment objective. Meeting Investment Objectives Meeting investment
objectives depends on various factors, including, but not limited to, how well
the Portfolio managers anticipate changing economic and market conditions. There
is no guarantee that any of these Portfolios will achieve their stated
objectives.
Where to Find More Information About the Portfolios
Additional information about the investment objectives and policies of all the
Portfolios and the investment advisory and administrative services and charges
can be found in the current Portfolio Prospectuses, which can be obtained from
the Schwab Insurance & Annuity Service Center.
The Portfolios' Prospectuses should be read carefully before any decision is
made concerning the allocation of Contributions to, or Transfers among, the
Sub-Accounts. Addition, Deletion or Substitution First GWL&A does not control
the Portfolios and cannot guarantee that any of the Portfolios will always be
available for allocation of Contributions or Transfers. We retain the right to
make changes in the Series Account and in its investments. Currently, Schwab
must approve certain changes. First GWL&A and Schwab reserve the right to
discontinue the offering of any Portfolio. If a Portfolio is discontinued, we
may substitute shares of another Portfolio or shares of another investment
company for the discontinued Portfolio's shares. Any share substitution will
comply with the requirements of the 1940 Act. If you are contributing to a
Sub-Account corresponding to a Portfolio that is being discontinued, you will be
given notice prior to the Portfolio's elimination.
Based on marketing, tax, investment and other conditions, we may establish new
Sub-Accounts and make them available to Owners at our discretion. Each
additional Sub-Account will purchase shares in a Portfolio or in another mutual
fund or investment vehicle.
If, in our sole discretion, marketing, tax, investment or other conditions
warrant, we may also eliminate one or more Sub-Accounts. If a Sub-Account is
eliminated, we will notify you and request that you re-allocate the amounts
invested in the eliminated Sub-Account.
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<PAGE>
14
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The Guarantee Period Fund
The Guarantee Period Fund is not part of the Series Account. Amounts allocated
to the Guarantee Period Fund will be deposited to, and accounted for, in a
non-unitized market value separate account. As a result, you do not participate
in the performance of the assets through unit values.
Because your Contributions do not receive a unit ownership of assets accounted
for in the separate account, the assets accrue solely to the benefit of First
GWL&A and any gain or loss in the separate account is borne entirely by First
GWL&A. You will receive the Contract guarantees made by First GWL&A for amounts
you contribute to the Guarantee Period Fund.
When you contribute or Transfer amounts to the Guarantee Period Fund, you select
a new Guarantee Period from those available. All Guarantee Periods will have a
term of at least one year. Contributions allocated to the Guarantee Period Fund
will be credited on the Transaction Date we receive them. Each Guarantee Period
will have its own stated rate of interest and maturity date determined by the
date the Guarantee Period is established and the term you choose.
Currently, Guarantee Periods with annual terms of 1 to 10 years are offered only
in those states where the Guarantee Period Fund is available. The Guarantee
Periods may change in the future, but this will not have an impact on any
Guarantee Period already in effect.
The value of amounts in each Guarantee Period equals Contributions plus interest
earned, less any Premium Tax, amounts distributed, withdrawn (in whole or in
part), amounts Transferred or applied to an annuity option, periodic withdrawals
and charges deducted under the Contract. If a Guarantee Period is broken, a
Market Value Adjustment may be assessed (please see "Breaking a Guarantee
Period" on page 15). Any amount withdrawn or Transferred prior to the Guarantee
Period Maturity Date will be paid in accordance with the Market Value Adjustment
formula. You can read more about Market Value Adjustments on page 15.
Investments of the Guarantee Period Fund
We use various techniques to invest in assets that have similar characteristics
to our general account assets--especially cash flow patterns. We will primarily
invest in investment-grade fixed income securities including:
o Securities issued by the U.S. Government or its agencies or instrumentalities,
which may or may not be guaranteed by the U.S. Government. o Debt securities
which have an investment grade, at the time of purchase, within the four highest
grades assigned by Moody's Investment Services, Inc. (Aaa, Aa, A or Baa),
Standard & Poor's Corporation (AAA, AA, A or BBB) or any other nationally
recognized rating service.
o Other debt instruments, including, but not limited to, issues of banks or
bank holding companies and of corporations, which obligations--although not
rated by Moody's, Standard & Poor's, or other nationally recognized rating
firms--are deemed by us to have an investment quality comparable to
securities which may be purchased as stated above.
o Commercial paper, cash or cash equivalents and other short-term investments
having a maturity of less than one year which are considered by us to have
investment quality comparable to securities which may be purchased as stated
above.
In addition, we may invest in futures and options solely for non-speculative
hedging purposes. We may sell a futures contract or purchase a put option on
futures or securities to protect the value of securities held in or to be sold
for the general account or the non-unitized separate account if the securities
prices are anticipated to decline. Similarly, if securities prices are expected
to rise, we may purchase a futures contract or a call option against anticipated
positive cash flow or may purchase options on securities. The above information
generally describes the investment strategy for the Guarantee Period Fund.
However, we are not obligated to invest the assets in the Guarantee Period Fund
according to any particular strategy, except as may be required by New York and
other state insurance laws. And, the stated rate of interest that we establish
will not necessarily relate to the performance of the non-unitized market value
separate account.
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15
Subsequent Guarantee Periods
Before annuity payouts begin, you may reinvest the value of amounts in a
maturing Guarantee Period in a new Guarantee Period of any length we offer at
that time. On the quarterly statement you receive prior to the end of any
Guarantee Period, we will notify you of the upcoming maturity of a Guarantee
Period. The Guarantee Period available for new Contributions may be changed at
any time, including between the date we notify you of a maturing Guarantee
Period and the date a new Guarantee Period begins.
If you do not tell us where you would like the amounts in a maturing Guarantee
Period allocated by the maturity date, we will automatically allocate the amount
to a Guarantee Period of the same length as the maturing period. If the term
previously chosen is no longer available, the amount will be allocated to the
next shortest available Guarantee Period term. If none of the above are
available, the value of matured Guarantee Periods will be allocated to the
Schwab Money Market Sub-Account. No Guarantee Period may mature later than six
months after your Payout Commencement Date. For example, if a 3-year Guarantee
Period matures and the Payout Commencement Date begins 1 3/4 years from the
Guarantee Period maturity date, the matured value will be transferred to a
2-year Guarantee Period. Breaking a Guarantee Period If you begin annuity
payouts, Transfer or withdraw prior to the Guarantee Period maturity date, you
are breaking a Guarantee Period. When we receive a request to break a Guarantee
Period and you have another Guarantee Period that is closer to its maturity
date, we will break that Guarantee Period first. If you break a Guarantee
Period, you may be assessed an interest rate adjustment called a Market Value
Adjustment.
Interest Rates
The declared annual rates of interest are guaranteed throughout the Guarantee
Period. For Guarantee Periods not yet in effect, First GWL&A may declare
interest rates different than those currently in effect. When a subsequent
Guarantee Period begins, the rate applied will be equal to or more than the rate
currently in effect for new Contracts with the same Guarantee Period.
The stated rate of interest must be at least equal to the Contractual Guarantee
of a Minimum Rate of Interest, but First GWL&A may declare higher rates. The
Contractual Guarantee of a Minimum Rate of Interest is based on the applicable
state standard non-forfeiture law which is 3%.
The determination of the stated interest rate is influenced by, but does not
necessarily correspond to, interest rates available on fixed income investments
which First GWL&A may acquire using funds deposited into the Guarantee Period
Fund. In addition, First Great-West considers regulatory and tax requirements,
sales and administrative expenses, general economic trends and competitive
factors in determining the stated interest rate.
Market Value Adjustment
Amounts you allocate to the Guarantee Period Fund may be subject to an interest
rate adjustment called a Market Value Adjustment if, six months or more before
the Guarantee Period Fund's maturity date, you:
o surrender your investment in the Guarantee Period Fund, o transfer money from
the Guarantee Period Fund, o partially withdraw money from the Guarantee Period
Fund, or
o apply amounts from the fund to purchase an annuity to receive payouts from
your account. The Market Value Adjustment will not apply to any Guarantee Period
having fewer than six months prior to the Guarantee Period maturity date in each
of the following situations:
o Transfer to a Sub-Account offered under this Contract o Surrenders, partial
withdrawals, annuitization or periodic withdrawals o A single sum payout upon
death of the Owner or Annuitant
A Market Value Adjustment may increase or decrease the amount payable on the
above-described distributions. The formula for calculating Market Value
Adjustments is detailed in Appendix B. Appendix B also includes examples of how
Market Value Adjustments work.
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Application and Initial Contributions
The first step to purchasing The Schwab Select Annuity is to complete your
Contract application and submit it with your initial minimum Contribution of
$5,000; $2,000 if an IRA; or $1,000 if you are setting up an Automatic
Contribution Plan. Initial Contributions can be made by check (payable to First
GWL&A) or transferred from a Schwab brokerage account.
If your application is complete, your Contract will be issued and your
Contribution will be credited within two business days after receipt at the
Annuity Administration Department at First GWL&A. Acceptance is subject to
sufficient information in a form acceptable to us. We reserve the right to
reject any application or Contribution.
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16
If your application is incomplete, the Annuity Administration Department will
complete the application from information Schwab has on file or contact you by
telephone to obtain the required information. If the information necessary to
complete your application is not received within five business days, we will
return to you both your check and the application. If you provide consent we
will retain the initial Contribution and credit it as soon as we have completed
your application.
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Free Look Period
During the free look period (ten days or longer where required by law), you may
cancel your Contract. During the free look period, all Contributions will be
processed as follows: o Amounts you specify to be allocated to one or more of
the available Guarantee Periods will be allocated as
directed, effective upon the Transaction Date.
o Amounts you specify to be allocated to one or more of the Sub-Accounts will
first be allocated to the Schwab Money Market Sub-Account until the end of
the free look period. After the free look period is over, the Variable
Account Value held in the Schwab Money Market Sub-Account will be allocated
to the Sub-Accounts you selected on the application.
During the free look period, you may change the Sub-Accounts in which you'd like
to invest as well as your allocation percentages. Any changes you make during
the free look period will take effect after the free look period has expired.
Contracts returned during the free look period will be void from the date we
issued the Contract and the greater of the following will be refunded: o
Contributions less withdrawals and distributions, or o The Annuity Account
Value.
If you exercise the free look privilege, you must return the Contract to the
Annuity Administration Department at First GWL&A.
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Subsequent Contributions
Once your application is complete and we have received your initial
Contribution, you can make subsequent Contributions at any time prior to the
Payout Commencement Date, as long as the Annuitant is living. Additional
Contributions must be at least $500; or $100 if made via an Automatic
Contribution Plan. Total Contributions may exceed $1,000,000 with our prior
approval.
Subsequent Contributions can be made by check or via an Automatic Contribution
plan directly from your bank or savings account. You can designate the date
you'd like your subsequent Contributions deducted from your account each month.
If you make subsequent Contributions by check, your check should be payable to
First GWL&A.
You'll receive a confirmation of each Contribution you make upon its acceptance.
First GWL&A reserves the right to modify the limitations set forth in this
section.
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Annuity Account Value
Before the date annuity payouts begin, your Annuity Account Value is the sum of
your Variable and Fixed Accounts established under your Contract. Before your
Annuity Commencement Date, the Variable Account Value is the total dollar amount
of all accumulation units credited to you for each Sub-Account. Initially, the
value of each accumulation unit was set at $10.00. Each Sub-Account's value
prior to the Payout Commencement Date is equal to: o net Contributions allocated
to the corresponding Sub-Account, o plus or minus any increase or decrease in
the value of the assets of the Sub-Account due to investment
results,
o minus the daily mortality and expense risk charge,
o minus reductions for the Contract Maintenance Charge deducted on the contract
anniversary o minus any applicable Transfer fees and o minus any withdrawals or
Transfers from the Sub-Account.
The value of a Sub-Account's assets is determined at the end of each day that
the New York Stock Exchange is open for regular business (a valuation date). A
valuation period is the period between successive valuation dates. It begins at
the close of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each valuation date and ends at the close of the New York Stock Exchange on the
next succeeding valuation date. The Variable Account Value is expected to change
from valuation period to valuation period, reflecting the investment experience
of the selected Sub-Account(s), as well as the deductions for applicable
charges. Upon allocating Variable Account Values to a Sub-Account you will be
credited with variable accumulation units in that Sub-Account. The number of
accumulation units you will be credited is determined by dividing the portion of
each Contribution allocated to the Sub-Account by the value of an accumulation
unit. The value of the accumulation unit is determined and credited at the end
of the valuation period during which the Contribution was received.
Each Sub-Account's accumulation unit value is established at the end of each
valuation period. It is calculated by multiplying the value of that unit at the
end of the prior valuation period by the Sub-Account's Net Investment Factor for
the valuation period. The formula used to calculate the Net Investment Factor is
discussed in Appendix C.
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17
Unlike a brokerage account, amounts held under a Contract are not covered by the
Securities Investor Protection Corporation ("SIPC").
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Transfers
Prior to the Annuity Commencement Date you may Transfer all or part of your
Annuity Account Value among and between the Sub-Accounts and the available
Guarantee Periods by telephone, by sending a Request to the Annuity
Adminstration Department at First GWL&A or by calling our touch-tone account and
trading service. Your Request must specify:
o the amounts being Transferred,
o the Sub-Account(s) and/or Guarantee Period(s) from which the Transfer is to be
made, and o the Sub-Account(s) and/or Guarantee Period(s) that will receive the
Transfer. Currently, there is no limit on the number of Transfers you can make
among the Sub-Accounts and the Guarantee Period Fund during any calendar year.
However, we reserve the right to limit the number of Transfers you make. There
is no charge for the first twelve Transfers each calendar year, but there will
be a charge of $10 for each additional Transfer made. The charge will be
deducted from the amount Transferred. All Transfers made on a single Transaction
Date will count as only one Transfer toward the twelve free Transfers. However,
if a one-time rebalancing Transfer also occurs on the Transaction Date, it will
be counted as a separate and additional Transfer.
A Transfer generally will be effective on the date the Request for Transfer is
received by the Annuity Administration Department at First GWL&A if received
before 4:00 p.m. Eastern time. Under current tax law, there will not be any tax
liability to you if you make a Transfer.
Transfers involving the Sub-Accounts will result in the purchase and/or
cancellation of accumulation units having a total value equal to the dollar
amount being Transferred. The purchase and/or cancellation of such units is made
using the Variable Account Value as of the end of the valuation date on which
the Transfer is effective.
When you make a Transfer from amounts in a Guarantee Period before the Guarantee
Period maturity date, the amount Transferred may be subject to a Market Value
Adjustment as discussed on page 15. If you request in advance to Transfer
amounts from a maturing Guarantee Period upon maturity, your Transfer will not
count toward the 12 free Transfers and no Transfer fees will be charged.
Possible Restrictions
We reserve the right without prior notice to modify, restrict, suspend or
eliminate the Transfer privileges (including telephone Transfers) at any time.
For example, Transfer restrictions may be necessary to protect you from the
negative effect large and/or numerous Transfers can have on portfolio
management. Moving significant amounts from one Sub-Account to another may
prevent the underlying Portfolio from taking advantage of long-term investment
opportunities because the Portfolio must maintain enough cash to cover the
cancellation of accumulation units that results from a Transfer out of a
Sub-Account. Moving large amounts of money may also cause a substantial increase
in Portfolio transaction costs which must be indirectly borne by you.
As a result, we reserve the right to require that all Transfer requests be made
by you and not by your designee and to require that each Transfer request be
made by a separate communication to us. We also reserve the right to require
that each Transfer request be submitted in writing and be signed by you.
Transfers among the Sub-Accounts may also be subject to such terms and
conditions as may be imposed by the Portfolios. Automatic Custom Transfers
Dollar Cost Averaging Dollar cost averaging allows you to make systematic
Transfers from one Sub-Account to any other of the Sub-Accounts. Dollar cost
averaging allows you to buy more units when the price is low and fewer units
when the price is high. Over time, your average cost per unit may be less than
if you invested all your money at one time. However, dollar cost averaging does
not assure a greater profit, or any profit, and will not prevent or necessarily
alleviate losses in a declining market.
You can set up automatic dollar cost averaging on a monthly, quarterly,
semi-annual or annual basis. Your Transfer will be initiated on the Transaction
Date one frequency period following the date of the request. For example, if you
request quarterly Transfers on January 9, your first Transfer will be made on
April 9 and every three months on the 9th thereafter. Transfers will continue on
that same day each interval unless terminated by you or for other reasons as set
forth in the Contract.
<PAGE>
18
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How dollar cost averaging works:
-------- --------- -------- --------
------- ContributiUnits Price
Month Purchasedper
unit
-------- --------- -------- --------
-------- --------- -------- --------
Jan. $250 10 $25.00
-------- --------- -------- --------
-------- --------- -------- --------
250 12 20.83
Feb.
-------- --------- -------- --------
-------- --------- -------- --------
250 20 12.50
Mar.
-------- --------- -------- --------
-------- --------- -------- --------
Apr. 250 20 12.50
-------- --------- -------- --------
-------- --------- -------- --------
May 250 15 16.67
-------- --------- -------- --------
-------- --------- -------- --------
June 250 12 20.83
-------- --------- -------- --------
Average market value per unit
$18.06
Investor's average cost per unit
$16.85
In the chart above, if all units had been purchased at one time at the highest
unit value of $25.00, only 60 units could have been purchased with $1500. By
contributing smaller amounts over time, dollar cost averaging allowed 89 units
to be purchased with $1500 at an average unit price of $16.85. This investor
purchased 29 more units at $1.21 less per unit than the average market value per
unit of $18.06.
- ------------------------------------------------------------------------------
If there are insufficient funds in the applicable Sub-Account on the date your
Transfer is scheduled, your Transfer will not be made. However, your dollar cost
averaging Transfers will resume once there are sufficient funds in the
applicable Sub-Account. Dollar cost averaging will terminate automatically when
you start taking payouts from the annuity. Dollar cost averaging Transfers are
not included in the twelve free Transfers allowed in a calendar year.
Dollar cost averaging Transfers must meet the following conditions: o The
minimum amount that can be Transferred out of the selected Sub-Account is $100.
o You must: (1) specify the dollar amount to be Transferred, (2) designate the
Sub-Account(s) to which the
Transfer will be made, and (3) designate the percent of the dollar amount to
be allocated to each Sub-Account into which you are Transferring money. The
accumulation unit values will be determined on the Transfer date.
You may not participate in dollar cost averaging and rebalancer at the same
time. First GWL&A reserves the right to modify, suspend or terminate dollar cost
averaging at any time.
Rebalancer
Over time, variations in each Sub-Account's investment results will change your
asset allocation plan percentages. Rebalancer allows you to automatically
reallocate your Variable Account Value to maintain your desired asset
allocation. Participation in Rebalancer does not assure a greater profit, or any
profit, nor will it prevent or necessarily alleviate losses in a declining
market.
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How rebalancer works:
- --------------------------------------------------------------------------------
Suppose you purchased your annuity by allocating 60% of your initial
contribution to stocks; 30% to bonds and 10% to cash equivalents as in this pie
chart:
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Now assume that stock portfolios outperform bond portfolios and cash equivalents
over a certain period of time. Over this period, the unequal performance may
alter the asset allocation of the above hypothetical plan to look like this:
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Rebalancer automatically reallocate your Variable Account Value to maintain your
desired asset allocation. In this example, the portfolio would be re-allocated
back to 60% in stocks; 30% in bonds; 10% in cash equivalents.
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You can set up rebalancer as a one-time Transfer or on a quarterly, semi-annual
or annual basis. If you select to rebalance only once, the Transfer will take
place on the Transaction Date of the request. One-time rebalancer Transfers
count toward the twelve free Transfers allowed in a calendar year. If you select
to rebalance on a quarterly, semi-annual or annual basis, the first Transfer
will be initiated on the Transaction Date one frequency period following the
date of the request. For example, if you request quarterly Transfers on January
9, your first Transfer will be made on April 9 and every three months on the 9th
thereafter. Transfers will continue on that same day each interval unless
terminated by you or for other reasons as set forth in the Contract. Quarterly,
semi-annual and annual Transfers will not count toward the 12 free Transfers.
<PAGE>
19
On the Transaction Date for the specified request, assets will be automatically
reallocated to the Sub-Accounts you selected. The rebalancer option will
terminate automatically when you start taking payouts from the Contract.
Rebalancer Transfers must meet the following conditions: o Your entire Variable
Account Value must be included.
o You must specify the percentage of your Variable Account Value you'd like
allocated to each Sub-Account and the frequency of rebalancing. You may
modify the allocations or stop the rebalancer option at any time.
o You may not participate in dollar cost averaging and rebalancer at the same
time. First GWL&A reserves the right to modify, suspend, or terminate the
rebalancer option at any time.
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Cash Withdrawals
You may withdraw all or part of your Annuity Account Value at any time during
the life of the Annuitant and prior to the date annuity payouts begin by
submitting a written withdrawal request to the Annuity Administration Department
at First GWL&A. Withdrawals are subject to the rules below and federal or state
laws, rules or regulations may also apply. The amount payable to you if you
surrender your Contract is your Annuity Account Value, with any applicable
Market Value Adjustment on the Effective Date of the surrender, less any
applicable Premium Tax. No withdrawals may be made after the date annuity
payouts begin. If you request a partial withdrawal, your Annuity Account Value
will be reduced by the dollar amount withdrawn. A Market Value Adjustment may
apply. Market Value Adjustments are discussed on page 15. Partial withdrawals
are unlimited. However, you must specify the Sub-Account(s) or Guarantee
Period(s) from which the withdrawal is to be made. After any partial withdrawal,
if your remaining Annuity Account Value is less than $2,000, then a full
surrender may be required. The minimum partial withdrawal (before application of
the MVA) is $500.
The following terms apply to withdrawals:
o Partial withdrawals or surrenders are not permitted after the date annuity
payouts begin. o A partial withdrawal or a surrender will be effective upon the
Transaction Date. o A partial withdrawal or a surrender from amounts in a
Guarantee Period may be subject to the Market Value
Adjustment provisions, and the Guarantee Period Fund provisions of the
Contract.
Withdrawal requests must be in writing with your original signature. If your
instructions are not clear, your request will be denied and no withdrawal or
partial withdrawal will be processed. After a withdrawal of all of your Annuity
Account Value, or at any time that your Annuity Account Value is zero, all your
rights under the Contract will terminate.
Withdrawals to Pay Investment Manager or Financial Advisor Fees
You may request partial withdrawals from your Annuity Account Value and direct
us to remit the amount withdrawn directly to your designated Investment Manager
or Financial Advisor (collectively "Consultant"). A withdrawal request for this
purpose must meet the $500 minimum withdrawal requirements and comply with all
terms and conditions applicable to partial withdrawals, as described above. Tax
consequences of withdrawals are detailed below, but you should consult a
competent tax advisor prior to authorizing a withdrawal from your Annuity
Account to pay Consultant fees.
Tax Consequences of Withdrawals
Withdrawals made for any purpose may be taxable--including payments made by us
directly to your Consultant. In addition, the Internal Revenue Code may require
us to withhold federal income taxes from withdrawals and report such withdrawals
to the IRS. If you request partial withdrawals to pay Consultant fees, your
Annuity Account Value will be reduced by the sum of the fees paid to the
Consultant and the related withholding. You may elect, in writing, to have us
not withhold federal income tax from withdrawals, unless withholding is
mandatory for your Contract. If you are younger than 59 1/2, the taxable portion
of any withdrawal is generally considered to be an early withdrawal and is
subject to an additional federal penalty tax of 10%. Some states also require
withholding for state income taxes. For details about withholding, please see
"Federal Tax Matters" on page 26.
If you are interested in this Contract as an IRA, please refer to Section 408 of
the Code for limitations and restrictions on cash withdrawals.
<PAGE>
20
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Telephone Transactions
You may make Transfer requests by telephone. Telephone Transfer requests
received before 4:00 p.m. Eastern time will be made on that day at that day's
unit value. Calls completed after 4:00 p.m. Eastern time will be made on the
next business day we and the NYSE are open for business, at that day's unit
value. We will use reasonable procedures to confirm that instructions
communicated by telephone are genuine, such as: o requiring some form of
personal identification prior to acting on instructions, o providing written
confirmation of the transaction and/or o tape recording the instructions given
by telephone.
If we follow such procedures we will not be liable for any losses due to
unauthorized or fraudulent instructions. We reserve the right to suspend
telephone transaction privileges at any time, for some or all Contracts, and for
any reason. Withdrawals are not permitted by telephone.
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Death Benefit
Before the date when annuity payouts begin, the Death Benefit, if any, will be
equal to the greater of: o the Annuity Account Value with an MVA, if applicable,
as of the date the request for payout is received,
less any Premium Tax, or
o the sum of Contributions, less partial withdrawals and/or periodic
withdrawals, less any Premium Tax. The Death Benefit will become payable
following our receipt of the Beneficiary's claim in good order. When an Owner or
the Annuitant dies before the Annuity Commencement Date and a Death Benefit is
payable to a Beneficiary, the Death Benefit proceeds will remain invested
according to the allocation instructions given by the Owner(s) until new
allocation instructions are requested by the Beneficiary or until the Death
Benefit is actually paid to the Beneficiary.
The amount of the Death Benefit will be determined as of the date payouts begin.
However, on the date a payout option is processed, the Variable Account Value
will be Transferred to the Schwab Money Market Sub-Account unless the
Beneficiary elects otherwise.
Subject to the distribution rules below, payout of the Death Benefit may be made
as follows: Variable Account Value o payout in a single sum, or o payout under
any of the variable annuity options provided under this Contract. Fixed Account
Value o payout in a single sum that may be subject to a Market Value Adjustment,
or o payout under any of the annuity options provided under this Contract that
may be subject to a Market Value
Adjustment
Any payment within 6 months of the Guarantee Period Maturity Date will not be
subject to a Market Value Adjustment. In any event, no payout of benefits
provided under the Contract will be allowed that does not satisfy the
requirements of the Code and any other applicable federal or state laws, rules
or regulations. Beneficiary You may select one or more Beneficiaries. If more
than one Beneficiary is selected, they will share equally in any Death Benefit
payable unless you indicate otherwise. You may change the Beneficiary any time
before the Annuitant's death.
A change of Beneficiary will take effect as of the date the request is processed
by the Annuity Administration Department at First GWL&A, unless a certain date
is specified by the Owner. If the Owner dies before the request is processed,
the change will take effect as of the date the request was made, unless we have
already made a payout or otherwise taken action on a designation or change
before receipt or processing of such request. A Beneficiary designated
irrevocably may not be changed without the written consent of that Beneficiary,
except as allowed by law.
The interest of any Beneficiary who dies before the Owner or the Annuitant will
terminate at the death of the Beneficiary. The interest of any Beneficiary who
dies at the time of, or within 30 days after the death of an Owner or the
Annuitant will also terminate if no benefits have been paid to such Beneficiary,
unless the Owner otherwise indicates by request. The benefits will then be paid
as though the Beneficiary had died before the deceased Owner or Annuitant. If no
Beneficiary survives the Owner or Annuitant, as applicable, we will pay the
Death Benefit proceeds to the Owner's estate.
<PAGE>
21
If the Beneficiary is not the Owner's surviving spouse, she/he may elect, not
later than one year after the Owner's date of death, to receive the Death
Benefit in either a single sum or payout under any of the variable or fixed
annuity options available under the Contract, provided that: o such annuity is
distributed in substantially equal installments over the life or life expectancy
of the
Beneficiary or over a period not extending beyond the life expectancy of the
Beneficiary and o such distributions begin not later than one year after the
Owner's date of death. If an election is not received by First GWL&A from a
non-spouse Beneficiary and substantially equal installments begin no later than
one year after the Owner's date of death, then the entire amount must be
distributed within five years of the Owner's date of death. The Death Benefit
will be determined as of the date the payouts begin.
If a corporation or other non-individual entity is entitled to receive benefits
upon the Owner's death, the Death Benefit must be completely distributed within
five years of the Owner's date of death. Distribution of Death Benefit Death of
Annuitant Upon the death of the Annuitant while the Owner is living, and before
the Annuity Commencement Date, we will pay the Death Benefit to the Beneficiary
unless there is a Contingent Annuitant.
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Contingent Annuitant
While the Annuitant is living, you may, by Request, designate or change a
Contingent Annuitant from time to time. A change of Contingent Annuitant will
take effect as of the date the request is processed at the Annuity
Administration Department at First GWL&A, unless a certain date is specified by
the Owner(s). Please note, you are not required to designate a Contingent
Annuitant.
- --------------------------------------------------------------------------------
If a Contingent Annuitant was named by the Owner(s) prior to the Annuitant's
death, and the Annuitant dies before the Annuity Commencement Date while the
Owner and Contingent Annuitant are living, no Death Benefit will be payable and
the Contingent Annuitant will become the Annuitant.
If the Annuitant dies after the date annuity payouts begin and before the entire
interest has been distributed, any benefit payable must be distributed to the
Beneficiary according to and as rapidly as under the payout option which was in
effect on the Annuitant's date of death.
If the deceased Annuitant is an Owner, or if a corporation or other
non-individual is an Owner, the death of the Annuitant will be treated as the
death of an Owner and the Contract will be subject to the "Death of Owner"
provisions described below.
Death of Owner Who Is Not the Annuitant
If there is a Joint Owner who is the surviving spouse and the Beneficiary of the
deceased Owner, the Joint Owner becomes the Owner and Beneficiary and the Death
Benefit will be paid to the Joint Owner or the Joint Owner may elect to take the
Death Benefit or to continue the Contract in force. If the Owner dies after
annuity payouts commence and before the entire interest has been distributed
while the Annuitant is living, any benefit payable will continue to be
distributed to the Annuitant as rapidly as under the payout option applicable on
the Owner's date of death. All rights granted the Owner under the Contract will
pass to any surviving Joint Owner and, if none, to the Annuitant. In all other
cases, we will pay the Death Benefit to the Beneficiary even if a Joint Owner
(who was not the Owner's spouse on the date of the Owner's death), the Annuitant
and/or the Contingent Annuitant are alive at the time of the Owner's death,
unless the sole Beneficiary is the deceased Owner's surviving spouse who may
elect to become the Owner and Annuitant and to continue the Contract in force.
Death of Owner Who Is the Annuitant If there is a Joint Owner who is the
surviving spouse of the deceased Owner and a Contingent Annuitant, the Joint
Owner becomes the Owner and the Beneficiary, the Contingent Annuitant will
become the Annuitant, and the Contract will continue in force.
If there is a Joint Owner who is the surviving spouse and the Beneficiary of the
deceased Owner but no Contingent Annuitant, the Joint Owner will become the
Owner, Annuitant and Beneficiary and may elect to take the Death Benefit or
continue the Contract in force.
In all other cases, we will pay the Death Benefit to the Beneficiary, even if a
Joint Owner (who was not the Owner's spouse on the date of the Owner's death),
Annuitant and/or Contingent Annuitant are alive at the time of the Owner's
death, unless the sole Beneficiary is the deceased Owner's surviving spouse who
may elect to become the Owner and Annuitant and to continue the Contract in
force.
<PAGE>
22
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Charges and Deductions
No amounts will be deducted from your Contributions except for any applicable
Premium Tax. As a result, the full amount of your Contributions (less any
applicable Premium Tax) are invested in the Contract. As more fully described
below, charges under the Contract are assessed only as deductions for: o Premium
Tax, if applicable, o Certain Transfers, o a Contract Maintenance Charge, and o
charges against your Variable Account Value for our assumption of mortality and
expense risks. Mortality and Expense Risk Charge We deduct a Mortality and
Expense Risk Charge from your Variable Account Value at the end of each
valuation period to compensate us for bearing certain mortality and expense
risks under the Contract. This is a daily charge equal to an effective annual
rate of 0.85%. The approximate portion of this charge attributable to mortality
risks is 0.68%. The approximate portion of this charge estimated to be
attributable to expense risk is 0.17%. We guarantee that this charge will never
increase beyond 0.85%. The Mortality and Expense Risk Charge is reflected in the
unit values of each of the Sub-Accounts you have selected. Thus, this charge
will continue to be applicable should you choose a variable annuity payout
option or the periodic withdrawal option. Annuity Account Values and annuity
payouts are not affected by changes in actual mortality experience incurred by
us. The mortality risks assumed by us arise from our contractual obligations to
make annuity payouts determined in accordance with the annuity tables and other
provisions contained in the Contract. This means that you can be sure that
neither the Annuitant's longevity nor an unanticipated improvement in general
life expectancy will adversely affect the annuity payouts under the Contract. We
bear substantial risk in connection with the Death Benefit before the Annuity
Commencement Date. The expense risk assumed is the risk that our actual expenses
in administering the Contracts and the Series Account will be greater than we
anticipated. If the Mortality and Expense Risk Charge is insufficient to cover
actual costs and risks assumed, the loss will fall on us. If this charge is more
than sufficient, any excess will be profit to us. Currently, we expect a profit
from this charge. Our expenses for distributing the Contracts will be borne by
our general assets, including any profits from this charge.
Contract Maintenance Charge
We currently deduct a $25 annual Contract Maintenance Charge from the Annuity
Account Value on each Contract anniversary date for accounts under $50,000. This
charge partially covers our costs for administering the Contracts and the Series
Account. Once you have started receiving payouts from the annuity, this charge
will stop unless you choose the periodic withdrawal option.
The Contract Maintenance Charge is deducted from the portion of your Annuity
Account Value allocated to the Schwab Money Market Sub-Account. If the portion
of your Annuity Account Value in this Sub-Account is not sufficient to cover the
Contract Maintenance Charge, then the charge or any portion of it will be
deducted on a pro rata basis from all your Sub-Accounts with current value. If
the entire Annuity Account is held in the Guarantee Period Fund or there are not
enough funds in any Sub-Account to pay the entire charge, then the Contract
Maintenance Charge will be deducted on a pro rata basis from amounts held in all
Guarantee Periods. There is no MVA on amounts deducted from a Guarantee Period
for the Contract Maintenance Charge. The Contract Maintenance Charge is
currently waived for Contracts with an Annuity Account Value of at least
$50,000. If your Annuity Account Value falls below $50,000, the Contract
Maintenance Charge will be reinstated until such time as your Annuity Account
Value is equal to or greater than $50,000. We do not expect a profit from
amounts received from the Contract Maintenance Charge. Transfer Fees There will
be a $10 charge for each Transfer in excess of 12 Transfers in any calendar
year. We do not expect a profit from the Transfer fee.
Expenses of the Portfolios
The value of the assets in the Sub-Accounts reflect the value of Portfolio
shares and therefore the fees and expenses paid by each Portfolio. A complete
description of the fees, expenses, and deductions is included in this Prospectus
under the Variable Annuity Fee Table and Portfolio Annual Expenses on pages 7
and 8.
<PAGE>
23
Premium Tax
We may be required to pay state Premium Taxes or retaliatory taxes currently
ranging from 0% to 3.5% in connection with Contributions or values under the
Contracts. Currently, the Premium Tax rate in New York for annuities is 0%.
Depending upon applicable state law, we will deduct charges for the Premium
Taxes we incur with respect to your Contributions, from amounts withdrawn, or
from amounts applied on the Payout Commencement Date. In some states, charges
for both direct Premium Taxes and retaliatory Premium Taxes may be imposed at
the same or different times with respect to the same Contribution, depending on
applicable state law.
Other Taxes
Under present laws, we will incur state or local taxes (in addition to the
Premium Tax described above) in New York. No charges are currently made for
taxes other than Premium Tax. However, we reserve the right to deduct charges in
the future for federal, state, and local taxes or the economic burden resulting
from the application of any tax laws that we determine to be attributable to the
Contract.
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Payout Options
During the Distribution Period, you can choose to receive payouts in four
ways--through periodic withdrawals, variable annuity payouts, fixed annuity
payouts or in a single, lump-sum payment. You may change the Payout Commencement
Date within 60 days prior to commencement of payouts or your Beneficiary may
change it upon the death of the Owner.
If this is an IRA, payouts which satisfy the minimum distribution requirements
of the Code must begin no later than April 1 of the calendar year following the
calendar year in which you become age 70 1/2. Periodic Withdrawals You may
request that all or part of the Annuity Account Value be applied to a periodic
withdrawal option. The amount applied to a periodic withdrawal is the Annuity
Account Value with any applicable MVA, less Premium Tax, if any.
In requesting periodic withdrawals, you must elect: o The withdrawal frequency
of either 1-, 3-, 6- or 12-month intervals o A minimum withdrawal amount of at
least $100 o The calendar day of the month on which withdrawals will be made
o One of the periodic withdrawal payout options discussed below-- you may
change the withdrawal option and/or the frequency once each calendar year
Your withdrawals may be prorated across the Guarantee Period Fund (if
applicable) and the Sub-Accounts in proportion to their assets. Or, they can be
made specifically from the Guarantee Period Fund and specific Sub-Account(s)
until they are depleted. Then, we will automatically prorate the remaining
withdrawals against any remaining Guarantee Period Fund and Sub-Account assets
unless you request otherwise. While periodic withdrawals are being received:
o You may continue to exercise all contractual rights, except that no
Contributions may be made. o A Market Value Adjustment, if applicable, will be
assessed for periodic withdrawals from Guarantee Periods
six or more months prior to its Guarantee Period maturity date.
o You may keep the same Sub-Accounts as you had selected before periodic
withdrawals began. o Charges and fees under the Contract continue to apply. o
Maturing Guarantee Periods renew into the shortest Guarantee Period then
available. Periodic withdrawals will cease on the earlier of the date:
o The amount elected to be paid under the option selected has been reduced to
zero. o The Annuity Account Value is zero. o You request that withdrawals stop.
o You purchase an annuity option. o The Owner or the Annuitant dies.
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If you choose to receive payouts from your Contract through periodic
withdrawals, you may select from the following payout options: Income for a
specified period (at least 36 months)--You elect the length of time over which
withdrawals will be made. The amount paid will vary based on the duration you
choose.
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Income of a specified amount (at least 36 months)--You elect the dollar amount
of the withdrawals. Based on the amount elected, the duration may vary. Interest
only--Your withdrawals will be based on the amount of interest credited to the
Guarantee Period Fund between withdrawals. Available only if 100% of your
Account Value is invested in the Guarantee Period Fund.
Minimum distribution--If you are using this Contract as an IRA, you may request
minimum distributions as specified under Code Section 401(a)(9). Any other form
of periodic withdrawal acceptable to us which is for a period of at least 36
months.
<PAGE>
24
If periodic withdrawals stop, you may resume making Contributions. However, we
may limit the number of times you may restart a periodic withdrawal program.
Periodic withdrawals made for any purpose may be taxable, subject to withholding
and to the 10% federal penalty tax if you are younger than age 59 1/2 . IRAs are
subject to complex rules with respect to restrictions on and taxation of
distributions, including penalty taxes.
In accordance with the provisions outlined in this section, you may request a
periodic withdrawal to remit fees paid to your Investment Manager or Financial
Advisor. There may be income tax consequences to any periodic withdrawal made
for this purpose. Please see "Cash Withdrawals" on page 19. Annuity Payouts You
can choose the date you'd like annuity payouts to start either when you purchase
the Contract or at a later date. The date you choose must be at least one year
after your initial Contribution. If you do not select a payout start date,
payouts will begin on the first day of the month of the Annuitant's 91st
birthday. You can change your selection at any time up to 30 days before the
annuity date you selected. If you have not elected a payout option within 30
days of the Annuity Commencement Date, the portion of your Annuity Account Value
held in your Fixed Account will be paid out as a fixed life annuity with a
guarantee period of 20 years. The Annuity Account Value held in the
Sub-Account(s) will be paid out as a variable life annuity with a guarantee
period of 20 years.
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If you choose to receive variable annuity payouts from your Contract, you may
select from the following payout options: Variable life annuity with guaranteed
period--This option provides for monthly payouts during a guaranteed period or
for the lifetime of the Annuitant, whichever is longer. The guaranteed period
may be 5, 10, 15 or 20 years.
Variable life annuity--This option provides for monthly payouts during the
lifetime of the Annuitant. The annuity terminates with the last payout due prior
to the death of the Annuitant. Since no minimum number of payouts is guaranteed,
this option may offer the maximum level of monthly payouts. It is possible that
only one payout may be made if the Annuitant died before the date on which the
second payout is due.
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The amount to be paid out is the Annuity Account Value on the Annuity
Commencement Date. The minimum amount that may be withdrawn from the Annuity
Account Value to purchase an annuity payout option is $2,000 with a Market Value
Adjustment, if applicable. If after the Market Value Adjustment, your Annuity
Account Value is less than $2,000, we may pay the amount in a single sum subject
to the Contract provisions applicable to a partial withdrawal.
Under an annuity payout option, you can receive payouts monthly, quarterly,
semi-annually or annually in payments which must be at least $50. We reserve the
right to make payouts using the most frequent payout interval which produces a
payout of at least $50.
If you elect to receive a single sum payment, the amount paid is the Surrender
Value. Amount of First Variable Payout The first payout under a variable annuity
payout option will be based on the value of the amounts held in each Sub-Account
you have selected on the 5th valuation date preceding the Annuity Commencement
Date. It will be determined by applying the appropriate rate to the amount
applied under the payout option. For annuity options involving life income, the
actual age and/or gender of the Annuitant will affect the amount of each payout.
We reserve the right to ask for satisfactory proof of the Annuitant's age. We
may delay annuity payouts until satisfactory proof is received. Since payouts to
older Annuitants are expected to be fewer in number, the amount of each annuity
payout under a selected annuity form will be greater for older Annuitants than
for younger Annuitants.
If the age or gender of the Annuitant has been misstated, the payouts
established will be made on the basis of the correct age or gender. If payouts
were too large because of misstatement, the difference with interest may be
deducted by us from the next payout or payouts. If payouts were too small, the
difference with interest may be added by us to the next payout. This interest is
at an annual effective rate which will not be less than the Contractual
Guarantee of a Minimum Rate of Interest.
Variable Annuity Units
The number of Annuity Units paid for each Sub-Account is determined by dividing
the amount of the first monthly payout by its Annuity Unit value on the 5th
valuation date preceding the date the first payout is due. The number of Annuity
Units used to calculate each payout for a Sub-Account remains fixed during the
Annuity Payout Period.
<PAGE>
25
Amount of Variable Payouts After the First Payout
Payouts after the first will vary depending upon the investment performance of
the Sub-Accounts. The subsequent amount paid from each Sub-Account is determined
by multiplying (a) by (b) where (a) is the number of Sub-Account Annuity Units
to be paid and (b) is the Sub-Account Annuity Unit value on the 5th valuation
date preceding the date the annuity payout is due. The total amount of each
variable annuity payout will be the sum of the variable annuity payouts for each
Sub-Account you have selected. We guarantee that the dollar amount of each
payout after the first will not be affected by variations in expenses or
mortality experience. Transfers After the Variable Annuity Commencement Date
Once annuity payouts have begun, no Transfers may be made from a fixed annuity
payout option to a variable annuity payout option, or vice versa. However, for
variable annuity payout options, Transfers may be made within the variable
annuity payout option among the available Sub-Accounts. Transfers after the
Annuity Commencement Date will be made by converting the number of Annuity Units
being Transferred to the number of Annuity Units of the Sub-Account to which the
Transfer is made. The result will be that the next annuity payout, if it were
made at that time, would be the same amount that it would have been without the
Transfer. Thereafter, annuity payouts will reflect changes in the value of the
new Annuity Units.
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If you choose to receive fixed annuity payouts from your Contract, you may
select from the following payout options: Income of specified amount--The amount
applied under this option may be paid in equal annual, semi-annual, quarterly or
monthly installments in the dollar amount elected for not more than 240 months.
Income for a specified period--Payouts are paid annually, semi-annually,
quarterly or monthly, as elected, for a selected number of years not to exceed
240 months.
Fixed life annuity with guaranteed period--This option provides monthly payouts
during a guaranteed period or for the lifetime of the Annuitant, whichever is
longer. The guaranteed period may be 5, 10, 15 or 20 years.
Fixed life annuity--This option provides for monthly payouts during the lifetime
of the Annuitant. The annuity ends with the last payout due prior to the death
of the Annuitant. Since no minimum number of payouts is guaranteed, this option
may offer the maximum level of monthly payouts. It is possible that only one
payout may be made if the Annuitant died before the date on which the second
payout is due. Any other form of a fixed annuity acceptable to us.
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Other restrictions
Once payouts start under the annuity payout option you select: o no changes can
be made in the payout option, o no additional Contributions will be accepted
under the Contract and
o no further withdrawals, other than withdrawals made to provide annuity
benefits, will be allowed. A portion or the entire amount of the annuity payouts
may be taxable as ordinary income. If, at the time the annuity payouts begin, we
have not received a proper written election not to have federal income taxes
withheld, we must by law withhold such taxes from the taxable portion of such
annuity payouts and remit that amount to the federal government (an election not
to have taxes withheld is not permitted for certain Qualified Contracts). State
income tax withholding may also apply. Please see "Federal Tax Matters" below
for details.
Annuity IRAs
The annuity date and options available for IRAs may be controlled by
endorsements, the plan documents, or applicable law. Under the Code, a Contract
purchased and used in connection with an Individual Retirement Account or with
certain other plans qualifying for special federal income tax treatment is
subject to complex "minimum distribution" requirements. Under a minimum
distribution plan, distributions must begin by a specific date and the entire
interest of the plan participant must be distributed within a certain specified
period of time. The application of the minimum distribution requirements vary
according to your age and other circumstances.
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Seek Tax Advice
The following discussion of the federal income tax consequences is only a brief
summary and is not intended as tax advice. The federal income tax consequences
discussed here reflect our understanding of current law and the law may change.
Federal estate tax consequences and state and local estate, inheritance, and
other tax consequences of ownership or receipt of distributions under a Contract
depend on your individual circumstances or the circumstances of the person who
receives the distribution. A tax adviser should be consulted for further
information.
<PAGE>
26
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Federal Tax Matters
The following discussion is a general description of federal income tax
considerations relating to the Contracts and is not intended as tax advice. This
discussion assumes that the Contract qualifies as an annuity contract for
federal income tax purposes. This discussion is not intended to address the tax
consequences resulting from all situations. If you are concerned about these tax
implications relating to the ownership or use of the Contract, you should
consult a competent tax adviser before initiating any transaction.
This discussion is based upon our understanding of the present federal income
tax laws as they are currently interpreted by the Internal Revenue Service. No
representation is made as to the likelihood of the continuation of the present
federal income tax laws or of the current interpretation by the Internal Revenue
Service. Moreover, no attempt has been made to consider any applicable state or
other tax laws. The Contract may be purchased on a non-tax qualified basis
("Non-Qualified Contract") or purchased and used in connection with IRAs. The
ultimate effect of federal income taxes on the amounts held under a Contract, on
annuity payouts, and on the economic benefit to you, the Annuitant, or the
Beneficiary may depend on the type of Contract, and on the tax status of the
individual concerned.
Certain requirements must be satisfied in purchasing an Annuity IRA and
receiving distributions from an Annuity IRA in order to continue receiving
favorable tax treatment. As a result, purchasers of Annuity IRAs should
- --------------------------------------------------------------------------------
Because tax laws, rules and regulations are constantly changing, we do not make
any guarantees about the Contract's tax status.
- --------------------------------------------------------------------------------
seek competent legal and tax advice regarding the suitability of the Contract
for their situation, the applicable requirements and the tax treatment of the
rights and benefits of the Contract. The following discussion assumes that an
Annuity IRA is purchased with proceeds and/or Contributions that qualify for the
intended special federal income tax treatment.
Taxation of Annuities
Section 72 of the Code governs taxation of annuities. You, as a "natural person"
will not generally be taxed on increases, if any, in the value of your Annuity
Account Value until a distribution occurs by withdrawing all or part of the
Annuity Account Value (for example, withdrawals or annuity payouts under the
annuity payout option elected). However, under certain circumstances, you
currently may be subject to taxation. In addition, an assignment, pledge, or
agreement to assign or pledge any portion of the Annuity Account Value generally
will be treated as a distribution. The taxable portion of a distribution (in the
form of a single sum payout or an annuity) is taxable as ordinary income. An IRA
Contract may not be assigned as collateral. If the Contract is not owned by a
natural person (for example, a corporation or certain trusts), you generally
must include in income any increase in the excess of the Annuity Account Value
over the "investment in the Contract" (discussed below) during each taxable
year. The rule does not apply where the non-natural person is the stated Owner
of a Contract and the beneficial Owner is a natural person. The rule also does
not apply where:
o The annuity Contract is acquired by the estate of a decedent. o The Contract
is held under an IRA. o The Contract is a qualified funding asset for a
structured settlement.
o The Contract is purchased on behalf of an employee upon termination of a
qualified plan. The following discussion generally applies to a Contract owned
by a natural person. Withdrawals In the case of a withdrawal under an IRA,
including withdrawals under the periodic withdrawal option, a portion of the
amount received may be non-taxable. The amount of the non-taxable portion is
generally determined by the ratio of the "investment in the Contract" to the
individual's total accrued benefit under the plan. The "investment in the
Contract" generally equals the amount of any nondeductible Contributions paid by
or on behalf of any individual. Special tax rules may be available for certain
distributions from an IRA.
<PAGE>
27
With respect to Non-Qualified Contracts, partial withdrawals, including periodic
withdrawals, are generally treated as taxable income to the extent that the
Annuity Account Value immediately before the withdrawal exceeds the "investment
in the Contract" at that time. If a partial withdrawal is made from a Guarantee
Period which is subject to a Market Value Adjustment, then the Annuity Account
Value immediately before the withdrawal will not be altered to take into account
the Market Value Adjustment. As a result, for purposes of determining the
taxable portion of the partial withdrawal, the Annuity Account Value will not
reflect the amount, if any, deducted from or added to the Guarantee Period due
to the Market Value Adjustment. Full surrenders are treated as taxable income to
the extent that the amount received exceeds the "investment in the Contract."
The taxable portion of any annuity payout is taxed at ordinary income tax rates.
Annuity Payouts Although the tax consequences may vary depending on the annuity
form elected under the Contract, in general, only the portion of the annuity
payout that represents the amount by which the Annuity Account Value exceeds the
investment in the Contract will be taxed. After the investment in the Contract
is recovered, the full amount of any additional annuity payouts is taxable. For
fixed annuity payouts, in general there is no tax on the portion of each payout
which represents the same ratio that the investment in the Contract bears to the
total expected value of the annuity payouts for the term of the payouts.
However, the remainder of each annuity payout is taxable. Once the investment in
the Contract has been fully recovered, the full amount of any additional annuity
payouts is taxable.
Penalty Tax
For distributions from a Non-Qualified Contract, there may be a federal income
tax penalty imposed equal to 10% of the amount treated as taxable income. In
general, however, there is no penalty tax on distributions: o Made on or after
the date on which the Owner reaches age 59 1/2.
o Made as a result of death or disability of the Owner.
o Received in substantially equal periodic payouts (at least annually) for
your life (or life expectancy) or the joint lives (or joint life
expectancies) of you and the Beneficiary.
Other exemptions or tax penalties may apply to distributions from a
Non-Qualified Contract or certain distributions from an IRA. For more details
regarding these exemptions or penalties consult a competent tax adviser.
Taxation of Death Benefit Proceeds
Amounts may be distributed from the Contract because of the death of an Owner or
the Annuitant. Generally such amounts are included in the income of the
recipient as follows: o If distributed in a lump sum, they are taxed in the same
manner as a full surrender, as described above. o If distributed under an
annuity form, they are taxed in the same manner as annuity payouts, as described
above.
Distribution at Death
In order to be treated as an annuity contract, the terms of the Contract must
provide the following two distribution rules: o If the Owner dies before the
date annuity payouts start, your entire interest must generally be distributed
within five years after the date of your death. If payable to a designated
Beneficiary, the distributions may be paid over the life of that designated
Beneficiary or over a period not extending beyond the life expectancy of
that Beneficiary, so long as payouts start within one year of your death. If
the sole designated Beneficiary is your spouse, the Contract may be
continued in the name of the spouse as Owner.
o If the Owner dies on or after the date annuity payouts start, and before the
entire interest in the Contract has been distributed, the remainder of your
interest will be distributed on the same or on a more rapid schedule than
that provided for in the method in effect on the date of death.
If the Owner is not an individual, then for purposes of the distribution at
death rules, the Primary Annuitant is considered the Owner. In addition, when
the Owner is not an individual, a change in the Primary Annuitant is treated as
the death of the Owner.
Distributions made to a Beneficiary upon the Owner's death from an IRA must be
made pursuant to the rules in Section 401(a)(9) of the Code. Transfers,
Assignments or Exchanges A transfer of ownership of a Contract, the designation
of an Annuitant, Payee or other Beneficiary who is not also the Owner, or the
exchange of a Contract may result in adverse tax consequences that are not
discussed in this Prospectus.
Multiple Contracts
All deferred, Non-Qualified Annuity Contracts that are issued by First GWL&A (or
our affiliates) to the same Owner during any calendar year will be treated as
one annuity contract for purposes of determining the taxable amount.
<PAGE>
28
Withholding
Annuity distributions generally are subject to withholding at rates that vary
according to the type of distribution and the recipient's tax status.
Recipients, however, generally are provided the opportunity to elect not to have
tax withheld from distributions. Certain distributions from IRAs are subject to
mandatory federal income tax withholding.
Section 1035 Exchanges
Internal Revenue Code Section 1035 provides that no gain or loss shall be
recognized on the exchange of one insurance contract for another. Generally,
contracts issued in an exchange for another annuity contract are treated as new
for purposes of the penalty and distribution at death rules. Individual
Retirement Annuities The Contract may be used with IRAs as described in Section
408 of the Code which permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity. Also,
certain kinds of distributions from certain types of qualified and non-qualified
retirement plans may be "rolled over" following the rules set out in the
Internal Revenue Code. If you purchase this Contract for use with an IRA, you
will be provided with supplemental information. You also have the right to
revoke your purchase within seven days of purchase of the IRA Contract.
If a Contract is purchased to fund an IRA, the Annuitant must also be the Owner.
In addition, if a Contract is purchased to fund an IRA, minimum distributions
must commence not later than April 1st of the calendar year following the
calendar year in which you attain age 70 1/2. You should consult your tax
adviser concerning these matters.
Various tax penalties may apply to Contributions in excess of specified limits,
distributions that do not satisfy specified requirements, and certain other
transactions. The Contract will be amended as necessary to conform to the
requirements of the Internal Revenue Code if there is a change in the law.
Purchasers should seek competent advice as to the suitability of the Contract
for use with IRAs. When you make your initial Contribution, you must specify
whether you are purchasing a Non-Qualified Contract or an IRA. If the initial
Contribution is made as a result of an exchange or surrender of another annuity
contract, we may require that you provide information with regard to the federal
income tax status of the previous annuity contract.
We will require that you purchase separate Contracts if you want to invest money
qualifying for different annuity tax treatment under the Code. For each separate
Contract you will need to make the required minimum initial Contribution.
Additional Contributions under the Contract must qualify for the same federal
income tax treatment as the initial Contribution under the Contract. We will not
accept an additional Contribution under a Contract if the federal income tax
treatment of the Contribution would be different from the initial Contribution.
If a Contract is issued in connection with an employer's Simplified Employee
Pension plan, Owners, Annuitants and Beneficiaries are cautioned that the rights
of any person to any of the benefits under the Contract will be subject to the
terms and conditions of the plan itself, regardless of the terms and conditions
of the Contract.
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Assignments or Pledges
Generally, rights in the Contract may be assigned or pledged for loans at any
time during the life of the Annuitant. However, if the Contract is an IRA, you
may not assign the Contract as collateral. If a non-IRA Contract is assigned,
the interest of the assignee has priority over your interest and the interest of
the Beneficiary. Any amount payable to the assignee will be paid in a single
sum. A copy of any assignment must be submitted to Annuity Administration
Department at First GWL&A. All assignments are subject to any action taken or
payout made by First GWL&A before the assignment was processed. We are not
responsible for the validity or sufficiency of any assignment. If any portion of
the Annuity Account Value is assigned or pledged for a loan, it may be treated
as a distribution. Please consult a competent tax adviser for further
information.
<PAGE>
29
<PAGE>
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Performance Data
From time to time, we may advertise yields and average annual total returns for
the Sub-Accounts. In addition, we may advertise the effective yield of the
Schwab Money Market Sub-Account. These figures will be based on historical
information and are not intended to indicate future performance. Money Market
Yield The yield of the Schwab Money Market Sub-Account refers to the annualized
income generated by an investment in that Sub-Account over a specified 7-day
period. It is calculated by assuming that the income generated for that
seven-day period is generated each 7-day period over a period of 52 weeks and is
shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned by an investment in that Sub-Account is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of the assumed reinvestment.
Average Annual Total Return
The table on the following page illustrates standardized and non-standardized
average annual total return for one-, three-, five- and ten-year periods (or
since inception, if less than 10 years) ended December 31, 1999. Average annual
total return quotations represent the average annual compounded rate of return
that would equate an initial investment of $1,000 to the redemption value of
that investment (excluding Premium Taxes, if any) as of the last day of each of
the periods for which total return quotations are provided. o Both the
standardized and non-standardized data reflect the deduction of all fees and
charges under the
Contract. The standardized data is calculated from the inception date of the
Sub-Account and the non-standardized data is calculated for periods
preceding the inception date of the Sub-Account. Some of the Sub-Accounts do
not have standardized performance information. For additional information
regarding yields and total returns calculated using the standard
methodologies briefly described herein, please refer to the Statement of
Additional Information.
31
<PAGE>
<TABLE>
30
<S> <C> <C> <C> <C> <C> <C>
Performance Data
Standardized Performance Data Non-Standardized Performance Data
Sub-Account 1 year Since Inception 1 Year 3 years 5 year 10 year Since Inception Date
Inception Date of Inception of Underlying
of Sub-Account of Portfolio
Sub-Account Underlying
Portfolio
(if less
than 10
years)
Alger American Growth 32.54% 34.68% 5/1/97 N/A 34.37% 29.81% 21.84% N/A 1/9/89
American Century VP International 62.67% 29.46% 5/1/97 N/A 31.16% 23.17% N/A 18.98% 5/1/94
Baron Capital Asset: Insurance Shares N/A 14.35% 5/3/99 34.55% N/A N/A N/A 58.67% 10/1/98
Berger IPT-Small Company Growth 89.84% 40.20% 5/1//97 N/A 32.12% N/A N/A 25.21% 5/1/96
Deutsche Asset Management VIT EAFE(R) N/A 20.01% 5/3/99 26.52% N/A N/A N/A 16.05% 8/22/97
Equity Index (formerly the BT
Insurance Funds Trust EAFE(R)Equity
Index)
Deutsche Asset Management VIT Small N/A 16.48% 5/3/99 19.14% N/A N/A N/A 8.47% 8/25/97
Cap Index (formerly the BT Insurance
Funds Trust Small Cap Index)
Dreyfus Variable Investment Fund N/A 2.43% 5/3/99 10.50% 21.89% 24.45% N/A 19.03% 4/5/93
Appreciation
Dreyfus Variable Investment Fund N/A 7.09% 5/3/99 15.89% 13.97% 23.26% N/A 19.82% 5/2/94
Growth and Income
Federated American Leaders II 5.77% 14.58% 5/1/97 N/A 17.42% 20.86% N/A 17.09% 2/1/94
Federated U.S. Government Securities -1.45% 4.29% 5/1/97 N/A 4.17% 4.62% N/A 4.35% 3/29/94
II
Federated Utility II 0.83% 12.57% 5/1/97 N/A 12.67% 14.27% N/A 12.40% 4/14/94
INVESCO VIF-High Yield 8.32% 16.97% 5/1/97 N/A 8.12% 11.65% N/A 10.36% 5/27/94
INVESCO VIF-Equity Income 13.87% 7.39% 5/1/97 N/A 18.29% 20.79% N/A 19.34% 8/10/94
INVESCO VIF-Technology N/A N/A 3/1/00 156.79% N/A N/A N/A 64.13% 5/21/97
Janus Aspen Growth 42.78% 33.30% 5/1/97 N/A 32.71% 28.73% N/A 23.18% 9/13/93
Janus Aspen Worldwide Growth 63.07% 35.19% 5/1/97 N/A 36.17% 32.45% N/A 28.59% 9/13/93
Janus Aspen Flexible Income N/A -0.45% 5/3/99 0.74% 6.49% 9.93% N/A 7.58% 9/13/93
Janus Aspen International Growth N/A 70.44% 5/3/99 80.73% 35.15% 32.12% N/A 27.10% 5/2/94
Montgomery Variable Series: Growth 19.78% -4.75% 5/1/97 N/A 15.93% N/A N/A 19.00% 2/9/96
Prudential Series Fund Equity Class NA -1.47% 5/4/99 N/A N/A N/A N/A -1.47% 5/4/99
II
SAFECO RST Equity 8.38% 16.45% 5/1/97 N/A 18.44% 21.26% 16.36% N/A 4/3/87
SAFECO RST Growth Opportunities N/A 14.38% 5/3/99 4.74% 14.86% 22.64% N/A 22.46% 1/7/93
Schwab MarketTrack Growth II 18.62% 16.91% 5/1/97 N/A 17.98% N/A N/A 18.23% 11/1/96
Schwab S&P 500 19.45% 23.48% 5/1/97 N/A 25.83% N/A N/A 26.29% 11/1/96
Scudder Variable Life Investment Fund N/A 26.44% 5/3/99 34.08% 30.16% 27.36% 17.03% N/A 7/16/85
Capital Growth
Scudder Variable Life Investment Fund N/A -6.37% 5/3/99 4.95% 13.00% 17.95% N/A 16.55% 5/24/94
Growth and Income
Strong Schafer Value II N/A -13.58% 5/3/99 -3.70% N/A N/A N/A -1.48% 10/10/97
Van Kampen LIT-Morgan Stanley Real -4.22% -4.79% 9/15/97 N/A 0.36% N/A N/A 9.94% 7/3/95
Estate Securities
</TABLE>
<PAGE>
31
Performance information and calculations for any Sub-Account are based only on
the performance of a hypothetical Contract under which the Annuity Account Value
is allocated to a Sub-Account during a particular time period. Performance
information should be considered in light of the investment objectives and
policies and characteristics of the Portfolios in which the Sub-Account invests
and the market conditions during the given time period. It should not be
considered as a representation of what may be achieved in the future. Reports
and promotional literature may also contain other information including: o the
ranking of or asset allocation/investment strategy of any Sub-Account derived
from rankings of variable
annuity separate accounts or their investment products tracked by Lipper
Analytical Services, Inc., VARDS, Morningstar, Value Line, IBC/Donoghue's
Money Fund Report, Financial Planning Magazine, Money Magazine, Bank Rate
Monitor, Standard & Poor's Indices, Dow Jones Industrial Average, and other
rating services, companies, publications or other people who rank separate
accounts or other investment products on overall performance or other
criteria, and
o the effect of tax-deferred compounding on investment returns, or returns in
general, which may be illustrated by graphs, charts, or otherwise, and which
may include a comparison, at various points in time, of the return from an
investment in a Contract (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a currently taxable
basis. Other ranking services and indices may be used.
o
We may from time to time also advertise cumulative (non-annualized) total
returns, yield and standard total returns for the Sub-Accounts. We may also
advertise performance figures for the Sub-Accounts based on the performance of a
Portfolio prior to the time the Series Account commenced operations.
For additional information regarding the calculation of other performance data,
please refer to the Statement of Additional Information.
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Distribution of the Contracts
Charles Schwab & Co., Inc. (Schwab) is the principal underwriter and distributor
of the Contracts. Schwab is registered with the Securities and Exchange
Commission as a broker/dealer and is a member of the National Association of
Securities Dealers, Inc. (NASD). Its principal offices are located at 101
Montgomery, San Francisco, California 94104, telephone 800-838-0649. Certain
administrative services are provided by Schwab to assist First GWL&A in
processing the Contracts. These services are described in written agreements
between Schwab and First GWL&A. First GWL&A has agreed to indemnify Schwab (and
its agents, employees, and controlling persons) for certain damages arising out
of the sale of the Contracts, including those arising under the securities laws.
<PAGE>
32
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Selected Financial Data
The following is a summary of certain financial data of First GWL&A. This
summary has been derived in part from, and should be read in conjunction with,
the consolidated financial statements of First GWL&A included herein (Financial
Statements and Supplementary Data).
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For the Period
from April 4,
1997
(inception)
through
(Dollars in Thousands) For the years ended December 31, December 31
-----------------------------------
1999 1998 1997
---------------- --------------- ----------------
INCOME STATEMENT DATA
Premium and fee income $ 9,836 $ 78 $ 21
Net investment income 6,278 3,367 243
Realized investment gains (6) 74
---------------- --------------- ----------------
---------------- --------------- ----------------
Total Revenues 16,108 3,519 264
---------------- --------------- ----------------
---------------- --------------- ----------------
Total benefits and expenses 14,444 2,124 213
Income tax expense 641 603 18
---------------- --------------- ----------------
Net Income $ 1,023 $ 792 $ 33
================ =============== ================
BALANCE SHEET DATA
Investment assets $ 112,799 $ 80,353 $ 5,381
Separate account assets 39,881 23,836 9,045
Total assets 171,710 107,095 16,154
Total policyholder 98,421 64,445 84
liabilities
Total stockholder's equity 30,614 16,642 6,538
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations The Company
First Great-West Life & Annuity Insurance Company (the "Company") is a stock
life insurance company organized under the laws of the State of New York in
1996. The Company is a wholly-owned subsidiary of Great-West Life & Annuity
Insurance Company ("GWL&A"), a life insurance company domiciled in Colorado.
GWL&A is a wholly-owned subsidiary of GWL&A Financial Inc. ("GWL&A Financial"),
a Delaware holding company. GWL&A Financial is an indirect wholly-owned
subsidiary of The Great-West Life Assurance Company ("Great-West Life"), a
Canadian life insurance company. Great-West Life is a subsidiary of Great-West
Lifeco Inc. ("Great-West Lifeco"), a Canadian holding company. Great-West Lifeco
is a subsidiary of Power Financial Corporation ("Power Financial"), a Canadian
holding company with substantial interests in the financial services industry.
Power Financial Corporation is a subsidiary of Power Corporation of Canada
("Power Corporation"), a Canadian holding and management company. Mr. Paul
Desmarais, through a group of private holding companies, which he controls, has
voting control of Power Corporation.
Shares of Great-West Lifeco, Power Financial and Power Corporation are traded
publicly in Canada. The Company is authorized to engage in the sale of life
insurance, annuities, and accident and health insurance. The Company became
licensed to do business in New York and Iowa in 1997. The Company operates in
the following two business segments:
oEmployee Benefits - group life and health products
Financial Services - savings products for both public and non-profit
employers and individuals (including 401, 403(b), 408 and 457 plans),
and life insurance products for individuals and
businesses.o
<PAGE>
33
The following discussion contains forward-looking statements. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments. In
particular, statements using verbs such as "expect," "anticipate," "believe" or
words of similar import generally involve forward-looking statements. Without
limiting the foregoing, forward-looking statements include statements which
represent the Company's beliefs concerning future or projected levels of sales
of the Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the Company's control and many of which, with respect
to future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments, some of which may be national in scope, such as general
economic conditions and interest rates, some of which may be related to the
insurance industry generally, such as pricing competition, regulatory
developments and industry consolidation, and others of which may relate to the
Company specifically, such as credit, volatility and other risks associated with
the Company's investment portfolio, and other factors. Readers are also directed
to consider other risks and uncertainties discussed in documents filed by the
Company with the Securities and Exchange Commission.
Management's discussion and analysis of financial condition and results of
operations of the Company for the years ended 1999 and 1998 follows.
COMPANY RESULTS OF OPERATIONS
Consolidated Results
The Company's consolidated net income increased $231 thousand in 1999 when
compared to the year ended December 31, 1998, reflecting net income in the
Employee Benefits segment during 1999, offset by a decrease in the Financial
Services segment. The Employee Benefits segment contributed $446 thousand to the
improved consolidated results compared to the Financial Services segment, which
recorded a $215 thousand decrease. Of total consolidated net income in 1999 and
1998, the Employee Benefits segment contributed 44% and 0%, respectively, while
the Financial Services segment contributed 56% and 100%, respectively. The
Employee Benefits segment began operations in 1999 by entering into an
assumption reinsurance agreement on December 1, 1999 with AH&L NY to acquire a
block of life and health insurance premium. The subsequent operations resulting
from this agreement resulted in net income of $446 thousand being recorded in
1999. The Financial Services net income decreased in 1999 primarily due to
realized losses on fixed maturities in 1999 of $6 thousand compared to realized
gains in 1998 of $74 thousand and a strengthening of BOLI reserves by $300
thousand.
The Company's consolidated net income increased $759 thousand in 1998 when
compared to the year ended December 31, 1997. During 1998 the Company received
approval from the New York Department of Insurance to market its BOLI product.
The growth in net income in 1998 was primarily due to higher investment income
resulting from BOLI sales as well as a capital infusion from GWL&A of $8.6
million in December 1998. The Company's operations during the period April 4,
1997 (inception) to December 31, 1997 were focused on obtaining a New York
insurance license (which occurred May 1997), and preliminary marketing
activities. In 1999 total revenues increased $12.6 million to $16.1 million when
compared to the year ended December 31, 1998. The growth in revenues in 1999 was
comprised of increased premium and fee income of $9.8 million, increased net
investment income of $2.9 million and decreased realized gain on investments of
$0.1 million. In 1998 total revenues increased $3.2 million to $3.5 million when
compared to the year ended December 31, 1997. The growth in revenues in 1998 was
comprised of increased net investment income of $3.1 million and increased
realized gains on investments of $0.1 million.
The increased premium and fee income in 1999 was comprised of growth in Employee
Benefits and Financial Services premium and fee income of $9.6 million and $0.2
million, respectively. Net investment income grew to $6.3 million and $3.4
million in 1999 and 1998, respectively, from $243 thousand in 1997, primarily
due to BOLI sales as well as capital infusions from GWL&A of $16 million and
$8.6 million in 1999 and 1998, respectively. The growth in both years was in the
Financial Services segment. Realized investment income from fixed maturities
decreased from a realized investment gain of $74 thousand in 1998 to a realized
investment loss of $6 thousand in 1999. There were no realized investment gains
in 1997. The increase in interest rates in 1999 contributed to fixed maturity
losses, while the decrease in interest rates in 1998 resulted in gains on sales
of fixed maturities.
Total benefits and expenses increased $12.3 million in 1999 when compared to the
year ended December 31, 1998. The Employee Benefits segments contributed $8.9
million of the increase in 1999 compared to the Financial Services segment,
which contributed $3.4 million. The increase in total benefits and expenses was
$1.9 million in 1998. The increase in Employee Benefits in 1999 reflects the
impact of operating in a new segment. The increase in Financial Services in both
years related to higher interest credits on BOLI account balances and increased
operating expenses associated with growth in the Company's business.
<PAGE>
34
Income tax expense increased $38 thousand in 1999 when compared to the year
ended December 31, 1998. Income tax expense increased $585 thousand in 1998 when
compared to the year ended December 31, 1997. The increase in income tax expense
in 1999 reflected higher net earnings. The increase in income tax expense from
1997 to 1998 reflected higher earnings in 1998 as well as state income taxes.
The Company's effective tax rate was 38.5% in 1999 compared to 43.2% in 1998,
due to lower state income taxes in 1999. The Company's effective tax rate was
43.2% in 1998 compared to 35% in 1997, due to the inclusion of state income
taxes in 1998. In evaluating its results of operations, the Company also
considers net changes in deposits received for investment-type contracts and
deposits to separate accounts.
Deposits for investment-type contracts decreased $42.5 million in 1999 when
compared to the year ended December 31, 1998, primarily due to BOLI deposits of
$62.5 million in 1998 compared to $20.0 million in 1999. Deposits for
investment-type contracts increased $62.4 million in 1998 when compared to the
year ended December 31, 1997, which represents the BOLI deposits of $62.5
million in 1998. BOLI sales are single premium and very large in nature, and
therefore, can vary from year to year. Deposits for separate accounts decreased
$3.4 million in 1999 when compared to the year ended December 31, 1998. Deposits
for separate accounts increased $3.7 million in 1998 when compared to the year
ended December 31, 1997.
Other Matters
On October 6, 1999, GWL&A entered into an agreement with Allmerica Financial
Corporation ("Allmerica") to acquire Allmerica's group life and health insurance
business on March 1, 2000. The Allmerica policies resident in the State of New
York are expected to be underwritten and retained by the Company upon each
policy renewal date. The purchase price is based on a percentage of the premium
and administrative fees in force at March 1, 2000 and March 1, 2001.
EMPLOYEE BENEFITS RESULTS OF OPERATIONS
As discussed above, on December 1, 1999, the Employee Benefits segment entered
into a reinsurance transaction with AH&L NY. The results below reflect the
operations for the Employee Benefits segment:
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For the Period
From April 4,
1997
(inception)
through
(Thousands) For the years ended December 31, December 31
-----------------------------------
1999 1998 1997
---------------- --------------- ----------------
INCOME STATEMENT DATA
Premium and fee income $ 9,625 $ $
Net investment income
Realized investment gains
---------------- --------------- ----------------
---------------- --------------- ----------------
Total Revenues 9,625
---------------- --------------- ----------------
---------------- --------------- ----------------
Policyholder benefits 8,378
Operating expenses 506
---------------- --------------- ----------------
Total benefits and expenses 8,884
---------------- --------------- ----------------
Income from operations 741
Income tax expense 295
---------------- --------------- ----------------
Net Income $ 446 $ $
================ =============== ================
</TABLE>
<PAGE>
In 2000, the Company will build upon the acquisition of the AH&L NY business
though new sales and the addition of the Allmerica group life and health
business beginning
March 1, 2000. The Company also intends to market 401(k) savings plans to
customers to complete the overall product offering in the Employee Benefits
segment.
<PAGE>
35
FINANCIAL SERVICES RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Financial Services
segment:
<PAGE>
(Thousands) Years Ended December 31,
-----------------------------------------
INCOME STATEMENT 1999 1998 1997
------------ ----------- -----------
DATA
Premium and fee income $ 211 $ 78 $ 21
Net investment income 6,278 3,367 243
Realized investment gains (losses) (6) 74
------------ ----------- -----------
Total Revenues 6,483 3,519 264
Policyholder benefits 4,600 1,737 0
Operating expenses 960 387 213
------------ ----------- -----------
Total benefits and expenses 5,560 2,124 213
------------ ----------- -----------
Income from operations 923 1,395 51
Income tax expense 346 603 18
------------ ----------- -----------
Net Income $ 577 $ 792 $ 33
============ =========== ===========
Deposits for investment-type
Contracts $ 20,000 $ 62,528 $ 84
Deposits to separate accounts 9,389 12,776 9,121
<PAGE>
During 1999, the Financial Services segment experienced increased net investment
income and increased total benefits and expenses. Net income for Financial
Services decreased $215 thousand in 1999 and increased $759 thousand in 1998.
The decrease in 1999 was due primarily to higher benefits related to BOLI
products and realized losses on fixed maturities in 1999 compared to realized
gains in 1998. The improvement in earnings in 1998 reflected higher earnings
from an increased asset base, an increase in investment margins, and larger
realized gains on fixed maturities.
Premium and fee income increased $133 thousand in 1999 compared to an increase
of $57 thousand in 1998. The increase in 1999 was driven by higher fee income
related to growth in the separate accounts. Deposits for investment type
contracts included BOLI deposits of $20.0 million in 1999 compared to $62.5
million in 1998. The large BOLI deposits in the prior year were attributable to
one large transaction of $50.0 million. The nature of this type of product leads
to large fluctuations from year to year. Deposits for separate accounts
decreased $3.4 million in 1999 to $9.4 million. In 1998 the deposits for
separate accounts increased $3.7 million to $12.8 million. The separate account
assets have increased by $16.0 million and $14.8 million in 1999 and 1998,
respectively, due to the strength of the equity markets in the United States and
new deposits.
Net investment income increased $2.9 million in 1999 compared to $3.1 million in
1998 primarily due to BOLI sales as well as capital infusions from GWL&A of $16
million and $8.6 million in 1999 and 1998, respectively. Total benefits and
expenses increased $3.4 million in 1999 compared to $1.9 million in 1998
primarily due to higher interest credits on BOLI balances and increased
operating expenses.
In 2000, the Company will focus on improving its Internet capability in the
annuity markets. INVESTMENTS The Company's primary investment objective is to
acquire assets whose durations and cash flows reflect the characteristics of the
Company's liabilities, while meeting industry, size, issuer and geographic
diversification standards. Formal liquidity and credit quality parameters have
also been established. The Company follows rigorous procedures to control
interest rate risk and observes strict asset and liability matching guidelines.
These guidelines are designed to ensure that even in changing interest rate
environments, the Company's assets will always be able to meet the cash flow and
income requirements of its liabilities. Through dynamic modeling, using
state-of-the-art software to analyze the effects of a wide range of possible
market changes upon investments and policyholder benefits, the Company ensures
that its investment portfolio is appropriately structured to fulfill financial
obligations to its policyholders.
<PAGE>
36
A summary of the Company's general account invested assets follows:
<PAGE>
<TABLE>
<S> <C> <C>
(Dollars in Thousands) 1999 1998
---------------- ---------------
Fixed maturities, available for sale, at fair value $ 74,149 $ 65,154
Fixed maturities, held-to-maturity, at amortized 37,050 14,500
cost
Short-term investments 1,600 699
---------------- ---------------
Total invested assets $ 112,799 $ 80,353
================ ===============
</TABLE>
<PAGE>
Fixed maturity investments include public and privately placed corporate bonds
government bonds and mortgage-backed and asset-backed securities. Private
placement investments, which are primarily in the held-to-maturity category, are
generally less marketable than publicly traded assets, yet they typically offer
covenant protection which allows the Company, if necessary, to take appropriate
action to protect its investment. The Company believes that the cost of the
additional monitoring and analysis required by
private placements is more than offset by their enhanced yield. One of the
Company's primary objectives is to ensure that its fixed maturity portfolio is
maintained at a high average quality, so as to limit credit risk. If not
externally rated, the securities are rated by the Company on a basis intended to
be similar to that of the rating agencies.
The distribution of the fixed maturity portfolio (both available-for-sale and
held-to-maturity) by credit rating is summarized as:
<PAGE>
<TABLE>
<S> <C> <C>
Credit Rating 1998 1998
- -------------
-------------- ---------------
AAA 57.4% 62.7%
AA 11.2 6.5
A 10.1 13.1
BBB 21.3 17.7
-------------- ---------------
TOTAL 100.0% 100.0%
============== ===============
</TABLE>
<PAGE>
37
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that are dependent upon the
principal product lines currently offered. Life insurance and pension plan
reserves are primarily long-term liabilities. Life insurance and pension plan
reserve requirements are usually stable and predictable, and are supported by
long-term, fixed income investments.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio. Liquidity for the
Company is strong, as evidenced by significant amounts of short-term investments
and cash, which totaled $7.0 million and $1.4 million as of December 31, 1999
and December 31, 1998, respectively.
As discussed above, the Company and GWL&A have an agreement whereby GWL&A has
undertaken to provide the Company with certain financial support related to
maintaining required statutory surplus and liquidity.
REGULATION
Insurance Regulation
The Company must comply with the insurance laws of New York and Iowa. These laws
govern the admittance of assets, premium rating methodology, policy forms,
establishing reserve requirements and solvency standards, maximum interest rates
on life insurance policy loans and minimum rates for accumulation of surrender
values and the type, amounts and valuation of investments permitted.
The Company's operations and accounts are subject to examination by the New York
Insurance Department at specified intervals. New York has substantially adopted
into law the National Association of Insurance Commissioners' risk-based capital
rules and other financial ratios for life insurance companies. Based on the
Company's December 31, 1999 statutory financial reports, the Company has
risk-based capital well in excess of that required; however, the Company did
fall outside the usual range of some of the ratios due to the start-up nature of
its operations.
Insurance Holding Company Regulations
The Company is subject to and complies with insurance holding company
regulations in New York. These regulations contain certain restrictions and
reporting requirements for transactions between an insurer and its affiliates,
including the payments of dividends. They also regulate changes in control of an
insurance company.
Securities Law
The Company is subject to various levels of regulation under federal securities
laws. The Company's separate accounts and annuity products are registered under
the Investment Company Act of 1940 and the Securities Act of 1933.
<PAGE>
37
Potential Legislation
United States legislation and administrative developments in various areas,
including pension regulation, financial services regulation, health care
legislation and the insurance industry could significantly and adversely affect
the Company in the future. Congress has from time to time considered legislation
relating to health care reform and managed care issues (including patients'
rights, privacy of medical records and managed care plan or enterprise
liability), changes in the deferral of taxation on the accretion of value within
certain annuities and life insurance products, changes in regulation for the
Employee Retirement Income Security Act of 1974, as amended, and changes as to
the availability of Section 401(k) for individual retirement accounts.
It is not possible to predict whether future legislation or regulation adversely
affecting the business of the Company will be enacted and, if enacted, the
extent to which such legislation or regulation will have an effect on the
Company and its competitors.
RATINGS
The Company is rated by a number of nationally recognized rating agencies. The
ratings represent the opinion of the rating agencies on the financial strength
of the Company and its ability to meet the obligations of its insurance
policies. The ratings take into account an agreement whereby GWL&A has
undertaken to provide the Company with certain financial support related to
maintaining required statutory surplus and liquidity.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Rating Agency Measurement Rating
- ------------------------------------ ------------------------------ --------------
A.M. Best Company Financial Condition and AA+ *
Operating Performance
Duff & Phelps Corporation Claims Paying Ability AAA *
Standard & Poor's Corporation Financial Strength AA **
Moody's Investors Service Financial Strength Aa3 ***
<PAGE>
</TABLE>
* Highest ratings available.
** Third highest rating out of 21 rating categories. *** Fourth highest
rating out of 21 rating categories.
<PAGE>
Miscellaneous
Significant BOLI deposits were received during 1999. Although the Company's BOLI
business is comprised of a few customers, which account for the majority of the
total deposits, the BOLI contracts allow for no more than 20% surrenders in any
given year.
The Company and GWL&A have an administration services agreement whereby GWL&A
administers, distributes, and underwrites business for the Company and
administers the Company's investment portfolio.
<PAGE>
38
Directors and Executives Officers of the Registrant
Following is information concerning First GWL&A's directors and executive
officers, together with their principal occupation for the past five years.
Unless otherwise indicated all of the directors and executive officers have been
engaged for not less than five years in their present principal occupations or
in another executive capacity with the companies or firms identified.
Directors are elected annually to serve until the following annual meeting of
shareholders. The appointments of executive officers are confirmed annually.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Director Served as Principal Occupation(s) For
Director From Last Five Years
Marcia D. Alazraki 1996 Partner, Kalkines, Arky, Zall & Bernstein LLP (a
law firm) since January, 1998; previously
Counsel, Simpson Thacher & Bartlett (a law firm)
James Balog (1) 1997 Company Director
James W. Burns, O.C. 1997 Chairman of the Boards of Great-West Lifeco,
Great-West Life, London Insurance Group Inc. and
London Life Insurance Company; Deputy Chairman,
Power Corporation
Paul Desmarais, Jr. 1997 Chairman and Co-Chief Executive Officer, Power
Corporation; Chairman, Power Financial
Robert Gratton 1997 Chairman of the Board of GWL&A, President and
Chief Executive Officer, Power Financial
N. Berne Hart (1) 1997 Company Director
Stuart Z. Katz 1997 Partner, Fried, Frank, Harris, Shriver & Jacobson
(a law firm)
William T. McCallum 1997 Chairman, President and Chief Executive Officer
of First GWL&A, President and Chief Executive
Officer, GWL&A, President and Chief Executive
Officer, United States Operations, Great-West Life
Brian E. Walsh (1) 1997 Co-Founder and Managing Partner, Veritas Capital
Management, LLC (a merchant banking company)
since September 1997; previously Partner, Trinity
L.P. (an investment company) from January 1996;
previously Managing Director and Co-Head, Global
Investment Bank, Bankers Trust Company (an
investment/commercial bank)
(1) Member of the Audit Committee
</TABLE>
The following lists directorships held by the directors of First GWL&A, on
companies whose securities are traded publicly in the United States or that are
investment companies registered under the Investment Company Act of 1940.
J. Balog Transatlantic Holdings
Phoenix Investment Partners
P. Desmarais, Jr. Rhodia S.A.
<PAGE>
39
Executive Officers
Executive Officer Served as Executive Principal Occupation(s) For
Officer From Last Five Years
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
William T. McCallum 1997 Chairman, President and Chief Executive
Chairman, President and Officer of First GWL&A, President and
Chief Executive Officer Chief Executive Officer, GWL&A,
President and Chief Executive Officer,
United States Operations, Great-West Life
Mitchell T.G. Graye 1997 Executive Vice President and Chief
Executive Vice President Financial Officer of First GWL&A and
and Chief Financial Officer GWL&A, Executive Vice President and
Chief Financial Officer, United States,
Great-West Life
James D. Motz 1997 Executive Vice President, Employee
Executive Vice President, Benefits of First GWL&A, GWL&A and
Employee Benefits Great-West Life
Douglas L. Wooden 1997 Executive Vice President, Financial
Executive Vice President, Services of the Company, GWL&A and
Financial Services Great-West Life
John T. Hughes 1997 Senior Vice President, Chief Investment
Senior Vice President, Officer of the Company and GWL&A, Senior
Chief Investment Officer Vice President, Chief Investment
Officer, United States, Great-West Life
D. Craig Lennox 1997 Senior Vice President, General Counsel
Senior Vice President, and Secretary of the Company and GWL&A,
General Counsel and Senior Vice President and Chief U.S.
Secretary Legal Officer, Great-West Life
Steve H. Miller 1997 Senior Vice President, Employee Benefits
Senior Vice President, Sales of the Company, GWL&A and
Employee Benefits Sales Great-West Life
Martin Rosenbaum 1997 Senior Vice President, Employee Benefits
Senior Vice President, of the Company, GWL&A and Great-West Life
Employee Benefits
Gregory E. Seller 1997 Senior Vice President, Government
Senior Vice President, Markets of the Company, GWL&A and
Government Markets Great-West Life
Robert K. Shaw 1997 Senior Vice President, Individual
Senior Vice President, Markets of the Company, GWL&A and
Individual Markets Great-West Life
</TABLE>
<PAGE>
40
Executive Compensation
The executive officers of First GWL&A are not compensated for their services to
First GWL&A. They are compensated as executive officers of GWL&A. Compensation
of Directors For each director of First GWL&A who is not also a director of
GWL&A, Great-West Life or Great-West Lifeco, First GWL&A pays an annual fee of
$10,000. For each director of First GWL&A who is also a director of GWL&A,
Great-West Life or Great-West Lifeco, First GWL&A pays an annual fee of $5,000.
First GWL&A pays each director a meeting fee of $1,000 for each meeting of the
Board of Directors or a committee thereof attended. In addition, all directors
are reimbursed for incidental expenses. The above amounts are paid in the
currency of the country of residence of the director.
Security Ownership of Certain Beneficial Owners
Set forth below is certain information, as of March 1, 2000, concerning
beneficial ownership of the voting securities of First GWL&A by entities and
persons who beneficially own more than 5% of the voting securities of First
GWL&A. The determinations of "beneficial ownership" of voting securities are
based upon Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This rule provides that securities will be deemed to be
"beneficially owned" where a person has, either solely or in conjunction with
others, (1) the power to vote or to direct the voting of securities and/or the
power to dispose or to direct the disposition of, the securities or (2) the
right to acquire any such power within 60 days after the date such "beneficial
ownership" is determined.
(1) 100% of First GWL&A's 2,500 outstanding common shares are owned by
Great-West Life & Annuity Insurance Company, 8515 East Orchard Road, Englewood,
Colorado 80111. (2) 100% of the outstanding common shares of Great-West Life &
Annuity Insurance Company's are owned by GWL&A Financial Inc., 8515 East Orchard
Road, Englewood, Colorado 80111. (3) 100% of the outstanding common shares of
GWL&A Financial Inc. are owned by GWL&A Financial (Nova Scotia) Co., Suite 800,
1959 Upper Water Street, Halifax, Nova Scotia, Canada B3J 2X2. (4) 100% of the
outstanding common shares of GWL&A Financial (Nova Scotia) Co. are owned by The
Great-West Life Assurance Company, 100 Osborne Street North, Winnipeg, Manitoba,
Canada R3C 3A5. (5) 100% of the outstanding common shares of The Great-West Life
Assurance Company are owned by Great-West Lifeco Inc., 100 Osborne Street North,
Winnipeg, Manitoba, Canada R3C 3A5. (6) 81.2% of the outstanding common shares
of Great-West Lifeco Inc. are controlled by Power Financial Corporation, 751
Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (7) 67.4% of the outstanding
common shares of Power Financial Corporation are owned by 171263 Canada Inc.,
751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (8) 100% of the
outstanding common shares of 171263 Canada Inc. are owned by 2795957 Canada
Inc., 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (9) 100% of the
outstanding common shares of 2795957 Canada Inc. are owned by Power Corporation
of Canada, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (10) Mr. Paul
Desmarais, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3, through a
group of private holding companies, which he controls, has voting control of
Power Corporation of Canada. As a result of the chain of ownership described in
paragraphs (1) through (10) above, each of the entities and persons listed in
paragraphs (1) through (10) would be considered under Rule 13d-3 of the Exchange
Act to be a "beneficial owner" of 100% of the outstanding voting securities of
the Company.
<PAGE>
41
Security Ownership of Management
The following table sets out the number of equity securities, and exercisable
options (including options which will become exercisable within 60 days) for
equity securities, of First GWL&A or any of its parents or subsidiaries,
beneficially owned, as of March 1, 2000, by (i) the directors of the Company;
and (ii) the directors and executive officers of First GWL&A as a group.
<PAGE>
- ---------------------- -------------------- ------------------ -----------------
Great-West Lifeco Power Financial Power Corporation
Inc. Corporation of Canada
- ---------------------- -------------------- ------------------ -----------------
- ---------------------- ---------------------------------------------------------
Directors (1) (2) (3)
- ---------------------- ---------------------------------------------------------
- ---------------------- ---------------------------------------------------------
M.D. Alazraki - - -
- ---------------------- ---------------------------------------------------------
- ---------------------- ---------------------------------------------------------
J. Balog - - -
- ---------------------- ---------------------------------------------------------
- ---------------------- ---------------------------------------------------------
J. W. Burns 153,659 8,000 400,640
200,000 options
- ---------------------- ---------------------------------------------------------
- ---------------------- ---------------------------------------------------------
P. Desmarais, Jr. 43,659 - 1,448,000
- ---------------------- ---------------------------------------------------------
- ---------------------- ---------------------------------------------------------
R. Gratton 330,000 310,000 5,000
5,280,000 options 300,000 options
- ---------------------- ---------------------------------------------------------
- ---------------------- ---------------------------------------------------------
N.B. Hart - - -
- ---------------------- ---------------------------------------------------------
- ---------------------- ---------------------------------------------------------
S.Z. Katz - - -
- ---------------------- ---------------------------------------------------------
- ---------------------- ---------------------------------------------------------
W.T. McCallum 82,800 80,000 -
360,000 options
- ---------------------- ---------------------------------------------------------
- ---------------------- ---------------------------------------------------------
B.E. Walsh - - -
- ---------------------- ---------------------------------------------------------
- ---------------------- ---------------------------------------------------------
Directors and
Executive Officers
as a Group
- ---------------------- ---------------------------------------------------------
- ---------------------- -------------------- ------------------ -----------------
725,549 628,000 1,853,640
896,800 options 5,526,000 options 500,000 options
- ---------------------- -------------------- ------------------ -----------------
<PAGE>
(1) All holdings are common shares, or where indicated, exercisable options
for common shares, of Great-West Lifeco Inc.
(2) All holdings are common shares, or where indicated, exercisable options
for common shares, of Power Financial Corporation.
(3) All holdings are subordinate voting shares, or where indicated,
exercisable options for subordinate voting shares, of Power Corporation
of Canada.
<PAGE>
The number of common shares and exercisable options for common shares of Power
Financial Corporation held by R. Gratton represents 1.6% of the total number of
common shares and exercisable options for common shares of Power Financial
Corporation outstanding. The number of common shares and exercisable options for
common shares of Power Financial Corporation held by the directors and executive
officers as a group represents 1.7% of the total number of common shares and
exercisable options for common shares of Power Financial Corporation
outstanding. The number of subordinate voting shares and exercisable options for
subordinate voting shares of Power Corporation of Canada held by the directors
and executive officers as a group represents 1.0 % of the total number of
subordinate voting shares and exercisable options for subordinate voting shares
of Power Corporation of Canada outstanding. None of the remaining holdings set
out above exceed 1% of the total number of shares and exercisable options for
shares of the class outstanding.
<PAGE>
42
Certain Relationships and Related
Transactions
M.D. Alazraki, a director of the Company, is an attorney with a law firm which
provided legal services to the Company. In 1999, the amount of such services was
approximately $115,088.
- --------------------------------------------------------------------------------
Voting Rights
In general, you do not have a direct right to vote the Portfolio shares held in
the Series Account. However, under current law, you are entitled to give us
instructions on how to vote the shares. We will vote the shares according to
those instructions at regular and special shareholder meetings. If the law
changes and we can vote the shares in our own right, we may elect to do so.
Before the Annuity Commencement Date, you have the voting interest. The number
of votes available to you will be calculated separately for each of your
Sub-Accounts. That number will be determined by applying your percentage
interest, if any, in a particular Sub-Account to the total number of votes
attributable to that Sub-Account. You hold a voting interest in each Sub-Account
to which your Annuity Account Value is allocated. If you select a variable
annuity option, the votes attributable to your Contract will decrease as annuity
payouts are made.
The number of votes of a Portfolio will be determined as of the date established
by that Portfolio for determining shareholders eligible to vote at the meeting
of the Portfolios. Voting instructions will be solicited by written
communication prior to such meeting in accordance with procedures established by
the respective Portfolios.
If we do not receive timely instructions and Owners have no beneficial interest
in shares held by us, we will vote according to the voting instructions as a
proportion of all Contracts participating in the Sub-Account. If you indicate in
your instructions that you do not wish to vote an item, we will apply your
instructions on a pro rata basis to reduce the votes eligible to be cast.
Each person or entity having a voting interest in a Sub-Account will receive
proxy material, reports and other material relating to the appropriate
Portfolio. Please note, generally the Portfolios are not required to, and do not
intend to, hold annual or other regular meetings of shareholders.
Contract Owners have no voting rights in First GWL&A.
- --------------------------------------------------------------------------------
Rights Reserved by First Great-West
We reserve the right to make certain changes we believe would best serve the
interests of Owners and Annuitants or would be appropriate in carrying out the
purposes of the Contracts. Any changes will be made only to the extent and in
the manner permitted by applicable laws. Also, when required by law, we will
obtain your approval of the changes and approval from any appropriate regulatory
authority. Approval may not be required in all cases, however. Examples of the
changes we may make include: o To operate the Series Account in any form
permitted under the Investment Company Act of 1940 or in any
other form permitted by law.
o To Transfer any assets in any Sub-Account to another Sub-Account, or to one
or more separate accounts, or to a Guarantee Period; or to add, combine or
remove Sub-Accounts of the Series Account.
o To substitute, for the Portfolio shares in any Sub-Account, the shares of
another Portfolio or shares of another investment company or any other
investment permitted by law.
o To make any changes required by the Code or by any other applicable law in
order to continue treatment of the Contract as an annuity.
o To change the time or time of day at which a valuation date is deemed to have
ended.
o To make any other necessary technical changes in the Contract in order to
conform with any action the above provisions permit us to take, including
changing the way we assess charges, without increasing them for any
outstanding Contract beyond the aggregate amount guaranteed.
- --------------------------------------------------------------------------------
Legal Proceedings
Currently, the Series Account is not a party to, and its assets are not subject
to any material legal proceedings. And, First GWL&A is not currently a party to,
and its property is not currently subject to, any material legal proceedings.
The lawsuits to which First GWL&A is a party are, in the opinion of management,
in the ordinary course of business, and are not expected to have a material
adverse effect on the financial results, conditions or prospects of First GWL&A.
<PAGE>
43
- --------------------------------------------------------------------------------
Legal Matters
Advice regarding certain legal matters concerning the federal securities laws
applicable to the issue and sale of the Contract has been provided by Jorden
Burt Boros Cicchetti Berenson & Johnson LLP.
- --------------------------------------------------------------------------------
Experts
The financial statements included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
- --------------------------------------------------------------------------------
Available Information
We have filed a registration statement ("Registration Statement") with the
Commission under the 1933 Act relating to the Contracts offered by this
Prospectus. This Prospectus has been filed as a part of the Registration
Statement and does not contain all of the information contained in the
Registration Statement and its exhibits. Please refer to the registration
statement and its exhibits for further information. You may request a free copy
of the Statement of Additional Information. Please direct any oral or written
request for such documents to:
Annuity Administration Department
P.O. Box 173920
Denver, Colorado 80217-3920
1-800-838-0649
The SEC maintains an Internet web site (http://www.sec.gov) that contains the
Statement of Additional Information and other information filed electronically
by First GWL&A concerning the Contract and the Series Account.
You can also review and copy any materials filed with the SEC at its Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference room by calling the SEC at
1-800-SEC-0330.
The Statement of Additional Information contains more specific information
relating to the Series Account and First GWL&A, such as: o general information o
information about First Great-West Life & Annuity Insurance Company and the
Variable Annuity-1 Series
Account
o the calculation of annuity payouts o postponement of payouts o services o
withholding o calculation of performance data
- -------------------------------------------------------------------------------
<PAGE>
44
- -------------------------------------------------------------------------------
Appendix A--Condensed Financial Information
Selected data for accumulation units
Outstanding through each period ending 12/31/99
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Sub-Account 1999 1998 1997
- ---------------------------------------------------- ------------------ ----------------- ----------------
Alger American Growth
Value at beginning of period $16.70 $11.37 $10.00
Value at end of period $22.15 $16.70 $11.37
Number of accumulation units outstanding at end of 230,184.38 157,992.77 31,803.04
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
American Century VP International
Value at beginning of period $12.25 $10.40 $10.00
Value at end of period $19.93 $12.25 $10.40
Number of accumulation units outstanding at end of 38,390.73 14,930.27 4,712.98
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Baron Capital Asset
Value at beginning of period $10.00
Value at end of period $11.43
Number of accumulation units outstanding at end of 31,570.23
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Berger IPT-Small Company Growth
Value at beginning of period $12.99 $12.86 $10.00
Value at end of period $24.65 $12.99 $12.86
Number of accumulation units outstanding at end of 83,554.33 38,814.23 17,749.02
period
------------------ ----------------- ----------------
Deutsche Asset Management VIT EAFE(R) Equity
Index (formerly the BT Insurance Funds Trust
EAFE(R) Equity Index)
Value at beginning of period $10.00
Value at end of period $12.00
Number of accumulation units outstanding at end of 202.32
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Deutsche Asset Management Small Cap Index
(formerly the BT Insurance Funds Trust Small
Cap Index
Value at beginning of period $10.00
Value at end of period $11.65
Number of accumulation units outstanding at end 2,509.50
of period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Dreyfus Variable Investment Fund Appreciation
Value at beginning of period $10.00
Value at end of period $10.24
Number of accumulation units outstanding at end of 36,666.42
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Dreyfus Variable Investment Fund Growth and Income
Value at beginning of period $10.00
Value at end of period $10.71
Number of accumulation units outstanding at end of 29,116.61
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Federated American Leaders II
Value at beginning of period $13.60 $11.66 $10.00
Value at end of period $14.39 $13.60 $11.66
Number of accumulation units outstanding at end of $123,305.45 120,058.09 67,881.72
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Federated Utility II
Value at beginning of period $13.61 $12.05 $10.00
Value at end of period $13.72 $13.61 $12.05
Number of accumulation units outstanding at end of 3,821.33 20,842.24 309.83
period
</TABLE>
<PAGE>
45
Selected data for accumulation units
Outstanding through each period ending 12/31/99
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------- ------------------ ----------------- ----------------
Federated U.S. Government Securities II
Value at beginning of period $11.36 $10.64 $10.00
Value at end of period $11.19 $11.36 $10.64
Number of accumulation units outstanding at end of 66,641.48 88,762.96 32,658.92
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
INVESCO VIF - High Yield
Value at beginning of period $11.18 $11.11 $10.00
Value at end of period $12.10 $11.18 $11.11
Number of accumulation units outstanding at end of 146,273.87 118,241.11 58,930.91
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
INVESCO VIF - Equity Income
Value at beginning of period $13.35 $11.68 $10.00
Value at end of period $15.20 $13.35 $11.68
Number of accumulation units outstanding at end of 136,557.41 127,823.11 66,563.10
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Janus Aspen Series Growth
Value at beginning of period $15.09 $11.22 $10.00
Value at end of period $21.55 $15.09 $11.22
Number of accumulation units outstanding at end of 235,562.17 146,172.46 42,289.81
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Janus Aspen Series Flexible Income
Value at beginning of period $10.00
Value at end of period $9.96
Number of accumulation units outstanding at end of 8,047.56
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Janus Aspen Series International Growth
Value at beginning of period $10.00
Value at end of period $17.04
Number of accumulation units outstanding at end of 43,282.60
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Janus Aspen Series Worldwide Growth
Value at beginning of period $13.72 $10.73 $10.00
Value at end of period $22.37 $13.72 $10.73
Number of accumulation units outstanding at end of 234,428.34 179,884.07 87,156.01
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Montgomery Variable Series: Growth
Value at beginning of period $11.95 $11.71 $10.00
Value at end of period $14.31 $11.95 $11.71
Number of accumulation units outstanding at end of 16,395.18 29,364.46 20,245.76
period
------------------ ----------------- ----------------
Prudential Series Fund Equity Class II
Value at beginning of period $10.00
Value at end of period $9.85
Number of accumulation units outstanding at end of 0.00
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
SAFECO RST Equity
Value at beginning of period $13.86 $11.19 $10.00
Value at end of period $15.02 $13.86 $11.19
Number of accumulation units outstanding at end of 77,731.57 81,951.27 33,470.59
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
SAFECO RST Growth Opportunities
Value at beginning of period $10.00
Value at end of period $11.44
Number of accumulation units outstanding at end of 19,507.00
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Schwab MarketTrack Growth II
Value at beginning of period $12.80 $11.42 $10.00
Value at end of period $15.18 $12.80 $11.42
Number of accumulation units outstanding at end of 42,025.42 46,662.83 17,849.53
period
<PAGE>
46
Selected data for accumulation units
Outstanding through each period ending 12/31/99
- ---------------------------------------------------- ------------------ ----------------- ----------------
Schwab Money Market
Value at beginning of period $10.69 $10.27 $10.00
Value at end of period $11.11 $10.69 $10.27
Number of accumulation units outstanding at end of 408,367.17 241,333.04 168,197.49
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Schwab S&P 500
Value at beginning of period $14.71 $11.58 $10.00
Value at end of period $17.57 $14.71 $11.58
Number of accumulation units outstanding at end of 270,917.40 221,962.56 73,884.33
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Scudder Variable Life Investment Fund Capital
Growth
Value at beginning of period $10.00
Value at end of period $12.64
Number of accumulation units outstanding at end of 8,180.65
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Scudder Variable Life Investment Fund Growth and
Income
Value at beginning of period $10.00
Value at end of period $9.36
Number of accumulation units outstanding at end of 863.61
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Strong Schafer Value Fund II
Value at beginning of period $10.00
Value at end of period $8.64
Number of accumulation units outstanding at end of 9,666.14
period
- ---------------------------------------------------- ------------------ ----------------- ----------------
Van Kampen Life Investment Trust Morgan Stanley
Real Estate Securities
Value at beginning of period $9.33 $10.56 $10.00
Value at end of period $8.94 $ 9.33 $10.56
Number of accumulation units outstanding at end of 5,789.35 4,699.89 273.65
period
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------------------------------------------------------------
<PAGE>
47
- -----------------------------------------------------------------------------
Appendix B--Market Value Adjustments
<PAGE>
The amount available for a full surrender, partial withdrawal or Transfer equals
the amount requested plus the Market Value Adjustment (MVA). The MVA is
calculated by multiplying the amount requested by the Market Value Adjustment
Factor (MVAF).
The MVA formula
The MVA is determined using the following formula: MVA = (amount applied) X
(Market Value Adjustment Factor) The Market Value Adjustment Factor is:
MVAF = {[(1 + i)/(1 + j)] N/12} - 1 Where:
o i is the U.S. Treasury Strip ask side yield as published in the Wall Street
Journal on the last business day of the week prior to the date the stated
rate of interest was established for the Guarantee Period. The term of i is
measured in years and equals the term of the Guarantee Period.
o j is the U.S. Treasury Strip ask side yield as published in the Wall Street
Journal on the last business day of the week prior to the week the Guarantee
Period is broken. The term of j equals the remaining term to maturity of the
Guarantee Period, rounded up to the higher number of years; and
o N is the number of complete months remaining until maturity.
If N is less than 6, the MVA will equal 0.
Examples
Following are four examples of Market Value Adjustments illustrating (1)
increasing interest rates, (2) decreasing interest rates, (3) flat interest
rates (i and j are within .10% of each other), and (4) less than 6 months to
maturity.
Example #1--Increasing Interest Rates
- ------------------------ ---------------------------
- ----------------------- $25,000 on November 1,
Deposit 1996
- ------------------------ ---------------------------
- ------------------------ ---------------------------
Maturity date December 31, 2006
- ------------------------ ---------------------------
- ------------------------ ---------------------------
Interest Guarantee 10 years
Period
- ------------------------ ---------------------------
- -------------------- -------------------------------
i assumed to be 6.15%
- -------------------- -------------------------------
- -------------------- -------------------------------
Surrender date July 1, 2001
- -------------------- -------------------------------
- -------------------- -------------------------------
j 7.00%
- -------------------- -------------------------------
- -------------------- -------------------------------
Amount surrendered $10,000
- -------------------- -------------------------------
- ------------------------ ---------------------------
N 65
- ------------------------ ---------------------------
MVAF = {[(1 + i)/(1 + j)]N/12} - 1 = {[1.0615/1.07]65/12} - 1 = .957718 - 1 =
-.042282
MVA = (amount Transferred or surrendered) x MVAF = $10,000 x - .042282 = -
$422.82
Surrender Value = (amount Transferred or surrendered + MVA) x (1-CDSC) =
($10,000 + - $422.82) x (1-0) = $9,577.18
Example #2--Decreasing Interest Rates
- ------------------------ ---------------------------
Deposit $25,000 on November 1,
1996
- ------------------------ ---------------------------
- ------------------------ ---------------------------
Maturity date December 31, 2006
- ------------------------ ---------------------------
- ------------------------ ---------------------------
Interest Guarantee 10 years
Period
- ------------------------ ---------------------------
- --------------------- ------------------------------
i assumed to be 6.15%
- --------------------- ------------------------------
- --------------------- ------------------------------
Surrender date July 1, 2000
- --------------------- ------------------------------
- --------------------- ------------------------------
j 5.00%
- --------------------- ------------------------------
- --------------------- ------------------------------
Amount surrendered $10,000
- --------------------- ------------------------------
- ------------------------ ---------------------------
N 65
- ------------------------ ---------------------------
MVAF = {[(1 + i)/(1 + j)]N/12} - 1 = {[1.0615/1.05]65/12} - 1 = .060778
MVA = (amount Transferred or surrendered) x MVAF
= $10,000 x .060778
= $607.78
Surrender Value = (amount Transferred or surrendered + MVA) x (1-CDSC) =
($10,000 + $607.78) x (1-0) = $10,607.78
<PAGE>
Example #3--Flat Interest Rates
- ------------------------ ---------------------------
Deposit $25,000 on November 1,
1996
- ------------------------ ---------------------------
- ------------------------ ---------------------------
Maturity date December 31, 2006
- ------------------------ ---------------------------
- ------------------------ ---------------------------
Interest Guarantee 10 years
Period
- ------------------------ ---------------------------
- --------------------- ------------------------------
i assumed to be 6.15%
- --------------------- ------------------------------
- --------------------- ------------------------------
Surrender date July 1, 2001
- --------------------- ------------------------------
- --------------------- ------------------------------
j 6.24%
- --------------------- ------------------------------
- --------------------- ------------------------------
Amount surrendered $10,000
- --------------------- ------------------------------
- ------------------------ ---------------------------
N 65
- ------------------------ ---------------------------
MVAF = {[(1 + i)/(1 + j)]N/12} - 1
= {[1.0615/1.0624]65/12} - 1
= .995420 - 1
= -.004580
MVA = (amount Transferred or surrendered) x MVAF = $10,000 x -.004589 =
$-45.80
Surrender Value = (amount Transferred or surrendered + MVA) x (1-CDSC) =
($10,000 - $45.80) x (1-0) = $9,954.20
Example #4--N < 6 (less than 6 months to maturity)
- ------------------------ ---------------------------
Deposit $25,000 on November 1,
1996
- ------------------------ ---------------------------
- ------------------------ ---------------------------
Maturity date December 31, 2006
- ------------------------ ---------------------------
- ------------------------ ---------------------------
Interest Guarantee 10 years
Period
- ------------------------ ---------------------------
- --------------------- ------------------------------
i assumed to be 6.15%
- --------------------- ------------------------------
- --------------------- ------------------------------
Surrender date July 1, 2006
- --------------------- ------------------------------
- --------------------- ------------------------------
j 7.00%
- --------------------- ------------------------------
- --------------------- ------------------------------
Amount surrendered $10,000
- --------------------- ------------------------------
- ------------------------ ---------------------------
N 5
- ------------------------ ---------------------------
MVAF = {[(1 + i)/(1 + j)]N/12} - 1
= {[1.0615/1.07]5/12} - 1
= .99668 - 1
= -.00332
However, N<6, so MVAF = 0
MVA = (amount Transferred or surrendered) x MVAF = $10,000 x 0 = $0
Surrender Value = (amount Transferred or surrendered + MVA) x (1-CDSC)
= ($10,000 + $0) x (1-0)
48
= $10,000
<PAGE>
49
- -----------------------------------------------------------------------------
Appendix C--Net Investment Factor
The Net Investment Factor is determined by dividing (a) by (b), and subtracting
(c) from the result where: (a) is the net result of:
1) the net asset value per share of the Portfolio shares determined as of the
end of the current Valuation Period, plus
2) the per share amount of any dividend (or, if applicable, capital gain
distributions) made by the Portfolio on shares if the "ex-dividend" date
occurs during the current Valuation Period, minus or plus
3) a per unit charge or credit for any taxes incurred by or provided for in
the Sub-Account, which is determined by First GWL&A to have resulted from
the investment operations of the Sub-Account, and
(b) is the net asset value per share of the Portfolio shares determined as of
the end of the immediately preceding Valuation Period, and (c) is an amount
representing the Mortality and Expense Risk Charge deducted from each
Sub-Account on a daily basis. Such amount is equal to 0.85%.
The Net Investment Factor may be greater than, less than, or equal to one.
Therefore, the Accumulation Unit Value may increase, decrease or remain
unchanged. The net asset value per share referred to in paragraphs (a)(1) and
(b) above, reflect the investment performance of the Portfolio as well as the
payment of Portfolio expenses.
- -------------------------------------------------------------------------------
<PAGE>
50
- -------------------------------------------------------------------------------
Financial Statements and Independent Auditor's Report
On the following pages, you'll find the financial statement and the independent
auditors' report for First Great-West Life & Annuity Insurance Company for the
years ended December 31, 1999, 1998 and the period from April 4, 1997
(inception) to December 31, 1997.
<PAGE>
51
First Great-West Life & Annuity Insurance Company
(A wholly-owned subsidiary of
Great-West Life & Annuity Insurance Company)
-------------------------------------------
Financial Statements for the Years Ended December 31,
1999, 1998, and for the period
from April 4, 1997
(Inception) to December 31,
1997 and Independent
Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
First Great-West Life & Annuity Insurance Company:
We have audited the accompanying balance sheets of First Great-West Life &
Annuity Insurance Company (a wholly-owned subsidiary of Great-West Life &
Annuity Insurance Company) as of December 31, 1999 and 1998, and the related
statements of income, stockholder's equity, and cash flows for the years then
ended and for the period from April 4, 1997 (Inception) to December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit 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, such financial statements present fairly, in all material
respects, the financial position of First Great-West Life & Annuity Insurance
Company as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for the years then ended and for the period from April 7, 1997
(Inception) to December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 31, 2000
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
===========================================================================================================================
[Dollars in thousands except for share information]
<S> <C> <C>
ASSETS 1999 1998
- ------
----------------- -----------------
INVESTMENTS:
Fixed maturities:
Held-to-maturity, at amortized cost
(fair value $35,335 and $15,044) $ 37,050 $ 14,500
Available-for-sale, at fair value
(amortized cost $77,740 and $63,321) 74,149 65,154
Short-term investments, available-for-sale (cost
approximates fair value) 1,600 699
----------------- -----------------
Total Investments 112,799 80,353
Cash 5,443 705
Reinsurance receivable 1,426 123
Deferred policy acquisition costs 1,702 381
Investment income due and accrued 1,204 695
Other assets 3,366 19
Premiums in course of collection 537
Deferred income taxes 2,050 983
Due from Parent Corporation 3,302
Separate account assets 39,881 23,836
----------------- -----------------
TOTAL ASSETS $ 171,710 $ 107,095
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
POLICY BENEFIT LIABILITIES:
Policy reserves $ 93,434 $ 64,320
Policy and contract claims 4,894 125
Policyholder funds 93
GENERAL LIABILITIES:
Due to Parent Corporation 2,077
Other liabilities 2,794 95
Separate account liabilities 39,881 23,836
----------------- -----------------
Total Liabilities 141,096 90,453
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
STOCKHOLDER'S EQUITY:
Common stock, $1,000 par value, 10,000 shares
authorized, 2,500 shares issued, and outstanding 2,500 2,500
Additional paid-in capital 28,600 12,600
Accumulated other comprehensive income (loss) (2,334) 717
Retained earnings 1,848 825
----------------- -----------------
Total Stockholder's Equity 30,614 16,642
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 171,710 $ 107,095
================= =================
See notes to financial statements.
</TABLE>
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE
=================================================================================================================================
PERIOD FROM APRIL 4, 1997 (INCEPTION) TO DECEMBER 31, 1997 [Dollars in
thousands]
1999 1998 1997
---------------- ----------------- -----------------
REVENUES:
<S> <C> <C> <C>
Premiums and fee income $ 9,836 $ 78 $ 21
Net investment income 6,278 3,367 243
Net realized gains (losses) on investments (6) 74
---------------- ----------------- -----------------
16,108 3,519 264
---------------- ----------------- -----------------
BENEFITS AND EXPENSES:
Life and other policy benefits 4,391 50
Increase in reserves 4,003
Interest paid or credited to
Contractholders 4,584 1,687
General and administrative expenses 1,466 387 213
---------------- ----------------- -----------------
14,444 2,124 213
---------------- ----------------- -----------------
INCOME BEFORE INCOME TAXES 1,664 1,395 51
PROVISION FOR INCOME TAXES:
Current 65 1,920 71
Deferred 576 (1,317) (53)
---------------- ----------------- -----------------
641 603 18
---------------- ----------------- -----------------
NET INCOME $ 1,023 $ 792 $ 33
================ ================= =================
See notes to financial statements.
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD
=====================================================================================================
FROM APRIL 4, 1997 (INCEPTION) TO DECEMBER 31, 1997 [Dollars in thousands except
for share information]
Accumulated
Additional Other
Paid-in Comprehensive Retained
Shares Amount Capital Income (Loss) Earnings Total
------------- ------------- ------------- --------------- ------------- -------------
Capital contributions 2,500 $ 2,500 $ 4,000 $ $ $ 6,500
Net income 33 33
Other comprehensive income 5 5
-------------
Comprehensive income 38
------------- ------------- ------------- --------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 2,500 2,500 4,000 5 33 6,538
Net income 792 792
Other comprehensive income 712 712
-------------
Comprehensive income 1,504
-------------
Capital contribution 8,600 8,600
------------- ------------- ------------- --------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 2,500 2,500 12,600 717 825 16,642
Net income 1,023 1,023
Other comprehensive income (3,051) (3,051)
(loss)
-------------
Comprehensive income (loss) (2,028)
-------------
Capital contribution 16,000 16,000
------------- ------------- ------------- --------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 2,500 $ 2,500 $ 28,600 $ (2,334) $ 1,848 $ 30,614
============= ============= ============= =============== ============= =============
See notes to financial statements.
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD
=======================================================================================================
FROM APRIL 4, 1997 (INCEPTION) TO DECEMBER 31, 1997
[Dollars in thousands]
1999 1998 1997
-------------- -------------- --------------
OPERATING ACTIVITIES:
Net income $ 1,023 $ 792 $ 33
Adjustments to reconcile net income to net cash
Provided by operating activities
Amortization of investments 59 12 (19)
Realized losses (gains) on sale of investments 6 (74)
Deferred income taxes 576 (1,317) (53)
Changes in assets and liabilities:
Accrued interest and other receivables (1,046) (671) (24)
Policy benefit liabilities 13,389 1,859
Reinsurance receivable (1,303) (123)
Other, net (1,145) (1,361) 326
-------------- -------------- --------------
Net cash (used in) provided
by operating activities 11,559 (883) 263
-------------- -------------- --------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and redemptions of investments:
Fixed maturities:
Held-to-maturity 447
Available-for-sale 15,683 73,340
Purchases of investments:
Fixed maturities:
Held-to-maturity (23,000) (14,500)
Available-for-sale (31,066) (131,924) (5,354)
-------------- -------------- --------------
Net cash used in investing activities (37,936) (73,084) (5,354)
-------------- -------------- --------------
See notes to financial statements.
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD
================================================================================================================
FROM APRIL 4, 1997 (INCEPTION) TO DECEMBER 31, 1997
[Dollars in thousands]
1999 1998 1997
-------------- -------------- --------------
FINANCING ACTIVITIES:
Contract deposits, net of withdrawals 20,494 62,502 84
Due to Parent Corporation (5,379) 1,922 155
Capital contributions 16,000 8,600 6,500
-------------- -------------- --------------
Net cash provided by financing activities 31,115 73,024 6,739
-------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH 4,738 (943) 1,648
CASH, BEGINNING OF PERIOD 705 1,648 0
-------------- -------------- --------------
CASH, END OF PERIOD $ 5,443 $ 705 $ 1,648
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid (received) during the year for:
Income taxes $ (1,073) $ 2,390 $ 0
</TABLE>
See notes to financial statements.
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD
=============================================================================
FROM APRIL 4, 1997 (INCEPTION) TO DECEMBER 31, 1997 [Dollars in thousands except
for share information]
1. ORGANIZATION
Organization - First Great-West Life & Annuity Insurance Company (the
Company) is a wholly-owned subsidiary of Great-West Life & Annuity
Insurance Company (the Parent Corporation). The Company was
incorporated as a stock life insurance company in the State of New York
and was capitalized on April 4, 1997, through a $6,000 cash investment
from the Parent Corporation for 2,000 shares of common stock. On
December 29, 1997, the Company issued an additional 500 shares of
common stock to the Parent Corporation for $500. The Company was
licensed as an insurance company in the State of New York on May 28,
1997. The Company does business in New York through two business
segments.
Basis of Presentation - 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash - Cash includes only amounts in demand deposit accounts.
Investments - Management determines the classification of fixed
maturities at the time of purchase. Fixed maturities are classified as
held-to-maturity when the Company has the positive intent and ability
to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost unless fair value is less than cost and the
decline is deemed to be other than temporary, in which case they are
written down to fair value and a new cost basis is established.
Fixed maturities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair
value, with the net unrealized gains and losses reported as accumulated
other comprehensive income (loss) in stockholder's equity.
<PAGE>
The amortized cost of fixed maturities classified as held-to-maturity
or available-for-sale is adjusted for amortization of premiums and
accretion of discounts using the effective interest method over the
estimated life of the related bonds. Such amortization is included in
net investment income. Realized gains and losses, and declines in value
judged to be other-than-temporary are included in net realized gains
(losses) on investments.
Short-term investments include securities purchased with initial
maturities of one year or less and are carried at amortized cost. The
Company considers short-term investments to be available-for-sale and
amortized cost approximates fair value.
Deferred Policy Acquisition Costs - Policy acquisition costs, which
primarily consist of sales commissions related to the production of new
and renewal business, have been deferred to the extent recoverable.
Deferred costs associated with the annuity products are being amortized
over the life of the contracts in proportion to the emergence of gross
profits. Retrospective adjustments of these amounts are made when the
Company revises its estimates of current or future gross profits.
Deferred costs associated with traditional life insurance are amortized
over the premium paying period of the related policies in proportion to
premium revenues recognized. Amortization of deferred policy
acquisition costs was $112, $0, and $0 in 1999, 1998, and 1997,
respectively.
Separate Accounts - Separate account assets and related liabilities are
carried at fair value. The Company's separate accounts invest in shares
of various external mutual funds. Investment income and realized
capital gains and losses of the separate accounts accrue directly to
the contractholders and, therefore, are not included in the Company's
statements of income. Revenues to the Company from the separate
accounts consist of contract maintenance fees, administration fees, and
mortality and expense risk charges.
Due to/from Parent Corporation - Due to/from Parent Corporation
includes amounts due on demand.
Policy Reserves - Life insurance reserves of $93,315 and $64,228 at
December 31, 1999 and 1998 are computed on the basis of estimated
mortality, investment yield, withdrawals, future maintenance and
settlement expenses, and retrospective experience rating premium
refunds. Annuity contract reserves without life contingencies of $119
and $92 are carried at contractholders' account value at December 31,
1999 and 1998, respectively.
<PAGE>
Reinsurance - Policy reserves ceded to other insurance companies are
carried as a reinsurance receivable on the balance sheet. The cost of
reinsurance related to long-duration contracts is accounted for over
the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies.
Policy and Contract Claims - Policy and contract claims include
provisions for reported life and health claims in process of
settlement, valued in accordance with the terms of the related policies
and contracts, as well as provisions for claims incurred and unreported
based primarily on prior experience of the Company.
Recognition of Premium Income and Expenses - Life insurance premiums
are recognized when due. Revenues for annuity and other contracts
without significant life contingencies are recognized as received. They
consist of contract charges for the cost of insurance, contract
administration, and surrender fees that have been assessed against the
contract account balance during the period. Fee income is derived
primarily from assets under management, consisting of contract
maintenance fees, administration fees and mortality and expense risk
charges, and is recognized when due. Benefits and expenses on policies
with life contingencies impact income by means of the provision for
future policy benefit reserves, resulting in recognition of profits
over the life of the contracts.
Income Taxes - Income taxes are recorded using the asset and liability
approach, which requires, among other provisions, the recognition of
deferred tax assets and liabilities for expected future tax
consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax
consequences, all expected future events (other than the enactments or
changes in the tax laws or rules) are considered.
Regulatory Requirements - In accordance with the requirements of the
State of New York, the Company must demonstrate adequate capital. At
December 31, 1999, the Company was in compliance with the requirement.
The Company is also required to maintain an investment deposit in the
amount of $5,000 in cash or investment certificates with the New York
Insurance Commissioner for the protection of policyholders in the event
the Company is unable to satisfactorily meet its contractual
obligations. A United States Treasury obligation, whose cost
approximates market value, was designated to meet this requirement at
December 31, 1999.
<PAGE>
3. RELATED-PARTY TRANSACTIONS
The Company and the Parent Corporation have service agreements whereby
the Parent Corporation administers, distributes, and underwrites
business for the Company and administers the Company's investment
portfolio and the Company provides certain services for the Parent
Corporation. The amounts recorded are based upon management's best
estimate of actual costs incurred and resources expended based upon
number of policies and/or certificates in force. These transactions are
summarized as follows:
<TABLE>
Years Ended
December 31,
--------------------------------------------
1999 1998 1997
====================================================== ------------ ------------ ------------
Investment management expense
======================================================
<S> <C> <C> <C>
(included in net investment income) $ 96 $ 47 $ 4
======================================================
Administrative services
======================================================
(included in operating expenses) (28) (48) (15)
======================================================
==================================================================================================================================
</TABLE>
The Company and the Parent Corporation have an agreement whereby the
Parent Corporation provides certain financial support related to
maintaining adequate regulatory surplus and liquidity.
4. REINSURANCE
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of
benefits paid by ceding risks to other insurance enterprises under
excess coverage and co-insurance contracts. The Company retains 100% of
the first $50 of coverage per individual life and has a maximum
retention of $250 per individual life. Life insurance policies are
first reinsured to the Parent Corporation up to a maximum of $1,250 of
coverage per individual life. Any excess amount is reinsured to a third
party.
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; consequently, allowances are
established for amounts deemed uncollectible. 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. At December 31, 1999
and 1998, the reinsurance receivable had a carrying value of $1,426 and
$123, respectively.
Total reinsurance premiums ceded to the Parent Corporation in 1999,
1998, and 1997 were $43, $61, and $0, respectively.
<PAGE>
On December 1, 1999, the Company entered into an assumption reinsurance
agreement with Anthem Health & Life Insurance Company of New York (AH&L
NY), to acquire a block of life and health insurance business. The
Company also agreed to the assignment of a coinsurance agreement
between the Parent and AH&L NY on certain policies that would not be
transferred to the Company via assumption reinsurance. The business
primarily consists of administration services only and stop loss
policies. The Company assumed $7,904 of policy reserves and
miscellaneous assets and liabilities in exchange for equal
consideration from AH&L NY and the Parent.
The following schedule details life insurance in force and life and
accident/health premiums:
<PAGE>
<TABLE>
Ceded Assumed Percentage
Primarily to Primarily of Amount
Gross the Other from Other Net Assumed
Amount Companies Companies Amount to Net
--------------- --------------- -------------- ----------------- ----------------
December 31, 1999:
Life insurance in force:
<S> <C> <C> <C> <C> <C>
Individual $ 329,346 $ 125,222 $ 173,773 $ 377,897 46.0%
Group 1,075,000 1,075,000 0.0%
--------------- --------------- -------------- -----------------
Total $ 1,404,346 $ 125,222 $ 173,773 $ 1,452,897
=============== =============== ============== =================
Premium Income:
Life insurance $ 685 $ 57 $ 93 $ 721 12.9%
Accident/health 9,471 1,064 23 8,430 0.3%
--------------- --------------- -------------- -----------------
Total $ 10,156 $ 1,121 $ 116 $ 9,151
=============== =============== ============== =================
December 31, 1998:
Life insurance in force:
Individual $ 251,792 $ 173,773 $ $ 78,019 0.0%
Group 0.0%
--------------- --------------- -------------- -----------------
Total $ 251,792 $ 173,773 $ $ 78,019
=============== =============== ============== =================
Premium Income:
Life insurance $ $ $ $ 0.0%
Accident/health 61 0.0%
--------------- --------------- -------------- -----------------
Total $ $ 61 $ $ (61)
=============== =============== ============== =================
<PAGE>
5. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 1999 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ------------- ------------- ------------- ------------
Held-to-Maturity:
Corporate bonds $ 30,050 $ $ 1,717 $ 28,333 $ 30,050
Public utilities 7,000 2 7,002 7,000
------------ ------------- ------------- ------------- ------------
$ 37,050 $ 2 $ 1,717 $ 35,335 $ 37,050
============ ============= ============= ============= ============
Available-for-Sale:
U.S. Treasury Securities
and obligations of U.S.
Government Agencies:
Collateralized mortgage
obligations $ 17,918 $ $ 630 $ 17,288 $ 17,288
Other 4,999 5 4,994 4,994
Collateralized mortgage
obligations 19,952 1,371 18,581 18,581
Corporate bonds 34,871 1,585 33,286 33,286
------------ ------------- ------------- ------------- ------------
$ 77,740 $ $ 3,591 $ 74,149 $ 74,149
============ ============= ============= ============= ============
Fixed maturities owned at December 31, 1998 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ------------- ------------- ------------- ------------
Held-to-Maturity:
Corporate bonds $ 14,500 $ 544 $ $ 15,044 $ 14,500
------------ ------------- ------------- ------------- ------------
$ 14,500 $ 544 $ $ 15,044 $ 14,500
============ ============= ============= ============= ============
Available-for-Sale:
U.S. Treasury Securities
and obligations of U.S.
Government Agencies:
Collateralized mortgage
Obligations $ 17,963 $ 1,063 $ $ 19,026 $ 19,026
Other 4,999 59 5,058 5,058
Collateralized mortgage
Obligations 19,956 331 20,287 20,287
Corporate bonds 20,403 380 20,783 20,783
------------ ------------- ------------- ------------- ------------
$ 63,321 $ 1,833 $ $ 65,154 $ 65,154
============ ============= ============= ============= ============
</TABLE>
The collateralized mortgage obligations consist primarily of sequential
and planned amortization classes with final stated maturities of two to
thirty years and average lives of less than one to fifteen years.
Prepayments on all mortgage-backed securities are monitored monthly and
amortization of the premium and/or the accretion of the discount
associated with the purchase of such securities is adjusted by such
prepayments.
See Note 6 for additional information on policies regarding estimated
fair value of fixed maturities.
The amortized cost and estimated fair value of fixed maturity
investments at December 31, 1999, by projected maturity, are shown
below. Actual maturities will likely differ from these projections
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
Held-to-Maturity Available-for-Sale
---------------------------- ----------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 260 $ 247 $ 4,999 $ 4,994
Due after one year through five years 1,952 1,851
Due after five years through ten years 15,770 15,233 15,007 13,982
Due after ten years 7,302 6,817 10,000 9,920
Mortgage-backed securities 37,870 35,869
Asset-backed securities 11,766 11,187 9,864 9,384
------------ ------------ ------------ ------------
$ 37,050 $ 35,335 $ 77,740 $ 74,149
============ ============ ============ ============
Proceeds from sales of securities available-for-sale were $15,158,
$68,109, and $0 during 1999, 1998, and 1997, respectively. The realized
gains on such sales totaled $15, $201, and $0 for 1999, 1998, and 1997,
respectively. The realized losses totaled $21, $127, and $0 for 1999,
1998, and 1997, respectively.
6. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31,
------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
ASSETS:
Fixed maturities and short-term
Investments $ 112,799 $ 111,084 $ 80,353 $ 80,897
LIABILITIES:
Annuity contract reserves without
life contingencies 119 119 92 92
</TABLE>
The estimated fair values of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented
are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The estimated fair value of fixed maturities that are publicly traded
are obtained from an independent pricing service. To determine fair
value for fixed maturities not actively traded, the Company utilized
discounted cash flows calculated at current market rates on investments
of similar quality and term.
The fair value of annuity contract reserves without life contingencies
are estimated by discounting the cash flows to maturity of the
contracts, utilizing current credited rates for similar products.
The carrying amounts for receivables and liabilities reported in the
balance sheet approximate fair value due to their short-term nature.
7. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate
and the Company's effective rate:
<TABLE>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
State taxes 4.6 6.8
Other (1.1) 1.4
------------- ------------- -------------
Total 38.5 % 43.2 % 35.0 %
============= ============= =============
Temporary differences, which give rise to the deferred tax assets and
liabilities as of December 31, 1999, and 1998 are as follows:
1999 1998
--------------------------- ---------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
----------- ------------ ------------ -----------
Policy reserves $ 128 $ $ $ 175
Deferred policy
Acquisition costs 596 134
Deferred acquisition
cost proxy tax 1,312 1,720
Investment assets 1,254 642
State taxes 48 214
----------- ------------ ------------ -----------
Total deferred taxes $ 2,694 $ 644 $ 1,934 $ 951
=========== ============ ============ ===========
Amounts related to investment assets above include $(1,256) and $642
related to the unrealized gains (losses) on the Company's fixed
maturities available-for-sale at December 31, 1999, and 1998,
respectively. Although realization is not assured, management believes
it is more likely than not that all of the deferred tax asset will be
realized.
8. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income".
This Statement establishes new rules for reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or stockholder's
equity. This Statement requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were
reported separately in stockholder's equity, to be included in other
comprehensive income (loss).
Other comprehensive income (loss) at December 31, 1999 is summarized as
follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
----------------- ----------------- ----------------
Unrealized gains on securities:
Unrealized holding gains
Arising during the period $ (5,425) $ 1,900 $ (3,525)
----------------- ----------------- ----------------
Net unrealized gains (5,425) 1,900 (3,525)
Reserve and DAC adjustment 729 (255) 474
----------------- ----------------- ----------------
Other comprehensive income (loss) $ (4,696) $ 1,645 $ (3,051)
================= ================= ================
Other comprehensive income at December 31, 1998 is summarized as
follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
----------------- ----------------- ----------------
Unrealized gains on securities:
Unrealized holding gains
Arising during the period $ 1,826 $ (639) $ 1,187
----------------- ----------------- ----------------
Net unrealized gains 1,826 (639) 1,187
Reserve and DAC adjustment (730) 255 (475)
----------------- ----------------- ----------------
Other comprehensive income $ 1,096 $ (384) $ 712
================= ================= ================
<PAGE>
Other comprehensive income at December 31, 1997 is summarized as
follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
----------------- ----------------- ----------------
Unrealized gains on securities:
Unrealized holding gains
Arising during the period $ 8 $ (3) $ 5
----------------- ----------------- ----------------
Net unrealized gains 8 (3) 5
----------------- ----------------- ----------------
Other comprehensive income $ 8 $ (3) $ 5
================= ================= ================
9. SEGMENT INFORMATION
During 1999, the Company had two reportable segments: Employee Benefits
and Financial Services. During 1998 and 1997, the Company had only one
reportable segment, Financial Services. The Employee Benefits segment
markets group life and health and 401(k) products to small and
mid-sized corporate employers. The Financial Services segment primarily
markets products to public and not-for-profit employers and individuals
and offers life insurance products to individuals and businesses. In
both 1998 and 1999, large dollar bank-owned life insurance policies
were sold to a limited number of customers. Accordingly, these
transactions account for the majority of the investment assets and
reserves, and significantly impact the results of operations, of this
segment.
The accounting policies of the segments are the same as those described
in Note 2. The Company evaluates performance based on profit or loss
from operations after income taxes.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately, as
each segment has unique distribution channels.
The Company's operations are not materially dependent on one or a few
customers, brokers, or agents.
<PAGE>
Summarized segment financial information for the year ended and as of
December 31, 1999 was as follows:
Operations: Employee Financial Total
Benefits Services U.S.
----------------- ----------------- ----------------
Revenue:
Premium and fee income $ 9,625 $ 211 $ 9,836
Net investment income 6,278 6,278
Realized investment gains (losses) (6) (6)
----------------- ----------------- ----------------
Total revenue 9,625 6,483 16,108
Benefits and Expenses:
Benefits 8,378 4,600 12,978
Operating expenses 505 961 1,466
----------------- ----------------- ----------------
Total benefits and 8,883 5,561 14,444
expenses
Net operating income
before
Income taxes 741 923 1,664
Income taxes 295 346 641
----------------- ----------------- ----------------
Net income $ 446 $ 577 $ 1,023
================= ================= ================
Assets: Employee Financial Total
Benefits Services U.S.
----------------- ----------------- ----------------
Investment assets $ $ 112,799 $ 112,799
Other assets 7,851 11,179 19,030
Separate account assets 39,881 39,881
----------------- ----------------- ----------------
Total assets $ 7,851 $ 163,859 $ 171,710
================= ================= ================
10. COMMITMENTS AND CONTINGENCIES
On October 6, 1999, the Parent entered into a purchase and
sale agreement (the Agreement) with Allmerica Financial
Corporation (Allmerica) to acquire Allmerica's group life and
health insurance business on March 1, 2000. The policies
resident in the State of New York have been assigned to the
Company as part of the Agreement. This business primarily
consists of administrative services only and stop loss
policies. The in-force business is expected to be underwritten
and retained by the Company upon each policy renewal date. The
purchase price, as defined in the Agreement, will be based on
a percentage of the amount in-force at March 1, 2000
contingent on the persistency of the block of business through
March 2001. Management does not expect the purchase price to
have a material impact on the Company's consolidated financial
statements.
<PAGE>
11. DIVIDEND RESTRICTIONS
The Company's net income and capital and surplus, as determined in
accordance with statutory accounting principles and practices for
December 31 are as follows (unaudited):
1999 1998 1997
================================================== -------------- -------------- --------------
(Unaudited)
==================================================
Net income (loss) $ 1,407 $ (2,182) $ (19)
==================================================
Capital and surplus 29,494 12,808 6,469
==================================================
</TABLE>
As an insurance company domiciled in the State of New York, the Company
is required to maintain a minimum of $6,000 of capital and surplus. In
addition, the maximum amount of dividends, which can be paid to
stockholders, is subject to restrictions relating to statutory surplus
and statutory adjusted net investment income. The Company should be
able to pay dividends of $2,949 in 2000. The Company paid no dividends
in 1999 and 1998. Dividends are paid as determined by the Board of
Directors.
